UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF KENTUCKY
DEBTORS CASE NO. 94-70016
BRUCE LEVY, Trustee of the
Estate of George Griffith and
Helen Griffith; HARLAN NOBLE
and BONNIE NOBLE PLAINTIFFS
VS. ADV. NO. 95-7032
CITIZENS BANK OF JACKSON;
LAURA P. GRAHAM, JOYCE G. HOGG,
and JUANITA FAYE KING, as Co-Executrixes
of the Estate of J. Douglas Graham; WILLIAM T.
BACK, VELMA BACK, and ETHEL BACK DEFENDANTS
This matter is before the Court on a Motion to Dismiss Complaint filed herein by defendants Graham, Hogg and King ("the Graham estate") on October 12, 1995, and on a Motion for Rule 12(b)/56 Against the Trustee filed herein by defendant Citizens Bank of Jackson ("the Bank") on November 2, 1995. This Court has jurisdiction of this matter pursuant to 28 U.S.C.'1334(b); the plaintiffs have alleged that it is a core proceeding pursuant to 28 U.S.C. '157(b)(2).
The plaintiffs initiated this matter by the filing of their Complaint on August 15, 1995. That Complaint named the debtors but not the bankruptcy trustee as party plaintiffs, and an Order was entered on August 16, 1995, requiring them to file an Amended Complaint to reflect the proper party plaintiffs. An Amended Complaint (hereinafter referred to as "the Complaint") was then filed on August 22, 1995. The Bank filed its Answer and the Graham estate its Motion to Dismiss Complaint on October 12, 1995. Defendants William T., Velma and Ethel Back ("the Backs") filed a Motion to Dismiss or in the Alternative Abate Proceedings on October 13, 1995. An Order for Trial, setting this matter for trial on February 29, 1996, was entered on October 17, 1995.
The Bank's Motion for Rule 12(b)/56 was filed as set out above on November 2, 1995. The plaintiffs filed a Joint Response to Motions to Dismiss on November 13, 1995, and on that same date the Court conducted a hearing on all the motions. On November 15, 1995, the Court entered an Order overruling the Backs' Motion, as well as an Order allowing the Graham estate time to reply to the plaintiffs' Joint Response and directing that an Order of Submission be tendered thereafter. The plaintiffs filed a Motion for Leave to Amend Complaint and for Extension of Time for Further Amendments on November 14, 1995.
The Bank filed a Motion for Leave to File Cross-Claim against the Graham estate on November 17, 1995. The Graham estate filed a Conditional Motion for Leave to File Third Party Complaint against American Home Assurance Company on the same date. The Graham estate and the Bank filed their respective Replies to the plaintiffs' Joint Response on November 28, 1995. After a hearing on December 1, 1995, an Order was entered on the same date sustaining the plaintiffs' Motion for Leave to Amend Complaint, and they were given until December 11, 1995, to file an Amended Complaint. Their Motion to Extend Time for Further Amendments was overruled. The Bank's Motion for Leave to File Cross-Claim was sustained, and the Cross-Claim tendered with the filing of the Motion was ordered to be filed. The Graham estate was ordered to file its responsive pleading to the Cross-Claim on or before December 11, 1995. The Graham estate's Motion for Leave to File Third-Party Complaint was also sustained and ordered to be filed no later than December 11, 1995.
The plaintiffs filed their Second Amended Adversary Complaint on December 8, 1995. An Order of Submission in regard to the Motions now before this Court was entered on December 11, 1995. The Graham estate filed its Third Party Complaint on December 12, 1995; the Bank filed its Answer to Second Amended Adversary Complaint and Cross-Claim, as well as a Motion for Rule 12(b)/56 in regard to the Second Adversary Complaint, on the same date. The Graham estate filed a Motion to Dismiss Second Amended Adversary Complaint on December 19, 1995. American Home Assurance Company ("American Home") filed its Answer to Third Party Complaint on January 26, 1996.
