JEFF JONES AND ANN JONES v. PBK BANK
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RENDERED:
NOVEMBER 24, 2004; 10:00 a.m.
NOT TO BE PUBLISHED
Commonwealth Of Kentucky
Court of Appeals
NO. 2003-CA-001512-MR
JEFF JONES AND
ANN JONES
APPELLANT
APPEAL FROM LINCOLN CIRCUIT COURT
HONORABLE WILLIAM T. CAIN, JUDGE
ACTION NO. 01-CI-00437
v.
PBK BANK
APPELLEE
OPINION
VACATING AND REMANDING
** ** ** ** **
BEFORE:
JOHNSON, TACKETT, AND SCHRODER, JUDGES.
JOHNSON, JUDGE:
Jeff Jones and his wife, Ann Jones, have
appealed from an order of the Lincoln Circuit Court entered on
March 12, 2003, which granted summary judgment to PBK Bank.
The
trial court ruled that PBK Bank had properly applied loan
proceeds received on behalf of the Joneses from Bank One, NA1 to
a chattel mortgage and that PBK Bank had a first and superior
1
Bank One, NA was a defendant in this action, but was not named a party on
appeal. It received judgment on its cross-claim on April 9, 2003.
mortgage lien upon the Joneses’ real estate.
Having concluded
that the trial court erred by determining that there was no
genuine issue as to any material fact and that PBK Bank was
entitled to judgment as a matter of law, we vacate and remand.
On December 27, 1999, the Joneses signed a
promissory note in favor of Peoples Bank of Kentucky, the
predecessor of PBK Bank, in the amount of $32,352.55 and
executed a mortgage on the same date, securing the note with
real estate.
This 1999 note was a refinancing of a note and
second real estate mortgage dated September 12, 1998.
The 1998
and 1999 loans were both negotiated by PBK Bank loan officer,
Jeff Singleton.
The Joneses’ business, Maverick Environmental
Construction Services, also had loans with PBK Bank that were
supervised by PBK Bank loan officer, Bob Folger.
Thus, PBK Bank
had both a personal banking and business banking relationship
with the Joneses.
In fact, at the time of filing this suit
against the Joneses, PBK Bank had a pending lawsuit against
Maverick.
On September 25, 2000, the Joneses borrowed money from
Bank One, and executed in its favor a promissory note and real
estate mortgage for $194,000.00.
The real estate secured a
first mortgage to Farmers National Bank and the second real
estate mortgage to PBK Bank.
In addition to the second mortgage
lien on the real estate, the Joneses also had a debt to PBK Bank
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of approximately $26,000.00 secured by liens on a 1996 Dodge
truck and 1981 Case tractor.
Evidence before the trial court at the time summary
judgment was granted included the Joneses’ depositions and the
in-court testimony of Jeff Jones and Bruce Edgington, Chief
Executive Officer of PBK Bank, who was a loan officer and
director of lending at the time the loans were made.
The
Joneses testified that the purpose of the Bank One loan was to
refinance and pay off the real estate loans in favor of Farmers
National Bank and PBK Bank.
According to Jones’s testimony, the
loan with Bank One originated in the late summer or early fall
of 2000, when Singleton asked him if he had considered
refinancing the loans on the real estate to take advantage of
lower interest rates.
Jones asked Singleton if he and Ann were
in a position to refinance and whether refinancing would cause
them any problems with PBK Bank.
Singleton stated that PBK Bank
was trying to move some of its notes to other institutions.
He
stated that he had contacts at Collateral One Mortgage, Inc., a
title company in Lexington that would help with the refinancing.2
Collateral One supervised the details of the Bank One loan
closing.
As part of the application process, Jeff Jones told
Bank One that there was a second mortgage on the real estate
2
Singleton eventually went to work at Collateral One.
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with PBK Bank.
Jones testified that Bank One told him it had to
collect this information itself, so he told Bank One that it
should contact Singleton.
Jones asserted that Singleton
provided whatever information was needed by Bank One after
completion of the initial loan application by the Joneses,
including the PBK Bank loan numbers.
It is not clear from the
evidence whether Collateral One or the closing attorney for Bank
One received the account numbers from PBK Bank.
Jones testified
that he never checked to see that the proper account number for
the note and mortgage was given because Bank One was dealing
with Singleton who had a business relationship with the mortgage
broker, Collateral One.
However, Edgington testified there was
no record in the PBK Bank loan file that Singleton had
communicated with Bank One or Collateral One.
The Joneses asserted that Bank One required the
balance remaining on Farmers National Bank’s first mortgage and
PBK Bank’s second mortgage to be paid off and their mortgages
released against the real estate, giving Bank One a first, prior
and superior mortgage lien against the real estate.
