RENDERED: MAY 14, 2021; 10:00 A.M.

TO BE PUBLISHED

Commonwealth of Kentucky

Court of Appeals

NO. 2020-CA-0208-MR

SALYERSVILLE NATIONAL BANK APPELLANT

APPEAL FROM MAGOFFIN CIRCUIT COURT

v. HONORABLE KIMBERLY CHILDERS, JUDGE

ACTION NO. 19-CI-00240

BRANDON RUSSELL AND

TASHA RUSSELL APPELLEES

OPINION

REVERSING AND REMANDING

**   **  **

BEFORE: CALDWELL, KRAMER, AND MAZE, JUDGES.

MAZE, JUDGE: The primary question in this appeal is whether the Magoffin 

Circuit Court erred in concluding that a mortgage held by appellant Salyersville 

National Bank (“the Bank”) does not require the mortgagors, appellees Brandon 

and Tasha Russell, to assign the Bank their claims against various contractors and 

subcontractors for the destruction of their residence which slid down the hill upon 

which it was constructed. The Bank also argues that it is entitled to the imposition 
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of a lien on any damages the Russells recover against the third-party tortfeasors for 

destruction of its collateral. Because we are convinced that the judgment was 

based upon an erroneous interpretation of the plain language of the mortgage and 

relevant caselaw, we reverse the entry of summary judgment in favor of the 

Russells and remand the case for entry of a judgment in favor of the Bank.

There is no dispute as to the facts. The Russells financed the purchase 

of a piece of property and the construction of a home in Magoffin County, 

Kentucky, with loans from the Bank. In September 2016, they executed a 

mortgage against the property to secure a construction loan and, in September 

2017, they signed another mortgage converting the construction loan to a 

conventional thirty-year mortgage. The ultimate debt on the loan exceeded 

$678,000.00.

The property in question sits atop a large hill, and the site required 

significant preparation for the construction of the residence. The excavation 

company that sold the property to the Russells was hired to excavate the land and 

create a level building site. Soon after the Russells moved in, the land beneath the 

residence began to give way causing foundation cracks and sinking. The general 

contractor installed a supplemental concrete foundation support which did not 

alleviate the problems. A second foundation company attempted to drive steel 

pillars into the bedrock to support the residence, but that effort also failed to 
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correct the problems. Ultimately, the residence began sinking and sliding down 

the hillside along with the soil and is estimated to be a total loss. The Bank 

advanced one hundred percent of the funds used to purchase the land, construct the 

residence, and finance the unsuccessful remediation efforts to address the 

foundation problems. Thus, the value of the real property assigned to the Bank as 

collateral for these loans has all but been destroyed by the alleged improper 

foundation, construction, and remediation work.

In July 2017, the Russells filed suit in Magoffin Circuit Court against 

the original foundation company that poured the foundation and basement. That 

company subsequently filed third-party claims against the general contractor and 

the excavation company. The Russells then amended their complaint to add the 

second foundation contractor who attempted to remedy the foundation failure by 

driving steel pillars into the bedrock. The litigation concerning the liability of the 

various contractors and subcontractors for damages due to the destruction of the 

Russells’ residence remains pending.

The litigation at issue in this appeal stems from the Russells’ refusal 

to assign to the Bank their claims against the various contractors, their denial that 

they have any duty to apply amounts recovered in those claims against the 

outstanding balance of their mortgage loan, and their position that their cause of 

action against the contractors is a personal property interest, a chose in action,
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which is not covered by the real estate mortgage. After the Russells filed a petition 

for Chapter 11 bankruptcy protection in November 2018, the bankruptcy judge 

directed the parties to seek a declaratory judgment in state court to determine 

whether and to what extent the Bank’s mortgage lien attached to their claims 

against the contractors.

In response to the direction of the bankruptcy court, the Bank filed the 

underlying action in Magoffin Circuit Court seeking a declaration: 1) that the 

mortgages between the parties require the Russells to assign to the Bank their 

claims against the third-party contractors allegedly responsible for the destruction 

of the Bank’s collateral; and 2) that the mortgages give the Bank a lien on any 

damages recovered against the third-party contactors up to the amount owed the 

Bank on the underlying loan. Because there was no dispute as to the facts, both the 

Bank and the Russells moved for summary judgment with respect to an 

interpretation of the mortgage agreement.