The record in this case reveals that the debtors filed their Chapter 7 petition in this Court on January 13, 1994. Their discharge was entered on July 13, 1994. On May 23, 1995, the trustee filed a Motion Requiring Compliance with 11 U.S.C. 543. This motion stated that on May 11, 1995, counsel for the trustee had made demand upon the attorney of record for the Bank to turn over possession of any property of the debtors under control of the Bank. The motion alleged that the Bank held control of property of the debtors, including $384,447.69, plus accrued interest since March 27, 1990. The motion asked the Court to order the Bank to turn over that sum to the trustee. After a hearing on the motion on June 13, 1995, the within adversary Complaint was filed.
While no joint stipulations have been filed by the parties, copies of pertinent documents which have been filed in this matter, as well as deposition testimony, reveal the following chronology of events:
In July 1984, the debtors George and Helen Griffith ("the Griffiths") and Harlan and Bonnie Noble ("the Nobles") executed a mortgage note to the Bank in the amount of $363,276.28. At the same time East Kentucky Market ("EKM"), a partnership entity formed by the Griffiths and the Nobles, executed a security agreement in regard to the mortgage. In addition, the Griffiths entered into a mortgage with the Bank separately, as did the Nobles. In August 1984 the Griffiths and Nobles entered into a land lease with the Backs ("the lease"). EKM entered into an insurance contract with Midwestern Indemnity Company ("Midwestern") to insure the building constructed on the property for $250,000.00 and the equipment and inventory for $175,000.00. An August 28, 1984, endorsement listed the Bank as a beneficiary. On January 19, 1985, the building and contents burned.
Pursuant to paragraph 9 of the lease, the Griffiths and Nobles gave notice to the Backs that they were cancelling the lease on January 29, 1985. In May 1985, civil action No. 85-CI-116 was brought by the Bank against the Griffiths, the Nobles, Sarah Griffith, EKM, and Midwestern in Breathitt Circuit Court. In October 1985, the Bank obtained a Summary Judgment against the Griffiths, Sarah Griffith, the Nobles and EKM. The Summary Judgment provided that the real estate in which the Bank had a security interest should be sold. In August 1988, in the same civil action but now styled "Citizens Bank of Jackson v. George Griffith and Harlan Noble d/b/a East Kentucky Market and Midwestern Indemnity Company and George Griffith and Harlan Noble, d/b/a East Kentucky Market v. Midwestern Indemnity Company," a judgment was entered pursuant to a jury verdict in favor of EKM on its Cross-Claim against Midwestern, which had denied coverage under the insurance policy.
EKM was awarded $499,000.00. The Kentucky Court of Appeals affirmed the verdict and the judgment on November 3, 1989, and the Kentucky Supreme Court denied discretionary review on March 7, 1990. On March 21, 1990, Midwestern paid $652,458.12 into the Breathitt Circuit Clerk's escrow account in satisfaction of the 1988 judgment ($499,000.00 + 8% interest from May 7, 1985). On March 27, 1990, an Agreed Order of Partial Distribution was entered directing that $268,918.43 ($175,000.00 + $93,918.43 in interest) be paid to the Bank by the Breathitt Circuit Clerk. The remainder of the money, representing insurance proceeds for the destruction of the building, was to remain in escrow pending further orders of the court.
On June 21, 1990, a judgment was entered in further proceedings in the same civil action in which William T. Back was allowed to intervene as defendant/cross-claimant. The judgment denied Back's claims to the insurance proceeds and ordered the money remaining in escrow to be paid to the Griffiths and Nobles. On June 25, 1990, the Bank obtained an Order of Garnishment directed to the Breathitt Circuit Clerk, and on the same date filed an Affidavit for Writ of Garnishment stating that the Griffiths and Nobles owed the Bank $363,306.68 with interest at 12% per annum from and after May 2, 1985, until paid. On June 29, 1990, the Bank filed in the civil action an Affidavit Regarding Amount Due Under Judgment, stating that the amount owed to the Bank as of July 10, 1990 (sic) was $315,992.93.
