UPS CAPITAL BUSINESS CREDIT v. C.R. CABLE CONSTRUCTION, INC.; PATTON MANAGEMENT CORP. (F/K/A WRIGHT & LOPEZ, INC.); PATTON MANAGEMENT GROUP, INC. (D/B/A WRIGHT & LOPEZ); T.D.A. PROPERTIES, INC. (D/B/A AULBACH AUCTIONEERS); ALLTEL COMMUNICATIONS PRODUCTS, INC.
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RENDERED:
DECEMBER 9, 2005; 10:00 A.M.
TO BE PUBLISHED
Commonwealth of Kentucky
Court of Appeals
NO. 2004-CA-002062-MR
UPS CAPITAL BUSINESS
CREDIT
v.
APPELLANT
APPEAL FROM CLARK CIRCUIT COURT
HONORABLE WILLIAM T. JENNINGS, JUDGE
ACTION NO. 03-CI-00170
C.R. CABLE CONSTRUCTION, INC.;
PATTON MANAGEMENT CORP. (F/K/A
WRIGHT & LOPEZ, INC.); PATTON
MANAGEMENT GROUP, INC. (D/B/A
WRIGHT & LOPEZ); T.D.A. PROPERTIES,
INC. (D/B/A AULBACH AUCTIONEERS);
ALLTEL COMMUNICATIONS PRODUCTS, INC.
APPELLEES
OPINION
AFFIRMING IN PART, REVERSING
IN PART, AND REMANDING
** ** ** ** ** ** ** **
BEFORE: DYCHE AND GUIDUGLI, JUDGES; PAISLEY, SENIOR JUDGE. 1
DYCHE, JUDGE:
UPS Capital Business Credit (UPS Capital),
appeals from a July 15, 2004, order of the Clark Circuit Court
invoking the equitable doctrine of marshaling assets, thereby
requiring UPS Capital to seek satisfaction of a debt on two
1
Senior Judge Lewis G. Paisley sitting as Special Judge by assignment of the
Chief Justice pursuant to Section 110(5)(b) of the Kentucky Constitution and
Kentucky Revised Statute 21.580.
notes owed by Patton Management Group, Inc. (d/b/a Wright &
Lopez) and Patton Management Corp. (f/k/a Wright & Lopez, Inc.)
(collectively Patton Management) through alternative sources,
including loan guaranties and other secured assets, prior to
exercising its first-priority security lien against garnished
cash accounts currently being held by the circuit court.
The
invocation of the doctrine facilitates the efforts of C.R. Cable
Construction, Inc. (C.R. Cable) to obtain satisfaction of its
judgment against Patton Management for breach of contract from
the garnished funds.
For the reasons stated below, we reverse the circuit
court’s July 15, 2004, order insofar as it requires UPS Capital
to marshal assets as against the guarantors of the Patton
Management notes; we affirm the order in all other respects.
On January 24, 2003, Patton Management executed two
notes in favor of UPS Capital’s predecessor, First International
Bank (First International). 2
The first note was for $750,000.00,
and was secured by a Security Agreement granting First
International a security interest in all of the property owned
by Patton Management or thereafter acquired.
The second note
was for $500,000.00 and was executed in conjunction with a Small
Business Administration (SBA) loan.
2
While not as broad as the
At some point subsequent to the execution of the notes, First International
changed its corporate identity to UPS Capital, and UPS Capital became the
creditor under the notes.
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security interest associated with the first note, this loan
likewise included a security interest in property owned by
Patton Management.
The security agreements were perfected by
the filing of financing statements with the Delaware Secretary
of State.
Each of the notes was also secured by separate
security guaranties executed by Patton Management officers Bill
Ray, Richard Boyle and Alec McLarty, and by Patton Management
shareholder, Linkcom, Inc.
These loan guaranties, and whether
the guaranties are subject to the doctrine of marshaling assets,
are at the center of the present litigation.
In the meantime, Patton Management became indebted to
C.R. Cable for work performed by C.R. Cable as a subcontractor
on a contract between Patton Management and South Central Bell
telephone company for, among other things, the installation of
underground cable.
Soon after the January 24, 2003, notes were executed,
Patton Management began experiencing financial difficulties and
undertook the process of self-liquidation.
This liquidation of
assets constituted default under the two loan security
agreements.
