Furlong Dev. Co. v. Georgetown-Scott Cnty. Planning & Zoning Comm'n, 2014–SC–000594–DG

• Decision Date: 15 December 2016
• Docket Number: 2014–SC–000594–DG
• Citation: 504 S.W.3d 34
• Parties: FURLONG DEVELOPMENT CO., LLC; and Gordon Stacy, Appellants v. GEORGETOWN–SCOTT COUNTY PLANNING AND ZONING COMMISSION; EGT Properties, Inc. ; and United Bank & Trust Company, Appellees
• Court: United States State Supreme Court — District of Kentucky

504 S.W.3d 34

FURLONG DEVELOPMENT CO., LLC; and Gordon Stacy, Appellants

v.GEORGETOWN–SCOTT COUNTY PLANNING AND ZONING COMMISSION; EGT Properties, Inc. ; and United Bank & Trust Company, Appellees

2014–SC–000594–DG

Supreme Court of Kentucky.

DECEMBER 15, 2016

COUNSEL FOR APPELLANTS:, Jeffrey Clayton Rager

COUNSEL FOR GEORGETOWN–SCOTT COUNTY PLANNING AND ZONING COMMISSION, APPELLEE:, Charles Perkins

COUNSEL FOR EGT PROPERTIES, INC., AND UNITED BANK & TRUST COMPANY, APPELLEES:, Steven B. Loy, Monica Hobson Braun

OPINION OF THE COURT BY JUSTICE CUNNINGHAM

Developer, Furlong Development Company and its owner, Gordon Stacy, (collectively referred to as "Developer"), owned a 26–acre tract of real estate in Georgetown, Kentucky. Developer intended to develop the property into 90 single-family residential lots known as "The Enclave." Developer secured financing through United Bank & Trust Company (hereinafter "the Bank"). The Bank provided financing in excess of 4 million dollars. Gordon Stacy, acting individually and in his capacity as Developer's owner, guaranteed the loans by executing a promissory note and mortgage in favor of the Bank.

Pursuant to a local municipal ordinance, Developer was required by the Georgetown-Scott County Planning and Zoning Commission ("the Commission"), to provide a surety bond in the amount equal to 125% of the estimated cost of building certain infrastructure. Platt River Insurance Company (hereinafter "Insurer") backed the bonds. Notably, Developer agreed to indemnify Insurer against any losses.

Insurer, as surety for the Developer, executed three separate instruments each entitled "Subdivision Bond" (collectively referred to as "Bond Agreements"). Each bond was for a different amount, totaling in excess of $148,000. The Bond Agreements specifically provided:

WHEREAS, this bond is required in an amount to 125% of the estimated costs of all improvements described in the plans approved by [the Planning Commission]; AND

WHEREAS, [the Commission] has approved the improvement plans for the project known as the Enclave Subdivision [ ] Sidewalk and handicap Ramps, 1' Asphalt Surfaced, and Storm Cleanup ...."

In 2008, the real estate market crashed. As a consequence, Developer defaulted in its loan from the Bank.

At that time, "The Enclave" development was worth less than the amount remaining on the loan. In other words, there was no equity in the land. Nevertheless, the Bank agreed to accept a deed in lieu of foreclosure. Developer executed the appropriate documents and deeded the property to the Bank's property management company, EGT. In return, the Bank released Developer from its obligations under the various loan agreements. Gordon Stacy was also released from his individual liability.

Sometime thereafter, the Bank transferred the property to another internal holding company, EKT (hereinafter "Holding Company"). The Bank also sent a letter to the Commission requesting that the Commission call Developer's bonds and that the proceeds be placed in escrow for the purpose of reimbursing the Bank for the completion of the necessary infrastructure projects required by the Developer's approved plat.

The Commission complied with the request, but both Developer and Insurer refused to pay. Insurer filed a declaration of rights action against Developer in the U.S. District Court for the Eastern District of Kentucky, seeking indemnity in the event that the Insurer was ordered to pay the bond amount. The federal court entered an Agreed Judgment under which Developer agreed to be jointly and severally liable to Insurer for $43,359.50, with the court retaining jurisdiction to re-open and amend that judgment "in the event the surety bonds issued by [Insurer] are eventually paid."

Developer also filed a declaratory judgment action against the Commission, the Bank, and the Holding Company in Scott Circuit Court. It alleged that the bonds were not callable and that payment on the bonds would result in the Bank receiving an unjust enrichment. The enrichment would result with the Bank/Holding Company owning the land without any obligation to incur the infrastructure cost. Although there was no equity in the property, the deed in lieu of foreclosure had released Developer from any obligations regarding the land.

