CITIZENS BANK OF NORTHERN KENTUCKY, INC. (F/K/A CITIZENS BANK OF CAMPBELL COUNTY, INC.) v. PBNK, INC. (F/K/A PEOPLES BANK OF NORTHERN KENTUCKY, INC.)
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RENDERED: FEBRUARY 17, 2006; 10:00 A.M.
ORDERED NOT PUBLISHED BY KY. SUPREME COURT: NOVEMBER 15, 2006.
(2006-SC-000217-D)
Commonwealth of Kentucky
Court of Appeals
NO. 2004-CA-001351-MR
CITIZENS BANK OF NORTHERN
KENTUCKY, INC. (F/K/A CITIZENS
BANK OF CAMPBELL COUNTY, INC.)
v.
APPELLANT
APPEAL FROM BOONE CIRCUIT COURT
HONORABLE ANTHONY W. FROHLICH, JUDGE
ACTION NO. 02-CI-00661
PBNK, INC. (F/K/A PEOPLES
BANK OF NORTHERN KENTUCKY,
INC.)
APPELLEE
OPINION
AFFIRMING
** ** ** ** ** ** ** **
BEFORE: BARBER AND McANULTY, JUDGES; MILLER, SENIOR JUDGE.1
MILLER, SENIOR JUDGE:
Citizens Bank of Northern Kentucky, Inc.,
(formerly known as Citizens Bank of Campbell County, Inc.)
(Citizens Bank) brings this appeal from the Boone Circuit
Court’s determination that it does not have a valid legal and/or
equitable mortgage superior to the mortgage of PBNK, Inc.
(formerly known as Peoples Bank of Northern Kentucky, Inc.)
1
Senior Judge John D. Miller 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.
(PBNK) upon certain real property located in Boone County,
Kentucky.
Because the circuit court correctly determined that
Citizens Bank does not have a valid legal or equitable mortgage
on the subject property, we affirm.
FACTUAL AND PROCEDURAL BACKGROUND
In the fall of 1997 Anthony William Erpenbeck, Sr.
(Tony) was the owner of an approximately 37-acre parcel of land
located in Boone County.
Tony’s wife is Phyllis Erpenbeck.
Tony acquired the subject property in January 1997 for
$1,579,610.00 from Mt. Zion Development Corp., a company owned
by his son William Erpenbeck, Jr. (Bill), whose wife is named
Marcia.
Tony took the property subject to two mortgages: a 1995
mortgage in favor of nine attorneys with an unpaid balance of
$404,234.95, and another 1995 mortgage in favor of Fifth Third
Bank, Northern Kentucky, Inc. (Fifth Third Bank) in the amount
of $750,000.00.
In 1997 Bill was the president and principal owner of
The Erpenbeck Company, Inc., and Erpenbeck Development Company,
Inc.
The companies engaged in the construction and development
business in the Northern Kentucky/Greater Cincinnati area.
In the fall of 1997 Bill and his companies obtained a loan in
the amount of $500,000.00 from Citizens Bank.
In the course of
obtaining the loan, Bill misrepresented to Citizens Bank that he
was the owner of the 37-acre tract previously conveyed to his
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father, Tony.
Bill wrongfully offered the tract as security for
the loan.
During the loan evaluation process the bank conducted
a title examination, but failed to discern that Tony, not Bill,
was the owner of the land.
The loan closed on December 8, 1997.
Bill signed the loan documents representing that he was the
owner of the property, and his wife, Marcia, signed the loan
documents to mortgage her purported dower interest.
The
mortgage on the subject property was duly recorded in the office
of the Boone County Clerk.
The proceeds of the loan were used to pay off the debt
associated with the mortgage held by the nine attorneys and to
pay down the Fifth Third Bank mortgage in the amount of
$72,553.75.
Bill pocketed $21,572.50.
In the spring of 2002, the Citizens Bank loan to Bill
and his companies fell into default, and Citizens Bank initiated
the present foreclosure action.