During this time Patton Management also defaulted
on its payment obligations to C.R. Cable under their contractual
agreement.
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On March 28, 2003, C.R. Cable filed a lawsuit in Clark
Circuit Court seeking to recover from Patton Management amounts
owing under the contract.
On May 1, 2003, Clark Circuit Court
entered a default judgment in favor of C.R. Cable entitling it
to collect from Patton Management the sum of $368,116.17 plus
interest, attorney fees, and costs.
In seeking to enforce its judgment, C.R. Cable
obtained Orders of Garnishment against T.D.A. Properties, Inc.,
d/b/a Aulbach Auctioneers, and Verizon/Alltel Communications,
Inc., for amounts these entities owed to Patton Management.
These parties deposited with the circuit court, respectively,
$429,711.28 and $33,936.35.
C.R. Cable also obtained an Order
of Garnishment against BellSouth Telecommunications, Inc., in
the amount of $277,995.95; those garnished funds, however, were
deposited with the Jefferson Circuit Court in association with
separate litigation involving Patton Management and are not at
issue in this proceeding.
On June 11, 2003, UPS Capital moved to intervene in
the Clark Circuit Court action and asserted a claim to the
garnished funds under its first-priority security interest.
UPS
Capital sought to quash the garnishments and apply the garnished
funds toward satisfaction of its two secured notes.
According
to the appellant, as of June 2, 2003, Patton Management owed UPS
Capital $309,502.71 on the first note and $398,386.20 on the SBA
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note.
By docket sheet order entered July 4, 2003, UPS Capital
was granted leave to intervene in the action.
On February 19, 2004, C.R. Cable filed a motion
requesting that the circuit court invoke the doctrine of
marshaling assets and order UPS Capital to first seek repayment
on the two notes from other collateral securing the notes, as
well as the four personal guarantors, prior to seeking payment
on the notes from the garnished funds.
As grounds for the
motion C.R. Cable noted the abundance of other collateral from
which UPS Capital could seek satisfaction of its notes; that the
personal guaranties were a source of satisfaction available only
to UPS Capital; and that UPS Capital had failed to exercise
diligence in trying to collect its debt, resulting in a
depletion of assets by Patton Management.
By order entered on July 15, 2004, the circuit court
granted C.R. Cable’s motion to invoke the doctrine of marshaling
assets and directed UPS Capital to “proceed forthwith to collect
its debt from Patton by enforcement of the guaranties and
liquidation of any other collateral it holds securing its
loans.”
The circuit court further directed that “the Garnished
Funds presently being held by this Court pursuant to previous
orders of this Court shall remain so until further order of this
Court.”
This appeal followed.
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We first address C.R. Cable’s argument that the
circuit court’s July 15, 2004, is an interlocutory and
nonappealable order.
Ky. R. Civ. Pro. (CR) 54.01 defines a final and
appealable judgment as "a final order adjudicating all the
rights of all the parties in an action or proceeding, or a
judgment made final under Rule 54.02."
However, CR 54.02(1)
provides:
When more than one claim for relief is
presented in an action, whether as a claim,
counterclaim, cross-claim, or third-party
claim, or when multiple parties are
involved, the court may grant a final
judgment upon one or more but less than all
of the claims or parties only upon a
determination that there is no just reason
for delay. The judgment shall recite such
determination and shall recite that the
judgment is final. In the absence of such
recital, any order or other form of
decision, however designated, which
adjudicates less than all the claims or the
rights and liabilities of less than all the
parties shall not terminate the action as to
any of the claims or parties, and the order
or other form of decision is interlocutory
and subject to revision at any time before
the entry of judgment adjudicating all the
claims and the rights and liabilities of all
the parties.
The circuit court’s July 15, 2004, order contained the
finality language required by CR 54.02.
Moreover, the trial
court has broad discretion in making a determination of whether
an order is final and appealable under CR 54.02.
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Christie v.
First American Bank, 908 S.W.2d 679, 681 (Ky.App. 1995); Jackson
v. Metcalf, 404 S.W.2d 793 (Ky. 1966).
We construe the circuit court’s July 15, 2004, order
as having resolved one among the multiple claims pending in the
lawsuit; namely, whether UPS Capital, over its objection, should
be required to undertake the time, effort, and expenses
associated with implementing the circuit court’s order to
commence marshaling assets against other secured Patton
Management collateral and against the four guarantors prior to
exercising its lien against the garnished funds.
