Court Opinion

ID: 5286124
Source: CourtListenerOpinion
Date Created: 2022-01-07 08:29:44.731157+00
Date Added: 2024-06-11T08:28:40.155040
License: Public Domain

WRIGHT, J.,
DISSENTING:
I respectfully dissent from the majority. Forcing developer to forfeit the bonds in this case amounts to punitive damages, which are not allowed in Kentucky contract law. At the outset, I point out that the lower courts failed to consider the issue of damages and whether they were punitive (and, therefore, prohibited by statute). Understandably, the majority’s opinion does not consider the issue because the parties failed to raise or argue it.
I. BACKGROUND
Developer obtained property in Scott County and began plans for a subdivision. It applied to the Georgetown-Scott County Planning and Zoning Commission for a permit to develop the subdivision. Ordinances required Developer to post a bond to ensure performance of certain work before selling any lots. Accordingly, Developer purchased bonds from Platt River Insurance Company for 125% of the estimated cost of building certain infrastructure. Developer did the work necessary to sell lots in the subdivision, but before sell*42ing any lots, the real estate market collapsed in 2008, leaving Developer unable to sell the lots or to borrow additional money. Eventually, Developer agreed to transfer the property to the bank’s Holding Company in exchange for the bank’s agreement to forego foreclosure proceedings.
The bank informed the Zoning Commission that Developer had abandoned the project. The bank’s Holding Company altered the subdivision plan and began to develop the subdivision accordingly. At that point, the bank suggested Developer had abandoned the project and that the bond should be declared forfeited. The Holding Company asked the Zoning Commission to use the forfeited bond money to pay the Holding Company the bond amounts allocated for each portion of the project covered by the bonds as it completed them. I point out that the ordinance provides for the partial release of bonds— it is not an all-or-nothing proposition.
The Commission declared the bonds forfeited and Developer filed a declaratory judgment action against the Zoning Commission, the bank, and the Holding Company in Scott Circuit Court. The Zoning Commission moved for summary judgment. The trial court ruled that, due to the amount of money Developer had spent on the project, the nature of the property must have changed. The trial court failed to conduct a hearing on the extent that Developer’s work had changed the property, whether development had been connected to any public services, or whether any public services would be required be-cáuse of the development! The court entered summary judgment and ordered the entire bond forfeited.
II. ANALYSIS
A. The Bond is a Contract
“A bond agreement is a contract ,... ” Five Star Lodging, Inc. v. George Const., LLC, 344 S.W.3d 119, 123 (Ky. Ct. App. 2010). The particular bond at issue in this case is a contract with the Zoning Commission as a third-party beneficiary. This is consistent with the majority’s opinion’s statement that “[w]e interpret the terms and provisions of the Assignment according to well-established principles of contract law.” See City of Middlesboro v. Am. Sur. Co. of N.Y., 307 Ky. 769, 211 S.W.2d 670, 671 (1947) (discussing “whether a bond and the renewals thereof constitute multiple contracts or one continuing contract”). Having established that a bond is a type of contract, I will now examine the types of damages available.
B. Damages
Two types of damages are available in contract: actual and liquidated. Actual damages are not at issue here since the trial court failed to make any determination of damages incurred. The majority affirms the trial court’s decision that the entire bond is forfeited and the Zoning Commission did not have to prove any damages. The ordinance fails to specify that the bonds would constitute liquidated damages or that the entire bond amount would be forfeited regardless of the actual cost of completion. Since actual damages are irrelevant to the forfeiture here, then forfeiture of the bond must be for liquidated damages.
