BANK ONE, KENTUCKY, NA v. DANIELLE C. VAUGHT, N/K/A DANIELLE COLDIRON; ARVIN G. VAUGHT; AND PRINCIPAL WHOLESALE MORTGAGE, INC.
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RENDERED:
JULY 18, 2003; 2:00 P.M.
ORDERED NOT PUBLISHED BY THE KENTUCKY SUPREME COURT:
APRIL 15, 2004 (2003-SC-0603-D)
Commonwealth Of Kentucky
Court of Appeals
NO. 2001-CA-001662-MR
BANK ONE, KENTUCKY, NA
APPELLANT
APPEAL FROM FAYETTE CIRCUIT COURT
HONORABLE MARY C. NOBLE, JUDGE
ACTION NO. 99-CI-04354
v.
DANIELLE C. VAUGHT, N/K/A
DANIELLE COLDIRON; ARVIN G. VAUGHT;
AND PRINCIPAL WHOLESALE MORTGAGE, INC.
APPELLEES
OPINION
AFFIRMING
** ** ** ** **
BEFORE:
JUDGE.1
BUCKINGHAM AND JOHNSON, JUDGES; AND HUDDLESTON, SENIOR
JOHNSON, JUDGE:
Bank One, Kentucky, NA has appealed from the
summary judgment and order entered by the Fayette Circuit Court
on July 6, 2001, in a mortgage foreclosure action that ordered
the distribution of certain proceeds held in escrow following
the sale of real estate jointly owned by appellees, Arvin G.
1
Senior Judge Joseph R. Huddleston, sitting as Special Judge by assignment of
the Chief Justice pursuant to Section 110(5)(b) of the Kentucky Constitution
and KRS 21.580.
Vaught and Danielle C. Vaught (n/k/a Danielle Coldiron).
Having
concluded that the trial court correctly applied the law in
distributing the proceeds from the sale, we affirm.
On June 5, 1991, the Vaughts purchased a house and lot
located in Lexington, Fayette County, Kentucky, for their
marital residence.
The couple held title to the property as
tenants by the entirety and the deed was duly recorded on June
5, 1991, in the Fayette County Court Clerk’s Office.
On
February 1, 1994, the Vaughts borrowed $73,600.00 from
Cumberland Federal Savings Bank and gave Cumberland a first
mortgage on their marital residence.2
On May 17, 1997, Danielle filed a petition for
dissolution of marriage in the Fayette Circuit Court.
While the
Vaughts’ divorce action was still pending, on February 16, 1998,
Arvin entered into a Revolving Credit Line Real Estate Mortgage
with Bank One, providing him with a line of credit of
$36,000.00.3
Arvin secured the line of credit with Bank One by
executing a mortgage on the Vaughts’ marital residence.
While
the mortgage to Bank One also included a signature line for
Danielle as a mortgagor and while the mortgage referenced the
title source for the mortgaged property as being the marital
2
Cumberland later assigned the note and mortgage to Principal Wholesale
Mortgage, Inc.
3
Arvin subsequently made draws in excess of $33,000.00 on the account.
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residence that had been conveyed to Arvin and Danielle as
husband and wife, Danielle never signed or agreed to the
mortgage.
On February 4, 1999, the Fayette Circuit Court entered
a decree dissolving the Vaughts’ marriage; and it ordered, inter
alia, that the marital residence “be listed and sold[.]”4
In the
decree Danielle was “awarded $25,000.00 of the net proceeds,
with any remaining proceeds equally divided between the
parties.”
No appeal was filed in the divorce action.
In December 1999 Bank One discovered that its mortgage
from Arvin securing the revolving credit line account had not
been recorded and that the original copy of the mortgage had
been lost.
On December 9, 1999, Bank One recorded a copy of the
mortgage in the Fayette County Court Clerk’s Office.5
On December 17, 1999, Principal filed a lawsuit in the
Fayette Circuit Court seeking to foreclose on its first mortgage
on the Vaught residence.
Danielle filed an answer and a cross-
claim asserting her interest in the property.
Bank One filed an
answer, counterclaim and a cross-claim asserting its interest in
the property based on the mortgage signed by Arvin.
