INTEGRATED TELECOM SERVICES CORPORATION v. LINN STATION PROPERTIES, LLC
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RENDERED: JUNE 1, 2007; 10:00 A.M.
NOT TO BE PUBLISHED
Commonwealth of Kentucky
Court of Appeals
NO. 2005-CA-002151-MR
AND
NO. 2005-CA-002620-MR
INTEGRATED TELECOM
SERVICES CORPORATION
v.
APPELLANT/CROSS-APPELLEE
APPEAL AND CROSS-APPEAL FROM JEFFERSON CIRCUIT COURT
HONORABLE DENISE CLAYTON, JUDGE
ACTION NO. 02-CI-004610
LINN STATION PROPERTIES, LLC
APPELLEE/CROSS-APPELLANT
OPINION
AFFIRMING
** ** ** ** **
BEFORE: ACREE, KELLER, AND LAMBERT, JUDGES.
KELLER, JUDGE: This case arises from the breach of a commercial lease between a
lessor, Linn Station Properties, LLC (Linn Station), and a lessee, Integrated Telecom
Services Corporation (ITS), and ITS challenges the propriety of a default judgment
entered in Linn Station's favor by the Jefferson Circuit Court. On direct appeal, ITS
contends that the circuit court did not have subject matter jurisdiction over the non-rental
issues, because those issues were subject to arbitration under the terms of the lease, and
erred in determining that ITS waived arbitration. On cross-appeal, Linn Station
challenges the timeliness of ITS's motion to vacate. We affirm.
In 1997, Caldwell R. Willig, the original owner, and ITS entered into a 5year lease of improved real property located at 10160 Linn Station Road in Louisville,
Kentucky.1 The term of the lease was from January 1, 1998, through December 31,
2003.2 Under the lease, ITS's obligations included paying monthly rent and maintaining
and repairing the premises. The lease also provided for and enumerated several events of
default and available remedies:
20. DEFAULT AND REMEDIES: Any of the
following occurrences, conditions, or acts shall constitute an
“Event of Default” under this Lease:
(a) If Tenant: (i) defaults in making payment
when due of any rent and the default continues for ten (10)
days after Tenant's receipt of written notice from Landlord
specifying the default and demanding that such default be
cured; or (ii) defaults in the observance or performance of any
other provision of this Lease, and the default continues for
sixty (60) days after Landlord gives written notice to Tenant
specifying the default and demanding that such default be
cured. . . .
(b) If the Leased Premises are abandoned
(except during times of remodeling or as the result of any
casualty or natural disaster) by Tenant for a period of fifteen
(15) consecutive days[.]
...
1
Linn Station became the assignee of the lease in 1999.
2
Based on our calculation, the term of the lease was actually six years, as opposed to five years
as recited in the lease.
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If there is any Event of Default, Landlord may
(i) terminate this Lease and take possession of the Leased
Premises, in which event the rent shall immediately become
due and be paid up to the time of said termination; and (ii)
Landlord may relet the Leased Premises, either in Landlord's
name or otherwise, for a term or terms which may, at
Landlord's option, be less than or exceed the then remaining
term of this Lease and Tenant shall also pay to Landlord, as
liquidated damages for Tenant's failure to observe and
perform Tenant's covenants under this Lease, the net present
value (calculated at the Prime Rate, as published by The Wall
Street Journal) of any deficiency between the rent required by
this Lease for the remaining term and the net amount, if any,
of the rents set forth in any lease or leases for the Leased
Premises for each month of the period which would otherwise
have constituted the remainder of the term of this Lease. In
computing the liquidated damages, there shall be added to the
deficiency all reasonable brokerage expenses that Landlord
may incur in connection with the reletting.
Under Paragraph 29, the lease detailed the tenant's obligations upon surrender of
possession:
Upon the conclusion, termination or expiration of this Lease,
other than by Tenant's exercise of the purchase option granted
in this Lease, Tenant covenants to surrender possession of the
Leased Premises, and all improvements and fixtures on the
Leased Premises to Landlord, in a condition which is, at a
minimum, equivalent to the condition at the Commencement
Date (subject to the improvements Tenant is allowed to make
under this Lease), excepting ordinary wear and tear. Upon
the conclusion, termination or expiration of this Lease,
Tenant may remove from the Leased Premises, at Tenant's
expense, all of Tenant's inventory and all furniture, fixtures
and equipment owned by Tenant. If upon the termination of
this Lease, Tenant removes the fixtures installed at the Leased
Premises by Tenant, then in such event Tenant shall be
obligated to install at the Leased Premises fixtures which are
functionally equivalent to the fixtures in the Leased Premises
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as of the Commencement Date which were removed by
Tenant.
