PBI Bank, Inc. v. Signature Point Condos. LLC

• Decision Date: 02 December 2016
• Docket Number: NO. 2013–CA–001874–MR, NO. 2014–CA–001825–MR,2013–CA–001874–MR
• Citation: 535 S.W.3d 700
• Parties: PBI BANK, INC., Appellant v. SIGNATURE POINT CONDOMINIUMS LLC; Signature Point Apartments LLC; and Signature Point KTC LLC, Appellees
• Court: Kentucky Court of Appeals

535 S.W.3d 700

PBI BANK, INC., Appellant

v.SIGNATURE POINT CONDOMINIUMS LLC; Signature Point Apartments LLC; and Signature Point KTC LLC, Appellees

NO. 2013–CA–001874–MR

NO. 2014–CA–001825–MR

Court of Appeals of Kentucky.

DECEMBER 2, 2016; 10:00 A.M.

Discretionary Review Granted by Supreme Court March 15, 2017.

Petition for Discretionary Review Withdrawn April 19, 2017

BRIEF AND ORAL ARGUMENT FOR APPELLANT: John T. McGarvey, Eric M. Jensen, Bradley S. Salyer, Louisville, Kentucky

AMICUS CURIAE BRIEF FOR KENTUCKY CHAMBER OF COMMERCE: Edward H. Stopher, Raymond G. Smith, Louisville, Kentucky

AMICUS CURIAE BRIEF FOR KENTUCKY BANKERS ASSOCIATION: Debra K. Stamper, Louisville, Kentucky

BRIEF AND ORAL ARGUMENT FOR APPELLEES: Laurence J. Zielke, Janice M. Theriot, Nancy J. Schook, Louisville, Kentucky

BEFORE: JONES, MAZE, AND STUMBO, JUDGES.

OPINION

JONES, JUDGE:

These appeals arise out of a judgment entered by the Jefferson Circuit Court following a jury trial. In accordance with the jury's verdict, the trial court awarded the Appellees, Signature Point Condominiums LLC, Signature Point Apartments LLC, and Signature Point KTC LLC, (collectively "Signature Point"), $1,515,000 in compensatory damages plus $5,500,000 in punitive damages for a total of $7,015,000. Alleging numerous assignments of error, the Appellant, PBI Bank, Inc. ("PBI"), asks us to reverse the verdict. Having found no reversible errors, we affirm.

I. BACKGROUND ¹

A ninety-acre piece of real estate in eastern Jefferson County, Kentucky, lies at the heart of this dispute. Scott Hagan, a prominent real estate developer, formed Signature Point to purchase and develop the property. His goal was to transform it into a unique, upscale residential development consisting of condominiums, apartments, and various community amenities, including a club house. Signature Point acquired the property in 2006 with the assistance of a loan from U.S. Bank.²

Eventually, Hagan became dissatisfied with U.S. Bank and began looking for another lender.³ Hagan had been doing business with PBI since 1996, and he was personally acquainted with PBI's President and Chief Executive Officer, Maria Bouvette. Bouvette expressed an interest in PBI taking over the financing on the Signature Point project. As a result, on March 8, 2007, PBI and Signature Point entered into a Development and Construction Loan Agreement. Under the terms of this agreement, PBI loaned $25 million to Signature Point. The loan was divided into two equal components, a $12.5 million Revolving Construction Loan and a $12.5 million Revolving Development Loan.⁴ The loans were secured by a mortgage on the Signature Point property and by personal guarantees from Hagan, Mark Sneed, James Mims, George McGeheem, and Wendy Hargrove. Repayment of the loans was heavily dependent on the future sales of the condominium units.⁵

The Development and Construction Loan Agreement was amended twice, first on June 20, 2007, and again September 12, 2007. As a result of the amendments, as well as Hagan's intention to obtain financing from King Southern Bank to acquire additional acreage for the Signature Point property, PBI ordered a new appraisal in the spring of 2008. The appraisal report, dated June 27, 2008, assigned an estimated "as is" market value for the entire project at $22,340,000, allocated as follows: $13,970,000 for the Brownstone Condominium Site; $2,800,000 for the Carriage Home Condominium Site; $1,840,000 for the Cottage Home Condominium Site; and $3,730,000 for the Apartment Site.

As is standard, the Development and Construction Loan Agreement contained a provision whereby Signature Point agreed that it would not permit any additional encumbrances to be placed on the property. In late 2008 or early 2009, one of Signature Point's contractors, Kelsey Construction, filed a $200,000 mechanics lien on the property.⁶ The lien constituted an event of default under the Development and Construction Loan Agreement. This gave PBI the right to terminate the loan and declare the entire unpaid balance immediately due and payable in full.

