EAGLE CLIFF RESORT, LLC, ET AL. VS. KHBBJB, LLC
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RENDERED: SEPTEMBER 4, 2009; 10:00 A.M.
TO BE PUBLISHED
Commonwealth of Kentucky
Court of Appeals
NO. 2008-CA-000676-MR
EAGLE CLIFF RESORT, LLC, A KENTUCKY
LIMITED LIABILITY COMPANY; DAVID L.
SPENCER; EMIL HALL; W. GRADY REGAS;
BUTCH MORROW; MARK SALYER; AND
J.R. JOHNSON
v.
APPELLANTS
APPEAL FROM LEE CIRCUIT COURT
HONORABLE THOMAS P. JONES, JUDGE
ACTION NO. 06-CI-00162
KHBBJB, LLC
APPELLEE
OPINION
AFFIRMING
** ** ** ** **
BEFORE: ACREE AND DIXON, JUDGES; GRAVES,1 SENIOR JUDGE.
1
Senior Judge J. William Graves sitting as Special Judge by assignment of the Chief Justice
pursuant to Section 110(5)(b) of the Kentucky Constitution and Kentucky Revised Statute (KRS)
21.580.
ACREE, JUDGE: Eagle Cliff Resort, LLC, and certain of its members2 (Eagle
Cliff) appeal from an order of the Lee Circuit Court confirming the judicial sale of
its commercial property following foreclosure by the mortgage holder, KHBBJB,
LLC (KHBBJB). We affirm.
Eagle Cliff was formed in January 2005 to purchase a tract of property
located near Natural Bridge in Lee and Wolfe counties. The original developer
had previously purchased multiple tracts of land in a remote, rural area and
attempted to build a resort complex. In 2003, Whitaker Bank foreclosed on the
property and subsequently purchased it for $1.2 million in a judicial sale. Eagle
Cliff purchased the resort from Whitaker Bank for $1,375,000.00, borrowing a
total of $1.6 million from KHBBJB to finance the purchase and planned renovation
efforts. The loan was secured by a mortgage on the property, the individual
guaranties of Eagle Cliff’s members, and by granting KHBBJB a membership
interest in the resort.
In January 2006, Eagle Cliff defaulted on the mortgage and KHBBJB
filed a foreclosure action the following October. The circuit court rendered a
partial judgment, awarding KHBBJB $1.8 million and ordering the property sold.
Eagle Cliff attempted to have the property partitioned prior to its sale, but the
circuit court found that such an action would substantially and negatively impact
2
Original appellants also included David L. Spencer, Emil Hall, W. Grady Regas,
Butch Morrow, Mark Salyer, J. R. Johnson, Robert Weir, Jr. and Larry Tummel. During the
pendency of this appeal, Weir and Tummel filed petitions in federal court seeking protection
under federal bankruptcy laws. Consequently, and in accordance with 11 United States Code
(U.S.C.) §362(a)(1) (2006), the appeal has been stayed as to Weir and Tummel. This opinion
relates to all original appellants other than Weir and Tummel.
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the property’s value. The trial court ordered an appraisal pursuant to KRS
426.520. The court-appointed appraiser valued the property at $1,057,500.00, and
the trial court ordered the property sold at auction based on that appraisal.
Eagle Cliff then moved the trial court to continue the sale and filed
exceptions to the appraisal. Specifically relevant to this appeal is Eagle Cliff’s
exception and objection that “the Appraisal [of $1,057,000.00] is inadequate, both
in form and substance, and cannot adequately protect the [Appellants’] rights,”
including redemption rights. Before the scheduled sale date, the trial court
conducted a hearing and then ordered the sale to proceed, allowing the Appellants
to again file exceptions after the report of sale.
KHBBJB was the sole and successful bidder, acquiring the property
for $710,000. The Master Commissioner submitted his report of the sale to the
trial court, and Eagle Cliff did file exceptions, again including the objection that
the appraisal was insufficient. After a lengthy evidentiary hearing, the circuit court
issued an order confirming the sale and specifically ruling that the appraisal by
court-appointed appraisers “was sufficient and that the appraisal price of
$1,057,500.00 is not unconscionable.” This appeal followed.
Eagle Cliff presents three arguments: (1) the trial court failed to
protect Eagle Cliff’s right of redemption; (2) the trial court erroneously relied upon
a defective appraisal; and (3) the trial court’s findings of fact are not supported by
substantial evidence. Ironically, the first argument is meritorious only if the
second argument prevails; and the second argument can only prevail if the
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assertion made in the third argument is true. Therefore, we view each of these
arguments as a variation on a single theme – that is, because there was not
sufficient evidence to support the trial court’s finding that the appraisal was
sufficient, the sale should not have been confirmed.
Appellants’ first argument is that the trial court failed to protect Eagle
Cliff’s right of redemption. Such a right is “protected” when the court assures
compliance with Kentucky statutes and caselaw regarding judicial sales.
Specifically, KRS 426.530(1) outlines the right of redemption as follows:
If real property sold in pursuance of a judgment or order
of a court, other than an execution, does not bring twothirds (2/3) of its appraised value, the defendant and his
representatives may redeem it within a year from the day
of sale, by paying the original purchase money and ten
percent (10%) per annum interest thereon.
Appellants do not claim that the property failed to bring two-thirds (2/3) of its
value as determined by the court-appointed appraisers. Their objection, embraced
more directly in their second argument, is actually that the appraisal of the courtappointed appraisers was defective.