After analyzing the various pertinent mortgage provisions, the circuit 

court granted summary judgment in favor of the Russells on the basis: 1) that 

language in Section 1 of the mortgage purporting to convey “all rights” the 

Russells had in the mortgaged property was insufficient to require assignment to 

the Bank of their personal property claims against the third-party contractors; 2) 

that language in Section 7 of the mortgage concerning assignment of claims the 
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“Mortgagor may have against parties who supply labor or materials to maintain or 

improve the Property” applied only to things such as adverse title claims, taxes, 

and materialman’s liens; and 3) that nothing in any of the remaining contract 

provisions included language which would require assignment of any of the 

Russells’ claims against the contractors to the Bank. This appeal followed.

The Bank presses two arguments in support of its contention that the 

judgment of the circuit court is erroneous: 1) that the circuit court erred in holding 

the mortgages do not create an affirmative duty to assign to the Bank their claims 

for destruction of the Bank’s collateral; and 2) that under Kentucky law an 

equitable lien attaches to any proceeds recovered from third parties responsible for 

the destruction of the Bank’s collateral, even without the express language of the 

mortgages. We agree.

As an initial matter, we address the Russells’ contention that the Bank 

is attempting to relitigate matters which have already been decided adversely to it

in their bankruptcy proceeding. A plain reading of the orders of the bankruptcy 

court dispels any such contention.

 The question is whether the plan is confirmable 

with the special provision. I am not required to decide 

what party has the right to any recovery from the 

litigation. The plan is confirmable with the special 

provision.

 The special provision revests the causes of action 

for negligence and breach of warranties in the Debtors. 
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The ownership of these causes of action is disputed, 

but the record shows the state court has not yet 

addressed the issue. Therefore, there is at least some 

interest that has become property of the estate and the 

estate’s interest may be addressed by the plan. 

 . . . . 

 This decision does not decide the ultimate issue: 

who has the right to the proceeds of the debtor’s 

causes of action. The record shows the bank and 

debtors are pursuing this question in the state court. 

Therefore, confirmation of a plan with a special provision 

that the addresses the debtors’ interest if they are 

successful does not harm any party.

Opinion and Order of the United States Bankruptcy Court, Eastern District of 

Kentucky, filed 11/26/2019 (emphases added). It is thus apparent that the ruling of 

the bankruptcy court made provision for a ruling by the Magoffin Circuit Court 

concerning the right to the proceeds of the ongoing litigation. Furthermore, the 

bankruptcy court’s conclusion that the negligent construction and breach of 

warranty claims are personal to the debtors does not preclude assignment of those 

claims to the Bank in the instant action.

Turning now to the equitable trust claim, we are persuaded that the 

decision in Grafton v. Shields Mini Markets, Inc., 346 S.W.3d 306 (Ky. App. 

2011), is dispositive. In Grafton, this Court held that when the mortgagor receives 

a recovery or settlement proceeds from a third-party tortfeasor, “he must hold it in 

trust for the mortgagee to the extent of his or her outstanding debt” and that such 
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an equitable trust “is sufficient protection for the mortgagee’s security interest in 

the mortgaged property.” Id. at 312. The holding in Grafton emphasizes that 

while a tortfeasor may not be subjected to having “to pay twice for the same act of 

property damage[,]” obligating the mortgagor to hold the proceeds in trust to the 

extent of a lien likewise protects a mortgagee from being left without a remedy. 

Id.

The circuit court refused to apply Grafton to the facts of this case on 

the basis that Grafton involved a case which had already been settled. We are 

convinced that holding is clear error. Nothing in the Grafton analysis restricts its 

application to cases which have previously been settled. Grafton simply and 

unequivocally holds that once a third-party tortfeasor settles with the mortgagor, 

the mortgagor is thereafter “obligated to hold the resulting proceeds in trust for the 

mortgagee” to avoid leaving the mortgagee without remedy for the destruction of 

its collateral. Id. at 311. We therefore hold that, under the authority of Grafton,

the Russells are obliged to hold the proceeds of their claims against the third-party 

tortfeasors in trust for the Bank to the extent of its mortgage.

