Shelton v. Kennedy Funding Inc.
| Decision Date | 24 September 2010 |
| Docket Number | No. 09-1670.,09-1670. |
| Citation | 622 F.3d 943 |
| Parties | Virgil SHELTON, Appellee, v. KENNEDY FUNDING, INC., Appellant. |
| Court | U.S. Court of Appeals — Eighth Circuit |
OPINION TEXT STARTS HERE
COPYRIGHT MATERIAL OMITTED.
David L. Williams, argued, Katherine M. Hingtgen, on the brief, Little Rock, AR, for appellant.
James Gerard Schulze, argued, Morgan E. Welch and Lloyd W. Kitchens, III, on the brief, Little Rock, AR, for appellee.
Before RILEY, Chief Judge, 1 SMITH and SHEPHERD, Circuit Judges.
This appeal arises out of the sale of an Arkansas cemetery. A jury awarded the cemetery's seller, Virgil Shelton, $1,675,000 on his breach-of-contract and fraud claims against Kennedy Funding, Inc. (KFI). KFI appeals. We affirm in part, reverse in part, and remand for reduction of Shelton's judgment to $675,000.
In 1967, Shelton established the Rest in Peace Cemetery (Rest in Peace) at Hensley, Arkansas. Rest in Peace was a success. Shelton operated Rest in Peace for nearly a quarter of a century until he decided to retire.
In 1992, Shelton sold Rest in Peace to Willie Acklin, a local undertaker. Acklin was experienced in the funeral business and had brought many burials to Rest in Peace. Acklin could not afford to pay cash for Rest in Peace, and Shelton wanted to minimize his tax liability. Acklin executed a promissory note (Note) in Shelton's favor in exchange for the title to Rest in Peace. Acklin also gave Shelton a mortgage (Mortgage) on Rest in Peace to secure Acklin's obligations under the Note.
Acklin's obligations under the Note were extensive and enduring. Acklin promised to (1) pay Shelton and his two children $50,000 immediately; (2) pay $100,000 to Shelton and his children in four semi-annual installments starting in 1992; (3) “beginning February 1, 1993[, pay Shelton] an amount equal to ... the income derived [from Rest in Peace's] perpetual trust fund” 3 on a quarterly basis for the life of Acklin or his wife, whichever was longer; and (4) pay Shelton, his wife, or their heirs and assigns, approximately $5,000 a month for twenty years. The Note forbade prepayment without Shelton's consent, because Shelton planned on “using [Rest in Peace] as a retirement plan.”
Acklin made payments on the Note for nearly a decade. In the late 1990s, Acklin encountered financial difficulties, including a “very big IRS problem,” after a failed attempt to expand his funeral business into Tennessee. Acklin had tried to capitalize on gang-related violence in Memphis but, according to KFI, “ran into stiff competition from existing establishments.” Acklin apprised Shelton “he was going to restructure his financing” and seek a bridge loan until he might secure more conventional terms.
KFI, an unregulated, non-bank private lender from New Jersey, expressed a willingness to provide Acklin a bridge loan. KFI styles itself as “America's leading hard money lender, specializing in bridge loans for commercial property ... workouts, bankruptcy and foreclosures” and as “the lender of last resort.” KFI boasts “flexibility and speed,” using “creative financing expertise” and an “international network of private lenders [to] let [ ] borrowers with assets get the hard money commercial loans they need incredibly fast.” KFI advertises the ability to close on a $100 million loan in less than two weeks. KFI fully collateralizes all of its loans-typically offering to lend up to 50% to 60% of the value of a prospective debtor's assets.
2. Estoppel Certificate
Before committing to a bridge loan, KFI sought to clarify Acklin's obligations to Shelton. KFI demanded Rest in Peace as collateral, but it was impossible to determine the amount due under the Note to Shelton. The value of the Mortgage was incalculable because Acklin had promised in the Note to make payments for a term of uncertain duration-the life of Shelton or his wife, whichever was longer. KFI was unwilling to loan Acklin a large sum without ascertaining the amount owing under the Note, because Shelton's Mortgage would have priority over any mortgage Acklin might give KFI.
KFI asked Shelton whether he would waive his rights as first mortgage holder. Shelton refused. KFI then queried whether Shelton would sign an “estoppel certificate.” 4 KFI wanted Shelton to reduce the value of the Mortgage to a sum certain and attest to certain facts about Rest in Peace's title.
