Opinion
NO. 2018-CA-001516-MR
03-13-2020
C&H MANUFACTURING, LLC, HERMAN MCKNIGHT, AND CAROLENE MCKNIGHT APPELLANTS v. CUMBERLAND VALLEY AREA DEVELOPMENT DISTRICT APPELLEE
BRIEFS FOR APPELLANTS: Scott M. Webster London, Kentucky BRIEF FOR APPELLEE: Kellie D. Wilson Harlan, Kentucky
NOT TO BE PUBLISHED APPEAL FROM HARLAN CIRCUIT COURT
HONORABLE KENT HENDRICKSON, JUDGE
ACTION NO. 06-CI-00068 OPINION
VACATING AND REMANDING
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BEFORE: COMBS, JONES, AND L. THOMPSON, JUDGES. JONES, JUDGE: Appellant C&H Manufacturing, LLC ("C&H"), owned by Appellants Herman and Carolene McKnight ("the McKnights"), defaulted on a loan from Cumberland Valley Area Development District ("CVADD") for the purchase of manufacturing equipment. This action was first initiated by First State Financial, Inc., who asserted claims against C&H and Mr. McKnight, among others, in the Harlan Circuit Court, seeking to foreclose on a mortgage covering property leased by C&H. After over nine years of erratic motion practice, CVADD successfully filed for repossession and judicial sale of the equipment securing C&H's defaulted loan. Following the sale, C&H and the McKnights raised a number of issues to the circuit court regarding the reasonableness of the sale as well as the amount of any resulting deficiency. The circuit court did not address the issues; instead, it struck the case from its docket and ordered all claims dismissed with prejudice. Having reviewed the record in conjunction with all applicable legal authority, we cannot agree that dismissal prior to addressing all the outstanding issues was appropriate. Accordingly, we must vacate the dismissal and remand for resolution of all the pending issues, including C&H's claims regarding the amount of deficiency, if any, as well as the reasonableness of the sale of the property.
I. BACKGROUND
C&H was involved in the manufacturing of metal parts, some of which were sold for use in the coal mining industry. C&H and its associates took out a series of loans from various lenders, all of which resulted in default. C&H's business ultimately failed, and it defaulted on the loans leading to this litigation.
On June 19, 2001, C&H sought and obtained its first loan, which came in the form of a grant agreement with a variety of parties, including Kingdom Come Industrial Development Authority, Inc. ("Kingdom Come"). This grant agreement provided for the construction of a manufacturing facility to be used by C&H on property owned by Kingdom Come in Lynch, Kentucky.
Later in 2001, C&H entered into a second loan agreement with CVADD for the purpose of purchasing equipment "for the use in operations of C&H" at the facility on the Lynch property. Mr. and Mrs. McKnight both personally guaranteed CVADD's loan to C&H. For its part, C&H provided CVADD with a promissory note for $100,000 and a corresponding security agreement. The Security Agreement provided CVADD with a first priority lien on certain identified equipment - a press brake, a shear, and a cutting system - and a secondary lien on all other equipment used by C&H. CVADD received a total of $21,752.04 from C&H and the McKnights prior to their default. All parties acknowledge that C&H and the McKnights defaulted on the loan and never attempted to make another payment or cure their default.
In 2002, C&H and Kingdom Come sought a third loan, this time from First State Financial, Inc. ("First State"). First State granted this loan in exchange for a promissory note and a mortgage on the Lynch property. C&H and the McKnights successfully made their loan payments until June 23, 2005, at which point they defaulted on this loan as well.
It was at this time that litigation pertaining to this case first began. On January 26, 2006, First State Financial, Inc. filed an action against Kingdom Come, C&H, and Mr. McKnight in the Harlan Circuit Court, seeking to foreclose on the mortgage granted by Kingdom Come on the Lynch property. The Complaint set out the official action of the Harlan County Fiscal Court and properly named CVADD as an interested party. On March 3, 2006, CVADD filed its answer and counter-claimed against all other parties, seeking to recover on its own loan to C&H. In an effort to continue operations at the Lynch property, the Harlan County Fiscal Court paid the debt owed to First State by C&H.
At this time, CVADD named Mrs. McKnight as a party because of her personal guarantee on the CVADD loan.
As a result, the circuit court entered an order dismissing the claims of First State on March 22, 2006. The other parties' claim remained open though dormant until 2012, when CVADD filed a Motion for Default Judgment.
Despite having received reprieves on two of their three loans, C&H and Kingdom Come's businesses continued to suffer. C&H ultimately abandoned its lease of the Lynch facility altogether in 2007 due to declining business, leaving the three items of secured collateral in the Lynch facility, which was then leased to a third party. That third party began using the collateral in its operations.
On April 24, 2012, nearly five and a half years after litigation first began, CVADD filed a Motion for Default Judgment against C&H and the McKnights. After no response from C&H or the McKnights, the circuit court granted a $134,289.41 default judgment to CVADD on August 16, 2012, and called for immediate repossession of all equipment remaining at the Lynch property.
Nothing was filed other than a Notice of Appearance by an attorney for another party on April 29, 2009, in that span of time.
