JAMES F. KNOTT, JR.; JAMES F. KNOTT MANAGEMENT CORPORATION, PARTNERS D/B/A LUCKY LADY PARTNERSHIP; AND LUCKY LADY PARTNERSHIP v. HILARY J. BOONE, JR. D/B/A WIMBLEDON FARM (SUCCESSOR IN INTEREST TO WIMBLEDON FARM, LTD.)
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RENDERED: June 1, 2001; 2:00 p.m.
NOT TO BE PUBLISHED
C ommonwealth O f K entucky
C ourt O f A ppeals
NO.
2000-CA-000558-MR
JAMES F. KNOTT, JR.;
JAMES F. KNOTT MANAGEMENT
CORPORATION, PARTNERS
D/B/A LUCKY LADY PARTNERSHIP;
AND LUCKY LADY PARTNERSHIP
APPELLANTS
APPEAL FROM FAYETTE CIRCUIT COURT
HONORABLE JOHN ADAMS, JUDGE
ACTION NO. 92-CI-01440
v.
HILARY J. BOONE, JR.
D/B/A WIMBLEDON FARM (SUCCESSOR
IN INTEREST TO WIMBLEDON FARM, LTD.
APPELLEE
OPINION
AFFIRMING IN PART - REVERSING IN PART AND REMANDING
** ** ** ** **
BEFORE:
GUIDUGLI, KNOPF AND SCHRODER, JUDGES.
GUIDUGLI, JUDGE.
James F. Knott, James F. Knott Management
Corporation, Partners, d/b/a Lucky Lady Partnership, and Lucky
Lady Partnership (LLP) (collectively Knott) appeal from a final
judgment entered by the Fayette Circuit Court on January 19,
2000, which awarded $415,480.79 plus interest to Hilary J. Boone,
Jr. d/b/a Wimbledon Farm (Boone).
We affirm in part and reverse
and remand in part.
FACTS
This matter involving LLP’s ownership of several shares
in two stallion syndicates is now before this Court for the
second time.
Unfortunately the facts have become no less
convoluted, and a full recitation of the history of the
syndicates and LLP’s involvement with them is required.
We will
address each syndicate separately, and then detail LLP’s
involvement with each.
A.
THE RELAUNCH SYNDICATE
On April 9, 1980, Boone and Leonard Lavin, co-owners of a
thoroughbred stallion named Relaunch, entered into a syndicate
agreement in which ownership of the horse was divided into forty
equal shares.
Boone received shares 21-40 under the terms of the
agreement, and was given the right to sell, transfer or otherwise
dispose of the shares.
The agreement stated that each share was
“subject to all of the terms and conditions of this Agreement,”
and further provided in pertinent part:
THIRD:
From and after date of delivery of
the Stallion to the Syndicate
Manager, the Stallion shall stand
at Wimbledon Farm, Lexington,
Kentucky, under the care, promotion
and general management of Hilary J.
Boone, Jr., the Syndicate Manager,
including without limitation the
supervision of all breeding
activities. Wimbledon Farm shall
be paid quarterly the prevailing
rate for stallion keep in the area.
As full compensation for his
services, Hilary J. Boone, Jr., so
long as he remains the Syndicate
Manager, shall receive four (4)
free nominations to the Stallion in
each breeding season[.]
. . . .
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FOURTH:
Each co-owner, in each breeding
season, beginning in 1981, shall be
entitled to one (1) free nomination
to the Stallion for each share
owned by him[.]
. . . .
NINTH:
Each co-owner shall pay such
proportion of all charges, costs and expenses
incurred after the Effective Date in
connection with the maintenance, care and
promotion of the Stallion as the number of
shares owned by him shall bear to the total
number of shares.
Notwithstanding the provisions of
Paragraph FOURTH, no co-owner who
is in default in the payment of his
share of the expenses as provided
herein, or in the payment of the
deferred installments of the
purchase price, shall be permitted
to breed a mare to the Stallion
until his obligation has been
satisfied.
TENTH:
B.