Prior to
closing, Collateral One faxed a request to PBK Bank requesting a
payoff amount for loan #67204186370, which was the note and real
estate mortgage that had been executed in 1998.
The previous
mortgage that evidenced this loan, dated September 12, 1998, had
not been released even though the loan had been refinanced in
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December 1999, and a new mortgage filed.
Edgington contended
that the 1998 mortgage would not have been released until
requested by the borrower if the line of credit provision was
elected by the borrower and noted on the mortgage.
However, it
appears from the evidence of record that this provision was not
elected by the Joneses on this mortgage, so there is no evidence
in the record to support it not being released.
PBK Bank faxed a notice to Collateral One on September
18, 2000, stating that loan #6704186370 had been “paid out.”
However, it is unclear from the evidence in the record whether
PBK Bank informed Collateral One that the note had been
refinanced by the note and mortgage dated December 27, 1999.
Edgington testified that even though the note had not been paid
off, but rather refinanced, he did not feel that it was
misleading to state that the note had been “paid out.”
Edgington did acknowledge that by PBK Bank receiving a payoff
request that PBK Bank was being made aware of the fact that a
customer was attempting to refinance.
Collateral One then faxed
a request for a payoff on account #67204186820, which did not
involve the real estate, but rather evidenced the loan secured
by a 1996 Dodge truck and a 1981 Case tractor.
At the closing of the loan with Bank One, the proceeds
of $97,388.40 were disbursed to Farmers National Bank and
applied to its first mortgage, which it released; and proceeds
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of $26,496.50 were disbursed to PBK Bank, which it applied to
the tractor/truck loan, rather than the real estate second
mortgage.
Thus, PBK Bank did not release its mortgage on the
Joneses’ real estate.
When the disbursed proceeds exceeded the
payoff on the tractor/truck loan,
Edgington attributed this
surplus to payments made by the Joneses’ before the payoff was
made, and the $782.19 in excess proceeds were placed by PBK Bank
into the Joneses’ checking account at PBK Bank.
The check issued by Collateral One to PBK Bank,
designated its purpose as “mortgage payoff.”
The stub of the
check contained the notations “REAL ESTATE CLOSING” and “For:
Mortgage Payoff.”
These were the only instructions given to PBK
Bank by Collateral One.
Edgington testified that to his
knowledge no one at PBK Bank had communicated with Bank One
regarding the fact that the check included the notation
“mortgage payoff” because the amount of the check matched the
previously requested payoff on the chattel loan.
Further,
Edgington testified that PBK Bank had never received a request
for release of the mortgage from Bank One.
Edgington testified regarding three of the
payments Jeff Jones made to PBK Bank after the date the
tractor/truck loan was paid off: (1) a check dated December 16,
2000, in the amount $2,032.56 (equivalent to three monthly
payments of $677.52 on the second mortgage); (2) a check dated
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May 1, 2001, in the amount of $1,038.08, which included the
notation “2nd mortgage on farm;” and (3) a check dated May 11,
2001, in the amount of $2,700.00, which included the notation
“2nd mortgage.”
Edgington testified that he did not know of any
communication between PBK Bank and the Joneses regarding the
second mortgage after the Bank One closing.
However, he
testified that there was less correspondence in the Joneses’ PBK
Bank file than was customary.
Apparently, the May 11, 2001, payment was the last
payment received by PBK Bank and attributed by it to the debt
secured by the second mortgage.
PBK Bank wrote the Joneses a
letter dated November 29, 2001, questioning their failure to pay
on the loan secured by the real estate mortgage.
On December
14, 2001, Jones wrote a letter to PBK Bank stating that he and
Ann thought the second mortgage on the real estate had been paid
off through the Bank One loan and that any subsequent monies
they had paid PBK Bank had been applied to other debts.
Then, on December 27, 2001, PBK Bank filed a complaint
to collect the debt allegedly owed by the Joneses and to
foreclose on the real estate.
PBK Bank alleged that it had a
valid first and prior mortgage lien on the real estate and that
the Joneses had defaulted on their obligations under the
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promissory note dated December 27, 1999.3
On January 22, 2002,
the Joneses filed an answer and counterclaim.
They claimed that
PBK Bank’s loan on the real estate had been voluntarily paid off
with proceeds from the Bank One loan at the time of their
refinancing in September 2000, but that PBK Bank had chosen to
apply the proceeds to another loan it had with the Joneses,
which was not secured by a mortgage on the real estate.