George Griffith, Harlan Noble and their counsel in the civil action, J. Douglas Graham ("Graham"), entered into a written agreement styled "Contract" on July 2, 1990. This document provided that Graham was owed the sum of $130, 491.62 as a contingency fee in the civil action, and that that sum should be placed in escrow at the Bank and paid to Graham "upon termination of this litigation with Back..." On that same date, Graham, the Griffiths, and the Nobles appeared at the office of the Breathitt Circuit Clerk and requested that the remaining insurance proceeds which the Clerk had placed in a Certificate of Deposit at the Bank be turned over to them. The Clerk testified that he cashed the Certificate of Deposit, retained the interest and put it into the office checking account, and issued a check in the amount of $392,843.39. The check was made payable to the Bank, Graham, the Griffiths and the Nobles.
The group then proceeded to the Bank. They informed the vice-president of the Bank, Burt Bellamy ("Bellamy"), that they wished to pay off what was owed the Bank, but that Graham's fee must be deducted from the amount of the check. Bellamy informed them that there would not be enough to pay off the balance of the loan, and the Griffiths and the Nobles agreed to split the deficiency between them. The Nobles wrote a check for $6,357.24, and the Griffiths signed a promissory note for the same amount. All parties to the check then endorsed it, and the Bank loan was paid off. The Bank issued Certificate of Deposit No. 11161 in the amount of Graham's fee in the name of "George Griffith and Harlan Noble, payable to J. Douglas Graham.
Upon the Backs' appeal of the June 1990 judgment, the Kentucky Court of Appeals reversed and remanded the judgment on February 14, 1992 (modified on May 8, 1992), and the Supreme Court denied discretionary review on October 14, 1992. On remand from the Court of Appeals, the Breathitt Circuit Court entered a judgment on October 31, 1992, which held that the $384,447.69 in remaining insurance proceeds attached to the Backs' real estate and belonged exclusively to them on January 29, 1985, free from liens or other encumbrances. The judgment ordered that all monies which had been seized by the Bank be returned to the Backs with interest, and that all monies paid to the Griffiths and Nobles be paid to the Backs with interest.
In March 1993, the Breathitt Circuit Court vacated the October 31, 1992, judgment, and entered an Order requiring the Special Commissioner to sell the Griffiths' and Nobles' real estate referred to in the Summary Judgment of November 16, 1985. The proceeds of this sale were to be applied to the debt owed to the Bank by the Griffiths and the Nobles. The court reserved ruling on the question of who was entitled to the $384,447.69 until the real estate was sold. In July 1993, the Court of Appeals dismissed the Bank's appeal of the March 1993 Order. The Special Commissioner's sale of the property subject to the Griffiths' mortgage was scheduled for January 14, 1994, but on January 13, 1994, the Griffiths filed their Chapter 7 petition and the sale was cancelled.
The plaintiffs' Complaint alleges avoidable transfer, misrepresentation, negligence and attorney malpractice, breach of contingent fee contract, breach of the July 2, 1990 contract, conversion by the Bank, conversion by Graham, fraud in the inducement, fraud and constructive fraud, breach of fiduciary duty, breach of duty of loyalty, confidentiality, and good faith and fair dealing, wrongful interference with fiduciary relationship, and equitable subordination. It further alleges that the Bank's claim was undersecured, that the Backs' claim is unsecured, and that Graham was unjustly enriched and that he (sic) holds the funds seized by him as constructive trustee for the Griffiths and the Nobles. It seeks the return of funds from the Bank and the Graham estate.
In support of its Motion asking for dismissal or summary judgment the Bank contends that the trustee's claims against the Bank as regards entitlement to the insurance proceeds are barred by res judicata because they could have been raised in the civil action, but were not. The Bank further contends that the trustee may not avoid the Partial Distribution Order because both the entry of the Order and the distribution of the garnished funds took place almost four years prior to the filing of the Griffiths' bankruptcy petition, and no attempt was made to obtain relief from the Order pursuant to CR 60.02. As to the claim of conversion, the Bank argues that the statute of limitations for conversion, KRS 413.140, bars it. The Bank also contends that the allegation of conversion fails because the Bank had a legal right to the funds.
The Bank makes a similar argument in regard to the claim of fraud, pointing out that the statute of limitations for fraud and constructive fraud in Kentucky is five years. The date of the alleged fraud was July 2, 1990, when the Bank, through Graham, caused the Griffiths and the Nobles to pay what they claim was an amount in excess of what they owed. The date of filing the Complaint herein was August 15, 1995, so that the claims of fraud and constructive fraud are, the Bank contends, barred by the statute of limitations. The Bank further contends that the plaintiffs cannot prove all the elements of fraud in regard to this transaction. In addition, the Bank says, the Griffiths and Nobles did not suffer any injury because they were legally obligated to repay the debt to the Bank.
