VP Louisville, LLC v. NBH Bank, N.A.
Filing
21
MEMORANDUM OPINION AND ORDER GRANTING MOTION TO DISMISS signed by Judge Claria Horn Boom on 11/6/2019. Granting 5 Motion to Dismiss for Failure to State a Claim. A separate judgment shall enter. cc: Counsel(KJA)
UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF KENTUCKY
LOUISVILLE DIVISION
VP LOUISVILLE, LLC,
)
)
)
)
)
)
)
)
)
Plaintiff,
v.
NBH BANK, N.A.,
Defendant.
***
***
Civil Action No. 3:17-CV-621-CHB
MEMORANDUM OPINION AND
ORDER GRANTING MOTION TO
DISMISS
***
***
This matter is before the Court on the Defendant’s Motion to Dismiss for Failure to State
a Claim [R. 5]. For the reasons set forth below, the Court will grant the motion.
I.
Background
This case is the latest volley in a long history of protracted litigation between the parties.
Briefly, the relevant facts are as follows. On October 29, 2012, the parties executed a settlement
agreement resolving a foreclosure action which NBH Bank, N.A. (“NBH”) had brought against
VP Louisville, LLC (“VP Louisville”) in Jefferson Circuit Court (the “state court action”)
relating to a $4,550,000.00 loan NBH had made to VP Louisville. [R. 5-13 p. 3] At the time of
the execution of the settlement agreement, the subject property of the foreclosure action, a hotel,
was under a court-appointed receivership administered by Smiling Hospitality, Inc. (“Receiver”)
(which was appointed as Receiver by the state court on July 12, 2012). [R. 5-12 p. 2] The
settlement agreement included two provisions important to this case: 1) a mutual release of “any
claims, demands, obligations, liabilities of [sic] causes of action relating to the Loan, the Loan
Documents, the Kentucky Litigation,” and another lawsuit not relevant here; and 2) a provision
stating that upon timely payment by VP Louisville of the “Settlement Sum” (the outstanding
-1-
obligations owed by VP Louisville to NBH), “all funds held by the Receiver . . . will be turned
over to the Borrower [VP Louisville].” [R. 9-1 p. 2] The Settlement Sum was payable on
December 14, 2012 (the “Payment Date”). [R. 91 p. 1] The Receiver was not a party to the
Settlement Agreement.
Having already filed regular monthly reports for each of the five months of the
receivership detailing its actions and expenditures, the Receiver filed its final report with the
Jefferson Circuit Court on January 11, 2013 (a month after the Payment Date), with a
supplemental report filed on August 13, 2013. [R. 5-13 p. 3; R. 5-3 p. 2] Nevertheless, the
parties continued litigating over issues relating to the receivership for years, culminating in a
battle over attorney’s fees.
On April 29, 2016, the Jefferson Circuit Court ruled that the attorney’s fees sought by the
Receiver for certain legal services were partly unreasonable, and essentially disallowed
$112,431.00 in fees and expenses to be paid out of the receivership funds. [R. 5-3; R. 5-13 p. 5]
The law firm which performed the legal work and charged these attorney’s fees complied with
this order by refunding the Receiver through a $45,195.00 write-off of unpaid fees, and a
$67,236.00 cash refund. [R. 5-13 p. 5] Before this cash refund, the receivership account had a
zero balance. Id.
The Receiver then filed a motion seeking discharge and asking the court how to disburse
the $67,236.00. [R. 5-13 p. 5] VP Louisville promptly filed a motion requesting that the court
enter an order consistent with the April 2016 order, and claiming that according to its
calculations, the refund amount should be $134,724.39. [R. 5-13 p. 6] NBH did not object to the
refund amount of $112,431.00, but sought a portion of the $67,236.00 (the only cash remaining)
to repay a $60,000.00 loan which it had previously made to the Receiver. Id. On July 22, 2016,
-2-
the court directed the Receiver to pay $60,000.00 to NBH (but did not make both finality
findings under Kentucky Rule of Civil Procedure 54.02). Id.