Kelsey Construction eventually filed suit in Jefferson Circuit Court to enforce its mechanics lien. PBI was named as a party due to its interest in the Signature Point property. As part of that action, PBI sought collection under the Development and Construction Loan Agreement and enforcement of its mortgage. On March 23, 2009, PBI and Signature Point entered into a Global Settlement as related to the Development and Construction Loan Agreement, as well as a separate loan between PBI and Hagan Properties Inc. The Global Settlement Agreement amended the Development and Construction Loan Agreement in several ways, two of which are central to the underlying dispute. First, PBI agreed to a partial release of the apartment portion of the development upon receipt of $2,835,000. Second, PBI agreed to issue a new $2.7 million non-revolving loan to Signature Point. The loan was for a one-year term with interest to be paid monthly. In exchange, Signature Point granted PBI a second mortgage on the Signature Point property and agreed to secure a release of Kelsey Construction's lien.⁷ The additional loan was secured by Hagan and Hagan Properties, Inc. Hagan signed the Global Settlement on Signature Point's behalf and Maria Bouvette signed it on PBI's behalf.

Signature Point hoped that the additional infusion of cash from the new $2.7 million non-revolving loan would allow it to market the already constructed condominiums and generate some sales to repay the loans and keep the project moving. It did not. As occurred all over the nation, the local real estate market hit rock bottom. The condominium market was hit especially hard. Mr. Hagan testified that most consumers were not interested in buying condominiums at that time, and the few that were interested generally could not obtain financing. In short, while Signature Point had completed several condominiums, it was unable to sell them despite its additional marketing efforts.

As already noted, pursuant to the Development and Construction Loan Agreement, the principal payments due from Signature Point to PBI were tied heavily to the sale of the condominium units. Since no condominium units were being sold, PBI's loans to Signature Point were not generating anything besides limited interest payments. Additionally, it appeared unlikely that Signature Point would be able to pay off the $2.7 million loan that PBI made to it as part of the Global Settlement when it came due in March of 2010.

On February 10, 2010, Bouvette telephoned Greg Isaacs, Signature Point's accountant, to discuss the PBI loans. Bouvette told Isaacs that the bank regulators had classified the Signature Point loan as "nonperforming." Bouvette informed Isaacs that PBI would not be able to agree to extend the $2.7 million loan from the prior year, and that she had been severely criticized for the way she handled the extension the previous March. Bouvette proposed that PBI would be willing to "take the property back" as a deed in lieu of foreclosure rather than have it as a nonperforming loan.⁸ Isaacs communicated Bouvette's interest in taking over the property to Hagan. Hagan expressed interest in accepting the deal if Signature Point could keep the apartment portion of the project.

Between February 17, 2010, and March 29, 2010, the parties negotiated extensively concerning the transfer of the property, particularly the apartment portion. Eventually, they agreed that Signature Point would deed the entire property to PBI in exchange for a full release of all its loan obligations and the personal guarantees. Signature Point would retain only a right of first refusal in the Apartment Tract.

Hagan testified that Bouvette came to his office unannounced on March 30, 2010, asking him to sign the documents necessary to consummate their agreement. Hagan testified that before he did so he asked Bouvette whether PBI knew of anyone interested in buying the Apartment Tract. Hagan testified that Bouvette told him that "no one was interested in the property" and "nobody was negotiating on it." Bouvette testified that she remembered Hagan asking her, "do you know or does the Bank know of anyone else interested in the property?" Bouvette testified, "I remember saying ‘there are no offers on the table that I am aware of. No one has written any offers or put in any amount to buy the property. There are no offers on the table.’ " According to Hagan, Bouvette also assured him that when he was ready to purchase the Apartment Tract, she would make sure that he was able to do so by pushing the deal through PBI's board.

Whether there were any offers on the table was important to Signature Point because it was in the process of applying to receive a loan from the United States Department of Housing and Urban Development ("HUD") to complete construction on the Apartment Tract. Hagan believed the HUD loan would eventually be approved, but might take some time. Because there was no present interest in the property, Hagan surmised that Signature Point would have time to complete the HUD application and approval process before another buyer materialized.

On March 30, 2010, PBI and Signature Point entered into an agreement whereby Signature Point agreed to transfer fee simple title to the entire Signature Point property to PBI, in full satisfaction of all outstanding loan obligations as well as any and all other obligations that Signature Point and the guarantors owed PBI. Under the terms of this agreement, Signature Point would have a right of first refusal for the Apartment Tract for the next year. The right of refusal provision provided: "the Bank shall deliver a copy of the letter of intent pertaining thereto to the Borrowers, and the Borrowers shall have a period of (14) days following receipt of such letter of intent within which to accept such letter of intent and thereafter purchase the Apartment Tract on the same terms and...