Separate books and records of
account shall be kept by the
Syndicate Manager which shall
accurately reflect all income and
disbursements for and on behalf of
the co-owners, which shall be
subject to inspection by them at
reasonable times during business
hours. The Syndicate Manager shall
furnish each co-owner, each year,
beginning with the year 1981, with
a statement showing the results of
the breeding season and the
receipts and expenditures for the
year and such other information as
the Syndicate Manager may deem
pertinent.
THE DANZIG CONNECTION SYNDICATE
In December 1986, Kennelot Stables, Ltd., and Wimbledon
Farms, Ltd. (WFL),1 co-owners of a thoroughbred stallion named
1
WFL was dissolved during the course of this litigation and
(continued...)
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Danzig Connection, entered into a syndicate agreement where
ownership of the horse was divided into forty equal shares.
WFL
received shares 21-40 under the agreement, and was given the
authority to sell its shares.
The agreement stated that all of
the shares were “subject to all of the terms and conditions of
this Agreement,” and further provided in pertinent part:
Third:
From and after the effective date
of this Syndicate Agreement, the
Stallion shall stand at stud at
Wimbledon Farm . . . under the
care, promotion and general
management of Wimbledon Farm, Ltd.
as the Syndicate Manager.
. . . .
Fourth:
From and after the effective date
of this Agreement, the Syndicate
Manager shall have the general
supervision and management of the
Stallion, including the supervision
and management of all breeding
activities of the Stallion without
limitation. As full compensation
for its services in each breeding
season the Stallion stands under
its supervision and management, the
Syndicate Manager shall receive
four (4) free nominations to the
Stallion[.]
. . . .
The farm at which the Stallion is
kept . . . shall be paid quarterly
the prevailing rate for Stallion
keep in the area and shall be
reimbursed for its out of pocket
expenses incurred in the keeping
and standing of the Stallion,
including veterinary, farrier,
transportation and promotion
expenses.
1
(...continued)
Boone became its successor in interest.
-4-
. . . .
FIFTH:
Each co-owner, in each breeding
season, commencing with the first
breeding season the Stallion stands
at stud, shall be entitled to one
(1) free nomination to the Stallion
for each Fractional interest
owned[.]
. . . .
ELEVENTH: Each co-owner shall pay such
proportion of the expenses of the
syndicate, inclusive of all costs
and charges incurred in connection
with the maintenance, care and
promotion of the Stallion,
including advertising and like
expenses, and charges and expenses
incurred by the Syndicate Manager
in the administration of the
syndicate, as the number of
Fractional Interest owned by such
co-owner shall bear to the total
number of Fractional Interests.
All such obligations of the coowners shall be paid to the
Syndicate Manager within ten (10)
days from billing therefor. A
service charge of two percent (2%)
per month may be made by the
Syndicate Manager on all past due
accounts.
Notwithstanding all other
provisions of this Agreement, a coowner who is in default in the
payment of his pro rata share of
the expenses of the syndicate,
shall not be permitted to breed a
mare to the Stallion until his
obligation has been satisfied in
full, nor shall a mare be bred to
the Stallion on any nomination
attributable to the Fractional
Interest of such co-owner, if the
nomination has been transferred to
a third party, until such
obligation has been satisfied in
full. The Syndicate Manager may
withhold stallion service
certificates until the co-owner of
the Fractional Interest on which
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the breeding has occurred has cured
any default in the payment of his
pro rata share of syndicate
expenses.
. . . .
Twelfth:
C.
Books and records of account shall
be kept by the Syndicate Manager
which shall accurately reflect all
receipts and disbursement for and
on behalf of the syndicate. The
Syndicate Manager shall furnish to
each co-owner prior to December 15
of each year after retirement of
the Stallion, a statement showing
the results of the breeding season.
The Syndicate Manager shall further
furnish to the co-owners prior to
March 15 of each year, a statement
showing the receipts and
expenditures on behalf of the coowners in the previous calendar
year.
LLP’S PURCHASE OF SYNDICATE SHARES
At some point in the 1980s, Knott and Richard A. Brooks
(Brooks) organized LLP.
On January 26, 1987, WFL and “For Lucky
Lady PTR. R.A. Brooks Trading as Sun Farm” entered into two
separate purchase and sale agreements for Shares 29 and 30 in the
Danzig Connection Syndicate.