On August 3, 2016, VP Louisville filed a “Response to Motion to Discharge Receiver
and VP Louisville LLC’s Motion for Attorneys’ Fees, Pre-Judgment and Post-Judgment Interest”
(the “August 2016 VP Louisville Motion”). [R. 5-5] This brief document stated in relevant part
that, based on the Court’s April 29, 2016 order, VP Louisville requested entry of an Order and
Judgment in the amount of $147,126.86, along with interest. [R. 5-5 pp. 2, 3] Because the Court
had directed the Receiver to disburse $60,000.00 to NBH to re-pay the loan, the Receiver had no
funds to defend against VP Louisville’s most recent motion, so NBH agreed, pursuant to a
previous indemnity agreement, that the Receiver could use the $60,000.00 to defend VP
Louisville’s latest motion. The Jefferson Circuit Court denied the August 2016 VP Louisville
Motion after VP Louisville failed to appear for the hearing convened to hear this motion, and the
Receiver was discharged. [R. 5-6 p. 1]
VP Louisville filed a response to the order discharging the Receiver, and renewed its
August 2016 motion. [5-13 p. 7] The Receiver responded. Id. Then, on October 18, 2016, VP
Louisville filed a second motion, a “Memorandum in Support of Renewed Motion of VP
Louisville LLC’s for Judgment Against Receiver Smiling Hospitality, Inc.,” this time seeking
judgment in the amount of $144,668.03. [R. 5-7] The Jefferson Circuit Court likewise denied
this motion on December 7, 2016, ordering that the Receiver “pay its local counsel [in
accordance with the previous orders], and return any remaining funds in the Receivership
Account to NBH” to pay, in part, the $60,000.00 loan made by NBH to the Receiver. [R. 5-8 p.
1] 1 VP Louisville appealed this order, arguing that the trial court was required to state the
1
It appears that NBH has not been fully repaid for the $60,000.00 loan. [See R. 13 p. 3, n.1]
-3-
evidence upon which it relied in approving the attorney’s fees which it did approve. [R. 5-13 p.
8] In the meantime, VP Louisville filed the instant lawsuit, bringing claims for tortious
interference with prospective business advantage and economic relationships; breach of contract
as to both the letter agreement and the settlement agreement, breach of the covenant of good
faith and fair dealing, and punitive damages. [R. 1] NBH filed a Motion to Dismiss [R. 5]
pursuant to Fed. R. Civ. P. 12(b)(6), arguing that the claim for breach of contract as to the
settlement agreement was issue precluded, and that all the rest of the claims were expressly
released. On June 28, 2019, the Kentucky Court of Appeals affirmed the Jefferson Circuit Court.
[R. 5-13]
II.
Analysis
The Court agrees with NBH that the Complaint fails to state a claim upon which relief
can be granted. VP Louisville claims in Count III that NBH failed to turn over funds held by the
Receiver pursuant to the terms of the Settlement Agreement, that the Receiver spent sums in
violation of the Settlement Agreement, and that the Receiver failed to pay certain operational
costs and property taxes for the hotel. But this breach of contract claim as to the settlement
agreement is premised upon issues that have already been litigated in the state court action and
whose re-litigation is therefore barred by issue preclusion. That is, the state court action already
litigated the issue of the proper disposition of all funds held by the Receiver, including the
refunded attorney’s fees. Similarly, the rest of the claims are barred by the release contained in
the settlement agreement. The court will address first the claim barred by issue preclusion, then
the claims barred by the release.
-4-
A. Issue Preclusion of Count III (Breach of Contract as to the Settlement Agreement)
The parties agree on substantially the same elements of issue preclusion applicable to the
December 7, 2016 state court Order under Kentucky law:
(1) The issue in the second case must be the same as the issue in the first case;
(2) The issue must have been actually litigated
(3) The issue must have been actually decided;
(4) The issue must have been necessary to the court’s judgment [NBH adds “and adverse
to the party to be bound”]; and
(5) At least one party [NBH adds “to be bound in the second case”] must have been a
party in the first action.
See R. 5 p. 8 (citing Preferred Care of Del., Inc. v. Quarles, 2016 U.S. Dist. LEXIS 82239, *7);
R. 9 p. 4 (citing Coomer v. CSX Transp., Inc., 319 S.W.3d 366, 374 (Ky. 2010). VP Louisville
appears to cede that the last factor is met, since it states that the parties here are identical (and
that this is more than issue preclusion requires). [R. 9 p. 4] However, the other factors are
disputed. VP Louisville disagrees that the issue presented by this claim is the same as the issue
in the state court action (and thus necessarily disagrees that the issue was actually litigated,
actually decided, and necessary to the state court’s judgment). Id.