When a party whose redemption rights are at stake believes the
appraisal of his property is inadequate in any way, he is entitled to an evidentiary
hearing to determine whether the appraisal was “irregular, fraudulent, or so
erroneous as to be unconscionable[.]” Burchett v. Bank Josephine, 474 S.W.2d 66,
68 (Ky. 1971). In this case, the trial court conducted such a hearing on March 12,
2008. All parties had the opportunity to present evidence and did.
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Following the hearing, the trial court confirmed the sale in an order
that bears quotation at length:
The Court has conducted a lengthy evidentiary
hearing on the exceptions and does not find the appraisal
to have been irregular, fraudulent, or so erroneous as to
have been unconscionable. The Court is satisfied that the
appraisal performed by [court-appointed appraisers] was
sufficient and that the appraisal price of $1,057,500.00 is
not unconscionable. . . .
[I]t was held in Sterling Grace Municipal
Securities Corporation v. Central Bank & Trust Co., 926
S.W.2d 670, 673 (Ky.App. 1996), that “mere inadequacy
of price is an insufficient ground for setting aside a
judicial sale.” Although the [Appellants’ appraiser
testified that the property] should have been appraised at
$4,000,000.00, the history of this property indicates
otherwise.
In 2008, the property was appraised at
$1,057,500.00 and sold for $710,000.00 [at the subject
judicial sale]. In 2003, it had been appraised at
$1,188,250.00 and sold for $1.2 million to Whitaker
Bank [at a previous judicial sale]. Whitaker Bank then
sold the property for $1,375,000.00 in January 2005 to
the Defendants. . . . There . . . have been no significant
improvements made to the property from 2003 to 2008.
It is not unreasonable for the property that was sold to the
Defendants for $1.3 million in January 2005 to be
appraised at $1,057,500.00 three years later. The Court
simply does not have its conscience shocked by this
figure.
. . . The $4,000,000.00 figure is simply not
applicable in this small, mountain area when such a
figure as $3,000,000.00, or even $2,000,000.00, has
never been attained heretofore by the property in
question. There was testimony at the hearing that despite
the fact that there is no comparable development closer
than Gatlinburg, Tennessee, some of the resort facilities
serve such specific purposes that they would not attract a
wide array of potential buyers, and there has been very
little rental of the facilities and difficulty selling
individual lots on the property. There was further
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testimony that the sheer size of the property lowers the
value per acre because few buyers could be expected to
have the financial resources to purchase such a large
piece of property.
These factual findings in this order are subject to our review under Kentucky Rules
of Civil Procedure (CR) 52.01. We cannot set them aside unless clearly erroneous.
They are not clearly erroneous if supported by substantial evidence, which is
“evidence of substance and relevant consequence having the fitness to induce
conviction in the minds of reasonable men.” Owens-Corning Fiberglas Corp. v.
Golightly, 976 S.W.2d 409, 414 (Ky. 1998). The order sets out, and the record
further substantiates, that the findings of fact in this order are supported by
substantial evidence. Based on that evidence, the trial court’s determination that
the appraisal was sufficient to protect redemption rights is not clearly erroneous.
However, Appellants’ third argument focuses on another aspect of the
substantial evidence issue. They claim that the following additional findings set
forth in the trial court’s order are not supported by substantial evidence:
Additionally, the property value has depreciated due in
part to septic problems and the fact that the roads must be
maintained privately.
Appellants claim these findings are based on questions posed by the attorneys
rather than testimony given. If so, this was no evidence at all.
We need not determine whether it was a fact that septic system issues
and private road maintenance contributed to the depreciation in the property.
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Excluding these specific findings from the order would not strip it of the
substantial evidence upon which it is based.
Furthermore, there was other evidence in the record not specifically
identified in the order that would support the finding that the appraisal used was
not irregular, erroneous or unconscionable. Chief among that evidence is the
failure of anyone to bid against KHBBJB. This is despite the fact that before the
auction took place, the Appellants had a $4,000,000.00 appraisal in hand, and also
despite the fact that the auction was advertised in two newspapers at a cost of more
than $8,500.00. It is reasonable to infer from these facts that everyone who knew
of the sale and had the wherewithal to purchase the property declined to do so for
reasons related to the property’s value, at least to them.
Additionally, we are mindful that “courts may take judicial knowledge
of prevailing economic conditions[.]” Elizabethtown Lincoln Mercury v. Jones,
313 Ky. 321, 231 S.W.2d 42, 44 (Ky. 1950). It is clear the trial court did so in this
case.
Having concluded that the trial court’s findings were supported by
substantial evidence, those findings were not clearly erroneous. CR 52.01. Nor
can we say that the sale price was “so grossly inadequate as to shock the
conscience of the court.” Gross v. Gross, 350 S.W.2d 470, 471 (Ky. 1961).
Despite the admittedly large gap between the appraisals by the courtappointed appraisers and the appraisal the Appellants privately obtained, Eagle
Cliff fails to demonstrate any abuse of the circuit court’s sound discretion.
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For the foregoing reasons, the judgment of the Lee Circuit Court is
affirmed.
ALL CONCUR.
BRIEFS AND ORAL ARGUMENT
FOR APPELLANTS:
BRIEF AND ORAL ARGUMENT
FOR APPELLEE:
Robert E. Maclin, III
David A. Cohen
Lexington, Kentucky
B. Scott Graham
Stanton, Kentucky
Huston Barrow Combs
Lexington, Kentucky
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