They
alleged that PBK Bank had refused to release its mortgage, in
violation of KRS4 382.365.5
The Joneses further alleged that PBK
3
There were two counts originally in PBK Bank’s complaint.
dismissed by the trial court on March 29, 2002.
4
Kentucky Revised Statutes.
5
Count two was
KRS 382.365 provides in relevant part as follows:
(1)
A holder of a lien on real property,
including a lien provided for in KRS 376.010,
shall release the lien in the county clerk’s
office where the lien is recorded within thirty
(30) days from the date of satisfaction.
(2)
A proceeding may be filed by any owner of
real property or any party acquiring an
interest in the real property in District Court
or Circuit Court against a lienholder that
violates subsection (1) of this section. A
proceeding filed under this section shall be
given precedence over other matters pending
before the court.
(3)
Upon proof to the court of the lien being
satisfied, the court shall enter a judgment
releasing the lien. The judgment shall be with
costs including a reasonable attorney’s fee.
If the court finds that the lienholder received
written notice of its failure to release and
lacked good cause for not releasing the lien,
the lienholder shall be liable to the owner of
the real property in the amount of one hundred
dollars ($100) per day for each day, beginning
on the fifteenth day after receipt of the
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Bank had misappropriated, concealed, misapplied, and converted
the proceeds paid to it by Bank One, causing damages in the
amount of the payoff made to PBK Bank, with interest.
The
Joneses further demanded punitive damages.
PBK Bank filed a motion for summary judgment and order
of sale.
After a hearing was held on January 13, 2003, the
trial court concluded that there was no genuine issue as to any
material fact and that PBK Bank was entitled to judgment as a
matter of law.
The trial court entered an order on March 12,
2003, finding PBK Bank to have a first and superior mortgage
lien on the real estate and granting it summary judgment.
summary the trial court found:
In
(1) that there was no misconduct
by PBK Bank and no misapplication of the payoff from Bank One,
but, rather, that PBK Bank had followed the request for payoff
made by the Joneses as a direct result of their meeting with
Collateral One, and therefore did not violate any duty to the
Joneses; (2) that it was the duty of the Joneses to ensure that
written notice, of the violation for which good
cause did not exist.
(4)
A lienholder that continues to fail to
release a satisfied real estate lien, without good cause,
within forty-five (45) days from the date of written notice
shall be liable to the owner of the real property for an
additional four hundred dollars ($400) per day for each day
for which good cause did not exist after the forty-fifth
day from the date of written notice, for a total of five
hundred dollars ($500) per day for each day for which good
cause did not exist after the forty-fifth day from the date
of written notice. The lienholder shall also be liable for
any actual expense including a reasonable attorney’s fee
incurred by the owner in securing the release of real
property by such violation.
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Collateral One had the proper loan account number to pay off the
mortgage and that it was the obligation of Collateral One or
Bank One to verify the account which was being paid off; and (3)
that the existing loan to PBK Bank was not paid off, as
evidenced by the Joneses’ own checks to PBK Bank after the date
of Bank One’s mortgage.
The Joneses filed a motion to vacate
the order and a hearing was held on May 30, 2003.
The trial
court denied the motion by order dated July 10, 2003.
This
appealed followed.
Under Kentucky law, “[t]he standard of review on
appeal of a summary judgment is whether the trial court
correctly found that there were no genuine issues as to any
material fact and that the moving party was entitled to judgment
as a matter of law.”6
The trial court must review the pleadings,
depositions, and discovery evidence to determine whether summary
judgment is proper.7
Since “factual findings are not at issue,”8
an appellate court need not defer to the trial court’s decision
on summary judgment.
An appellate court will review the issue
de novo since it “involves only legal questions and the
existence of any disputed material issues of fact.”9
The Supreme
6
Scifres v. Kraft, Ky.App., 916 S.W.2d 779, 781 (1996); Kentucky Rules of
Civil Procedure (CR) 56.03.
7
CR 56.03.
8
Barnette v. Hospital of Louisa, Inc., Ky.App., 64 S.W.3d 828, 829 (2002).
9
Lewis v. B & R Corp., Ky.App., 56 S.W.3d 432, 436 (2001).
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Court has stated that “[t]he proper function for a summary
judgment . . . ‘is to terminate litigation when, as a matter of
law, it appears that it would be impossible for the respondent
to produce evidence at the trial warranting a judgment in his
favor and against the movant.’”10
The term “impossible” is to be
applied in a practical sense, not in an absolute sense.11
However, summary judgment is not considered a substitute for a
trial, so the trial court must review the evidentiary record not
to decide any issue of fact, but to determine if any real
factual issue exists and whether the non-movant cannot prevail
under any circumstances.12
Moreover, “[t]he record must be viewed in a light
most favorable to the party opposing the motion for summary
judgment and all doubts are to be resolved in his favor.”13
The
movant bears the initial burden of convincing the trial court by
evidence of record that there is no genuine issue as to any
material fact, which then shifts the burden to the party
opposing summary judgment.
