M. A. WALKER COMPANY, INC., M.A. WALKER, LLC v. PBK BANK, INC., f/k/a PEOPLES BANK OF KENTUCKY, VANMAR, INC., both Kentucky Corporations, and MADISON COUNTY, KENTUCKY
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RENDERED: DECEMBER 27, 2002; 2:00 p.m.
TO BE PUBLISHED
C ommonwealth O f K entucky
C ourt O f A ppeals
NO.
2001-CA-002017-MR
M. A. WALKER COMPANY, INC.,
now known as
M.A. WALKER, LLC
v.
APPELLANT
APPEAL FROM MADISON CIRCUIT COURT
HONORABLE JULIA H. ADAMS, JUDGE
ACTION NO. 00-CI-01220
PBK BANK, INC.,
f/k/a PEOPLES BANK OF KENTUCKY,
VANMAR, INC., both Kentucky Corporations,
and MADISON COUNTY, KENTUCKY
APPELLEES
OPINION
AFFIRMING IN PART,
REVERSING IN PART AND REMANDING
** ** ** ** **
BEFORE:
BUCKINGHAM, HUDDLESTON, AND JOHNSON, JUDGES.
BUCKINGHAM, JUDGE: M. A. Walker Company, Inc., appeals from an
order of the Madison Circuit Court granting summary judgment in
favor of PBK Bank, Inc.
M. A. Walker also appeals from the
court’s order denying its motion to amend its complaint.
As for
the order granting summary judgment in favor of PBK Bank, we
reverse and remand; as for the order denying M. A. Walker’s
motion to amend its complaint, we affirm.
VanMar, Inc., was involved in real estate developments
in Madison County, Kentucky.
PBK Bank provided financing for
several of the projects developed by VanMar, including the
development of the Saddlebrook Estates subdivision.
In July
1999, PBK Bank loaned VanMar $470,000 to purchase and begin the
development of that property.
In October 1999, PBK Bank extended
a letter of credit, on behalf of VanMar, to the Madison County
Fiscal Court.
This letter of credit was a condition for the
county’s approval for the Saddlebrook Estates development plan.
The purpose of the letter of credit was to ensure that funds
would be available to the Madison County Fiscal Court in the
event VanMar failed to develop the necessary improvements,
including streets, as set forth in the approved development plan.
M. A. Walker became involved with VanMar in the
Saddlebrook Estates development as a provider of rock for the
roads.
M. A. Walker’s last delivery of materials took place on
June 27, 2000.
When VanMar failed to timely respond to M. A.
Walker’s billing requests, M. A. Walker filed a materialman’s
lien against Saddlebrook Estates.
This lien was filed on July
26, 2000.
Subsequent to the date of M. A. Walker’s materialman’s
lien, PBK Bank extended further financing to VanMar in support of
the Saddlebrook Estates development.
Two additional loans were
made in October 2000; one loan was for approximately $363,000,
and the other was for approximately $77,000.
As with the prior
loans made for the development of Saddlebrook Estates, the bank
took mortgages on lots in Saddlebrook Estates as well as other
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properties held by VanMar.
As a result of this collateral
structure, the bank had the right to satisfy its loans against
lots in Saddlebrook Estates, lots in “The Woods,” and, in some
cases, Lot 3 in Jack’s Trace and Lot 103 in The Woods.
The bank
also provided additional financing to VanMar for the development
of properties other than Saddlebrook Estates.
On December 19, 2000, M. A. Walker filed a civil
complaint in the Madison Circuit Court seeking to enforce its
lien.
In addition to naming VanMar as a defendant, M. A. Walker
also named other defendants who might have a claim secured by
Saddlebrook Estates.
Because of its mortgages, PBK Bank was
named by M. A. Walker as a defendant in the lawsuit.
PBK Bank filed an answer and cross-claim against VanMar
based on loans which were secured by Saddlebrook Estates.
The
circuit court then referred the matter to a master commissioner.
On April 27, 2001, the Madison County Fiscal Court
provided notification to the bank to call the letter of credit
based on VanMar’s failure to meet its obligations under the
Saddlebrook Estates development plan.
By this time, the amount
on the letter of credit had been reduced from $188,000 to
$100,000.
The demand was made against the full $100,000.
As these events were occurring, PBK Bank entered into
settlement negotiations with VanMar concerning the various
collateral sources, other than Saddlebrook Estates, and the debt
load then carried based on outstanding loans.
