Sports South, LLC v. Johnson, II et al
Filing
40
MEMORANDUM OPINION & ORDER: 1) The 27 JOINT MOTION for Judgment on the Pleadings filed by Dfts Earley M. Johnson, II and Jennifer D. Arnett is GRANTED. 2) Pla's claims against Dfts Earley M. Johnson, II and Jennifer D. Arnett are DISMISSED WITH PREJUDICE. 3) Pla's 32 Motion for Summary Judgment as to the claims against Dfts Johnson and Arnett are DENIED AS MOOT. Signed by Judge Joseph M. Hood on 02/27/2014. (KLB) cc: COR
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF KENTUCKY
CENTRAL DIVISION at LEXINGTON
SPORTS SOUTH, LLC,
Plaintiff,
v.
EARLEY M. JOHNSON, II, et al.,
Defendants.
)
)
)
)
)
)
)
)
)
)
)
Action No. 5:13-CV-266-JMH
MEMORANDUM OPINION
AND ORDER
***
This matter is before the Court upon the Joint Motion for
Judgment on the Pleadings [D.E. 27] filed by Defendants Earley
M.
Johnson,
II
and
Jennifer
D.
Arnett.
Plaintiff
filed
a
Response [D.E. 31], and Defendants filed a Reply. [D.E. 34].
This matter being fully briefed, and the Court being otherwise
sufficiently advised, it is ripe for review.
I. Procedural Background
Security Safe Outlet, Inc. was a Kentucky corporation doing
business in Paris, Kentucky. [D.E. 1 at 2; D.E. 10 at 1-2].
Security Safe applied for credit with Plaintiff Sports South,
LLC [D.E. 32-10], and the application was approved. Sports South
avers that it supplied Security Safe with hundreds of pieces of
inventory between March 23, 2012 and December 14, 2012, and sent
multiple invoices for the purchase price of the inventory. [D.E.
1
at
2].
According
to
Sports
South,
an
amount
equal
to
inventory
to
$279,733.25 remains unpaid. [D.E. 1 at 3].
Shortly
Security
after
Safe,
Sports
Johnson,
South
the
began
President
supplying
of
Security
Safe,
and
Arnett, the Vice-President of Security Safe, executed identical
personal guaranties in favor of Sports South, guaranteeing the
debts of Security Safe. Each guaranty provides:
In consideration of Sports South, LLC, at my request,
giving or extending terms of credit to Security Safe
Outlet, Inc. . . . hereinafter called debtor, I hereby
give this continuing guaranty to said transferee or
assigns, for the payment at full list price or any
indebtedness, direct or contingent, of said debtor to
said creditor, up to the amount four hundred thousand
($400,000) DOLLARS, whether due or to be become due
and whether now existing or hereafter arising; and I
hereby bind and obligate myself, my heirs and assigns,
in solido, with said debtor, for the payment of the
said indebtedness precisely as if the same had been
contracted and was due and owing by me in person,
hereby agreeing to and binding myself, my heirs and
assigns, by all the terms and conditions of sale or
contained in any note or notes signed or to be signed
by said debtor, making myself a party thereto; and,
waiving all notice and pleas of discussion and
division, I agree to pay upon demand at any time to
said creditor, its transferees, assigns or successors,
the full list amount of said indebtedness up to the
amount of this guaranty, together with interest,
finance and service charges as set forth hereinabove.
The creditor may extend or modify any obligation of
the debtor one or more times and may surrender any
securities held by it without notice or consent from
me, and I shall remain at all times bound hereby,
notwithstanding such extensions and/or surrender.
It is hereby understood by the undersigned
guarantor that should the total amount due hereunder
remain unpaid by debtor and/or guarantor after the
receipt by debtor and/or guarantor of 10 days written
notice, then and in that event the undersigned
2
guarantor hereby obligates himself to pay twenty-five
(25%) percent of the total amount owed hereunder if
this matter is placed in the hands of an attorney for
collection.
This guaranty shall be a continuing guaranty, and
shall remain in full force and effect until terminated
by written notice upon mutual consent of both the
creditor and debtor by either certified or registered
mail to the said creditor, its transferees or assigns,
but such termination shall not affect or impair any
liability hereunder at the time of such termination. .
. .
[D.E. 1-2 at 2-3]. Sports South claims that it made a demand
upon Defendants to pay the outstanding indebtedness incurred by
Security
Safe,
in
accordance
with
the
above
guaranty,
but
Defendants refused. [D.E. 1 at 3].