On June 7,
4
The decree did not provide any specifics concerning the sale of the real
estate other than the requirement that “[e]ach party shall execute all
documents necessary to comply with the Court’s Findings of Fact, Conclusions
of Law and Decree.”
5
An Affidavit in Aid of Title was also filed as an explanation as to why a
copy was being filed.
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2000, the trial court entered a judgment and order of sale in
favor of Principal, and on July 24, 2000, the residence sold for
$107,000.00.
After the payment of costs and Principal’s first
mortgage, the net proceeds from the sale of $39,914.99 were held
in escrow by the master commissioner.
After considering various motions by the parties, the
trial court on September 8, 2000, ordered that one-half of the
net sale proceeds be distributed to Danielle with the remaining
one-half staying on deposit with the master commissioner.6
After
considering further motions by the parties, the trial court
entered an opinion and order on June 12, 2001, providing that
Danielle should receive a total of $32,457.50 from the net sale
proceeds of $39,914.99.
This amount was based on the previous
award in the divorce decree of $25,000.00, plus one-half of the
remainder, or $7,457.50.7
Bank One was awarded $7,457.49.8
The
opinion and order of June 12 was adopted by the trial court in a
summary judgment and order entered on July 6, 2001, which
ordered the distribution of the remaining funds.
This appeal
followed.
6
Danielle received $19,957.50 at that time.
7
The net sale proceeds were $39,914.99. Danielle received a total of
$32,457.50, which consisted of the sum of $25,000.00 and $7,457.50
($39.914.99 minus $25,000.00, divided by 2). Bank One received the other
one-half of the balance, or $7,457.49.
8
In its brief Bank One incorrectly claimed that Danielle received all of the
net sale proceeds.
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This case presents an issue of first impression in
Kentucky.9
We must determine whether a circuit court’s divorce
decree which divided a couple’s marital interest in real
property held by them as tenants by the entirety is binding in a
subsequent circuit court foreclosure action where a mortgagee,
who had obtained a mortgage against the marital property solely
from the husband during the marriage and while the property was
held by the couple as tenants by the entirety, claimed an
interest in the net sale proceeds from the foreclosure.
Bank One claims that it is not bound by the property
division made by the circuit court in the Vaught divorce decree
and that it is entitled to one-half of the net sale proceeds
from the foreclosure.
Bank One contends that a divorce decree
binds only the parties thereto and their privies;10
and more
specifically, that as a mortgagee it was not a privy of its
mortgagor, Arvin, for res judicata purposes.
9
We were unable to find any case law on all fours with the case sub judice.
See generally, Frank D. Wagner, J.D., Annotation, Propriety of Consideration
of, and Disposition as to, Third Persons’ Property Claims in Divorce
Litigation, 63 A.L.R.3d 373 (1975); and J. H. Cooper, Annotation, Interest of
Spouse in Estate by Entireties as Subject to Satisfaction of His or Her
Individual Debt, 75 A.L.R.2d 1172 (1961). Considering the contingent
interest that a creditor has in a tenancy by the entirety when only one
spouse mortgages the property, it is understandable that such a mortgage
would be rarely utilized and consequently this issue would be rarely
litigated. See Hoffman v. Newell, 249 Ky. 270, 284-85, 60 S.W.2d 607, 613
(1932).
10
Citing Parks v. Parks, 209 Ky. 127, 132, 272 S.W. 419, 422 (1925).
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Bank One cites Strong v. First Nationwide Mortgage
Corp.,11
for its contention that “if a party to a divorce action
wherein an interest in real estate is disputed files a lis
pendens notice,12
anyone claiming an interest in the property
which arises after the recording of the lis pendens takes that
interest subject to the results of the divorce litigation.”
Bank One then argues that “the converse is equally clear-if no
lis pendens is filed, then the outcome of any pending divorce
litigation can have no effect on any real estate encumbrances
which might have arisen during the course of that litigation.”