Each agreement provided that the
shares were subject to the terms and conditions of the Danzig
Connection Syndicate Agreement, a copy of which was attached.
The purchase price for each share was $200,000.
Brooks made a
$20,000 down payment on each share, and the remaining $180,000
balances were secured by two separate promissory notes.
Each
note provided for four separate payments of $45,000 payable on or
before September 1 1987-1990, “together with interest on the
unpaid principal balance from time to time remaining at the rate
equal to the “prime rate” being charged by First National Bank &
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Trust Company of Louisville, Kentucky, plus one (1%) percent.”
WFL set up Account 540 to track income and expenses attributable
to the Danzig Connection shares owned by LLP.
On February 1, 1987, “R.A. Brooks Trading as Sun Farm
for Lucky Lady PTR” purchased share 33 in the Relaunch Syndicate
from Boone.
The purchase price for the share was $175,000.
Brooks made a down payment of $20,000, and the remaining balance
was secured by a promissory note calling for three separate
payments of $51,666.67 payable on or before February 1 for the
years 1988-1990.
The interest rate contained in the note was
identical to the one contained in the Danzig Connection notes.
The bill of sale between Boone and Brooks provided that the share
was subject to the terms of the Relaunch Syndicate Agreement, a
copy of which was attached.
In addition, Paragraph 7(a) of the
bill of sale set forth certain events of default which would
trigger Boone’s right to declare the entire unpaid balance
immediately due and owing.
Included among the events of default
were (1) the Buyer’s failure to perform or breach of any term or
provision of the Relaunch Syndicate Agreement; and (2) default in
the payment of any installment of principal and interest.
Paragraph 7(b) stated in pertinent part:
Upon the happening of one or more of the
Events of Default specified in subparagraph
(1) above...(iii) interest on the Note shall
accrue and be due and payable at the rate of
fourteen (15%) per annum from the date of the
occurrence of the first of the Events of
Default to occur instead of at the rate
provided in that Note.
Boone established Account 816 to track income and expenses
attributable to the Relaunch share owned by LLP.
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Aside from the LLP shares, Brooks also purchased share
31 in the Danzig Connection Syndicate for an unrelated entity
known as Allan Thoroughbreds and share 32 in the Danzig
Connection Syndicate for himself.
Boone established Accounts 505
and 511, respectively, for these shares.
D.
BROOKS’ MANAGEMENT OF PARTNERSHIP FUNDS
Brooks was responsible for the day to day management of
LLP.
Knott would forward money to Brooks with the expectation
that it would be used to make payments to Boone for syndicate
expenses and installment payments.
Unbeknownst to Knott,
however, Boone failed to keep the LLP Accounts current.
As a
result of Brooks’ mismanagement, both LLP Accounts as well as
Accounts 505 and 511 fell into arrears.
In July 1988, Brooks asked Boone to combine his four
accounts into one.
July 31, 1988.
Boone agreed, and established Account 109 on
Brooks did not have Knott’s permission to
transfer the LLP Accounts to Account 109.
Upon the creation of
Account 109, the outstanding balances of the LLP Accounts and
Accounts 505 and 511 were zeroed out and commingled into Account
109.
Promissory note payments and syndicate expenses which came
due after July 31, 1988, were charged back to the original LLP
Accounts.
Boone mailed monthly invoices to LLP at Sun Farm for
Account 540.
Each statement indicated on its face that a 1.5%
“late fee” was charged monthly on past-due accounts.
The
statement for August 31, 1988, showed the transfer of the
outstanding balance to Account 109 and the addition of a charge
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of $117,12.38 to Account 540 for the principal and interest
payment due on September 1, 1988.
The statement for the period
ending September 30, 1988, shows the previous balance of
$117,126.38 and syndicate expenses for the month of $1,129.06.
The statement reflects two cash receipts totaling $88,000, which
were subtracted from the outstanding balance, leaving $29,126.38.
A late charge of $436.90 ($29,126.38 x 1.5%) was added, and the
statement indicated that a total of $30,692.34 was due.
A review
of the balance of the invoices contained in the record for
Account 540 shows that the 1.5% late fee was routinely applied to
past due balances attributable to both the syndicate expenses and
principal and interest installments.