Subsequently,
Sports
South
brought
claims
against
Defendants for breach of contract. [D.E. 1 at 3-4]. Defendants
now
bring
their
joint
motion
for
judgment
on
the
pleadings
claiming that the guaranties they executed are not enforceable
under Kentucky law.
II. Standard of Review
“After the pleadings are closed[,] . . . a party may move
for judgment on the pleadings.” Fed. R. Civ. P. 12(c). “For
purposes of a motion for judgment on the pleadings, all wellpleaded material allegations of the pleadings of the opposing
party must be taken as true, and the motion may be granted only
if
the
moving
party
is
nevertheless
clearly
entitled
to
judgment.” JPMorgan Chase Bank, N.A. v. Winget, 510 F.3d 577,
3
581 (6th Cir. 2007) (quoting S. Ohio Bank v. Merrill Lynch,
Pierce,
Fenner
&
Smith,
Inc.,
479
F.2d
478,
480
(6th
Cir.
1973)). “A Rule 12(c) motion is granted when no material issue
of fact exists and the party making the motion is entitled to
judgment as a matter of law.” Id. at 582 (quoting Paskvan v.
City of Cleveland Civil Serv. Comm’n, 946 F.2d 1233, 1235 (6th
Cir. 1991)) (internal quotation marks omitted).
III. Analysis
The guaranties signed by Defendants do not comply with the
requirements for a guaranty of indebtedness set out by Kentucky
statute. Therefore, Defendants’ Joint Motion for Judgment on the
Pleadings must be granted.
The applicable statute provides:
No guaranty of an indebtedness which either is not
written on, or does not expressly refer to, the
instrument or instruments being guaranteed shall be
valid or enforceable unless it is in writing signed by
the guarantor and contains provisions specifying the
amount of the maximum aggregate liability of the
guarantor thereunder, and the date on which the
guaranty terminates.
KRS
371.065(1).
guarantee
To
“must:
be
(1)
enforceable
be
written
guaranteed;
or
(2)
expressly
guaranteed;
or
(3)
be
provisions
specifying
the
on
refer
signed
by
amount
under
to
the
of
the
the
Kentucky
a
instrument
being
instrument
being
guarantor
the
law,
and
maximum
contain
aggregate
liability and the date on which the guaranty terminates.” BP
4
Prods. N. Am. Inc. v. McGuirk Oil Co., No. 1:10-cv-89-JHM, 2011
WL 2149627, at *3 (W.D. Ky. June 1, 2011) (citing Wheeler &
Clevenger Oil Co. v. Washburn, 127 S.W.3d 609 (Ky. 2004)). The
interpretation of the guaranty and statute is a question of law
for the Court to decide. See Smith v. Bethlehem Sand & Gravel
Co., 342 S.W.3d 288, 291 (Ky. Ct. App. 2011) (citing Cumberland
Valley Contrs., Inc. v. Bell Cnty. Coal Corp., 238 S.W.3d 644,
647 (Ky. 2007)) (deeming whether a guaranty agreement complied
with KRS 371.065 to be a question of law for the courts).
The parties acknowledge that the guaranties are not written
on the instrument they guarantee. [D.E. 27-1 at 4] (“[T]hey are
not written on the instrument that they purport to guarantee.”);
[D.E. 31-1 at 7 n.17] (stating that there are three methods to
enforce a guaranty, but the only method at issue is the express
reference to the instrument guaranteed). Additionally, Plaintiff
does not argue that the guaranties specify the maximum aggregate
liability and the date on which the guaranties terminate, see
[D.E. 31-1 at 7 n.17], and the Court finds that there is no
termination date within the guaranty. See McGuirk Oil Co., 2011
WL 2149627, at *4 (“An unlimited guaranty that continues in
perpetuity until the guarantor notifies the guarantee is not one
that contains a provision specifying the date on [which] the
guaranty terminates.”). Thus, in order for the guaranties to be
5
valid, the guaranties must expressly refer to the instrument
being guaranteed.
Plaintiff argues that the guaranties expressly referenced
the instruments they covered through the use of the words “terms
of credit” and “all the terms and conditions of sale.” There is
contention over whether “terms of credit” or “all the terms and
conditions of sale” can be considered an instrument. However,
even assuming “terms of credit” or “all the terms and conditions
of sale” meet the definition of instrument, the guaranties fail
to expressly reference either of these instruments.
