Associates First Capital Corporation v. Hensley

Filing 7

MEMORANDUM OPINION: the bankruptcy court's order granting summary judgment to the Hensleys & the order denying Associates First's motion to alter, amend or vacate the original order are AFFIRMED. Signed by Judge Karen K. Caldwell on 8/22/13.(KJR)cc: COR, Bankruptcy Court

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF KENTUCKY
CENTRAL DIVISION AT LEXINGTON

IN RE: LARRY WILSON HENSLEY,
NANCY CAROL HENSLEY

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LARRY HENSLEY and NANCY C. HENSLEY )
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PLAINTIFFS/APPELLEE
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v.
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ASSOCIATES FIRST CAPITAL CORPORATION )
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DEFENDANT/APPELLANT
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CIVIL ACTION NO. 5:13-04-KKC

MEMORANDUM OPINION

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The Appellant, Associates First Capital Corporation, appeals the order denying its motion
to alter, amend, or vacate its opinion and judgment entered by the United States Bankruptcy
Court, Eastern District of Kentucky, in Bankruptcy Matter No. 11-50642. The original opinion
and judgment granted summary judgment in favor of the Appellees, Larry W. Hensley and
Nancy C. Hensley. For the following reasons, the Court affirms the bankruptcy court’s orders.
I.

Facts and Procedural Background
On August 21, 1991, the Appellees, Larry W. Hensley and Nancy C. Hensley, purchased

two parcels of real estate: (1) a residential property located at 1083 Winchester Road, Irvine,
Kentucky, and (2) a commercial property located at 1055 Winchester Road, Irvine, Kentucky.
The Hensleys purchased each parcel from different sellers, but they funded the purchases with
one $80,000 loan from Harlan National Bank, which was then known as Union Bank and Trust
Company. A mortgage against both properties secured the repayment of the loan. In March
2000, the Hensleys refinanced the Harlan National Bank loan with Kentucky Finance Company,

Inc.

It is this transaction that is now in dispute.

The mortgage prepared as part of the

refinancing transaction lists the Hensleys’ address as 1055 Winchester Road, Irvine, Kentucky,
the commercial property, but contains only a legal description of 1083 Winchester Road, the
residential property, as the consideration for the loan. The Appellant, Associates First, now
holds the note and mortgage from this refinancing transaction.
On February 10, 2010, CitiFinancial Services, Inc., filed a foreclosure action against the
Hensleys and others in Estill Circuit Court. Associates First was substituted as plaintiff on
October 7, 2010. The Hensleys answered the amended complaint on October 26, 2010, and filed
an amended answer on November 9, 2011. After Citizens Guaranty Bank, a judgment lien
holder in the case, moved for summary judgment, the Estill Circuit Court entered a judgment for
sale on January 7, 2012. The Estill County Master Commissioner set a sale date of March 11,
2011 for both Hensley properties. On March 4, 2011, the Hensleys filed a voluntary petition
under Chapter 7 of the Bankruptcy Code.

Associates First filed its proof of claim in the

bankruptcy case and asserted a mortgage lien against both properties. The Hensleys objected,
and the adversary proceeding in bankruptcy court followed. Larry W. Hensley died on March
19, 2012, and Nancy C. Hensley became the fee simple owner of both properties by reason of the
survivorship clause contained in each deed.1
The issue before the bankruptcy court was the scope of the mortgage held by Associates
First. On September 6, 2012, the bankruptcy court granted the Hensleys’ summary judgment
motion and entered a judgment declaring the mortgage held by Associates First is secured only
by a security interest in the real property located at 1083 Winchester Road, Irvine, Kentucky.
The bankruptcy court held that Associates First’s state cause of action for mortgage reformation
– filed in an amended complaint in October 2010 – was barred by the statute of limitations.
1

For consistency, the Court will continue to refer to the Appellees as the “Hensleys.”

