Court Opinion

ID: 4688956
Source: CourtListenerOpinion
Date Created: 2021-05-21 14:06:28.520557+00
Date Added: 2024-06-11T08:04:51.209836
License: Public Domain

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
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

                                          -8-
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

                                          -9-
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

                                         -10-
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:                     BRIEF FOR APPELLEES:

John T. Hamilton                          Eldred E. Adams, Jr.
Lori B. Shelburne                         Louisa, Kentucky
Lexington, Kentucky

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