A guaranty will meet the express reference requirement when
“either (1) the guaranty itself . . . refer[s] to the instrument
guaranteed, or (2) the guaranty . . . clearly refer[s] to a
document, such as an exhibit or attachment, that references the
instrument guaranteed.” Guangzhou Consortium Display Prod. Co.
v. PNC Bank, N.A., 956 F. Supp. 2d 769, 791 (E.D. Ky. 2013)
(citing Smith v. Bethlehem Sand & Gravel Co., 342 S.W.3d 288
(Ky. Ct. App. 2011); Banterra Bank v. Hendrick, No. 5:09-cv-12TBR, 2011 WL 832455 (W.D. Ky. Mar. 3, 2011)); see also Howson v.
JP
Morgan
4779851
Chase
(Ky.
Ct.
Bank,
N.A.,
No.
App.
Sept.
6,
2012-CA-001217-MR,
2013)
(finding
the
2013
WL
express
reference method was not met where the number of a promissory
note referenced at the top of the guaranty was not expressly
linked to the terms of the guaranty); Alliant Tax Credit Fund
6
31-A, Ltd. v. Murphy, 494 F. App’x 561, 569 (6th Cir. 2012)
(finding the instrument expressly referenced where the guaranty
explicitly
defined
the
term
“Agreement”
as
a
partnership
agreement “dated as of December 8, 2003” and included specific
provisions of that agreement); Wells Fargo Fin. Leasing, Inc. v.
Griffin, No. 5:13-cv-75-TBR, 2013 WL 4776524, at *9 (W.D. Ky.
Sept.
6,
2013)
instrument
(“The
purportedly
Guaranties’
guaranteed
only
is
reference
to
the
to
the
‘lease/rental
agreement,’ but that term is not defined and there is no further
description of what lease/rental agreement the Guaranties refer
to.”). The guaranties executed by Defendants do not expressly
refer to the instrument guaranteed, either within the guaranties
themselves or by referencing external documents, and, thus, the
guaranties are not enforceable under Kentucky law.
Neither
sale”
were
“terms
of
credit”
defined
in
the
nor
“terms
guaranties
and
conditions
themselves
or
of
another
document referenced by the guaranties. In Alliant Tax Credit
Fund 31-A, Ltd. v. Murphy, an express reference was found where
the
guarantee
General
Partner
“explicitly
under
the
‘guarantee[d]
Agreement,’
obligations
where
the
of
the
‘Agreement’
[was] defined as the ‘Amended and Restated Agreement of Limited
Partnership dated as of December 8, 2003.’” 494 F. App’x 561,
569
(6th
Cir.
2012).
Similarly,
our
sister
court
express reference where the term “Note” was defined as
7
found
an
[t]he promissory note from Borrower to Lender, bearing
the same dates as this mortgage in the original amount
equal to the maximum lien amount of this mortgage,
together will all renewals or replacements of,
extensions of, modifications of, refinancings of,
consolidations
of,
and
substitutions
for
the
promissory note or agreement.
Banterra Bank v. Hendrick, No. 5:09-cv-12-TBR, 2011 WL 832455,
at *9 (W.D. Ky. Mar. 3, 2011). The court also noted that the
guaranty, promissory note, and mortgage were all dated October
30, 2006, with the mortgage expressly referring to the maximum
line of credit. Id. There is no definition of “terms of credit”
or “all the terms and conditions of sale” in the guaranties
executed by Defendants. Additionally, there has been no evidence
presented
that
the
credit
instrument
and
guaranties
were
attached. See Brunswick Bowling & Billiards v. Ng-Cadlaon, No.
2010-CA-001844-MR, 2011 WL 5244971, at *2 (Ky. Ct. App. Nov. 4,
2011) (“By contrast, the guaranty signed by Ng-Cadlaon was not
attached to the note.” (citing Alliant Tax Credit Fund 31-A,
Ltd. v. Nicholasville Cmty. Hous., L.L.C., 663 F. Supp. 2d 575
(E.D.
Ky.
either
2009))).
guaranty,
Thus,
or
an
there
is
no
language
attachment
to
either
contained
guaranty,
in
that
allows the Court to determine to what instrument or document
“terms of credit” or “all the terms and conditions of sale”
refers.
The
facts
at
hand
most
resemble
those
of
Wells
Fargo
Financial Leasing, Inc. v. Griffin, where the court found that
8
the guaranty could not be enforced. No. 5:13-cv-75-TBR, 2013 WL
4776524, at *9 (W.D. Ky. Sept. 6, 2013).