While things
remain to be done in the circuit court litigation, we cannot
conclude that the circuit court abused its discretion in
determining that there was no just reason for delay under CR
54.02.
Turning now to the merits of the appeal, UPS Capital
contends that, for various reasons, the circuit court erred in
invoking the doctrine of marshaling assets with respect to the
loan guaranties executed by Bill Ray, Richard Boyle, Alec
McLarty and Linkcom, Inc. 3
We agree.
The doctrine of marshaling assets is an ancient rule
of equity.
The doctrine 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
3
UPS Capital does not appear to challenge invocation of the marshaling assets
doctrine with respect to other available Patton Management collateral.
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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.”
Bartley v. Pikeville Nat. Bank & Trust Co., 532 S.W.2d
446, 448 (Ky. 1975).
By this method of distribution both
creditors may be paid or both funds will be exhausted.
Id.
However, “it is well settled that a creditor who has a
claim against two debtors, one a principal and the other a
surety, cannot be compelled by another creditor of the principal
debtor to exhaust his remedy against the surety before
proceeding against the principal.”
Gaines v. Hill, 147 Ky. 445,
144 S.W. 92, 94 (1912)(citations omitted).
The rationale for
this rule has been explained as follows:
A surety is not a “fund” or “security” in
the sense in which those terms are used in
connection with the principle of marshaling
so as to permit or require a senior creditor
to look first to the surety for satisfaction
of its claim. Where a fund is held by a
surety or guarantor, marshaling is barred
because the debtor does not hold the funds
which are in the hands of the surety or
guarantor and, therefore, are not assets
subject to marshaling. Thus, in the absence
of some special equity, the principle of
marshaling assets is not applicable to a
case where one of the funds is the property
of a surety of the common debtor. As a
result, a creditor cannot be compelled to
satisfy its debt from the sureties of a
debtor before resorting to a fund or
collateral security on which the creditor
has a lien.
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53 AM. JUR. 2D Marshaling Assets § 28 (1996).
The circuit court’s July 15, 2004, order, insofar as
it includes the four guarantors of the Patton Management loans
(Ray, Boyle, McLarty, and Linkcom, Inc.) as subject to the
doctrine of marshaling assets, is not in compliance with the
rule as stated in Gaines v. Hill.
facet of the order.
We accordingly reverse that
We affirm the circuit court’s July 15,
2004, order, however, with respect to marshaling as concerns
other Patton Management collateral covered under the security
agreements.
In support of including the guarantors as subject to
the doctrine of marshaling assets, C.R. Cable cites us to In the
Matter of Clary House, Inc., 11 B.R. 462 (W.D.Mo. 1981), and
Morgan v. Meacham, 279 Ky. 526, 130 S.W.2d 992 (1938).
Clary House is an anomaly which has not been followed by any
other court and is at odds with the rule as stated in Gaines;
further, we do not believe that Morgan is inconsistent with the
rule as stated in Gaines.
In any event, Gaines has not been
overruled, and has been applied as recently as 1975 in Bartley
v. Pikeville National Bank & Trust Company, supra.
In summary,
we believe that the rule as stated in Gaines v. Hill remains the
law in this Commonwealth.
as stated therein.
Hence, we are bound to apply the rule
Rules of the Supreme Court 1.030(8)(a).
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For the foregoing reasons we affirm in part, reverse
in part, and remand for additional proceedings consistent with
this opinion.
ALL CONCUR.
BRIEF FOR APPELLANT:
Craig C. Dilger
W. Duncan Crosby III
Ogden, Newell & Welch, PLLC
Louisville, Kentucky
BRIEF FOR APPELLEE C.R. CABLE
CONSTRUCTION, INC.:
Dan M. Rose
R. Eberley Davis
Lizbeth Ann Tully
Stoll, Keenon & Park, LLP
Lexington, Kentucky
ORAL ARGUMENT FOR APPELLANT:
ORAL ARGUMENT FOR APPELLEE
C.R. CABLE CONSTRUCTION, INC.:
John T. McGarvey
Morgan & Pottinger, PSC
Louisville, Kentucky
Kevin G. Henry
Sturgill, Turner, Barker,
& Moloney, PLLC
Lexington, Kentucky
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