The Bank’s second allegation of error centers on the circuit court’s 

interpretation of the mortgage document provisions. The Bank argues that the 

plain language of those documents requires the assignment of the Russells’ claims 

against the third-party tortfeasors. We agree.
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Section 7 of the mortgage agreement between the parties provides:

7. Claims Against Title. Mortgagor will pay all taxes, 

assessments, liens, encumbrances, lease payments, 

ground rents, utilities, and other charges relating to the 

Property when due. Lender may require Mortgagor to 

provide to Lender copies of all notices that such amounts 

are due and the receipts evidencing Mortgagor’s 

payment. Mortgagor will defend title to the Property 

against any claims that would impair the lien of this 

Security Instrument. Mortgagor agrees to assign to 

Lender, as requested by Lender, any rights, claims or 

defenses Mortgagor may have against parties who supply 

labor or materials to maintain or improve the Property.

(Emphasis added.)

The circuit court refused to give effect to this provision, holding:

 Turning to Section 7, when one reads this section 

in its full context, it obviously applies only to things such 

as adverse title claims, taxes, and materialman’s liens. 

This is not a case where someone is making a claim 

against the property. Nowhere is there anything that 

remotely suggests that the Russells are assigning any 

cause of action for faulty construction or other claims for 

damages to property. The only provision about 

assignment relates to mechanics and materialman’s liens. 

Under the doctrine of ejusdem generis the mortgage 

clause is limited to things such as taxes, etc., i.e. the 

clause is to be read narrowly, not broadly.

We are convinced that this conclusion is erroneous for several reasons.

Prior to setting out our rationale for setting aside the circuit court’s 

decision, we reiterate that because the parties agree there are no genuine issues of 

material fact, we review the circuit court’s decision de novo. 3D Enterprises 
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Contracting Corp. v. Louisville and Jefferson County Metropolitan Sewer District, 

174 S.W.3d 440, 445 (Ky. 2005). We thus owe no deference to the circuit court’s 

analysis of the contractual provisions.

Citing Kentucky Shakespeare Festival, Inc. v. Dunaway, the Bank 

argues that the circuit court’s analysis does not comport with fundamental

principles of contract interpretation:

Our review must begin with an examination of the plain 

language of the instrument. “‘In the absence of 

ambiguity, a written instrument will be enforced strictly 

according to its terms,’ and a court will interpret the 

contract’s terms by assigning language its ordinary 

meaning and without resort to extrinsic evidence.” “A 

contract is ambiguous if a reasonable person would find 

it susceptible to different or inconsistent interpretations.” 

 “When no ambiguity exists in the contract, we look 

only as far as the four corners of the document to 

determine the parties’ intentions.” . . . The interpretation 

of a contract, including determining whether a contract is 

ambiguous, is a question of law to be determined de novo

on appellate review. 

490 S.W.3d 691, 694-95 (Ky. 2016) (citations omitted).

The Bank insists that the circuit court’s analysis not only fails to apply 

the plain language of Section 7 regarding the assignment of claims, but also fails to 

give effect to Section 23 regarding interpretation of the agreement. That section 

provides in pertinent part that the “captions and headings of the section of the 
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Security Instrument are for convenience only and are not to be used to interpret or 

define the terms of this Security Instrument.”

Returning to the circuit court’s order, the circuit court stated that 

“when one reads this section in its full context, it obviously applies only to things 

such as adverse title claims, taxes, and materialman’s liens.” Again, the caption 

for Section 7 reads “Claims Against Title.” However, when Section 7 is read in 

its entirety, it unambiguously requires the Russells to “assign to [the Bank] . . . any 

rights, claims or defenses [they] may have against parties who supply labor or 

materials to maintain or improve the Property.” Clearly, this language cannot be 

construed as referring to a claim against title. Rather, according that portion of 

Section 7 its ordinary meaning, we are convinced that a reasonable person would 

find it susceptible of only one interpretation: that it encompasses a duty to assign 

to the Bank the kind of claims the Russells are pursuing against the various 

contractors and subcontractors for damages due to the destruction of their 

residence and, in turn, the Bank’s collateral. Thus, the circuit court was not free to 

simply ignore the plain and unambiguous language of Sections 7 and 23 of the 

mortgages.

Accordingly, because we are convinced that the circuit court 

misconstrued the plain language of the mortgage agreement and clearly erred in 

applying settled caselaw to the undisputed facts of this case, we reverse the entry 
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of judgment in favor of the Russells and remand the case for entry of an order 

granting the Bank’s motion for summary judgment.

ALL CONCUR. 

BRIEFS FOR APPELLANT:

John T. Hamilton

Lori B. Shelburne

Lexington, Kentucky

BRIEF FOR APPELLEES:

Eldred E. Adams, Jr.

Louisa, Kentucky