The Guaranties’ only reference to the instrument
purportedly
guaranteed
is
to
the
“lease/rental
agreement,” but that term is not defined and there is
no further description of what lease/rental agreement
the Guaranties refer to. The Guaranties make no
reference to, or mention of, the parties to that
lease/rental agreement, nor is there any reference to
the date of that lease/rental agreement, its terms or
provisions, or any other information to give any
specificity
to
what
lease/rental
agreement
the
Guaranties purport to guarantee.
Id. Here, the agreement specifies the parties to the “terms of
credit” agreement, but that is all. At most, this creates an
inference of the debts Defendants agreed to guarantee, but a
mere inference does not amount to an express reference. See id.
(“[A]t
best
[the
Guaranties
were
under
Master
the
insufficient
to
facts]
intended
support
to
guarantee
Agreements;
satisfy
§
the
however,
inference
SE
Book’s
such
371.065(1)’s
an
that
the
obligations
inference
requirement
is
that
a
guaranty expressly refer to the instrument being guaranteed.”).
Furthermore, that Sports South and Security Safe had an
agreement that falls into one of the broad categories described
in the guaranties is of no consequence.
The guaranty signed by [defendant] does not expressly
refer to the instrument being guaranteed but rather
binds her to a broad range of potential present and
future obligations. The fact that the note at issue
falls within one of the categories of obligations
listed in the guaranty is insufficient in itself to
constitute an express reference.
9
Brunswick Bowling, 2011 WL 5244971, at *2.
Moreover, Plaintiff does not argue that it had a single
all-encompassing credit agreement with Security Safe to which
the phrase “terms of credit” or “all the terms and conditions of
sale” applies. Rather, Plaintiff argues that “[t]he Invoices are
the instruments that set forth the indebtedness based on ‘all
the terms and conditions of sale’ arising from Sports South’s
extension of its ‘terms of credit’ to Security Safe as set forth
in the instruments governing Security Safe’s account with Sports
South.” [D.E. 31-1 at 11]. The Kentucky Court of Appeals has
found there was no express reference to an instrument being
guaranteed when the guaranty explicitly listed the borrower and
loan number of the loan guaranteed, but had “no language linking
the terms of the guaranty agreement to the reference number or
the promissory note.” Howson, 2013 WL 4779851, at *2. In the
face of this case law, the Court cannot find that the generic
phrases “terms of credit” and “all the terms and conditions of
sale” linked the terms of the guaranty agreements to multiple
documents created on multiple days, especially given that no
account
provided
number
to
is
the
referenced
Court
in
evidences
either
that
guaranty
any
of
and
the
nothing
multiple
documents to which Plaintiff refers were actually titled “terms
of credit” or “all the terms and conditions of sale.”
10
Plaintiff also argues that the parties knew the debts the
guaranties were intended to cover, and, thus, extrinsic evidence
should
be
express
allowed,
reference.
which
The
would
Court
allow
finds
the
this
Court
to
find
unpersuasive,
an
as
a
similar argument has been rejected by the Kentucky Court of
Appeals.
[Guarantee] contends that [guarantor] knew very well
what she was signing and that she cannot pretend that
she did not know the nature or extent of her liability
under the guaranty. But if the guaranty is indeed
unambiguous, we may not consider extrinsic evidence
such as what [guarantor] knew or intended when she
signed the guaranty. . . . Moreover, [guarantees] were
free to draft the guaranty with sufficient specificity
to comply with the requirements of KRS 371.065(1).
Brunswick Bowling, 2011 WL 5244971, at *2).
Both guaranties appear to be boilerplate, and each guaranty
has a portion of the boilerplate provisions crossed out. [D.E.
1-2 at 2-3]. Plaintiff argues that the Court should look at the
crossed out portions because the crossed out terms match the
terms on which financing was extended to Security Safe. [D.E.
31-1 at 10]. However, these terms, as they were crossed out, did
not
become
part
of
the
agreement
between
Plaintiff
and
Defendants. The Court does not find, and Plaintiff does not
argue, that the agreement is ambiguous. Therefore, these crossed
out provisions are extrinsic evidence that cannot be considered
by the Court. See Frear v. P.T.A. Indus., Inc., 103 S.W.3d 99,
106
(Ky.
2003)
(“‘[I]n
the
absence
11
of
ambiguity
a
written
instrument will be enforced according to its terms,’ and a court
will interpret the contract’s terms by assigning language its
ordinary
meaning
and
without
resort
to
extrinsic
evidence.”