Boone mailed quarterly statements to LLP at Sun Farm
for Account 816.
Statements which contained past-due balances
indicated that a 1.5% “late fee” was charged monthly on past-due
balances.
Like the statements for Account 540, these statements
reflect the transfer to Account 109, and that the 1.5% late fee
was routinely applied to past-due balances attributable to both
syndicate expenses and principal and interest installments,
As a result of the imposition of the monthly late fee,
the yearly interest on both LLP Accounts was 18%, both before and
after the creation of Account 109.
The outstanding balances
contained in Account 109 accrued interest at a yearly rate of
12%, which we assume comes from the imposition of a 1% monthly
late fee.
Further problems developed with Account 109 when Brooks
instructed Boone to apply income received by the LLP shares from
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the sale of breeding seasons to the balance of Account 109 as
opposed to the individual LLP Accounts.
Knott had no knowledge
of the creation of Account 109, nor had he given permission for
partnership credits to be applied to the commingled balance of
Account 109.
Had the credits been applied to the individual
Accounts, Account 816 would have received credits totaling
$97,500.84 and Account 540 would have received a $20,000 credit.2
Brooks’ misappropriation of partnership funds came to
Knott’s attention in the summer of 1990.
Knott retained an
accountant to investigate Brooks’ activities.
On September 26,
1990, Knott’s attorney informed Boone of Brooks’ removal as
administrative general partner of LLP in writing, and further
indicated that Brooks was no longer authorized to act on behalf
of LLP.
The letter further stated:
All decisions regarding the stallion shares
and authorizations will come solely from Mr.
Knott. In your absence last week, I spoke
with your secretary, Ms. Ann Oliver. She
informed me that there were liens against the
shares. Mr. Knott was unaware of the
existence of any such liens. He had sent his
payments to Mr. Brooks and been led to
believe that his payments, along with Mr.
Brooks’s share, had been paid over to
Wimbledon Farm. If you would please provide
us with a breakdown of the expenses and
payments, as well as the amount of the
claimed liens, Mr. Knott can talk to Mr.
Brooks about this issue.
Either in response to Knott’s letter or at the request
of Knott’s accountant, Boone faxed Knott copies of the accounting
ledgers for the LLP Accounts on October 9, 1990.
2
The ledger for
There is, however, a dispute as to whether the $20,000
credit should go to LLP or Allan Thoroughbreds.
-10-
Account 540 showed the transfer of the account balance to Account
109 on July 31, 1988.
The ledger for Account 816 appears to be
missing a page and does not reflect the transfer to Account 109.
The last entry on both of these ledgers occurred on October 30,
1990.
Neither of the ledgers showed any of the five disputed
credits.
The ledger for Account 540 showed a balance due of
$193,128.81, the ledger for Account 816 showed a balance due of
$97,467.98.
Boone faxed another set of ledger sheets to Knott’s
accountant on January 22, 1991.
These ledgers were identical to
the ones previously sent, with the exception that the last entry
on both accounts occurred on June 30, 1990.
When Knott’s
accountant asked for an updated ledger of the LLP Accounts in
November 1991, he was given a completely different set of ledger
sheets which contained more transactions than the ones previously
provided and revealed all of the five disputed credits.
It
appears that Knott’s accountant advised him on December 31, 1991,
that $152,198.54 was owed on the LLP Accounts.
Knott began liquidating his thoroughbred interests in
the Fall of 1990.
He sold all of his shares with the exception
of the ones currently at issue.
Knott finally sold the Danzig
Connection shares for $7,000 per share.
Relaunch died before
Knott could sell his shares.
On March 13, 1991, Boone wrote a letter to Knott
stating:
Pursuant
Notes for the
Shares No. 29
33 Lucky Lady
to the terms of the Promissory
release of DANZIG CONNECTION
and 30 and RELAUNCH Share No.
Partnership is in default.
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This letter constitutes notice of such
default. In the event that said default is
not immediately cured we will have no other
alternative but to seek all appropriate
remedies.
We have previously provided you with the
accounting detail with respect to the funds
which are due and owing.
E.