The Bank disputes the plaintiffs' contention that it did not have a security interest in the insurance proceeds. It states that the summary judgment which was entered on October 24, 1985, in favor of the Bank held that the Bank had a valid security interest in the inventory portion of the insurance proceeds, and that the Agreed Order of Partial Distribution entered into in 1990 directed the distribution of those proceeds to the Bank. The Bank further contends that the plaintiffs may not argue equitable subordination because the Bank never filed a claim in the bankruptcy case, and 11 U.S.C.'510 speaks to subordination of an "allowed claim." The Bank finally argues that the plaintiffs' claims concerning the alleged breach of various duties have no merit because the Bank only did what it was legally entitled to do, and it did so in good faith. The Bank discounts what appear to be the plaintiffs' contentions that it was, at worst, acting in collusion with Graham, or, at best, unduly influenced by him, to "seize" funds to which it was not entitled.
The Graham Estate's Motion to Dismiss argues, first of all, that the trustee may not bring any claim against the Estate because it did not exist on the date the bankruptcy petition was filed, Graham having died on June 12, 1994. The Estate further argues that, pursuant to KRS 396.035, the plaintiffs are prohibited from bringing any civil action against the Estate unless and until they have presented a claim against it and the claim has been rejected. Even if the plaintiffs, or any of them, had presented a claim against the Estate, however, it contends that the claim would be barred by the statute of limitations as set out in KRS 396.011. In that regard, the Estate also contends that 11 U.S.C.'108 does not operate to extend the time. The Estate further contends that the claims of conversion, conspiracy, and professional malpractice are time-barred by KRS 413.140 and 413.245.
The plaintiffs have filed a Joint Response to the Motions of the Bank and the Graham Estate. In regard to the Graham Estate's Motion to Dismiss, the plaintiffs argue that no statute of limitations cited by the Estate operates to bar their claims against it. Specifically, they state that KRS 396.011 does not apply in this proceeding because it is expressly overridden by KRS 413.245 as to claims which constitute malpractice. Further, the plaintiffs point out, the time limit in KRS 413.245 does not begin to run until the "cause of action was, or reasonably should have been, discovered by the party injured." This did not occur, they argue, until Graham cashed the Certificate of Deposit in April 1994. In addition, they argue that KRS 413.190, which provides that the statute of limitations does not run during the period in which the defendant "by any ... indirect means obstructs the prosection of the action," and which has been applied to misrepresentations and concealment of underlying facts, takes Graham's acts and omissions outside KRS 396.011. While this statute may to apply to a myriad of actions mentioned in KRS 413.090 to 413.160, it clearly does not apply to extend the limitations period for state law preferential conveyances pursuant to KRS 378.060 since that statute has its own limitations period set forth in KRS 378.070.
The plaintiffs' claims against the Bank relating to the funds paid to Graham do not come within the purview of KRS 396.011 either, they contend, because the six month rule in that section does not apply to prevent a party from recovering his own property from a decedent's estate. Since the estate's title only extends to property of the decedent, not property held in trust or in escrow for other parties, the plaintiffs contend that the funds paid to Graham when he cashed the Certificate of Deposit did not become property of his estate when he died. The terms of the July 2, 1990 Contract and the Certificate of Deposit itself leave no doubt, they say, that the funds representing Graham's legal fee were being held in escrow. KRS 396.011 is also inapplicable, the plaintiffs contend, because it does not "prevent ... any proceeding to establish liability of the decedent for which he is protected by liability insurance." They assume that both Graham and the Bank carried some kind of liability insurance.