At the trial court, the defendants moved for summary judgment. The court granted the motion, holding that neither Insurer nor Developer was released from their obligations under the Bond Agreements. In a split decision, the Court of Appeals affirmed the trial court. Although Insurer was added as a party on appeal, Insurer did not file a brief or formally join Developer in their arguments before the Court of Appeals. We granted Developer's motion for discretionary review. Insurer did not request discretionary review and is not a party to this appeal. Having reviewed the record and the law, we affirm the Court of Appeals' decision.

Standard of Review

"The standard of review on appeal of a summary judgment is whether the trial court correctly found that there were no genuine issues as to any material fact and that the moving party was entitled to judgment as a matter of law." Coomer v. CSX Transp. Inc., 319 S.W.3d 366, 370 (Ky. 2010). We review a trial court's summary judgment ruling de novo. Blankenship v. Collier, 302 S.W.3d 665, 668 (Ky. 2010). We must also view the record in a light most favorable to the nonmoving party and resolve all reasonable doubts in that party's favor. Steelvest, Inc. v. Scansteel Serv. Ctr., Inc., 807 S.W.2d 476, 480 (Ky. 1991).

Analysis

Developer contends that the plain language of the Bond Agreements is not dispositive of the present matter and that additional evidence must be considered in order to obtain the parties' intent. We interpret the terms and provisions of the Assignment according to well-established principles of contract law. See, e.g., Hazard Coal Corp. v. Knight, 325 S.W.3d 290, 298 (Ky. 2010).

Legal Arguments

Despite the plain language of the Bond Agreements, Developer asserts that the bonds were not callable because no homes had been built on the development property prior to Developer's default. In support of its argument, Developer urges this Court to adopt the reasoning presented in Westchester Fire Insurance Co. v. Brooksville, 731 F.Supp.2d 1298 (M.D. Fla. 2010).

In that case, the city approved the development of a five-phase subdivision community. Each phase had its own plat. Similar to the present case, the city required that the developer post a bond to ensure the construction of "several on-site improvements, including earthwork, roadways, storm lines, potable water lines, reclaimed water lines, and sanitary sewer lines (the ‘Phase Two Improvements')." Id. at 1300. Before beginning construction on Phase Two, the developer petitioned for bankruptcy. The bankruptcy court subsequently granted the developer's motion to abandon the development. As a result, the city demanded payment on the bonds and filed suit against the developer's surety in state court. The development property was eventually sold to another development company.

The matter subsequently came before the U.S. District Court which determined that, "the bonds and the ordinance construed together impose a condition that construction of the development proceed before the City may collect." Id. at 1305. The ordinance to which the court was referring required "the posting of a bond ‘to ensure that future owners [will] be able to connect their lots to the City's utility services.’ " Id. at 1307. In holding that the neither the developer nor its surety was obligated to pay the bond, the court reasoned:

Because no homeowner exists in Phase Two for whom the City must ensure the availability of utility services, requiring payment on the bonds both creates a cash windfall for the City and fails to achieve the purpose of the City's ordinance. Because no home exists in Phase Two that requires the City's utility services, requiring the City to install improvements on undeveloped land (and requiring [surety company] to reimburse the City's cost to install the improvements) imposes an unreasonable forfeiture against [surety company] and promotes an unreasonable windfall for the City. Id. at 1307 (footnote omitted).

Unlike the documents at issue in Brooksville, the relevant documents in the present case are very clear that Insurer, on behalf of Developer as principal, was obligated to pay the bonds. The Bank release documents specifically state that "there is no assumption by [Holding Company] of the obligations and liabilities under any instruments or agreements with third parties and all such obligations and liabilities remain the responsibility of [Developer]...." The Commission clearly constitutes a third party under the terms of the Bank's release.

Furthermore, the Bond Agreements at issue here concerned the Developer, Insurer, and the Commission; not the Bank. Therefore, neither the Bank nor its Holding Company assumed liability under the bonds or had the authority to discharge the bonds on behalf of the Commission.

In addition, the fact that the Bank's representative requested that the Commission call the bonds and then distribute those proceeds to the Holding Company upon completion of the necessary improvements does not expressly or implicitly violate the previously executed discharge agreement. Rather, the Bank's proposition to the Commission served to protect the Bank's investment which, at that time, constituted a significant loss. This was an economically rational and otherwise lawful request by the Bank. However, the extent to which the bond funds may be allocated to new or additional improvements is a different matter that will be subsequently discussed at length.

Another critical distinction between Brooksville and the present case is the absence of any local ordinance that must be read in conjunction with the Bond Agreements in order to "impose a condition that construction of the development proceed before the...