The Court is not persuaded. In its December 7, 2016 order denying VP Louisville’s
second motion seeking judgment related to the Receiver’s attorney’s fees and disbursement of
receivership funds following the order on attorney’s fees, the Jefferson Circuit Court held that
the Receiver was authorized to pay its additional attorney’s fees caused by VP Louisville’s
motions and return any remaining funds in the receivership account to NBH [to re-pay the
$60,000.00 loan NBH made to the Receiver.] The Court also specifically recounted that the
-5-
Receiver was discharged on October 6, 2016, and further found that that the Receiver (along
with its officers, agents, employees, attorneys, and representatives) had “duly and fully complied
with their obligations [in the state court action] and are relieved from all liabilities in connection
with the lawsuit.” [R. 5-13 p. 7] No doubt this is why Plaintiff did not sue the Receiver in this
action.
Further, as recounted by the Kentucky Court of Appeals in its opinion upholding the
order of the Jefferson Circuit Court, the Receiver filed reports every month during the
receivership “detailing its actions during that month.” [R. 5-13 p. 3] The opinion also made clear
that the Receiver had many expenses to pay, as the first Receiver report (filed on July 20, 2012)
“described deplorable conditions at the hotel, including a methamphetamine lab,” and the
Receiver was also entitled to pay reasonable attorney’s fees incurred in the course of the
receivership. [R. 5-13 pp. 3, 2] As mentioned, the Receiver filed its final report on January 11,
2013 (a month after the Payment Date), and a supplemental report filed on August 13, 2013. [R.
5-13 p. 3; R. 5-3 p. 2] Even though VP Louisville objected to every one of the Receiver’s
reports (filing a total of over thirty motions claiming the Receiver engaged in misconduct,
thereby causing the Receiver to incur additional costs in the form of attorney’s fees), “[t]he trial
court at no time found [the Receiver] engaged in any misconduct.” [R. 5-13 p. 3] In other words,
the state court specifically reviewed all amounts spent by the Receiver out of the receivership
account, along with VP Louisville’s objections (which should have covered any objections to
any expenditures from the receivership account), found the expenditures to be proper (with the
exception of some of the attorney’s fees, as discussed) and ordered the remainder of funds, after
payment of the Receiver’s attorney’s fees defending VP Louisville’s additional motions on the
issue, be returned to NBH in partial repayment of its loan to the Receiver. NBH claims that VP
-6-
Louisville did not object to NBH’s motion for the $60,000.00 repayment of NBH’s loan, and that
“[i]t was not until later in the case that VP moved the state court to order [the Receiver] to refund
to VP all of [the] unreasonable attorney fees.” [R. 5 p. 11] But in any event, the state court
clearly noted that the only remaining issue with regard to how the funds in the receivership
account were disbursed was the issue of attorney’s fees. [R. 5-13 p.3]
Thus, it is clear that the parties actually litigated, and the state court’s previous orders
actually decided, the issues of the propriety of the Receiver’s spending of all amounts in the
Receivership Account, and disbursement of all remaining funds on deposit with the Receiver –
both those remaining soon after the Payment Date and those remaining at the very end of the
state court action. Those issues encompass the underlying issue in VP Louisville’s breach of
contract claim based on breach of the settlement agreement – namely, the question of whether
VP Louisville is entitled to funds leftover in the Receivership Account.
VP Louisville cites to authority for the proposition that the “true requirement [for res
judicata to bar a suit] is that the causes of action in the two suits shall be the same.” [R. 9 p. 8
(quoting 3D Enterprises Contracting Corp. v. Louisville & Jefferson Cty. Metro. Sewer Dist.,
174 S.W.3d 440, 448 (Ky. 2005))] However, as NBH points out, that authority appears to be
describing claim preclusion, not issue preclusion (also known as collateral estoppel). Further,
the recent seminal case on claim and issue preclusion under Kentucky law, Miller v. Admin.