“[A] party opposing a properly
supported summary judgment motion cannot defeat it without
10
Paintsville Hospital Co. v. Rose, Ky., 683 S.W.2d 255, 256 (1985) (quoting
Roberson v. Lampton, Ky., 516 S.W.2d 838, 840 (1974)). See also Steelvest,
Inc. v. Scansteel Service Center, Inc., Ky., 807 S.W.2d 476, 480 (1991).
11
Perkins v. Hausladen, Ky., 828 S.W.2d 652, 654 (1992).
12
Steelvest, 807 S.W.2d at 480.
13
Id.
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presenting at least some affirmative evidence showing that there
is a genuine issue of material fact for trial,”14 but, the
threshold is quite low.15
summary judgment motion.”
The key phrase is “properly supported
In other words, the evidence
presented by the moving party in support of its summary judgment
“must be of such a nature that no genuine issue of fact remains
to be resolved.”16
Otherwise, summary judgment is improper even
when the party opposing summary judgment presents no
contradicting evidence.17
The Joneses argue that the trial court decided factual
questions on the merits since there were genuine and substantial
disputes regarding the version of the evidence accepted by the
trial court.
The Joneses further assert (1) that the trial
court erred in applying the law regarding involuntary payments
because the “mortgage payoff” to PBK Bank by Bank One was a
voluntary payment and should have been applied to the real
estate loan as designated; (2) that the trial court, without any
supporting legal authority, imposed a legal duty on the Joneses
and Bank One to ensure that the proper loan account number
14
Id. at 482.
15
Commonwealth, Transportation Cabinet, Dept. of Highways v. R.J. Corman
Railroad Company/Memphis Line, Ky., 116 S.W.3d 488, 498 (2003).
16
Hartford Insurance Group v. Citizens Fidelity Bank & Trust Co., Ky.App.,
579 S.W.2d 628, 631 (1979).
17
Hartford, 579 S.W.2d at 631; and Carter v. Jim Walter Homes, Inc., Ky.App.,
731 S.W.2d 12, 14 (1987).
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accompanied the payment to PBK Bank; (3) that the trial court
incorrectly supported its granting of summary judgment with
evidence of the Joneses’ payments to PBK Bank subsequent to the
application of the Bank One proceeds, because the payments had
no relevance to the fact that PBK Bank misapplied the proceeds
in the first place; and (4) that PBK Bank confused Collateral
One by failing to disclose that its initial payoff request was
for a note that had been refinanced, not paid in full, and that
it confused the trial court by stating that the original payoff
request did not involve the real estate, when in fact it did.
The Joneses contend that the proceeds from the Bank
One loan were a voluntary payment to PBK Bank on their real
estate loan that had been specifically designated as a mortgage
payoff.
Under Kentucky law, when a debtor designates the manner
of payment, a creditor must make the requested application.
However, the rule does not apply when there is no designation.18
When the debtor does make a designation of payment, it does not
need to be expressed in writing or delivered in any particular
manner.
It is sufficient if the intention is manifest and comes
to the attention of the other party at the proper time.19
The
debtor’s intention may also be implied from the circumstances at
18
McDaniel v. Barnes, White & Co., 5 Bush 183 (1868); Hargis Bank & Trust Co.
v. Gambill, 234 Ky. 538, 28 S.W.2d 769, 770 (1930).
19
Tayloe v. Sandiford, 20 U.S. 13, 5 L.Ed. 384 (1822).
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the time of payment.20
Even if a creditor enjoys a right to
unilaterally apply the payment, this right may be denied for the
protection of a third party’s superior equity, or where the
creditor had reason to know that the funds were derived from a
source unrelated to the debt to which it now attempts to apply
the payment.21
If a debtor is under a duty to a third person to
apply a payment to the discharge of a particular debt, and the
creditor knows or has reason to know of such duty, the payment
must be so applied.22
The determination of whether the payment
was voluntary or involuntary is an issue that must be addressed
in order to determine whether the proceeds were properly
applied.
In its order, the trial court imposed a duty on the
Joneses to give Collateral One the proper loan account number to
ensure that the mortgage loan was paid off and it imposed a duty
on Collateral One and Bank One to verify the account number.
However, neither PBK Bank nor the trial court cites any legal
authority to support this position.
Pursuant to Beck, supra,
PBK Bank may have had a duty to verify that it correctly applied
the Bank One proceeds if it had knowledge of the Joneses’
attempt to refinance, either through custom or direct
20
Id. 20 U.S. at 20.