Following the commencement of
the foreclosure action, Citizens Bank first became aware that
Tony, not Bill, was the owner of the property which secured
Bill’s $500,000.00 loan.
After learning that Bill was not the owner of the
property, on June 6, 2002, the Bank entered into an “Agreement
to Sell and Purchase Note and Mortgage” with Tony.
In the
agreement, among other things, Tony represented that Bill had
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signed the loan documents as his agent.
It appears that this
transaction was undertaken in Tony’s attempt to retroactively
ratify Bill’s act of mortgaging his (Tony’s) property and to
ensure that Citizens Bank would have a valid lien upon same.
In the meantime, shortly after the Citizens Bank loan
closed, PBNK made a mortgage loan to Tony secured by the subject
property.
The PBNK note, in the amount of $1,000,000.00, was
signed by Tony, and the mortgage securing the note was properly
signed by both Tony and his wife.
The loan closed on December
18, 1997, and the mortgage associated with the PBNK loan was
recorded subsequent to the Citizens Bank mortgage.2
At the time PBNK made its mortgage loan to Tony, PBNK
was aware of the prior recorded mortgage in favor of Citizens
Bank in connection with the $500,000.00 loan to Bill.
There is
no doubt as to PBNK’s actual knowledge.
In Citizens Bank’s foreclosure action, a dispute
developed between Citizens Bank and PBNK regarding whether
Citizens Bank held a valid prior mortgage upon the 37-acre
parcel of land.
Commissioner.
The matter was referred to the Master
On March 18, 2004, the Master Commissioner issued
his Report wherein he determined that Citizens Bank did not have
a valid legal and/or equitable mortgage on the subject property.
2
Tony ultimately defaulted on the loan.
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On June 8, 2004, the circuit court entered a “Judgment and Order
of Sale” in which the Master Commissioner’s report was adopted
in full.
Kentucky Rules of Civil Procedure (CR) 53.06(2).
This
appeal followed.
STANDARD OF REVIEW
We begin with a statement of our standard of review.
CR 52.01 states, in pertinent part, for actions tried without a
jury, “[f]indings of fact shall not be set aside unless clearly
erroneous, and due regard shall be given to the opportunity of
the trial court to judge the credibility of the witnesses.
The
findings of a commissioner, to the extent that the court adopts
them, shall be considered as the findings of the court.”
As a
result, when the trial court adopts the recommendations of the
Commissioner, those recommendations fall under the same standard
of review as applied to a trial court's findings.
See Greater
Cincinnati Marine Service, Inc. v. City of Ludlow, 602 S.W.2d
427, 429 (Ky. 1980) and Wells v. Sanor, 151 S.W.3d 819, 822
(Ky.App. 2004).
A factual finding is not clearly erroneous if
it is supported by substantial evidence.
Substantial evidence
is evidence, when taken alone or in light of all the evidence,
which has sufficient probative value to induce conviction in the
mind of a reasonable person.
S.W.3d 843 (Ky.App. 1999).
Janakakis-Kostun v. Janakakis, 6
An appellate court, however, reviews
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legal issues de novo.
Carroll v. Meredith, 59 S.W.3d 484, 489
(Ky.App. 2001).
ARGUMENTS OF CITIZENS BANK
On appeal, Citizens Bank contends that the circuit
court erred by determining that it did not have a valid legal
mortgage and/or a valid equitable mortgage on the subject
property.
Citizens Bank also makes an argument to the effect
that it should prevail over PBNK because, otherwise, PBNK would
be unjustly enriched.
We consider each of these arguments in
turn.
LEGAL MORTGAGE ISSUES
We believe it a general rule that where a mortgagor
has previously disposed of property, his subsequent execution of
a mortgage, the description of which included the land disposed
of, does not create a lien upon it.
37, 137 S.W. 779 (1911).
Miller v. Williams, 144 Ky.