These negotiations
resulted in a settlement and release agreement filed with the
circuit court on June 4, 2001.
Under this agreement the various
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collateral sources, other than Saddlebrook Estates, were in some
portions signed over to the bank.
In return, the bank agreed to
release VanMar and the collateral, other than Saddlebrook
Estates, from further liability against any of the remaining
loans.
The agreement indicated that PBK Bank set the value of
the assets to which it received title at approximately $1.7
million.
The record does not indicate any foundation as to how
this figure was determined.
Based on this figure, the bank
credited various loan obligations then owed by VanMar.
Conveniently for the bank, these credits were applied first to
those loans having nothing to do with Saddlebrook Estates and
then to those loans attributed to Saddlebrook Estates which were
subordinate to M. A. Walker’s lien.
As a further part of this
agreement, VanMar entered a Confession of Judgment with the
circuit court in favor of PBK Bank.
This document was entered in
the record on June 5, 2001.
On June 6, 2001, M. A. Walker filed a motion seeking to
amend the court’s previous order assigning the case to a master
commissioner.
In this motion, M. A. Walker asked the court to
instruct the master commissioner to make findings concerning the
actual amounts due to PBK Bank on the two priority liens.
Based
on the bank’s admission during discovery that some portion of the
two October 2000 loans were for refinancing prior debt, M. A.
Walker asked that a finding be made as to the existence of a
novation as to the priority lien debt.
Further, M. A. Walker
asked that the commissioner be ordered to make findings
concerning the use of the loan proceeds, in particular whether
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such amounts were diverted from the development of Saddlebrook
Estates.
Finally, M. A. Walker asked that findings be made
concerning the total payments received by the bank as well as how
such payments should be attributed to the various loans.
On July
5, 2001, the court entered an order directing the master
commissioner to make findings on each of the issues raised in M.
A. Walker’s motion.
On July 12, 2001, the bank filed a motion seeking
summary judgment.
Said motion was based on VanMar’s confession
of judgment in favor of the bank.
The bank argued that the sole
material issue concerned the priority of filing.
Since the
bank’s first loan and the promissory note underlying the letter
of credit, together totaling in excess of $500,000, were filed
first by the bank, it argued that those amounts should be
satisfied first.
The bank conceded that the remaining two loans
secured by Saddlebrook Estates were subordinate to M. A. Walker’s
materialman’s lien.
M. A. Walker responded and argued that there
were material facts that had yet to be determined and that
summary judgment should not be granted.
On July 19, 2001, M. A. Walker filed a motion seeking
to amend its complaint and add Madison County Fiscal Court as a
party because it held a letter of credit from the bank to
guarantee construction of the roads in Saddlebrook Estates.
Therein, M. A. Walker claimed an interest as a third-party
beneficiary in the $100,000 it believed had been paid or would
soon be paid to the fiscal court by the bank.
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M. A. Walker noted
that the rock it delivered was used to develop the very
infrastructure the letter of credit was issued to ensure.
On August 30, 2001, the circuit court entered an order
denying M. A. Walker’s motion to amend its complaint.
The court
held that M. A. Walker was not a party to the letter of credit
and could not be considered a third-party beneficiary to the
letter.
The court relied on Utica Mut. Ins. Co. v. Walker, Ky.
App., 725 S.W.2d 24 (1987), which held that strict compliance is
required when interpreting letters of credit.
Id. at 26.
Further, the court rejected M. A. Walker’s cited authority as
distinguishable from the facts herein since these facts involve a
letter of credit rather than a performance bond.
The circuit court also issued an order granting summary
judgment in favor of PBK Bank.
The court accepted the bank’s
argument that the only issue of fact concerned the priority of
filing.
The court determined that, after the payment of the
expenses of the sale of the lots in Saddlebrook Estates and after
paying the court costs, the amounts owed to the bank under its
priority filings were to be paid next.
Following the payment of
those amounts, the court directed that the next $100,000 be paid
for the use and benefit of the Madison County Fiscal Court in
completing the improvements to the subdivision.
Finally, the
court stated that the remaining proceeds, if any, were to be held
by the master commissioner pending entry of a judgment regarding
the claims of M. A. Walker.
M. A. Walker filed this appeal from
the judgment in favor of the bank and from the court’s order
denying M. A. Walker’s motion to amend complaint.
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We will first address the court’s order denying M. A.
