Peoples Bank v. Crowe Chizek and Co., No. 2007-CA-001174-MR.

• Decision Date: 06 June 2008
• Docket Number: No. 2007-CA-001174-MR.
• Citation: 277 S.W.3d 255
• Parties: PEOPLES BANK OF NORTHERN KENTUCKY, INC.; PBNK, Inc., f/k/a Bancorporation of Northern Kentucky, Inc., Appellants, v. CROWE CHIZEK AND COMPANY LLC; William B. Brizendine, Appellees.
• Court: Kentucky Court of Appeals

277 S.W.3d 255

PEOPLES BANK OF NORTHERN KENTUCKY, INC.; PBNK, Inc., f/k/a Bancorporation of Northern Kentucky, Inc., Appellants, v. CROWE CHIZEK AND COMPANY LLC; William B. Brizendine, Appellees.

No. 2007-CA-001174-MR.

Court of Appeals of Kentucky.

June 6, 2008.

Rehearing Denied September 9, 2008.

Discretionary Review Denied by Supreme Court March 11, 2009.

Ronald R. Parry, Covington, KY, for appellant.

Gary L. Prior, J. Jeffrey Patton, Daniel I. Konieczny, Chicago, IL, Henry E. Kinser, Virginia Hamilton Snell, Lexington, KY, for appellees.

Before COMBS, Chief Judge; ACREE and WINE, Judges.

OPINION

WINE, Judge.

Peoples Bank of Northern Kentucky, Inc., and PBNK, Inc., f/k/a Bancorporation of Northern Kentucky, Inc. (collectively "PBNK") appeals from summary judgments of the Boone Circuit Court dismissing its complaint against Crowe Chizek and Company, LLC ("Crowe Chizek") and William B. Brizendine ("Brizendine"). We agree with PBNK that summary judgment was not appropriate on its claims for professional negligence and breach of fiduciary duty as these claims were not barred by the statute of limitations or by the release contained in the contracts between PBNK and Crowe Chizek. Furthermore, the contracts do not bar all of PBNK's claims for consequential and punitive damages arising from Crowe Chizek's negligence. We also find that PBNK has presented sufficient evidence of gross negligence to create a jury issue for punitive damages. However, we agree with the trial court that PBNK is not entitled to recover its claimed check conversion damages because those losses were not proximately caused by any negligence of Crowe Chizek. We also find that summary judgment was appropriate on PBNK's claims of aiding and abetting liability because Crowe Chizek's alleged negligence does not meet the requirements for civil conspiracy. Finally, we find that summary judgment was appropriate on PBNK's claims under Kentucky Revised Statute ("KRS") 271B.8-300, but that statute may be relevant to any defenses based on comparative fault and as a defense to Crowe Chizek's third-party claims. Hence, we affirm in part, reverse in part, and remand for further proceedings on the merits of the remaining claims.

For purposes of this appeal, the following facts are not in dispute: PBNK was organized in 1992. John O. Finnan served as president and chief executive officer of PBNK from its inception until April 2002. Marc Menne worked for PBNK during the same period, first as senior vice-president in charge of commercial lending and later as executive vice-president in charge of commercial lending. Both Finnan and Menne were also members of the board of directors of PBNK.

In 1996, Eskew and Gresham, P.S.C., became the accountants and auditors for PBNK. Brizendine was a partner with Eskew and Graham and had primary responsibility for providing independent accounting and auditing services to PBNK. In 1998, Crowe Chizek acquired the assets of Eskew and Gresham. As a result of the merger, Brizendine became a partner with Crowe Chizek and he continued to be primarily responsible for providing services to PBNK.

During this period, PBNK's largest loan customer was real estate developer William Erpenbeck and the entities he controlled (collectively "Erpenbeck"). Finnan and Menne supervised Erpenbeck's loan activities for the bank. In addition, they began to develop a close friendship with Erpenbeck, frequently traveling and vacationing with him. In addition, Erpenbeck built houses and sold them to Finnan and Menne for below cost.

In December 1997, Finnan and Menne, along with their spouses, created JAMS Properties, LLP ("JAMS"), a limited partnership specifically organized to purchase model homes from Erpenbeck entities. Typically, JAMS would purchase model homes or condominiums from Erpenbeck at cost, but would create fictitious purchase contracts showing a much higher purchase price. The parties would then go to banks other than PBNK to obtain mortgages for the amounts stated on the fictitious purchase contracts. To obtain these mortgages, JAMS submitted fraudulent HUD statements to the lending banks. The excess loan proceeds would then be divided between Erpenbeck and JAMS. Thereafter, Erpenbeck would rent the properties from JAMS, which would use the rental payments to pay the mortgages. From December 1997 through 2000, JAMS purchased twenty-five properties from Erpenbeck and borrowed a total of $505,950.00 in excess of the actual purchase prices of these properties. By 2000, JAMS had a total mortgage indebtedness of nearly $3.9 million and was financially dependent upon Erpenbeck.