In Strong, this Court recognized that in a dissolution
action the trial court had a duty pursuant to KRS 403.190 to
divide the marital property in “just proportions”; and the Court
further held that the wife’s filing of a lis pendens notice
during the pendency of the divorce action did not give the
judgment the wife obtained against the husband pursuant to the
divorce a priority over a third party’s judgment lien against
the husband since the third party’s lien was filed before the
wife obtained her judgment.13
To the extent the wife’s claim in
Strong was determined to have priority over the husband’s
creditors’ claims, the Court’s holding turned on the circuit
11
Ky.App., 959 S.W.2d 785 (1998).
12
Kentucky Revised Statutes (KRS) 382.440.
13
Strong, 959 S.W.2d at 787.
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court’s authority to distribute the marital property under KRS
403.190 and not on the wife’s filing of the lis pendens notice.
Bank One concludes its argument by relying on Peyton
v. Young,14 where the deceased husband’s mortgagees asserted
their interest in property which had been held by the husband
and wife as a tenancy by the entirety at the time of both of
their deaths following their divorce.
In Peyton, the Supreme
Court of Kentucky held that the husband’s undivided one-half
interest in the property was subject to the mortgagees’ claims
and that his mortgagees were entitled to receive one-half of the
net proceeds from the master commissioner’s sale of the
property.
The Supreme Court’s ruling in Peyton appears to be
the result of its failure to recognize that a fundamental aspect
of a tenancy by the entirety is the unity of marriage and that
the dissolution of the marriage converts the tenancy by the
entirety into a tenancy in common.15
Since Peyton is an
aberration to the well settled law concerning tenancies by the
entirety, we do not find it to be persuasive in our analysis.
In response to Bank One’s arguments, Danielle
correctly points out that the cases relied upon by Bank One are
either distinguishable from the case sub judice or favorable to
her.
It is well established that a tenancy by the entirety
14
Ky., 659 S.W.2d 205 (1983).
15
Id. at 207-09 (Wintersheimer, J., dissenting).
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creates an indivisible estate in the whole property in both the
husband and wife; and that since a tenancy by the entirety
requires the legal unity of husband and wife, upon the
dissolution of the marriage the tenancy by the entirety, by
operation of law, is terminated and replaced by a tenancy in
common.
In Nelson v. Mahurin,16 this Court stated:
“One of the distinguishing incidents of
this venerable estate is that which exempts
it from the ordinary processes to which all
other estates are subject. A tenancy by the
entirety fundamentally rests on the legal
unity of the husband and wife. ‘It is
founded on the common-law doctrine of the
unity of husband and wife as constituting in
law but one person. A conveyance to a
husband and wife as tenants by the entirety
creates one indivisible estate in them both
and in the survivor, which neither can
destroy by any separate act. Both husband
and wife are seised of such an estate per
tout et non per my as one person, and not as
joint tenants or tenants in common.
Alienation by either the husband or the wife
will not defeat the right of the survivor to
the entire estate on the death of the other.
There can be no severance of such estate by
the act of either alone without the assent
of the other, and no partition during their
joint lives, and the survivor becomes seised
as sole owner of the whole estate regardless
of anything the other may have done. The
tenancy by the entirety is essentially a
joint tenancy modified by the common-law
theory of the unity of husband and wife.
They do not take by moieties but by
entireties.’”17
16
Ky.App., 994 S.W.2d 10 (1998).
17
Nelson, supra at 14 (quoting Hoffman, 60 S.W.2d at 609 (citing
Bernatavicius, 156 N.E. at 686)).
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A tenancy by the entirety is a unique
estate which can only be “conveyed or
encumbered [ ] by a joint instrument or with
the consent of both tenants.” Peyton v.
Young, Ky., 659 S.W.2d 205, 207 (1983),
Justice Wintersheimer Dissenting Opinion;
Weindl v. Weindl, Ky., 359 S.W.2d 333
(1962). The estate arose when divorce was
rare and “functioned as a rough equivalent
of a homestead right, affording protection
to the family and the nondebtor spouse.”
Graham and Keller, Domestic Relations Law
4.7 (2d ed., 1997). It is axiomatic that
dissolution of the tenants’ marriage
terminates or destroys an “essential element
of the tenancy--spousal unity.” C. Bratt, A
Primer on Kentucky Intestacy Laws, 82
Ky.L.J. 29, 95 (1993-94). As a result, a
decree of dissolution, by operation of law,
terminates a tenancy by the entirety and the
concomitant right of survivorship to the
entire estate.