The lease also contained an arbitration clause in Paragraph 27:
Other than Landlord's right to institute legal action with
respect to a default by Tenant in the payment of rent required
by this Lease, any disputes under this Lease shall be referred
by the parties to binding arbitration by the American
Arbitration Association under its rules relating to commercial
disputes. Such arbitration shall be conducted in Jefferson
County, Kentucky.
In March 2002, with almost two years remaining on the lease, Linn Station
discovered that ITS had failed in its obligation to maintain the premises pursuant to
Paragraph 6. Therefore, Linn Station provided ITS with notice of its default and
demanded that the default be cured within sixty days. ITS did not cure the default.
Pursuant to the arbitration clause, Linn Station filed a Demand for Arbitration with the
American Arbitration Association (AAA) on May 2, 2002, serving ITS's registered agent,
Rand Parker, and its attorney, John L. Gardner.
Sometime prior to May 2002, Linn Station discovered that in addition to
failing to maintain the premises, ITS had actually abandoned the premises. This was
confirmed on May 1, when the rent was not paid. On May 8, 2002, Linn Station sent ITS
another notice via certified mail regarding the non-payment of rent and the abandonment
of the premises. The notice was also served on John L. Gardner, in his capacity as
General Counsel for Inter-Tel, Inc., the parent company of ITS. As before, ITS did not
cure its default by paying the past-due rent within ten days, and continued to be absent
for over fifteen days. Additionally, Linn Station discovered that ITS failed to remove its
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obsolete personalty and had removed fixtures present when the lease commenced, but
failed to install replacement fixtures as required by the lease.
On May 21, 2002, Gardner sent Linn Station correspondence, the body of
which reads as follows:
Pursuant to your letter of May 8, 2002, please be advised of
the following. Inter-Tel Technologies, Inc., is the parent
company of Integrated Telecom Services Corporation (ITS).
ITS, which is the only lessee on the Lease dated December 4,
1997 is now a defunct corporation with no assets. ITS
abandoned the space on or about May 31, 2002. For the
entire period of time that ITS occupied the space, rental was
timely paid. Being defunct and having no assets, there is no
need for ITS to participate in an arbitration or legal
proceeding. Accordingly, you may take a default against ITS
in either proceeding. The parent company neither guaranteed
the lease nor agreed to assume liability for same and will not
pay the damages claimed.
On June 19, 2002, Linn Station filed a Verified Complaint in Jefferson
Circuit Court against ITS, alleging that ITS breached the lease by failing to maintain the
property, failing to pay rent, abandoning the premises, and improperly removing and
failing to replace fixtures. For those breaches, Linn Station demanded $193,000 for the
net present value of the remaining rent; $120,000 for the cost to repair the premises; and
$19,900 for the value of the fixtures and improvements removed. ITS was served with
process on June 24, 2002, by a special bailiff, but never answered the complaint.
Therefore, Linn Station sought and obtained a default judgment in the amount of
$332,900, which was entered on August 12, 2002. Linn Station withdrew its demand for
arbitration that November. A few months after the default judgment was entered, Linn
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Station sought to depose Inter-Tel's officers, directors or agents about Inter-Tel's
relationship with and to ITS. The circuit court eventually limited discovery to a request
for production of documents regarding any transfer of assets. In June 2003, Linn Station
filed a separate action in Jefferson Circuit Court (03-CI-005485) against ITS and InterTel seeking to impose liability on Inter-Tel for the amount of the default judgment. That
action is still pending.
On September 28, 2004, more than two years after the default judgment
was entered, ITS moved the circuit court to set aside, presumably pursuant to CR 55.02,
the portion of the default judgment awarding Linn Station damages on the non-rental
issues, arguing that it had no jurisdiction over those issues.3 Pursuant to the lease, all
non-rental issues were subject to arbitration, meaning that those disputes were outside the
jurisdiction of the circuit court. In response, Linn Station argued that ITS waived
arbitration in the May 2002 letter and that the motion itself was not timely under CR
60.02, as ITS waited two years before seeking relief. The circuit court held a hearing on
the motion in December. ITS asserted that the May 2002 letter did not constitute a
waiver of arbitration, but only indicated that it had no intention of defending in either
action. Furthermore, ITS argued that jurisdiction over the non-rental issues was vested in
the AAA once Linn Station filed its notice of demand. Therefore, the circuit court lacked
jurisdiction, and the default judgment on the non-rental portion was void ab initio as a
matter of law. Linn Station, in turn, argued that ITS provided no authority to support its
3
ITS did not contest the portion of the default judgment awarding damages related to the nonpayment of rent.