Moreover, we draw attention to
KRS3 382.370 which provides, in relevant part, as follows:
Powers of attorney to convey or release real
or personal property, or any interest
therein, may be acknowledged, proved and
recorded in the proper office, in the manner
prescribed for recording conveyances. If
the conveyance made under a power, is
required by law to be recorded or lodged for
record, to make the same valid against
creditors and purchasers, then the power
must be lodged or recorded in like manner
. . . . (Emphasis added.)
3
Kentucky Revised Statutes.
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Of course, in order to be valid as against purchasers
and creditors, a mortgage must be recorded in the county clerk’s
office in which the property is located.
KRS 382.110.
KRS 382.270;
In order for an agent to encumber or convey real
property on behalf of a principal, the agent’s authority must
likewise be of record in the county clerk’s office.
KRS 382.370.
See also State Bank of Stearns v. Stephens,
265 Ky. 615, 97 S.W.2d 553 (Ky. 1936) (Where a contract required
to be in writing and recorded is made under a power of attorney,
the power of attorney as to third parties must also be
recorded); Graves v. Ward, 63 Ky. 301 (1865) (Deed executed by
attorney-in-fact and recorded does not operate as constructive
notice unless the power of attorney is also recorded or lodged
for record); and Taylor v. McDonald's Heirs, 5 Ky. 420 (1811)
(Power of attorney to convey land must be recorded in the county
where the deed is required to be recorded).
In view of the foregoing, we must conclude that Bill
had no power to mortgage property which he did not own.
We
further conclude that Bill could not act as Tony’s agent in
mortgaging the latter’s property without having complied with
the statutory requirements.
The reasoning underlying these
conclusions also prevents us from assigning merit to Tony’s
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attempted retroactive ratification of Bill’s wrongful act so as
to be effective against PBNK.
EQUITABLE MORTGAGE ISSUES
Citizens Bank also contends that an equitable mortgage
was created because Tony accepted the benefits of the loan in
that existing mortgages on the property were paid off with the
proceeds of the Citizens Bank loan, thereby benefiting Tony by
increasing his equity in the subject property.
An equitable mortgage arises from a
transaction, regardless of its form, which
resolves into a security, or an offer or
attempt to pledge land as security for a
debt or liability. It is absolutely
essential to its existence that there be a
definite debt, obligation, or liability to
be secured, due from the mortgagor to the
mortgagee. . . . The true situation giving
rise to an equitable mortgage is the
extension of credit in reliance or an
agreement that certain property is to be
security for the loan. In such case the
creditor is entitled to the security in
equity, his remedy at law being inadequate
as an unsecured creditor.
Keats, Pitt, and Oldham, Kentucky Practice, Vol. 3, § 18.5
(citing 59 C.J.S. Mortgages § 13).
Kentucky has few cases addressing the doctrine of
equitable mortgages.
We have, however, located a sister-state
case which is, by analogy, applicable to the situation at hand.
In Lubin v. Klein, 193 A.2d 46 (Md. 1963) the Lubins
held a third mortgage on the property of the defaulting parties,
the Frohwirths, and the Kleins held an ostensibly inferior
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judgment lien against the property.
The Lubins’ mortgage had
been executed by an individual acting as attorney-in-fact for
the Frohwirths pursuant to a general power of attorney.
As it
turns out, however, the power of attorney was not properly
acknowledged as required by the Maryland statutory code.
The Lubins conceded that the power of attorney was
defective at law because it lacked the required acknowledgment,
but contended that their mortgage was nevertheless entitled to
priority over the subsequent judgment lien of the Kleins on the
theory that it was an equitable mortgage.
The Court of Appeals
of Maryland rejected this contention, stating as follows:
It is well settled in this State, since
Dyson v. Simmons, 48 Md. 207 (1878), that
generally where an instrument intended to
operate as a mortgage fails as a legal
mortgage because of some defect or infirmity
in its execution, an equitable mortgage may
be recognized, with priority over judgments
subsequently obtained. See also Jackson v.