Divorce is not an act of the
parties. It is an act of the law
. . .
That act of the law creates
a new legal status, both for the
husband and for the wife. It
divides the common-law unity
hitherto existing. It creates two
individuals in place of the unity
theretofore recognized by the
common law as existing. It
substitutes for that unity two
persons who thereafter are
strangers to each other in their
legal status. . . . Divorce
establishes a legal situation with
respect to the man and woman
previously husband and wife which
is incompatible with the legal
theory of tenancy by the entirety
. . . . When persons who have been
tenants by the entirety cease to be
husband and wife, the legal factors
necessary to that tenancy have gone
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out of existence. A tenancy by the
entirety cannot be created by the
most explicit words in a legal
instrument, unless the man and
woman are in truth husband and
wife. It seems to us more in
harmony with the principles
governing such tenancies to hold
that they cannot continue after the
tenants have become divorced and
thus have ended the legal
relationship to each other, which
constitutes the essence of that
tenancy. The great weight of
authority supports this conclusion.
Bernatavicius, supra, 156 N.E. at 686-687
(citations omitted). Thus, when a marriage
has been dissolved and the former husband
and wife continue to hold legal title to
realty, they hold that property as tenants
in common. Id.; see also Bratt, supra at
96.18
Bank One, citing Future Federal Savings & Loan Assoc. v.
Daunhauer,19 argues that since the dissolution of the Vaughts’
marriage converted their estate in the subject property from a
tenancy in the entirety to a tenancy in common and that since
Arvin and Danielle each possessed an undivided interest in the
subject property, that it was entitled to “an undivided one-half
interest in said property.”
The flaw in this argument is that
at the time Arvin mortgaged his sole interest in the subject
property he held the property by a tenancy by the entirety, and
as such, he could only obligate as security to Bank One that
18
Nelson, 994 S.W.2d at 14-15.
19
Ky.App., 687 S.W.2d 871, 873-74 (1985).
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interest which he held.
Arvin’s interest in the property was
not converted from a tenancy by the entirety to a tenancy in
common until the circuit court dissolved the parties’ marriage,
at which time the circuit court simultaneously divided Arvin’s
and Danielle’s marital interest in the property pursuant to KRS
403.190.
Thus, since Bank One’s secured interest in the subject
property was limited to no greater an interest than Arvin had in
that property, when the circuit court in the dissolution action
determined Arvin’s interest in the property to be only one-half
of the remaining net sale proceeds after Danielle was paid
$25,000.00, Bank One’s interest in the net sale proceeds was
limited to that same amount.
Bank One is correct that it does
have an interest in Arvin’s undivided interest in the tenancy in
common, but that interest was determined by the circuit court in
the divorce action to be an amount less than one-half of the net
sale proceeds that Bank One claims.
Bank One’s argument that it cannot be bound by the
circuit court’s ruling in the divorce action because it was not
a party to that action and because Danielle did not file a lis
pendens notice in that action also fails.
Until their marriage
was dissolved, Arvin and Danielle held the subject property as a
tenancy by the entirety.
As a mortgagee of only Arvin, Bank
One’s right to foreclose on the property during the Vaught’s
marriage was limited by Arvin’s contingent interest in the
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property.
At the time Bank One foreclosed on Arvin’s interest,
the Vaughts were divorced, the tenancy by the entirety had been
converted to a tenancy in common, and the former spouses’
respective interests in the property had been adjudicated.
As a
contingent interest, Bank One’s claim against Arvin’s interest
in the property was determined upon the finality of the divorce
action.
Based on the foregoing reasons, the summary judgment
and order of the Fayette Circuit Court is affirmed.
ALL CONCUR.
BRIEF FOR APPELLANT:
Scott T. Rickman
Lexington, Kentucky
BRIEF FOR APPELLEE, DANIELLE
COLDIRON:
Kathryn Warnecke
Lexington, Kentucky
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