Liquidated damages are allowed under Kentucky contract law, unless their amount is substantially higher than the actual injury incurred. “If the stated amount is substantially higher than the actual injury suffered, the provision will be declared a penalty and not enforceable. G.D. Deal Holdings, Inc. v. Baker Energy, Inc., 501 F.Supp.2d 914, 923 (W.D. Ky. 2007), aff'd sub nom. G.D. Deal Holdings, LLC v. Baker Energy, Inc., 291 Fed.Appx. *43690 (6th Cir. 2008) (citing Coca-Cola Bottling Works (Thomas) Inc. v. Hazard Coca-Cola Bottling Works, Inc., 450 S.W.2d 515, 518 (Ky.1970)); see also Patel v. Tuttle Properties, LLC, 392 S.W.3d 384, 387 (Ky. 2013) (“ ‘A provision in a contract providing for liquidated damages will be enforced, provided it is in actuality liquidated damages and not a penalty. If such provision is in fact a penalty it will not be enforced and the injured party will be entitled to recover the actual damages suffered;’ ” (quoting Fidelity & Deposit Co. of Maryland v. Jones, 256 Ky. 181, 75 S.W.2d 1057, 1060 (1934)));
Furthermore, “[w]here, at the time of the execution of the contract, damages may be uncertain in character or amount, or difficult to reasonably ascertain, a provision for liquidated damages will be enforced, provided the amount agreed upon is not greatly disproportionate to the injury which might result.” United Servs. Auto. Ass’n v. ADT Sec. Servs., Inc., 241 S.W.3d 335, 340-41 (Ky. Ct. App. 2006). The damages in the present case are certain in character since they are specified in the subdivision plan. The damages are also certain as to amount since the bond was set on the estimated cost plus 25%. Obtaining bids or estimates on the cost of; completing the specified infrastructure would be a routine part of normal business in the construction industry. Therefore, the amount of any damages would be easy to reasonably obtain. The forfeiture of the bonds in this case fails to meet any of the criteria normally required for liquidated damages.
In the present case, the amount of liquidated damages could easily be far in excess of any' actual damages. Developer spent more than $4 million developing the property and had reached the stage at which it could sell lots. It would appear that much of the infrastructure development had been done, but the trial court failed to make any determination as to how much completion would cost. Rather, the trial court merely stated in its order granting summary judgment that “[t]here is proof that a great deal of the work necessary to turn the property into a subdivision had been done in that the,bank had distributed over $4,000,000 at the time of the default .... ” The liquidated damages received as a result of any forfeiture would be 125% of the total cost of developing the infrastructures. If Developer had completed most or a substantial portion of the infrastructure construction, then the liquidated damages of total bond forfeiture would be greatly disproportionate to the actual injury. This would make forfeiture of the bonds—at least .in part—a penalty and, therefore, would amount to punitive damages. This is prohibited under Kentucky law. In fact, we have a statute directly on point which reads, “[i]n no case shall punitive damages be awarded for breach of contract.” KRS 411.184 (4). Since the trial court failed to make any finding as to the amount of damages, if any, then there is an issue of fact and the summary judgment fails to meet the standard under Steelvest, Inc. v. Scansteel Serv. Ctr., Inc., 807 S.W.2d 476, 480 (Ky. 1991).
C. Bond Vests Only When Lots Are Sold
Georgetown’s governing ordinance specifies that the bond shall be posted before lots can be sold. This makes the selling of the lots the triggering event for the binding of the bond. As the Zoning Commission points out in its brief, “[t]he public improvements that are covered by the bonds are sidewalks, handicap ramps, storm cleanup, landscaping, and the final layer of asphalt (Vol. II, Rec. 245-50). Once the bonds were in place, the Commission approved the final plat, which allowed [Developer] to sell lots. (Vol. II, R. 232; *44KRS 100.277(3)).” In the present case, Developer did not sell any lots. Therefore, nothing occurred to trigger the bonds or their forfeiture.
I would also point out that nothing in the ordinance indicates that the entire bond (even portions already spent making the required developments—as occurred here) should be forfeited, even if lots had been sold. As the Zoning Commission also states in its brief, quoting the bond language: the insurance carrier and Developer ‘“are jointly and severally held and firmly bound unto [the Zoning Commission]’ for ‘the costs of labor and materials and successful construction, completion and acceptance of all improvements.’ ” Here, the majority takes the contractual terms bargained for by the parties and expands them to take the complete bond, with no regard as to the amount it will actually take for completion.
D. Trial Court Did Not Determine Any Damages Occurred
The Zoning Commission would only have damages if lots had been sold, thus leaving purchasers in need of the infrastructure, connections to public utilities, or roads. The trial court failed to determine if any of these events had occurred. If the Planning and Zoning Commission did not have any actual damages, then forfeiture of the bonds would be punitive and prohibited by statute.
III. CONCLUSION
For these reasons, I respectfully dissent and would remand this matter to the trial court, as summary judgment was not properly granted.