2

Associates First moved the bankruptcy court to alter, amend, or vacate its opinion and judgment.
On November 16, 2012, the bankruptcy court denied that motion, and this appeal followed.
II. Jurisdiction and Standard of Review
A federal district court has jurisdiction to hear appeals from “final judgments, orders, and
decrees” of the bankruptcy court. 28 U.S.C. § 158(a). On appeal, a district court reviews the
bankruptcy court’s finding of fact under a clearly erroneous standard, but reviews de novo the
bankruptcy court’s conclusions of law. Nicholson v. Isaacman (In re Isaacman), 26 F.3d 629,
631 (6th Cir. 1994). Most, if not all, facts are undisputed. Therefore, the Court will review de
novo the bankruptcy court’s conclusions of law.
Both Associates First and the Hensleys requested that no oral argument be had in this
matter, and the Court agrees that oral argument would be unnecessary. Fed. R. Bankr. P. 8012.
III. Analysis
Associates First challenges the bankruptcy court’s decision in multiple ways. Initially,
Associates First argues that the bankruptcy court erred in determining Associate First’s state
court cause of action for mortgage reformation was time barred. Under Kentucky law, an action
for reformation of a mortgage based on mistake “shall be commenced within five (5) years after
the cause of action accrued ….” K.R.S. § 413.120(12). The action is not deemed to accrue until
the discovery of the mistake; “[h]owever, the action shall be commenced within ten (10) years
after the time of making the contract or the perpetration of the fraud.” K.R.S. § 413.130(3). The
mortgage at issue here was executed on March 31, 2000. The original state court complaint was
filed on February 10, 2010. Associates First made its claim for reformation in an amended
complaint filed on October 11, 2010 in state court – after the end of both the five- and ten-year
limitations periods.

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Associates First argues that its claim for reformation falls within the ten-year statute of
limitations because the claim should relate back to the date when the original complaint was
filed. As the bankruptcy court noted, however, Associates First has not made any arguments to
justify an extension of the five-year limitations period, which ended on March 31, 2005. “The
five-year statute of limitations set forth in K.R.S. § 413.120(12) does not commence to run until
the alleged fraud or mistake is discovered or, in the exercise of reasonable diligence, should have
been discovered.” Hernandez v. Daniel, 471 S.W.2d 25, 26 (Ky. 1971). In other words, “if the
five year period is allowed to elapse, the plaintiff must allege and prove that the fraud or mistake
was not only not discovered within the period, but also that the same could not have been
discovered sooner by the exercise of reasonable diligence.” McCoy v. Arena, 174 S.W.2d 726,
729 (Ky. 1943). See also Madison Cnty. v. Arnett, 360 S.W.2d 208, 210 (Ky. 1962); Martin et
al. v. Wagers et al., 220 S.W.2d 580, 581 (1949). Associates First has not made any argument as
to why the mistake could not have been discovered before the five-year limitations period ended
on March 31, 2005. Associates First’s amended complaint in state court does not allege an
inability to discover the mistake. The counterclaim filed in the bankruptcy court adversary
proceeding also lacks an allegation on this issue. There was no proof offered on the issue of
discovery. As a result, the action was barred on March 31, 2005.2
Next, Associates First argues that, even if a limitations period applies, the Hensleys are
barred from raising this defense in bankruptcy court because they had not done so in state court.
Associates First contends that the Hensleys cannot assert the statute of limitations as a defense
2

The bankruptcy court’s original Memorandum Opinion and Order gave Associates First the benefit of K.R.S §
413.130(3) and determined Associates First was still too late even applying the ten-year limitations period. This
Court, however, may affirm the bankruptcy court’s decision “for any reason,” even if “an issue [was] not raised or
considered below.” Resolution Trust Corp. v. Moreland (In re Moreland), 21 F.3d 102, 104 (6th Cir. 1994)
superseded by statute on other grounds, Bankruptcy Reform Act of 1994. In this case, the bankruptcy did consider
the shorter period, and even suggested that it likely applied when denying the motion to alter, amend, or vacate.
(DE 1-5, Memorandum Opinion and Order at 3).

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because it is an affirmative defense and they waived it by failing to plead it in an answer or a
motion to dismiss. See Ky. Civ. R. P. 8.03 and 12.02; Com., Dep’t of Highways v. Chinn, 350
S.W.2d 622, 623 (Ky. 1961) (“Ordinarily … a statute of limitation must be pled and a failure so
to do constitutes a waiver of that defense.”). When the Hensleys pursued the adversary
proceeding in bankruptcy court, however, they did assert the statute of limitations as a bar to
Associates First’s attempts to reform the mortgage.
While the Henlseys had not raised the statute of limitations in state court, this failure does
not affect their ability to rely on the defense in bankruptcy court. First, the state court did not
actually decide Associates First’s claim against the Hensleys.