Notice of the order went undelivered, as both orders sent to the McKnights and C&H were in fact returned to sender.
As a result of the circuit court's judgment, CVADD filed a motion for Writ of Possession on September 28, 2012. In support of said motion, CVADD stated that "the requirements of KRS 425.011 have been proven and the Court has been provided a valid UCC filing which authorizes [CVADD] to hold a first priority lien as security for repayment of the loan on the promissory note." The Harlan County Fiscal Court objected to this motion for Writ of Possession, claiming that granting the Writ of Possession would materially impair the underlying economic development enterprise at the Lynch property. It is unclear if these objections made any impact on the circuit court's impression of the case; however, neither the circuit court nor the parties took any further action regarding CVADD's motion for Writ of Possession after the objections were filed.
Kentucky Revised Statutes.
Although its initial claim was dismissed when the Harlan County Fiscal Court paid the debt owed, First State also objected to the motion for Writ of Possession to the extent it related to the Lynch property mortgage.
Two years later, on February 14, 2014, the McKnights and C&H filed a motion to vacate the August 16, 2012, default judgment, arguing that neither the McKnights nor C&H had ever been served with process in the action. The circuit court granted the McKnights' and C&H's motion on April 25, 2014, vacating the default judgment.
The McKnights blamed the failure to serve on their estranged former daughter-in-law, who purportedly received the attempted service of process in their stead, and claimed that they first learned of the action in late 2013.
Subsequently, on May 1, 2014, C&H and the McKnights filed an answer to the March 3, 2006, cross-claim by CVADD, alleging that CVADD acted in violation of the loan agreement and, more generally, the UCC. C&H and the McKnights further claimed that CVADD was estopped from obtaining a deficiency judgment against them because of CVADD's failure to dispose of the collateral with commercial reasonableness.
On July 28, 2014, CVADD filed its own motion for summary judgment, alleging that the McKnights were personally liable for the remaining amount due on their defaulted loan, which now, including principal and interest, totaled $134,289.41. C&H and the McKnights countered on a number of grounds, including that there had not been enough time for adequate discovery. Substantively, they argued that summary judgment against them would be inappropriate as CVADD had failed to provide notice of C&H's default as required by the UCC and the promissory note. They also alleged that CVADD had "tacitly allowed" the collateral to be used by the third party leasing the Lynch property, thereby failing to procure a commercially reasonable use or sale of the collateral. C&H and the McKnights contended that CVADD was required to collect on its note in good faith under Erlanger Citizens Bank v. Williams, 151 S.W.2d 381 (Ky. 1941), and had failed to do so by not pursuing the disposition of the equipment. Finally, they argued that CVADD's only remedy was a conversion claim against those who had undertaken unauthorized disposition of the collateral under Ranier v. Gilford, 688 S.W.2d 753 (Ky. App. 1985). On November 21, 2014, the circuit court denied CVADD's motion for summary judgment after concluding the motion was premature due to the lack of discovery.
They argued that neither their loan agreement nor their guaranty agreement contained a waiver of notice and, therefore, the "express terms of the agreement control," requiring CVADD to give notice prior to reclaiming its collateral. Catron v. Citizens Union Bank, 229 S.W.3d 54, 57 (Ky. App. 2006); KRS 355.1-303(5)(a).
Approximately seven months later, CVADD filed for immediate possession and/or judicial sale of the three secured items of equipment, claiming that C&H and the McKnights had abandoned their interest in the equipment. By this time, CVADD had not had possession of any of the equipment for almost fourteen (14) years, and C&H had not asserted ownership since 2007.
The McKnights countered and moved for partial summary judgment, arguing that CVADD could not pursue them personally because of their prior personal bankruptcy action. The McKnights argued that because CVADD knew of the bankruptcy action and had not sought relief relating to this particular promissory note during the McKnights' personal bankruptcy, it was precluded from doing so now. In response, CVADD appears to have conceded that it was barred from recovering against the McKnights in their personal capacities —yet there is no evidence in the record that the circuit court ever made an affirmative ruling on this issue, meaning the McKnights remained parties to the action.
C&H separately objected to CVADD's motion for summary judgment, arguing that CVADD's lack of possession barred any potential judicial sale, a lack of a judgment would unlawfully extinguish C&H's right to redeem, and CVADD's breach of contract and failure to comply with the UCC precluded relief.
Subsequently, on September 24, 2015, the court ordered C&H to return the equipment to CVADD, noting that one piece of the equipment had already been moved from the Lynch premises. The circuit court then entered its last order of substance on October 2, 2015, granting in part and denying in part CVADD's motion for judicial sale. CVADD could repossess the equipment to arrange for a commercially reasonable sale if it could do so without a breach of the peace. The court's order did not include a recitation of finality.
The October 2, 2015 order provides:
CVADD's motion is HEREBY GRANTED IN PART and DENIED IN PART. The motion is GRANTED IN PART due to attorneys for both parties agreeing in court to a commercially reasonable sale of the above listed items. However, the motion is DENIED IN PART because a local sale by the Master Commissioner is unlikely to reach buyers interested in such specialized equipment.