PROCEDURAL HISTORY
On April 24, 1992, Knott filed suit seeking an
accounting of what was due under each separate account.
Knott
also sought compensatory and punitive damages from Boone for
breach of fiduciary duty and for interference with Knott’s
efforts to sell the shares, along with disgorgement of the fees
paid to Boone and/or Wimbledon Farms, Ltd. in their capacity as
syndicate manager.
On January 9, 1995, the trial court entered summary
judgment in favor of Boone, finding that Boone was not aware that
Brooks was acting without authority until September 1990, that
the credits in dispute were applied to Account 109 in the
ordinary course of business, and that LLP was bound by Brooks’
actions.
On May 3, 1996, this Court entered an opinion reversing
the grant of summary judgment, stating:
Evidence in this case establishes facts
from which a jury could find that Wimbledon
Farm had knowledge that Brooks was acting
against the interest of the partnership, and
benefitting non-partnership entities without
any consideration in return. This evidence
raises a question of fact as to whether
Wimbledon Farm had knowledge of facts that in
the circumstances showed bad faith. If a
jury found that Wimbledon Farm had such
knowledge, then Lucky Lady Partnership would
not be bound by Brooks’ actions and should be
properly credited.
-12-
. . . .
Because we reverse the summary judgment,
all of appellant’s claims are revived,
including the claims for breach of fiduciary
duties.
. . . .
Once a jury has determined the factual
issues . . . then an award for interest can
be made, if any is justified. If an award of
interest is made, it must be at the legal
rate or at a rate agreed to by the parties.
At trial, Knott presented expert testimony establishing
that the Relaunch share would have been worth $200,000 - $225,000
and the Danzig Connection shares would have been worth $100,000 $125,000 per share if they could have been sold within a
reasonable period of time after October 1990.
Prior to submitting the matter to the jury, the trial
court entered a directed verdict in favor of Boone on Knott’s
claim for wrongful interference with the sale of the shares.
trial court refused to tender a jury instruction on that issue
The
and also refused to allow the jury to decide whether Knott was
entitled to a $20,000 credit for the sale of the 1990 breeding
season on Danzig Connection share 29.3
Following the presentation of evidence, the jury
responded “No” to the following special interrogatories:
Do you believe from the evidence that
the invoices from the Defendant, Wimbledon,
to Lucky Lady Partnership correctly stated
the syndicate account of Plaintiff, Lucky
Lady Partnership, for Relaunch throughout the
period of time beginning with the date of
3
This was one of the five credits which were applied to
Account 109 instead of the separate LLP Accounts.
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purchase of the share in Relaunch until
December 1994?
Do you believe from the evidence that
the invoices from the Defendant, Wimbledon,
to Lucky Lady Partnership correctly stated
the syndicate account of Plaintiff, Lucky
Lady Partnership, for Danzig Connection
throughout the period of time beginning with
the date of purchase of the share in Danzig
Connection until December 1994?
Do you believe from the evidence that
the acts of Dick Brooks in asking that the
accounts be combined and the interest rate
lowered were acts for apparently carrying on
in the usual way the business of the Lucky
Lady Partnership?
Do you believe from the evidence that
Dick Brooks had authority (either express or
implied) to ask that the accounts be combined
and the interest rate lowered?
If you believe from the evidence that
Dick Brooks was not authorized to ask on
behalf of Lucky Lady Partnership that the
accounts be combined and the interest rate
lowered, do you also further believe from the
evidence that Wimbledon Farm had knowledge of
Dick Brooks’ lack of authority?
Following receipt of the jury’s findings, the trial
court began the process of “unwinding” Account 109 and bringing
the LLP Accounts forward to determine what Boone was owed.
Each
party submitted reports prepared by certified public accountants
outlining what they believe was owed.
According to the report
submitted by Boone, Knott owed $415,480.79.
A review of Boone’s
report showed that instead of tracking the ledgers as prepared by
Boone, Boone’s accountant recalculated the amounts due using the
2% late fee provided under the Danzig Connection Syndicate
Agreement and the 14% default interest rate provided under the
terms of paragraph 7(b) of the bill of sale and security
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agreement for the Relaunch share.