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proposition that AAA had jurisdiction that would divest the circuit court of jurisdiction
and continued to assert that the letter was a waiver. Finally, ITS stated that it did not
disagree with the circuit court's statement that a default judgment would have been
entered in either instance, although it continued to maintain that the circuit court lacked
subject matter jurisdiction to do so.
In an order entered December 14, 2004, the circuit court denied ITS's
motion to set aside the 2002 default judgment. After reciting the parties' respective
arguments, the circuit court held:
The Court finds that pursuant to the case of Foremost
Insurance Company v. Whitaker, Ky.App., 892 S.W.2d 607
(1995), that Motions to set aside default judgment made
pursuant to CR 60.02(e) must be filed within a reasonable
time. The defendant, in this instance, did not file[] his
Motion within a reasonable time and instead waited two (2)
years before bringing this to the Court's attention.
Additionally, the Court finds that the defendant did waive
arbitration as set out in its letter dated May 21, 2002. The
defendant has made it clear that even if the plaintiff had
proceeded with arbitration, they would have obtained a
Default Judgment. The results in this case would have been
the same whether the plaintiff had proceeded with this Court
or proceeded with arbitration.
The order contains a notation that it was served on counsel for both Linn Station and ITS.
ITS did not seek review of the December 2004 order until almost six
months later, when it filed a motion to vacate the order denying its motion to set aside or
to make that order final. ITS argued that the circuit court did not address its primary
argument, namely, that it lacked subject matter jurisdiction. It further argued that CR
60.02's time limitation does not apply when subject matter jurisdiction is raised, and that
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subject matter jurisdiction may be raised at any point. In response, Linn Station asserted
that the pending motion to vacate was untimely, as such motions under CR 52.02 must be
filed within ten days after the entry of the order sought to be amended. Linn Station also
pointed out that a motion filed more than ten days after the entry of a judgment may only
be done pursuant to CR 60.02, but that ITS failed to cite any CR 60.02 grounds in its
motion. In this case, ITS was almost six months too late in seeking review. Furthermore,
Linn Station argued that the December 2004 order was final and appealable upon entry,
but no appeal was taken. Finally, Linn Station stated that the December 2004 order did
address subject matter jurisdiction, in that the circuit court made a finding that ITS
waived its right to arbitrate. In reply, ITS argued that subject matter jurisdiction never
vested due to the pending arbitration and that subject matter jurisdiction cannot be
waived.
On September 29, 2005, the circuit court entered an opinion and order, in
which it essentially granted ITS's pending motion. While it did not specifically vacate
the December 2004 order, the circuit court opted to reconsider (and again deny) ITS's
original motion to set aside the default judgment. The circuit court first determined that it
would entertain the motion despite the timeliness issue Linn Station raised, as it pertained
to subject matter jurisdiction. It then concluded that it had subject matter jurisdiction,
because ITS never actively participated in the arbitration proceeding and sent
correspondence stating that it would not be participating.4 Therefore, the circuit court
4
We note that the lease requires the parties, not a party, to refer any non-rental disputes to
arbitration.
-8-
was unable to find any valid reason to set aside the default judgment. It is from this order
that ITS has appealed and Linn Station has cross-appealed.
On direct appeal, ITS continues to argue that the circuit court lacked subject
matter jurisdiction over the arbitration issues and that the alleged waiver in the May 2002
letter cannot confer such jurisdiction. Linn Station disputes ITS's arguments in its
appellee brief and goes on to argue in its cross-appellant brief that the circuit court erred
in deciding to reconsider the subject matter jurisdiction argument, as ITS did not timely
seek review of the December 14, 2004, order that actually ruled on the issue.
DIRECT APPEAL
We shall first address the propriety of ITS's direct appeal. Having reviewed
the procedural history of this case, as well as Linn Station's motion to dismiss the direct
appeal and its argument on cross-appeal, we hold that the circuit court erred in
considering ITS's June 2005 motion to vacate the December 2004 order. This decision is
based upon our conclusions that the circuit court had already ruled on the issue of subject
matter jurisdiction and that ITS did not timely seek review of the December 2004 order.
ITS based its June 2005 motion upon the supposition that the circuit court
did not address subject matter jurisdiction in the first order, making it proper for the
circuit court to rule on that issue as delineated in the second motion. We disagree with
this and hold that the circuit court did address subject matter jurisdiction in the December
2004 order when it determined that ITS had waived arbitration in the May 2002 letter. It
logically follows from this determination that the circuit court was ruling that it had
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subject matter jurisdiction over the dispute. Therefore, the circuit court should not have
reviewed its prior ruling on this basis, despite the fact that the issue of subject matter
jurisdiction may be raised at any time. Here, the issue had already been addressed, and,
as more fully addressed below, ITS failed to timely or properly seek review of the initial
ruling.