Finnan and Menne hired Crowe Chizek in March 1998 to perform tax services for JAMS. Brizendine served as engagement partner for Crowe Chizek's dealings with JAMS. Crowe Chizek prepared tax returns for JAMS for the tax years 1997 through 2001. JAMS maintained all of its bank accounts with PBNK during this period.

Beginning in January 2000, Erpenbeck began to deposit checks into his PBNK account that were payable to other individuals, entities or banks. This conduct continued until late March of 2002, when it was discovered by PBNK. In early 2001, Erpenbeck also caused a kite of insufficient funds checks to be conducted among various accounts, including the account at PBNK. When the kiting scheme was discovered by another bank, Erpenbeck's PBNK account became substantially overdrawn. Finnan and Menne authorized additional loans to Erpenbeck to cover these overdrafts.

In April of 2002, Finnan informed Brizendine of Erpenbeck's check diversion and check kiting schemes. Upon further review of JAMS' tax files, Brizendine discovered the relationship between JAMS and the Erpenbeck-related companies. He advised Finnan to inform the PBNK board of the relationship and potential conflict of interest. Upon learning of the relationship, the PBNK board notified authorities and hired an independent law firm to conduct an internal investigation. The investigations revealed the extent of the dealings between Erpenbeck, JAMS, Finnan and Menne, the extent of the check kiting and check diversion schemes, the post-2001 loans to Erpenbeck, and Erpenbeck's default on the loans from PBNK and other banks. Finnan and Menne resigned their positions shortly thereafter.

The adverse publicity related to the scandal caused many customers to withdraw their funds from PBNK, significantly damaging its reputation and eventually destroying its banking business. PBNK ceased operations in November of 2002 and sold its remaining assets at a substantial loss. Erpenbeck was eventually convicted on numerous federal bank fraud charges. Finnan and Menne later pled guilty to other federal bank fraud charges.

In March of 2003, PBNK filed this action against Crowe Chizek and Brizendine. The complaint, as later amended, asserted causes of action for: (1) aiding and abetting Finnan's and Menne's breaches of fiduciary duty; (2) aiding and abetting Finnan's and Menne's breaches of KRS 286.3-065; (3) professional negligence; (4) breach of fiduciary duty; and (5) violation of KRS 271B.8-300. PBNK sought both compensatory and punitive damages for these claims. The parties conducted substantial discovery over a four-year period.

On March 15, 2007, Crowe Chizek filed six motions: (1) motion for summary judgment based on written releases executed by PBNK; (2) motion for summary judgment based on the statute of limitations; (3) motion for summary judgment on PBNK's claim for punitive damages; (4) motion for judgment on the pleadings on PBNK's claim for violation of KRS 271B.8-300; (5) motion for summary judgment on the aiding and abetting counts; and (6) motion for partial summary judgment on PBNK's claims for check conversion losses. After considering the pleadings, record, and arguments of counsel, the trial court entered orders on May 2, 2007, granting all of Crowe Chizek's motions and dismissing PBNK's complaint. This appeal followed.

Since the trial court did not set out its grounds for granting the motions for summary judgment, we shall presume that the court did so for the reasons set out in Crowe Chizek's motions. The standard of review governing an appeal of a summary judgment is well settled. We must determine whether the trial court erred in concluding that there was no genuine issue as to any material fact and that the moving party was entitled to a judgment as a matter of law. Scifres v. Kraft, 916 S.W.2d 779, 781 (Ky.App.1996). Summary judgment is appropriate "if the pleadings, depositions, answers to interrogatories, stipulations, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Kentucky Rules of Civil Procedure ("CR") 56.03.

In Paintsville Hospital Co. v. Rose, 683 S.W.2d 255, 256 (Ky.1985), the Supreme Court of Kentucky held that for summary judgment to be proper, the movant must show that the adverse party cannot prevail under any circumstances. The Court has also stated that "the proper function of summary judgment is to terminate litigation when, as a matter of law, it appears that it would be impossible for the respondent to produce evidence at the trial warranting a judgment in his favor." Steelvest, Inc. v. Scansteel Service Center, Inc., 807 S.W.2d 476, 480 (Ky.1991). Because factual findings are not at issue, there is no requirement that the appellate court defer to the trial court. Goldsmith v. Allied Building Components, Inc., 833 S.W.2d 378, 381 (Ky.1992). "The record must be viewed in a light most favorable to the party opposing the motion for summary judgment and all doubts are to be resolved in his favor." Steelvest, 807 S.W.2d at 480.

PBNK first argues that the trial court erred in dismissing its claims that Crowe Chizek and Brizendine aided and abetted Finnan's and Menne's misconduct. PBNK maintains that Crowe Chizek had actual...