It is clear that this
constituted the first use by Boone of the late fee and default
interest rate which were agreed to by Knott in writing.
Aside
from submitting his own accounting report, Knott argued that
Boone could not recover interest on either account because the
late fees Boone sought to collect constituted usurious interest
pursuant to KRS 360.010.
On December 13, 1999, the trial court entered an order
finding:
The issue concerning the unwinding of
Account 109, necessitated by the jury
verdict, requires this Court to find whether
the “late charges” are to be calculated as
interest. If the “late charges” are
interest, it would create a [sic] usurious
interest claimed by the Defendants, and noncollectable under KRS 360.020. The Court
finds that the one and one-half percent
change [sic], designated as a “late fee” is
just that. It is not interest and not
subject to any claim of “usury”.
It is also incumbent upon this Court to
make a determination as of March 31, 1999
what the balances would be if there were to
be an unwinding of Account 109. This Court
finds that the Twenty Thousand Dollar payment
by Dick Brooks . . . should be credited to
Allen Thoroughbreds (Danzig Connection Share
31, Account No. 505). The proof is
undisputed as to the source of and
application to be made of these monies. This
Court is of the opinion it is uncontroverted
as to Mr. Brook’s [sic] payment and the
purpose of which it was intended (the jury
verdict nor the proof contradicts this
finding).
This Court finds that the special
verdict of the jury requires that the
balances as of March 31, 1999 should be, as
calculated by the Defendant’s [sic], in the
amount of Four Hundred and Fifteen Thousand,
Four Hundred and Eighty Dollars and SeventyNine Cents ($415,480.79.)
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Post judgment interest at the statutory
rate of twelve percent per annum will run on
the $415,480.79 until the judgment is
satisfied.
The Court also finds that the judgment
should include and be entered in favor of the
Defendant on all other claims including the
claimed breach of fiduciary duty. This Court
finds the applicable law as to that claim to
be Thomas v. Hodge, 897 F.Supp. 980 (W.D.Ky.
1995).
The judgment should not go further,
because this Court in this opinion finds that
while the distinction may be minor, it is
significant, in that the inaccuracy of the
invoices was the application of the credits.
With the unwinding of the accounts and the
adjustments set forth as above, it is this
Court’s opinion, as a matter of law, there
was not a breach of fiduciary duty. This is
also predicated upon the jury’s finding that
Wimbledon Farm was not aware of Dick Brooks
[sic] lack of authority; therefore, there
could not be a contrary finding.
Plaintiffs wish to revisit the claim for
interference with the potential sale of its
shares. The Court has previously ruled and
nothing has changed. The Court’s previous
ruling is REAFFIRMED.
On January 19, 2000, the trial court entered final
judgment in favor of Boone in the amount of $415,480.79.
Knott’s
motion to alter, amend or vacate was denied by order entered
February 29, 2000, and this appeal followed.
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I.
DID THE TRIAL COURT ERR IN PERMITTING
BOONE TO RECOVER LATE CHARGES ON THE
PARTNERSHIP ACCOUNTS?
As we noted, Boone’s accountant calculated the late
fees allegedly owned on the LLP Accounts based on (a) the 2% late
fee allowed under the terms of the Danzig Connection Syndicate
Agreement; and (b) the 14% default interest rate allowed under
paragraph 7(b) of the bill of sale and security agreement for the
Relaunch share.
The trial court held that these late fees were
recoverable by Boone and that the late fees were not interest.
Knott argues that regardless of the fact that Boone’s accountant
calculated the late fees based on what was agreed to under the
terms of the various written agreements, no interest is
recoverable on any of the notes because Boone imposed a 1.5% late
fee on both LLP Accounts against both past-due syndicate expenses
and past-due payments of principal and interest.
We agree.
KRS 360.010 sets forth the legal rate of interest as
follows:
The legal rate of interest is eight
percent (8%) per annum, but any party may
agree, in writing, for the payment of
interest in excess of that rate as follows: .
. . (b) at any rate on money due or to become
due upon any contract or other obligation in
writing where the original principal amount
is in excess of fifteen thousand dollars[.]
KRS 360.010(1)(b) (emphasis added).
