WHITE (RICHARD), ET AL. VS. WHITAKER BANK, INC.Annotate this Case
RENDERED: AUGUST 29, 2008; 2:00 P.M.
NOT TO BE PUBLISHED
Commonwealth of Kentucky
Court of Appeals
APPEAL FROM FAYETTE CIRCUIT COURT
HONORABLE THOMAS L. CLARK, JUDGE
ACTION NO. 04-CI-05225
WHITAKER BANK, INC.
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BEFORE: THOMPSON AND DIXON, JUDGES; HENRY,1 SENIOR JUDGE.
HENRY, SENIOR JUDGE: Richard and Valerie White appeal from an order
granting summary judgment to Whitaker Bank, Inc., in a lawsuit alleging
misconduct by the appellee and one of its employees in connection with a
construction loan. The Whites contend that the trial court erroneously awarded
Senior Judge Michael L. Henry, sitting as Special Judge by assignment of the Chief Justice
pursuant to Section 110(5)(b) of the Kentucky Constitution and KRS 21.580.
summary judgment to the Bank upon their claims alleging fraud and negligent
supervision. For the reasons stated below, we affirm.
FACTUAL AND PROCEDURAL BACKGROUND
In December 1997 the Whites organized Cliffview Resort, LLC, for
the purpose of developing and operating a recreational project on property located
in Wolf and Lee Counties, Kentucky. In February 1998 Cliffview Resort
borrowed $1,664,408.00 from Whitaker Bank for the purpose of constructing an
inn and conference center on the property. The Whites personally guaranteed the
loan. The loan agreement included a provision that the Bank would not make
advances under the loan unless it obtained a report by an independent inspector
“reflecting a condition of such Collateral [i.e., the inn and conference center]
acceptable to the Bank.” As the independent inspector, the Bank retained Jonathan
Debbie Tipton was the loan officer of the bank originally assigned to
oversee the loan. For unrelated reasons the Whites retained her brother, Randy
Rose, as the general contractor on the project.
Rose began construction on the project in January 1998. By sometime
in April 1998, the Whites were aware of Rose’s failure to undertake the initial
construction phase of the inn and conference center in a workmanlike manner, as
evidenced by narrated video tapes made by Richard on April 29, 1998, and May 6,
1998. The Whites discharged Rose from the project on April 27, 1998.
As previously noted, as part of the loan disbursement process, the
Bank retained Skidmore as an independent inspector to monitor the progression of
the project for the purpose of confirming that further disbursements were justified.
In connection with his inspections, Skidmore produced inspection reports. The
first two of the reports, those dated February 22, 1998, and March 10, 1998, were
submitted to Tipton. The reports contained negative commentary regarding Rose’s
performance on the project. Reports subsequent to March 10, 1998, were
addressed to Whitaker Bank president Steve Hale. According to Tipton, she, in
effect, recused herself from overseeing the loan when problems developed
concerning her brother’s performance on the project. The Whites allege that in
violation of the Bank’s normal policies and procedures, Skidmore’s inspection
reports were not provided to them. As further discussed below, this failure to
provide the reports to the Whites’ forms the basis for the fraud and negligent
supervision claims at issue in this appeal.
Following the Whites’ termination of Rose, they retained another
contractor to complete the inn and conference center. The project was completed
in late 1998. The Whites first defaulted on the loan in the winter of 2000-2001.
Cliffview Resort was eventually sold for $2,230,000, with all of those proceeds
going to the Bank in full satisfaction of the loan.
In the meantime the Bank had made a second loan to the Whites in the
amount of $60,000.00. In 2002 the Bank filed a foreclosure action against the
Whites in Wolf Circuit Court involving the second loan, and the Whites filed
various counterclaims against the Bank relating to the transaction.
On September 9, 2004, the Whites initiated the present case by filing a
Complaint in Rowan Circuit Court. The parties eventually agreed that Rowan
County was not the proper venue for the lawsuit, and agreed to transfer the case to
Fayette Circuit Court. Accordingly, on January 25, 2005, the Whites filed an
Amended Complaint in Fayette Circuit Court. The Original and Amended
Complaints raised various claims relating to the aforementioned $60,000.00 loan.