In regard to the Bank's Motion, the plaintiffs argue that the Bank is not entitled to judgment as a matter of law because there are still many facts in dispute. They point to the fact that affidavits offered by the various parties in this matter contradict each other in many respects, but especially as concerns the circumstances of the disbursement of funds in July 1990. The plaintiffs also bring up the fact that they had not (at the time of the filing of their Response) had an opportunity to complete discovery of Graham's files and financial records. The Bank's defenses based on statutes of limitation are countered by the plaintiffs' argument that the running of any statute of limitations was suspended by the operation of KRS 413.190 during the period of alleged concealment of various pertinent facts by the Bank and Graham. The Bank's arguments based on res judicata do not address, inter alia, the fact that the acts and omissions complained of did not occur until after the various judgments and orders it cites in the civil action were entered, and that entitlement to the funds seized in July 1990 has yet to be determined in the civil action.
Both the Graham Estate and the Bank have filed Motions to Dismiss, as set out above.
In Columbia Natural Resources v. Tatum, 58 F.3d 1101 (6th Cir. 1995), the court, in determining whether a district court had correctly dismissed a suit pursuant to FRCP 12(b)(6), stated:
The district court must construe the complaint in a light most favorable to the plaintiff, accept all of the factual allegations as true, and determine whether the plaintiff undoubtedly can prove no set of facts in support of his claims that would entitle him to relief. .... When an allegation is capable of more than one inference, it must be construed in the plaintiff's favor. .... Hence, a judge may not grant a Rule 12(b)(6) motion based on a disbelief of a complaint's factual allegations. (Cites omitted.)
At page 1109. The court in In re Barr, 188 B.R. 565 (Bkrtcy. N.D. Ill. 1995), held similarly that
[f]or Defendants to prevail on their Motion to Dismiss, it must clearly appear from the pleadings that the Plaintiffs can prove no set of facts in support of their claims which would entitle them to relief. .... The Court must consider both pleaded facts and reasonable inferences drawn from pleaded facts in a light most favorable to Plaintiff when reviewing the Defendants' Motion to Dismiss. ....
Under federal 'notice' pleading requirements, pleadings need contain 'a short and plain statement of the claim showing that the pleader is entitled to relief.' Fed.R.Civ.P. 8(a) (as made applicable to this Adversary proceeding by Fed.R.Bankr.P. 7008); .... 'Notice' pleading merely requires that plaintiff give notice to defendant of the theory behind claims alleged and the basic facts supporting those allegations. .... Federal pleadings should therefore be liberally construed. .... So long as fair notice has been given and the court can glean an actionable claim from the complaint, the court must entertain the party's case. .... (Cites omitted.)
At page 570. Applying this standard to the facts pleaded in the Complaint filed herein, as well as the reasonable inferences to be drawn from those facts, it is clear that this Court must overrule both Motions to Dismiss except to the extent that they are directed at state law preferential conveyances.
As concerns the Bank's Motion for Summary Judgment, the standard in the Sixth Circuit for granting such a motion has most recently been set out in Employers Ins. of Wausau v. Petroleum Specialities, Inc., 69 F.3d 98 (6th Cir. 1995), wherein the court stated:
This court must affirm the district court only if it determines that the pleadings, affidavits, and other submissions show 'that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law.' Fed.R.Civ.P. 56(c). When evaluating this appeal, this court must view the evidence in the light most favorable to the non-moving party. ....
.... The pivotal question is whether the party bearing the burden of proof has presented a jury question as to each element of its case. .... The plaintiff must present more than a mere scintilla of evidence in support of his position; the plaintiff must present 'evidence on which the jury could reasonably find for the plaintiff.' .... (Cites omitted.)
At page 102. See also Street v. J. C. Bradford & Co., 886 F.2d 1472 (6th Cir. 1989). This Court is of the opinion that the plaintiffs have presented evidence on which the trier of fact could reasonably find for them. Further, the "pleadings, affidavits, and other submissions" now before the Court are not sufficient to satisfy the Bank's burden of demonstrating that there is no genuine issue as to any material fact and that it is entitled to judgment as a matter of law. The Court will therefore also overrule the Bank's Motion for Summary Judgment. An order in conformity with this opinion will be entered separately.
By the Court -
C. Wayne Shepherd, Esq.
C. Christopher Trower, Esq.
W. Thomas Bunch, Esq.
Jerry D. Truitt, Esq.
Jesse Hogg, Esq.
John O. Morgan Jr., Esq.
Patrick W. Michael, Esq.