Walker’s motion to amend its complaint in order to seek recovery
as a third-party beneficiary on the letter of credit issued by
the bank in favor of the Madison County Fiscal Court.
is applicable.
CR1 15.01
That rule states in pertinent part that a party
may amend its pleading, following the twenty-day period after it
is served, “only by leave of court or by written consent of the
adverse party; and leave shall be freely given when justice so
requires.”
CR 15.01.
Although leave to amend shall be freely
given when justice so requires, the decision is within the
discretion of the trial court.
Lambert v. Franklin Real Estate
Co., Ky. App., 37 S.W.3d 770, 779 (2000).
Furthermore, the
discretion of the trial court will not be disturbed absent an
abuse of discretion.
Id.
While M. A. Walker acknowledges this
authority, it argues that the trial court erred in determining
that it failed to state a claim upon which relief may be granted.
It maintains that it stated a valid claim.
Article V of the Uniform Commercial Code involves
letters of credit.
See KRS2 355.5-101 to 355.5-118.
“Beneficiary,” as that term is used in that section, “means a
person who under the terms of a letter of credit is entitled to
have its complying presentation honored.
The term includes a
person to whom drawing rights have been transferred under a
transferable letter of credit.”
KRS 355.5-102(1)(c).
“Issuer”
is defined in that section as “a bank or other person that issues
1
Kentucky Rules of Civil Procedure.
2
Kentucky Revised Statutes.
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a letter of credit, but does not include an individual who makes
an engagement for personal, family, or household purposes.”
355.5-102(1)(i).
KRS
Furthermore, the statute provides as follows:
Rights and obligations of an issuer to a
beneficiary or a nominated person under a
letter of credit are independent of the
existence, performance, or nonperformance of
a contract or arrangement out of which the
letter of credit arises or which underlies
it, including contracts or arrangements
between the issuer and the applicant and
between the applicant and the beneficiary.
KRS 355.5-103(4).
M. A. Walker did not meet the statutory definition of
“beneficiary” of a letter of credit under KRS 355.5-102(1)(c).
Furthermore, M. A. Walker was not named as a beneficiary under
the terms of the letter of credit.
Moreover, PBK Bank should not
be compelled to assume the risk of VanMar’s nonperformance on an
underlying contract with M. A. Walker.
See Utica Mut. Ins. Co.
v. Walker, Ky. App., 725 S.W.2d at 26-27, quoting Philadelphia
Gear Corp. v. Central Bank, 717 F.2d 230, 236 (5th Cir. 1983).
We conclude that the trial court did not abuse its discretion in
denying M. A. Walker’s motion to amend its complaint.
The second issue is whether the trial court erred in
awarding summary judgment to the bank.
The bank argued that the
sole issue involved the priority of filing.
In response, M. A.
Walker advanced several theories under which they claimed the
bank’s priority filing would not be the controlling factor.
By
accepting the bank’s argument that the controlling issue was the
priority of filing, the trial court necessarily rejected M. A.
Walker’s right to recover under any of its theories.
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CR 56.03 allows a court to enter a summary judgment
where there is no genuine issue of material fact and the moving
party is entitled to a judgment as a matter of law.
The rule is
to be “cautiously applied,” and “[t]he record must be viewed in a
light most favorable to the party opposing the motion for summary
judgment and all doubts must be resolved in his favor.”
Steelvest, Inc. v. Scansteel Serv. Ctr., Inc., Ky., 807 S.W.2d
476, 480 (1991).
Furthermore, “[t]he standard of review on
appeal of a summary judgment is whether the trial court correctly
found that there was no genuine issue of material fact and that
the moving party was entitled to judgment as a matter of law.”
Scifres v. Kraft, Ky. App., 916 S.W.2d 779, 781 (1996).
As we have noted, M. A. Walker’s lien was against
Saddlebrook Estates property while PBK Bank’s mortgages related
to both the Saddlebrook Estates property and The Woods
subdivision.
Some of the bank’s loans and mortgages were entered
into and recorded prior to M. A. Walker’s lien, but some were
entered into after the recording of the lien and were thus
inferior.
During the pendency of the lawsuit, the bank entered
into a settlement agreement with VanMar whereby VanMar confessed
judgment to the bank and conveyed portions of The Woods
subdivision lots to it with “various credits” being applied to
VanMar’s loans.
The agreement valued The Woods subdivision lots
conveyed at $1,489,500.
However, there is no indication as to
how or why the lots were valued at this amount.