KFI, Acklin, and Shelton negotiated the terms of an estoppel certificate. Shelton agreed to reduce the value of his Mortgage to a sum certain, $675,000. The sticking point in the negotiations was whether KFI would place $675,000 in an escrow account and, in the event Acklin defaulted on his loan to KFI, pay off the Mortgage. KFI drafted an estoppel certificate that did not provide for an escrow account, but simply stated, “KFI will have the right to pay off the [Mortgage] in part or in full, upon the default of [Acklin], at any time.” This proposal was unacceptable to Shelton, who insisted KFI set up an escrow account for his benefit.
On January 22, 1999, Shelton signed a revised estoppel certificate (Estoppel Certificate). In relevant part, the Estoppel Certificate provided:
[Shelton] is the Mortgagee under that certain Mortgage between [Acklin and Shelton concerning Rest in Peace]. Shelton acknowledges [KFI] intends to make a $2,200,000.00 loan to [Acklin] ..., that the [KFI-Acklin] Loan will be secured by a second mortgage on [Rest in Peace] (subordinate to the Mortgage) and that KFI will hold in an escrow account the amount of $675,000.00, the amount needed to satisfy [the Mortgage]. Upon the default of [Acklin], or payment of the loan in full, KFI will pay said sum into a trust or other tax deferred account designated by agreement between [Acklin] and Shelton. Said account is to serve as a substitution of collateral for said mortgage. Upon payment of the amount of $675,000.00[,] Shelton will release his lien on [Rest in Peace]. Prior and as a condition to such funding, KFI must have assurances as to the status of the loan.
Accordingly, and in consideration of the payment of some or all of the obligations of [Acklin] to Shelton by KFI, ... Shelton hereby certifies[:]
1) As of January 14, 1999, the outstanding principal and interest balance of the Loan is not more than $675,000.00.
2) To the best knowledge of the undersigned, no default exists under the Mortgage or any other documents executed and delivered in connection with the Loans ... and no event has occurred which, with notice or the passage of time or both would constitute a default under the Mortgage[ ] or Loan Documents.
3) The Mortgage and Loan Documents have not been modified, amended or supplemented. A true and accurate copy of the Note is annexed hereto.
4) The Mortgage is the only security given by [Acklin] to Shelton for the Loan.
Shelton and his family members also signed an Affidavit of Facts attesting to the circumstances surrounding Rest in Peace's incorporation, which KFI required to complete the bridge loan.
KFI did not respond to Shelton upon receipt of the Estoppel Certificate or notify Shelton the Estoppel Certificate was unacceptable. KFI never signed the Estoppel Certificate. Like the version KFI drafted, the Estoppel Certificate only contained a blank line for Shelton's signature and no signature block for KFI.
4. KFI Loans .2 Million to Acklin
In late January 1999, KFI closed on a $2.2 million bridge loan to Acklin. Acklin accepted steep terms, including a non-refundable 10% “commitment fee” and a laddered interest rate, which rose to as high as 36%. KFI agreed to hold $675,000 “in reserve ..., to be applied, at [KFI]'s sole discretion, on [Rest in Peace].”
When finalizing the bridge loan, KFI provided its closing agent with a U.S. Department of Housing and Urban Development Form 1 Settlement Statement (Settlement Statement). The Settlement Statement itemized the costs associated with the bridge loan. Consistent with the Estoppel Certificate, the Settlement Statement calculated a $2.2 million loan from KFI to Acklin, with $675,000 of the principal to be disbursed to Shelton.
KFI's closing agent was prepared to disburse the $675,000 to Shelton, but the day before the loan closed one of KFI's attorneys, Rochelle Moskowitz, appended a “sticky note” to the Settlement Statement. The “sticky note” cautioned, The closing agent only dispersed approximately $1.1 million to Acklin-$2.2 million in principal, minus $675,000 in reserve 5 and approximately $400,000 in fees and prepaid interest. KFI never placed the $675,000 in an escrow account for Shelton's benefit.
KFI used the Shelton Estoppel Certificate in conjunction with its bridge loan to Acklin. In April 1999, KFI sent the Internal Revenue Service (IRS) a copy of the Estoppel Certificate after the IRS requested documentation of the loan. In 2001, KFI submitted the Estoppel Certificate as part of its application for title insurance on Rest in Peace. KFI's closing agent falsely represented to the title company that
5. Acklin Defaults
In 2000, Acklin defaulted on his bridge loan, and KFI initiated foreclosure proceedings on Rest in Peace. Delays in grave digging at Rest in Peace prompted its Board to place Rest in Peace in receivership.
Relying upon the substitution of collateral provision in the Estoppel Certificate, Shelton initially did not exercise his own foreclosure rights as first-priority mortgagee. 6 Shelton believed the $675,000 escrow account afforded him security and, for financial reasons, preferred not to foreclose on the Mortgage.
Shelton did not verify the creation of the $675,000...
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