As we have noted, the
interest rate stated in all three notes was “the rate equal to
the “prime rate” being charged . . . plus one (1%) percent[.]” In
regard to the Danzig Connection shares, the parties agreed that
Boone could charge a 2% service charge on any past due payment of
syndicate expenses.
In regard to the Relaunch share, the parties
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agreed that a default interest rate of 14% could be applied to
the principal of the note “from the date of occurrence of the
first of the Events of Default to occur instead of at the rate
provided in the Note.”
Although there is nothing in any document
setting forth the rights and responsibilities of the parties
which allowed Boone to levy a 1.5% monthly late fee on past-due
syndicate expenses and past-due payments of principal and
interest, that is exactly what he did.
We believe this
constitutes usurious interest under KRS 360.010.
The fact that
Boone referred to the extra charge as a late fee makes no
difference.
“Courts will not tolerate the collection of usury
through the use of any trick, device, or subterfuge.”
Schultz v.
Provident Loan Ass’n., Ky., 157 S.W.2d 736, 738 (1941).
From the language in the trial court’s opinion, it
appears that the trial court may have believed that the late
charges calculated in the report prepared by Boone’s accountant
did not constitute interest, usurious or otherwise, because the
report calculated late fees based on what the parties agreed to
under the terms of the various written agreements.
However, a
creditor cannot “retroactively purge the account of the taint of
usury by dropping the added charges” at a later date.
Weyerhauser Company, 598 S.W.2d 54, 56 (Ark. 1980).
Bunn v.
Under KRS
360.020(1), all Boone had to do to trigger the interest
forfeiture penalty of that statute was knowingly take, receive,
reserve, or merely charge “a rate of interest greater than is
allowed by KRS 360.010.”
Nor can Boone argue that the
application of the 1.5% late fee was not knowingly done as he has
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admitted that it was charged as evidenced by the statements
prepared for the LLP Accounts and there is no claim that the
charge was levied as a result of mistake or mathematical error.
We are not persuaded by Boone’s argument that “late
charges or late fees do not constitute interest [if] the debtor
can avoid them simply by paying the obligation on time.”
The
fact that Knott could have avoided a late charge by paying it on
time does not remove Boone’s responsibility to charge an interest
rate in accordance with what the parties have agreed to in the
event that a default occurs.
The trial court erred in holding that the late charges
were not interest, thus this matter must be remanded to the trial
court with instructions to apply the penalty provisions set forth
in KRS 360.020.
Because we find that Boone is not entitled to
recover interest under the notes, we need not address Knott’s
argument concerning the compounding of interest under the award.
II.
DID THE TRIAL COURT ERR IN FINDING NO
BREACH OF FIDUCIARY DUTY ON BEHALF OF
WIMBLEDON AND/OR BOONE AND IN REFUSING
TO SUBMIT THIS ISSUE TO THE JURY?
Under the terms of the Relaunch Syndicate Agreement,
Boone was designated syndicate manager.
Boone’s duties as such
were set forth as follows:
Separate books and records of account shall
be kept by the Syndicate Manager which shall
accurately reflect all income and
disbursements for and on behalf of the coowners, which shall be subject to inspection
by them at reasonable times during business
hours. The Syndicate Manager shall furnish
each co-owner, each year, beginning with the
year 1981, with a statement showing the
results of the breeding season and the
receipts and expenditures for the year and
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such other information as the Syndicate
Manager may deem pertinent.
As payment for his services, Boone was entitled to “four (4) free
nominations to the Stallion in each breeding season.”
Under the
terms of the Danzig Connection Syndicate Agreement, WFL was
designated syndicate manager.
As successor in interest to WFL,
Boone took over its duties as syndicate manager.
Boone’s duties
as syndicate manager in the Danzig Connection Syndicate were set
forth as follows:
Books and records of account shall be kept by
the Syndicate Manager which shall accurately
reflect all receipts and disbursements for
and on behalf of the Syndicate. The
Syndicate Manager shall furnish to each coowner prior to December 15 of each year after
retirement of the Stallion, a statement
showing the results of the breeding season.