See Yeoman v. Com., Health

Policy Bd., 983 S.W.2d 459, 464-65 (Ky. 1998) (explaining the principles of res judicata).
Second, there are many exceptions to the rule that “ordinarily” the defense is waived, including
Kentucky Rule of Civil Procedure 15.01, which states that leave to amend shall be freely given
when justice so requires. See Farmers Crop Ins. Alliance, Inc. v. Gray, No. 2009-CA-000969MR, 2010 WL 5018284, at *3 (Ky. Ct. App. Dec. 10, 2010); Burns v. Capitol Beverage Co., 472
S.W.2d 510, 511 (Ky. 1971); Caldwell v. Bethlehem Mines Corp., 455 S.W.2d 67, 68 (Ky.
1970); Curry v. Cincinnati Equitable Ins. Co., 834 S.W.2d 701, 704 (Ky. Ct. App. 1992).
Justice favors amendment especially when there is no prejudice. “Where no prejudice results to
the adverse party, the Statute of Limitations can be subsequently pleaded in an amended answer,
and there is no waiver of such defense if the answer is properly amended to include it.”
Eastridge v. Fruehauf Corp., 52 F.R.D. 129, 131 (W.D. Ky. 1971) (nothing that Federal Rule of
Civil Procedure 15 and Kentucky’s parallel Rule 15.01 allow amendment “even after
judgment”).

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Associates First relies on unpublished Kentucky Court of Appeals case for the
proposition that amendment would not be allowed to add a statute of limitations defense. Postal
Enterprizes, LLC v. Salas Enter. Corp., No. 2009-CA-000488-MR, 2009 WL 4723242, at *3
(Ky. Ct. App. Dec. 11, 2009). The facts of the unpublished case, Postal Enterprizes, LLC v.
Salas Enterprises Corporation, are different. In Postal, the trial court had first entered a default
judgment against the defendant. Postal, 2009 WL 4723242 at *2. More than thirty days later,
the defendant successfully moved to set that judgment aside. Id. Even later, after filing an initial
answer, the defendant moved to file an amended answer asserting a limitations defense. Id. The
trial court granted leave to amend over the plaintiff’s objection. Id. On appeal, the Kentucky
Court of Appeals found it was an error to allow amendment under those circumstances. Id. at *3.
These are far from the facts of the matter before this Court.
Furthermore, there is published and contrary authority on this issue. Kentucky’s highest
court held that “a defendant may amend his answer at any time before judgment to plead
limitation.” Wyrick v. Wyrick, 243 S.W.2d 1004, 1007 (Ky. 1951) (citing Brock v. Turner Fuel
Co., 178 S.W.2d 427, 428 (Ky. 1944)). When interpreting the parallel Federal Rule of Civil
Procedure, the Court of Appeals for the Sixth Circuit similarly concluded that “[s]imply put,
Rule 15(a) allows a party to amend his pleading to assert an omitted affirmative defense[.]”
Phelps v. McClellan, 30 F.3d 658, 662-663 (6th Cir. 1994). Therefore, there is no reason to
conclude that the Hensleys had lost their ability to litigate a legitimate defense in bankruptcy
court.
Finally, Associates First argues that the bankruptcy court failed to address its claim for
equitable subrogation. After considering the doctrine of equitable subrogation, and the applicable
case law, the bankruptcy court found the facts of this case were not appropriate for the doctrine’s

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application. “Equitable subrogation permits a creditor who pays the debt of another to stand in
the shoes of the original creditor, enjoying all rights and remedies of the original creditor.”
Mortgage Elec. Registration Sys., Inc. v. Roberts, 366 S.W.3d 405, 408 (Ky. 2012) (quoting
Wells Fargo Bank, Minn., N.A. v. Com., Fin. and Admin., Dept. of Revenue, 345 S.W.3d 800,
806 (Ky. 2011)). Specifically, the bankruptcy court found that the commercial property, 1055
Winchester Road, “is not encumbered solely because Associates First failed to include
information regarding the Commercial Property in the mortgage document.”

(DE 1-3,

Memorandum Opinion and Order at 7). Moreover, the bankruptcy found “there is no intervening
lien or other lienholder claiming priority.” (Id.). Thus, equitable subrogation was not applicable
to this set of facts.

While Associates First may disagree with the conclusion, this was

appropriate analysis.

Because the bankruptcy court addressed the application of equitable

subrogation, there is no reason to remand the matter to have it addressed again.
IV. Conclusion
Accordingly, for all these reasons, the bankruptcy court’s order granting summary
judgment to the Hensleys and the bankruptcy court’s order denying Associates First’s motion to
alter, amend, or vacate the original order are AFFIRMED.
This 22nd day of August, 2013.

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