County Trust Co., 176 Md. 505, 6 A.2d 380
(1939); Western Nat. Bank of Baltimore v.
National Union Bank, 91 Md. 613, 46 A. 960
(1900); cf. Berman v. Berman, 193 Md. 614,
69 A.2d 271 (1949). The theory underlying
the equitable mortgage doctrine is that an
instrument which is intended to charge
certain lands, even though defectively
executed, is nevertheless considered to be
evidence of an agreement to convey, and a
court of equity should enforce the
obligation despite the technical defects in
the instrument.
The case before us is not one, however,
where the defect complained of occurred in
the mortgage itself. It occurred rather in
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the document which sought to invest the
attorney-in-fact with power to execute the
mortgage. The reasoning in Jackson v.
County Trust Co., supra, recognizes power to
convey or charge the land as a condition
precedent to the invocation of the equitable
mortgage doctrine. In that case, in which a
mortgage executed without an affidavit of
consideration was held to be an equitable
mortgage and given priority over a
subsequent judgment lien, the Court quoted
from Dyson v. Simmons, supra (at p. 510 of
176 Md. at p. 382 of 6 A.2d):
‘* * * At the time of the execution
of this mortgage the mortgagor had
full and complete power of conveying
or charging the land * * * and the
general principle is, that if a party
has power to charge certain lands and
agrees to charge them, in equity he has
actually charged them; and a Court of
equity will enforce the charge. * * *’
This language, when considered in
conjunction with the case of Citizens' Fire
Insurance, etc. v. Doll, 35 Md. 89 (1872),
leaves little doubt that the equitable
mortgage doctrine must be limited to
situations where the person who executed the
mortgage had the legal power to do so, and
cannot be extended to cure mortgages which
have been executed by persons with no legal
authority.
We conclude from the foregoing that while an equitable
lien may be impressed upon property if there is a simple defect
in the mortgage proposed to create the lien, an equitable lien
will not be impressed upon the property if the person who sought
to create the lien in the first instance had no legal authority
to do so.
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Analogous to the attorney-in-fact in Lubin, here, Bill
did not have a properly recorded power of attorney to act as
Tony’s agent; thus, he was without legal authority to charge the
property.
We agree with the rule as stated in Lubin that the
equitable mortgage doctrine cannot be extended to cure mortgages
which have been executed by persons without legal authority.
Application of the rule in the present case compels the result
that Citizens Bank cannot claim an equitable mortgage in the
subject property.
UNJUST ENRICHMENT ISSUES
Finally, we address Citizens Bank’s contention that
PBNK has been unjustly enriched.
Citizens Bank thinks this is
so because at the time PBNK made its loan, it well knew of the
Citizens Bank loan and considered its loan subordinate.
We know
of no rule of law that dictates that a subordinate lienholder
enhanced by the failure of a prior lien, or for that matter the
cancellation or retirement of same, is to be considered unjustly
enriched.
A serendipity perhaps.
But not an unjust gain to be
condemned by the law.
The doctrine of unjust enrichment, an equitable one,
is applicable as a basis of restitution to prevent one person
from keeping money or benefits belonging to another.
Haeberle v. St. Paul Fire and Marine Ins. Co., 769 S.W.2d 64
(Ky.App. 1989).
Because Citizens Bank does not have a valid
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legal or equitable mortgage on the subject property under which
to assert a lien, it cannot claim that PBNK is depriving it of
money or benefits.
Citizens Bank’s claim of unjust enrichment
is thus without merit.
For the foregoing reasons, the judgment of the Boone
Circuit Court is affirmed.
ALL CONCUR.
BRIEF FOR APPELLANT:
BRIEF FOR APPELLEE:
Scott M. Powers
Newport, Kentucky
Beverly R. Storm
Covington, Kentucky
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