The Syndicate Manager shall further furnish
to the co-owners prior to March 15 of each
year, a statement showing the receipts and
expenditures on behalf of the co-owners in
the previous calendar year.
As payment for his services, Boone was entitled to “four (4) free
nominations to the Stallion” per breeding season.
Based on the
foregoing, Knott maintains that the trial court erred in deciding
that there was no breach of fiduciary duty.
We agree.
There can be no doubt that under the terms of the two
syndicate agreements, Boone, as syndicate manager, was
responsible for accurate accountings of the shares for both
syndicates.
Based on the evidence contained in the record,
specifically in regard to the creation of Account 109, the
misapplication of credits due to LLP Accounts to Account 109, and
the failure of the ledgers to accurately reflect what was owed,
there was more than enough evidence to create a question of fact
-20-
for the jury to decide whether Boone breached the fiduciary duty
he owed as syndicate manager.
Thomas v. Hodge, 898 F.Supp. 980 (W.D.Ky. 1995), has no
applicability to this case.
If Boone had merely sold the shares
to Knott and then submitted periodic invoices to Knott for
Syndicate services, the reasoning in Thomas would apply as in
that scenario Boone would merely be a vendor of services.
However, as syndicate manager there is no denying the fact that
Boone undertook responsibility for providing accurate accounts to
the share owners.
Boone cannot escape this responsibility by
relying solely on his position as vendor of the shares and
services.
The trial court erred in holding that there was no
breach of fiduciary duty and in refusing to submit this issue to
the jury.
III. DID THE TRIAL COURT ERR IN DISMISSING
KNOTT’S CLAIM FOR INTERFERENCE WITH THE
SALE OF THE SHARES?
Based on expert testimony as to the decrease in the
value of the shares, Knott alleges that he has shown intentional
interference with a prospective contractual relationship and that
the trial court erred in not submitting this claim to the jury.
We disagree.
The Kentucky Supreme Court adopted the tort of
intentional interference as set forth in the Restatement, Second,
of Torts, § 767 in National Collegiate Athletic Association v.
Hornung, Ky., 754 S.W.2d 855 (1988).
One of the elements to be
considered in deciding whether the tort has occurred is whether
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there was a valid business relationship or the expectation
thereof which was interfered with.
Aside from merely expressing an interest in selling the
shares, it is clear that Knott took no active steps to do so.
As
Boone illustrates in his brief on appeal, Knott admitted that he
had never received or sought an offer to sell the shares.
In the
absence of anything beyond a mere desire to sell the shares,
there can be no intentional interference.
IV.
DID THE TRIAL COURT ERR IN FAILING TO
GIVE LLP THE DISPUTED $20,000 CREDIT?
Knott alleges that the $20,000 payment in question was
made by Brooks to release a stallion certificate for breeding on
one of the Danzig Connection shares.
Boone contends that the
$20,000 came from a check written on Brooks’ personal account,
and that Brooks instructed Boone to apply it to the debt of Allan
Thoroughbreds in Account 505.
this issue to the jury.
The trial court refused to submit
We believe that the refusal of the trial
court to submit this issue to the jury was erroneous as there was
obviously a factual dispute as to which account the $20,000
should have been applied to.
CONCLUSION
The final judgment of the Fayette Circuit Court is
reversed to the extent that it awarded interest on the notes and
refused to submit issues to the jury regarding breach of
fiduciary duty and application of the disputed $20,000 credit.
This matter is remanded with instructions to (a) submit the
issues involving breach of fiduciary duty and application of the
$20,000 credit to the jury; and (b) apply the penalty provisions
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of KRS 360.020 for the charging of usurious interest.
To the
extent that the trial court dismissed Knott’s claim for
intentional interference, the judgment is affirmed.
ALL CONCUR.
BRIEF FOR APPELLANTS:
BRIEF FOR APPELLEE:
Glen S. Bagby
J. Robert Lyons, Jr.
Lexington, KY
Phillip D. Scott
Anne A. Chesnut
Lexington, KY
ORAL ARGUMENT FOR APPELLANTS:
ORAL ARGUMENT FOR APPELLEE:
J. Robert Lyons, Jr.
Lexington, KY
Anne A. Chesnut
Lexington, KY
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