Furthermore,
there is no indication of the value of the collateral released
but not conveyed.
The bank then turned to the Saddlebrook Estate
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property to satisfy the remainder of the indebtedness owed to it
by VanMar.
The trial court granted summary judgment to the bank,
over M. A. Walker’s objections, based on the priority of the
bank’s earlier mortgages.
M. A. Walker first argues that there are issues of fact
which are “material under the doctrine of marshaling of assets
which requires PBK Bank to use its full collateral fairly in
satisfying its outstanding liabilities.”
In Bartley v. Pikeville
Nat. Bank & Trust Co., Ky., 532 S.W.2d 446 (1975), the court
explained the doctrine of marshaling of assets as follows:
The doctrine of marshaling assets requires
that where two or more creditors seek
satisfaction out of the assets of their
common debtor, and one of them can resort to
two funds where another has recourse to only
one of the funds, the former creditor may be
required to seek satisfaction out of the
funds which the latter creditor cannot reach,
before resorting to the other fund. By this
method of distribution both creditors may be
paid or both funds will be exhausted.
Id. at 448.
As that doctrine applies to the case sub judice,
there are two creditors (the bank and M. A. Walker) who seek
satisfaction out of the assets of their common debtor (VanMar).
The bank can resort to satisfaction of the debt owed to it by
resorting to both the Saddlebrook Estates property and The Woods
subdivision.
However, M. A. Walker has recourse to only the
Saddlebrook Estates property.
Under the doctrine of marshaling
of assets, the bank “may be required to seek satisfaction out of
the funds which the latter creditor cannot reach, before
resorting to the other fund.”
Id.
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M. A. Walker argues that there is a genuine issue of
material fact concerning the actual value of The Woods
subdivision lots, both those conveyed to the bank and those
released without being conveyed.
As we have noted, the lots
conveyed were valued by the bank at $1,489,500.
However, there
was no explanation as to how this calculation was made.
or may not have been a reasonable valuation.
It may
We agree with M. A.
Walker that a true valuation of The Woods lots, both those
conveyed and those released but not conveyed, would have a
bearing on whether the bank utilized its collateral fairly in
order that M. A. Walker’s lien could possibly be paid from any
excess proceeds.
M. A. Walker asserts that there is a second issue of
fact concerning whether the loan proceeds listed by the bank at
$598,000 were actually expended by VanMar on improving
Saddlebrook Estates property.
M. A. Walker asserts that the bank
should lose its priority status as to any amounts which were
diverted to projects other than Saddlebrook Estates.
M. A.
Walker has not cited any authority to support this argument, and
we are unaware of any such authority.
In short, we reject its
argument that there is a fact issue in this regard.
M. A. Walker argues that there is a third fact issue
concerning whether the indebtedness to the bank incurred by
VanMar on October 9, 2000, represented a refinancing of some
portion of the previously loaned and unpaid loan proceeds and was
thus a novation.
M. A. Walker raised this issue after learning
through discovery that some portion of the two loans made on that
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date was for refinancing prior debt.
M. A. Walker argues that,
to the extent the October 2000 loans were a refinancing of debt
involved in the priority lien loans, novation may apply to
displace the bank’s priority status as to the amounts refinanced.
The bank did not address this issue in its brief.
In Truscon Steel Co. v. Thirlwell Elec. Co., 265 Ky.
414, 96 S.W.2d 1023 (1936), the court defined novation as
follows:
A novation is the substitution of a new
obligation for an old one, with intent to
extinguish the old one, or the substitution
of a new debtor for an old one, with the
intent to release the latter, or the
substitution of a new creditor, with the
intent to transfer the rights of the old one
to him.
265 Ky. at 416-17.
We agree with M. A. Walker that there are
fact issues concerning whether or to what extent the October 2000
notes were a novation substituting a new obligation for an old
one.
PBK Bank argues that there were no genuine issues of
fact for the court to determine and that summary judgment was
appropriate.
In support of its argument, it cites KRS 376.010
which states in pertinent part as follows:
The lien shall not take precedence over a
mortgage or other contract lien or bona fide
conveyance for value without notice, duly
recorded or lodged for record according to
law, unless the person claiming the prior
lien shall, before the recording of the
mortgage or other contract lien or
conveyance, file in the office of the county
clerk of the county wherein he has furnished
or expects to furnish labor or materials, a
statement showing that he has furnished or
expects to furnish labor or materials, and
the amount in full thereof.