This leads us to our second conclusion, that ITS's June 2005 motion was
untimely. The first order denying ITS's motion to set aside the default judgment under
CR 60.02 was entered and served on December 14, 2004. We are instructed that orders
denying CR 60.02 motions are final and appealable upon entry. Good v. Ohio Edison
Co., 149 F.3d 413 (6th Cir. 1998). See also Hackney v. Hackney, 327 S.W.2d 570, 571-72
(Ky. 1959); Brozowski v. Johnson, 179 S.W.3d 261, 263 (Ky.App. 2005). Once the
December 2004 order was entered, ITS had essentially three options to seek relief: 1) a
motion to amend under CR 52.02; 2) a notice of appeal; or 3) a CR 60.02 motion.
First, ITS could have filed a motion pursuant to CR 52.02 and requested the
circuit court to make additional findings and amend its judgment. However, such
motions must be “made not later than 10 days after entry of judgment[.]” CR 52.02. The
same is true for motions filed under CR 59.05. There is no question that ITS failed to
seek CR 52.02 relief within ten days.
Second, ITS could have appealed the order to the Court of Appeals.
However, a notice of appeal must “be filed within 30 days after the date of notation of
service of the judgment or order under Rule 77.04(2).” CR 73.02(1)(a). The Clerk of the
- 10 -
Jefferson Circuit Court noted that the attorneys of record, including William H. Mooney
as counsel for defendant, were served with the order on December 14, 2004. While we
appreciate ITS's dilemma in that its attorney apparently did not learn of the order's entry
until just prior to filing the June 2005 motion, the law is clear that “the time for filing a
notice of appeal is triggered not by service but by the date of the clerk's notation on the
docket of the service of notice of entry. That date is the date of entry for the purpose of
fixing the running of time for appeal.” Fox v. House, 912 S.W.2d 450, 451 (Ky.App.
1995). See also Mollett v. Trustmark Ins. Co., 134 S.W.3d 621 (Ky.App. 2003).
Third, and finally, ITS could have sought relief under CR 60.02, which
reads as follows:
On motion a court may, upon such terms as are just, relieve a
party or his legal representative from its final judgment,
order, or proceeding upon the following grounds: (a)
mistake, inadvertence, surprise or excusable neglect; (b)
newly discovered evidence which by due diligence could not
have been discovered in time to move for a new trial under
Rule 59.02; (c) perjury or falsified evidence; (d) fraud
affecting the proceedings, other than perjury or falsified
evidence; (e) the judgment is void, or has been satisfied,
released, or discharged, or a prior judgment upon which it is
based has been reversed or otherwise vacated, or it is no
longer equitable that the judgment should have prospective
application; or (f) any other reason of an extraordinary nature
justifying relief. The motion shall be made within a
reasonable time, and on grounds (a), (b), and (c) not more
than one year after the judgment, order, or proceeding was
entered or taken. A motion under this rule does not affect the
finality of a judgment or suspend its operation.
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We note that “CR 60.02 relief 'is not available for correction of an error or mistake of
law by the court.'” Brozowski, 179 S.W.3d at 265, citing James v. Hillerich & Bradsby
Co., 299 S.W.2d 92, 93 (Ky. 1957).
ITS did not cite or rely upon any of these Rules in its June 2005 motion,
nor are we able to discern any CR 60.02 grounds in the motion itself. For these reasons,
the circuit court should not have ruled upon the merits of the June 2005 motion, but
should have summarily denied it. The issues ITS raised in its brief are therefore moot,
and we shall not address them. However, since the circuit court did not change its initial
ruling, we shall affirm.
CROSS-APPEAL
On cross-appeal, Linn Station raises a single argument that addresses the
same issue we held to be determinative on direct appeal. While we agree that the circuit
court erred in ruling on the merits of the June 2005 motion, we nevertheless hold that this
error is harmless, as the ruling did not change the ultimate ruling of the December 2004
order. CR 61.01. Therefore, we affirm.
For the foregoing reasons, the judgment of the Jefferson Circuit Court is
affirmed.
ALL CONCUR.
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BRIEFS FOR APPELLANT/CROSSAPPELLEE:
BRIEF FOR APPELLEE/CROSSAPPELLANT:
Scott D. Spiegel
William H. Mooney
Louisville, Kentucky
Ridley M. Sandidge, Jr.
Louisville, Kentucky
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