The trial court ultimately granted summary judgment upon those claims based
upon the res judicata effect of the Wolf County case. The Whites have not
appealed the award of summary judgment upon those issues, and all claims relating
to the second loan are not relevant to this appeal.
As discovery progressed in the proceedings below, the Whites learned
for the first time of the Skidmore inspection reports filed beginning in February
1998 at the outset of the construction project. The reports, as previously noted,
contained adverse conclusions relating to Rose’s work. Based upon the Bank’s
failure to contemporaneously disclose these reports, on January 26, 2007, the
Whites filed a Second Amended Complaint alleging counts of fraud and negligent
supervision in connection with the 1998 loan. These counts are predicated
exclusively upon the Bank’s (and Tipton’s) failure to contemporaneously disclose
the Skidmore reports and to take proper actions based upon the contents of the
On July 11, 2007, the trial court entered an order awarding the Bank
summary judgment upon all issues. As relevant here, the trial court awarded
summary judgment upon the White’s fraud and negligent supervision claims based
upon the five-year statute of limitations period for bringing an action for fraud.
The Whites have appealed only the award of summary judgment upon their fraud
and negligent supervision claims.
STANDARD OF REVIEW
The standard of review on appeal when a trial court grants a motion
for 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.” Scifres v. Kraft, 916 S.W.2d 779, 781 (Ky.App.
1996); Kentucky Rules of Civil Procedure (CR) 56.03. “The trial court must view
the evidence in the light most favorable to the nonmoving party, and summary
judgment should be granted only if it appears impossible that the nonmoving party
will be able to produce evidence at trial warranting a judgment in his favor.”
Lewis v. B & R Corp., 56 S.W.3d 432, 436 (Ky.App. 2001), citing Steelvest v.
Scansteel Serv. Ctr., Inc., 807 S.W.2d 476, 480-82 (Ky. 1991).
“The moving party bears the initial burden of showing that no genuine
issue of material fact exists, and then the burden shifts to the party opposing
summary judgment to present ‘at least some affirmative evidence showing that
there is a genuine issue of material fact for trial.’” Lewis, 56 S.W.3d at 436, citing
Steelvest, 807 S.W.2d at 482. The trial court “must examine the evidence, not to
decide any issue of fact, but to discover if a real issue exists.” Steelvest, 807
S.W.2d at 480. The Kentucky Supreme Court has held that the word “impossible,”
as set forth in the standard for summary judgment, is meant to be “used in a
practical sense, not in an absolute sense.” Lewis, 56 S.W.3d at 436. “Because
summary judgment involves only legal questions and the existence of any disputed
material issues of fact, an appellate court need not defer to the trial court's decision
and will review the issue de novo.” Lewis at 436.
The Whites contend that the trial court erroneously awarded the Bank
summary judgment upon their fraud claim. As previously noted, this claim is
predicated upon the Bank’s failure to provide the Skidmore inspection reports
prepared in February through April 1998 when Randy Rose was the contractor on
the conference center project and performing substandard work. The Whites
suggest that Tipton failed to provide the reports because they reflected badly on her
brother’s work and she wanted to protect him from the potential consequences of
Skidmore’s negative evaluations.
The Whites contend that as a result of the failure of Tipton and the
Bank to provide them with the inspection reports and timely address the problems
identified therein, the construction of the inn and conference center was
substantially and significantly delayed, resulting in significant increases in the cost
of constructing the project. They suggest that this was what ultimately led to the
failure of the project.
KRS 413.120(12) requires that a claim for fraud be brought within
five years after the cause of action accrues. The present fraud claim was not
brought until the White’s filed their Second Amended Complaint on January 26,
2007, almost nine years following the alleged fraudulent conduct. Clearly, then,
unless the limitations period contained in KRS 413.120(12) was tolled, the claim
was brought outside of the five-year limitations period.
While the trial court awarded summary judgment upon this basis, in
their brief, the Whites do not specifically address the statute of limitations issue.
They do allege, however, that they did not learn of the Skidmore reports until the
time of Tipton’s deposition testimony in May 2006. Thus they imply that the
limitations period was tolled pursuant to the discovery rule contained in KRS
413.130(3). This provision provides as follows:
In an action for relief or damages for fraud or mistake,
referred to in subsection (12) of KRS 413.120, the cause
of action shall not be deemed to have accrued until the
discovery of the fraud or mistake. However, the action
shall be commenced within ten (10) years after the time
of making the contract or the perpetration of the fraud.