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KRS 376.010(2).
The bank argues “that PBK Bank’s loan for the
development of this subdivision was fully disbursed several
months prior to that notice.
Therefore, the statute mandates
that PBK Bank’s development loans are prior to the mechanic’s
lien of M. A. Walker.”
In response, M. A. Walker asserts that it
is not claiming its lien should receive priority over previously
recorded bank mortgages.
Rather, M. A. Walker argues that the
doctrine of marshaling of assets required the bank to utilize its
collateral fairly to allow M. A. Walker’s lien to be paid from
any excess proceeds.
We agree with M. A. Walker that, although
its lien does not have priority over the earlier bank mortgages,
the doctrine of marshaling of assets required the bank to utilize
its collateral fairly in consideration of the M. A. Walker lien.
Next, in response to M. A. Walker’s argument that there
was a fact issue concerning the fair value of The Woods
subdivision lots, the bank maintains that this was “an issue of
fact only if PBK Bank is required to marshal assets by selling
that development prior to its sale of Saddlebrook Estates.”
The
bank maintains that it had entered into its settlement agreement
with VanMar prior to M. A. Walker asserting the doctrine of
marshaling of assets.
Therefore, it contends that M. A. Walker
did not plead the applicability of the doctrine until it was too
late.
The issue of a priority lienholder’s release of
collateral not subject to a claim by the subordinate lienholder
was considered in Glass v. Pullen, 69 Ky. (6 Bush) 346 (1869).
In that case, the priority lienholder elected to purchase the
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collateral that was not subject to the subordinate lienholder’s
claim.
As in the case sub judice, the subordinate lienholder in
the Glass case did not raise the doctrine of marshaling of assets
until after the priority lienholder had already released the
other sources of collateral.
See also Blood v. Munn, 100 P.694,
697 (Cal. 1909), and Continental Supply Co. v. Marshall, 152 F.2d
300, 308 (10th Cir. 1945).
We hold that M. A. Walker was not
barred from raising the doctrine of marshaling assets after the
bank had entered into the settlement agreement with VanMar.
Finally, the bank argues that the doctrine of
marshaling of assets is an equitable principle which may be
applied “only in the event that it does not damage, in any way,
the creditor who has properly perfected its lien claims and has
access to both funds.”
The bank cites Calhoun v. Federal Land
Bank of Louisville, 230 Ky. 460, 20 S.W.2d 72 (1929).
Therein,
the court held that:
The one entitled to invoke it may shuffle the
prior lienholder around, in such a manner and
fashion as to not produce unreasonable delay,
in the choice of procedure for the
enforcement and collection of his debt, but
according to the authorities, supra, as well
as the dictates of the innate principles of
exact justice, he cannot, by the exercise of
the privileges conferred on him by that
doctrine, deprive to any extent a prior
lienholder of any of the securities which the
latter has for the payment of his debt.
230 Ky. at 464.
The bank argues that forcing it to liquidate The
Woods subdivision along with Saddlebrook Estates would have
caused it “substantial additional delay and expense, and
potentially substantial loss.”
However, the Calhoun court also
noted that “mere delay, so long as it is not of an unreasonable
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length, is not sufficient to compel the court to deny relief,
when no other injury can occur, because some delay is a necessary
consequence of the enforcement of all rights.”
Id.
We conclude
that there are fact issues involved concerning the application of
the doctrine of marshaling of assets to this case which were not
addressed by the trial court and which must be resolved prior to
any final disposition.
In conclusion, we agree with the bank that the trial
court did not err in denying M. A. Walker’s motion to amend its
complaint.
However, we agree with M. A. Walker that the court
erred in granting summary judgment in favor of the bank based
solely on the priority of filing.
There were fact issues to be
addressed before a final judgment could be entered.
The order of the Madison Circuit Court denying M. A.
Walker’s motion to amend its complaint is affirmed.
The summary
judgment granted by the court in favor of the bank is reversed,
and the case is remanded for further proceedings consistent with
this opinion.
ALL CONCUR.
BRIEFS FOR APPELLANT:
BRIEF FOR APPELLEE, PBK BANK,
INC.:
Steven Connelly
Berea, Kentucky
Stuart K. Olds
Richmond, Kentucky
BRIEF FOR APPELLEE, MADISON
COUNTY, KENTUCKY:
Marc Robbins
Richmond, Kentucky
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