(citations omitted)).
Plaintiff’s final argument, that the statute is a consumer
protection
provision
and
should
not
be
used
to
protect
Defendants from their obligations, is similarly without merit.
In
making
this
interpretation
argument,
of
a
Plaintiff
Kentucky
relies
Court
of
on
this
Appeals
Court’s
decision,
Intercargo Insurance Co. v. B.W. Farrell, Inc., 89 S.W.3d 422.
See [D.E. 31-1 at 7]; Alliant Tax Credit Fund 31-A, Ltd. v.
Murphy, 663 F. Supp. 2d 575, 581 (E.D. Ky. 2009) (“The court
rejected
an
argument
that
‘the
legislature
also
intended
to
protect sophisticated businessmen and corporate executives from
their own promises when they pledge their individual assets to
secure
performance
bonds
for
their
corporate
ventures.’”
(quoting Intercargo, 89 S.W.3d at 426))). However, this is only
persuasive authority when interpreting the Kentucky statute. See
Taylor Steel, Inc. v. Keeton, 417 F.3d 598, 608 (6th Cir. 2005)
(“When and how state law applies to a particular case is a
matter on which the state supreme court has the last word. We
only anticipate how the state’s supreme court would rule on an issue of state law when the law is unsettled.”).
12
The Kentucky Supreme Court has interpreted the statute as
applying to “all guaranties.” Wheeler & Clevenger Oil Co., Inc.
v. Washburn, 127 S.W.3d 609, 613 (Ky. 2004). Additionally, the
only portion of the statute that the Kentucky Supreme Court
explicitly
called
a
“consumer-protection
provision”
was
the
provision allowing for compliance with the statute by stating
the
maximum
aggregate
liability
and
termination
date
in
the
guaranty. Id. at 615 (“KRS 371.065’s requirement that a guaranty
state
the
guarantor’s
maximum
liability
and
the
guaranty’s
termination date is a consumer-protection provision . . . .”).
Plaintiff itself noted that this provision was not applicable to
this case [D.E. 31-1 at 7 n.17], so the portion of the statute
specifically meant to protect consumers is not at issue.
Furthermore, Intercargo does not stand for the proposition
that all guaranties executed by sophisticated businessmen are
valid, without regard to the requirements of KRS 371.065. In
Intercargo, the court did state that the statute was not meant
to provide sophisticated businessmen “carte blanche to renege on
their contractual obligations.” Intercargo Ins. Co., 89 S.W.3d
at 427. However, this cannot be read as stating that the statute
only applies to consumers because the Kentucky Court of Appeals
had previously noted, in the same paragraph, that the purpose of
the statute was “to protect persons or entities who guarantee
the extension of credit to third persons . . . .” Intercargo, 89
13
S.W.3d at 427 (emphasis added). The Kentucky Court of Appeals
could not have meant that the statute only applied to consumers
when it explicitly stated one purpose of the statute was to
protect entities. See Black’s Law Dictionary 139 (3d pocket ed.
2006)
(“consumer.
A
person
who
buys
goods
or
services
for
personal, family, or household use, with no intention of resale;
a natural person who uses products for personal rather than
business purposes.”). Based on the foregoing, the Court will not
read Intercargo to mean that a guaranty wholly failing to make
an attempt to comply with KRS 371.065 should be upheld merely
because a sophisticated business person is involved, especially
when the party drafting the guaranty in contravention of the
plain
language
of
the
statute
is
an
equally
sophisticated
business entity.
IV. Conclusion
Accordingly, for the foregoing reasons, IT IS ORDERED:
(1)
that the Joint Motion for Judgment on the Pleadings
[D.E. 27] filed by Defendants Earley M. Johnson, II and Jennifer
D. Arnett shall be, and the same hereby is, GRANTED;
(2)
that Plaintiff’s claims against Defendants Earley M.
Johnson, II and Jennifer D. Arnett be, and the same hereby are,
DISMISSED WITH PREJUDICE;
14
(3)
that Plaintiff’s Motion for Summary Judgment as to the
claims against Defendants Earley M. Johnson, II and Jennifer D.
Arnett [D.E. 32] be, and the same hereby is, DENIED AS MOOT.1
This the 27th day of February, 2014.
1
Plaintiff’s Motion for Summary Judgment as to the claims
against Defendant Security Safe Outlet, Inc. [D.E. 32] remains
pending.
15
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?