Therefore, CVADD should repossess the equipment if it can do so without a breach of the peace and make appropriate arrangements for an ARTICLE 9 sale. Moreover, this court also orders that any party other than CVADD having possession or control of the above listed property shall contact ... and make arrangements for immediate repossession.
CVADD found a buyer and executed an equipment purchase agreement. --------
For reasons that are not entirely clear, the McKnights and C&H filed a motion on December 29, 2017, asking the court to declare that CVADD did not have title to the equipment. The action was dormant for approximately six months until C&H filed another motion, this time seeking to consolidate this action with a conversion action C&H had filed related to some of the same equipment. In response, on October 3, 2018, the circuit court entered what it designated as its final and appealable order. The order provides:
[T]he Court having determined that there is [sic] no genuine issues as to any material fact to consolidate this matter . . . , IT IS HEREBY ORDERED AND
DIRECTED: That all claims against CVADD are hereby DISMISSED, WITH PREJUDICE . . . and this matter is stricken from the Court's active docket.
This appeal followed.
II. ANALYSIS
On appeal, C&H and the McKnights allege that the circuit court erred in allowing CVADD to dispose of the subject collateral without entry of final judgment and that it did not entertain their arguments concerning whether the sale was commercially reasonable.
In a very limited respect, we agree with the McKnights and C&H. The circuit court should not have "stricken" the case from its docket without first disposing of all the claims before it. The only order of substance entered in the case was the order permitting CVADD to seize the property and dispose of it. No orders of substance were entered following the order of sale. Most importantly, the circuit court never adjudicated the final amount due on the note, nor did it address the outstanding issues of deficiency or the commercial reasonableness of the sale. Additionally, even though it appears the circuit court may have implicitly concluded that CVADD could not recover on the McKnights' personal guarantee because of their bankruptcy, there was never any order dismissing them or confirming that they were not liable for any deficiency.
"There are numerous cases in Kentucky holding that an order directing property to be sold in satisfaction of a judgment was, in fact, a final judgment and that the only purpose of retaining the case on the docket was to enforce the judgment." Cerwin v. Taub, 552 S.W.2d 675, 678 (Ky. App. 1977). An order that orders the sale of property "but does not include the magic words of CR 54.02 'there is no reason for delay,' or 'this is a final order,' is still a final and appealable order." Hadley v. Citizen Deposit Bank, 186 S.W.3d 754, 758 (Ky. App. 2005) (citation omitted). However, an order is only "final" for appeal purposes if the order adjudicated all of the claims of all of the parties before the court at the time the order was entered. Sec. Fed. Sav. & Loan Ass'n of Mayfield v. Nesler, 697 S.W.2d 136, 138 (Ky. 1985) (holding that an order was final because it left nothing to be adjudicated regarding the validity, amount, and priorities of each of the multiple claims related to the property sold). Thus, a judgment is not final if it does not "put an end to the controversy between the parties" and leaves issues unsettled. Cerwin, 552 S.W.2d at 678 (citation omitted).
CVADD "resorted to 'judicial process,'" obtaining a court order to sell the collateral and cut off Appellants' rights in the property. Appellee's Br. at 2. This ordered sale was contingent on the peaceful repossession of the property. CVADD did so. Appellants offer no argument as to why this order is not valid. The October 2, 2015 court order for repossession and sale of the collateral was in fact a valid judgment ordering the sale of the collateral. This order, however, did not resolve all the claims with respect to all parties before the circuit court. Issues related to CVADD's claim for a deficiency judgment, whether CVADD would proceed against the McKnights personally for any deficiency, as well as the commercial reasonableness of the sale, were not resolved prior to dismissal even though they had been raised as part of the action. We cannot decide the issues presented in this appeal until those matters have been addressed by the circuit court. Therefore, we must vacate the dismissal and remand this matter with instructions to dispose of all the claims.
We are sympathetic to the circuit court's frustration with this case. This matter has an extraordinarily convoluted procedural history. The docket sheet is punctuated with prolonged and unexplained delays, some lasting years, during which time several different circuit court judges presided over the matter. Unfortunately, none has been able to fully resolve the parties' claims. While the last order issued by the circuit court attempted to terminate the litigation, it did so in an incomplete way. The order served only to remove the case from the court's docket as opposed to actually resolving the pending claims.
On remand, the parties should present their remaining arguments with respect to all the parties in a cohesive and complete fashion. If CVADD is seeking a deficiency judgment following the sale, it should plainly indicate the amount and the parties at issue. By the same token, Appellants should make known to the circuit court whether they are challenging the commercial reasonableness of the sale and upon what basis. Thereafter, the circuit court should decide the remaining issues as part of a final order on the merits. It is insufficient to simply strike the case from the court's docket without first having finally resolved all claims against all parties to the action.
III. CONCLUSION
In light of the foregoing, we vacate the dismissal and remand this matter to the Harlan Circuit Court for further proceedings as set forth above.
ALL CONCUR. BRIEFS FOR APPELLANTS: Scott M. Webster
London, Kentucky BRIEF FOR APPELLEE: Kellie D. Wilson
Harlan, Kentucky