21
Ellingsen v. Western Farmers Association, 529 P.2d 1163, 1166 (Wash. App.
1974).
22
United States for Use of Carroll v. Beck, 151 F.2d 964, 966 (6th Cir.
1945).
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involvement with the Joneses’ loan with Bank One.
Edgington
testified that when a payoff request came to PBK Bank, it
understood that the client might desire to refinance.
Further,
it is unclear what Singleton’s role, and thus PBK Bank’s role,
was in securing the Joneses’ loan with Bank One.
The trial court based its decision, in part, on the
belief that Jeff Jones provided account numbers for the payoffs;
and that as a direct result of a meeting between the Joneses and
Collateral One, the specific payoffs were requested.
Jones
testified that he took no part in obtaining the loan numbers for
the payoffs, and that Singleton was the person who had provided
this information.
Further, PBK Bank’s file contained no proof
to show who provided the account numbers for the payoff.
Thus,
there is nothing in the record to support PBK Bank’s
allegations, nor the trial court’s findings, that Jones provided
Bank One with the account to be paid off.
Furthermore, Jones’s
testimony regarding his relationship with PBK Bank and Singleton
definitely presented a factual question as to PBK Bank’s
involvement and its knowledge of the Joneses’ refinancing
attempts, and whether PBK Bank had correctly applied the loan
proceeds.
The trial court also relied upon the three subsequent
payments by the Joneses to PBK Bank after the payoff of the
tractor/truck loan.
However, there was a dispute as to whether
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the Joneses understood that this money was being applied to the
mortgage debt instead of the chattel debt.
Edgington testified
that the Joneses never raised any issue regarding the subsequent
payments.
However, Jones testified that due to his and Ann’s
personal and business relationships with PBK Bank, it was
customary for Singleton or another bank employee to call them
and to tell them to make a payment, and they made the payments
without questioning the account to which the payments were to be
applied.
PBK Bank did not dispute this claim.
Thus, since the
purpose of the subsequent payments is in dispute, the trial
court erred in relying on these subsequent payments to award
summary judgment.
Regardless of the purpose of these payments, it
must first be determined whether PBK Bank misapplied the Bank
One proceeds.
Jones’s testimony provided motives for PBK Bank’s
possible deliberate misapplication of the proceeds, including
proof of the lawsuit pending by PBK Bank against Maverick and
the fact that the second mortgage lien on the real estate was
PBK Bank’s only recourse on the Maverick loans.
Jones contended
that he and Ann felt deceived by PBK Bank; they alleged that
misapplication of the loan proceeds from Bank One was part of a
scheme to improve its own embarrassing financial condition by
obtaining mortgage payoff proceeds without releasing the
mortgage.
Jones testified that he had been told of this scheme
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indirectly by Folger and John Nichols, another employee of PBK
Bank.
The trial court’s decision was also predicated
on the belief that the initial payoff request was for a loan
that did not involve the real estate.
These facts are disputed
by the Joneses and, in fact, even PBK Bank filed a correction in
the record stating that the loan, for which a payoff was
initially requested, did involve the real estate.
This
erroneous finding by the trial court is significant because it
is unclear whether PBK Bank informed Collateral One that its
initial payoff request was on a loan that had been refinanced
into a loan for which PBK Bank had a mortgage lien at the time
of the Bank One closing.
If the trial court had understood that
the initial payoff request was for the real estate loan, it may
have ruled differently because of the possible misunderstanding
by Collateral One as to the existence of a PBK Bank real estate
mortgage.
Accordingly, we conclude that these genuine issues of
material fact should have precluded the trial court from
determining that it was impossible for the Joneses to prevail at
trial.
Further, even if the evidence in the record shifted the
burden of proof to the Joneses, Jones’s testimony regarding his
discussions with Singleton, which PBK Bank could not explain and
did not deny, met the threshold to defeat summary judgment.
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Thus, viewing the record most favorably to the Joneses and
resolving all doubts in their favor, we conclude that there were
genuine issues as to material facts regarding the allegations of
PBK Bank’s complaint so as to preclude summary judgment.
For the foregoing reasons, the order of the Lincoln
Circuit Court granting summary judgment to PBK Bank is vacated
and this matter is remanded for further proceedings consistent
with this Opinion.
ALL CONCUR.
BRIEFS AND ORAL ARGUMENT FOR
APPELLANT:
BRIEF AND ORAL ARGUMENT FOR
APPELLEE:
Richard Clay
Danville, Kentucky
Robert R. Baker
Stanford, Kentucky
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