However, the discovery rule contained in KRS 413.130 has been
interpreted to provide that the limitations period begins to run when, through
reasonable diligence, the defrauded party could have discovered the fraud.
In order to enlarge the five-year statute of limitations to
ten years, on a charge of fraud, appellant must allege and
prove the fraud was not discovered within the five-year
period and also allege and prove the fraud could not have
been discovered within that period by the exercise of
reasonable diligence. If there were no earlier actual
knowledge, the limitation commences to run when by the
exercise of ordinary care the fraud ought to have been
Madison County v. Arnett, 360 S.W.2d 208, 210 (Ky. 1962) (citations omitted).
“If the five year period of KRS 413.120(12) has elapsed, the plaintiff must allege
and prove that the fraud or mistake was not only not discovered within the five
year period, but that it could not have been discovered sooner by the exercise of
reasonable diligence.” Skaggs v. Vaughn, 550 S.W.2d 574, 577 (Ky.App. 1977).
In the case at bar, the Whites have failed to demonstrate that with the
exercise of reasonable diligence they could not have discovered the alleged fraud –
i.e., the alleged cover-up of the Skidmore reports.
The Loan Agreement for the Cliffview Loan states that the Bank
would not make advances under the loan unless it obtained a report by an
independent inspector “reflecting a condition of such Collateral acceptable to the
Bank.” Moreover, Richard Wright admits that he met and became acquainted with
Skidmore and knew he was doing inspections of the inn and conference center
project for the Bank (though not at the time that Rose was on the project). Further,
the Wrights knew from their own observations of the project that there were
substantial problems with Rose’s workmanship and the substandard quality of his
work. From the foregoing it could have been deduced that reports had been
provided to the Bank which reflected that there were defects in Rose's performance
on the job.
Based upon the foregoing, the Whites, with the exercise of reasonable
diligence and ordinary care, could have requested and obtained copies of the
Skidmore reports within the five-year limitations period and discovered the alleged
fraudulent conduct associated with the reports. As such, we do not believe that the
Whites may avail themselves of the discovery rule contained in KRS 413.130(3).
Accordingly, the statute of limitations bars their fraud claim.
The Whites’ negligent supervision claim is derivative of their fraud
claim. The allegation supporting this claim is that management personnel at the
Bank failed to properly supervise Deborah Tipton so as to prevent her from
covering up the Skidmore reports from the Whites and failing to take proper
actions based upon the negative content contained in the reports.
Kentucky has adopted the tort of negligent supervision as described in
the Restatement (Second) of Agency §213 and §§350-358, and in the Restatement
(Second) of Torts, § 877. Smith v. Isaacs, 777 S.W.2d 912, 914 (Ky. 1989); see
Turner v. Pendennis Club, 19 S.W.3d 117, 121-22 (Ky.App. 2000); Oakley v.
Flor-Shin, Inc., 964 S.W.2d 438, 442 (Ky.Ct.App. 1998). However, the tort of
negligent supervision is a second tort that derives from a tort committed by the
person negligently supervised. We believe the law is correctly stated in Grego v.
Meijer, Inc., 187 F.Supp.2d 689 (W.D.Ky. 2001) that the statute of limitations to
be applied to a negligent supervision claim is the limitations period applicable to
the underlying tort committed by the employee. Id. at 694. Thus, the same statute
of limitations applicable to a fraud claim – five years – is the limitations period
applicable to the Whites’ negligent supervision claim.
For substantially the same reasons as set forth in the previous section,
we likewise conclude that Whitaker Bank was entitled to summary judgment upon
the Whites’ negligent supervision claim. Tipton’s alleged conduct and the Bank’s
alleged negligent supervision occurred in early 1998, and the claim was not
brought until early 2007, well outside of the limitations period. Moreover, for the
same reasons as discussed above, the discovery rule contained in KRS 413.130(3)
is not applicable under the facts at bar.
For the foregoing reasons the judgment of the Fayette Circuit Court is
BRIEF FOR APPELLANT:
BRIEF FOR APPELLEE:
Michael J. Leibson
Robert W. Kellerman
J. Mel Camenisch, Jr.