Office of Courts, 361 S.W.3d 867 (Ky. 2011), described an identity of the two causes of action as
an element of claim preclusion, but not as an element of issue preclusion. See Miller v. Admin.
Office of Courts, 361 S.W.3d 867, 872 (Ky. 2011). Thus, as the Eastern District of Kentucky has
stated, “Kentucky law does require the application of collateral estoppel, even in cases involving
different causes of action, if the issue was actually litigated in an earlier proceeding.” Mays v.
-7-
Envelope House, No. CIV. A. 86-45, 1987 WL 25631, at *2 (E.D. Ky. Dec. 1, 1987) (citation
omitted). VP Louisville objected to each of the Receiver’s reports. It clearly litigated (and the
state court clearly decided) the propriety of every dollar the Receiver spent, and where the
leftover funds should go. With the exception of a portion of the attorney’s fees, VP Louisville
simply lost. The cash refund of attorney’s fees, totaling $67,236.00, was ultimately spent on
additional attorney’s fees incurred by the Receiver in defending against VP Louisville’s
incessant motions and in partial repayment of NBH’s previous loan to the Receiver. Having
actually litigated these issues, resulting in an actual decision adverse to VP Louisville and
necessary to the judgment by the state court, VP Louisville’s claim is therefore issue precluded.
VP Louisville argues that “[n]one of these motions and resulting orders concerned the
turnover of funds on deposit with the Receiver in December 2012 to [VP Louisville] as provided
for in the Settlement Agreement.” [R. 9 p. 5] Yet the turnover of funds on deposit with the
Receiver to VP Louisville was the exact subject of VP Louisville’s motions for judgment. The
Jefferson Circuit Court denied these motions. As already discussed, not only did the state court
decide the sole remaining issue of the disposition of the leftover attorney’s fees, but VP
Louisville specifically objected to every single one of the Receiver’s reports – including the two
reports that came after the Payment Date and would have necessarily reflected the sums
remaining in the receivership account as of that date.
This issue was also necessary to the state court judgment. VP Louisville cites Miller for
the proposition that it was not, but Miller is distinguishable because in that case, none of the
previous court orders ruled on the merits of the issue in question, with one opinion specifically
declining to do so. Miller, 361 S.W.3d at 875. By contrast, as the Kentucky Court of Appeals
made perfectly clear in its opinion affirming the Jefferson Circuit Court, the only funds
-8-
remaining on deposit with the Receiver at the end of the state court action were the refunded
attorney’s fees. [R. 5-13 p. 5] Thus, contrary to VP Louisville’s assertions, the state court
necessarily did decide that VP Louisville was not entitled to any of the remaining funds, by
denying VP Louisville’s motions for judgment entitling it to those funds – the only funds left to
fight over. Contra R. 9 p. 6. In short, having painstakingly litigated the expenditure of every
receivership dollar throughout the entire length of the receivership and beyond, VP Louisville
cannot now get a “second bite at the apple.”
This case is not like the cases cited by VP Louisville. It is unlike Yeoman v. Com.,
Health Policy Bd., 983 S.W.2d 459 (Ky. 1998), where issue preclusion did not apply because a
new tax law was different from a previous tax law which was the subject of litigation. Yeoman v.
Com., Health Policy Bd., 983 S.W.2d 459, 465 (Ky. 1998). It is likewise unlike Specialty Auto
Parts USA, Inc. v. Holley Performance Prod., Inc., 771 F. App’x 584 (6th Cir. 2019), in which
none of the elements of claim preclusion were met. It is true that Specialty Auto Parts found that
– since a party could not have raised its breach of contract claims for alleged violation of a
settlement agreement in the first action – the elements of issue preclusion were necessarily not
met. Specialty Auto Parts USA, Inc., 771 F. App’x at 593. But that case did not hold that this
would be the case anytime a party sought to apply issue preclusion to a breach of contract claim
for alleged violation of a settlement agreement. In light of that, the Court is convinced that the
reasoning of Specialty Auto Parts as to the application of issue preclusion is simply inapplicable
to the facts of this case. Specialty Auto Parts involved a breach of contract claim which was
predicated upon a violation, years after the fact, of a settlement agreement resolving a closed
civil case. But here, while the breach of contract claim is based upon a refusal to disburse certain
funds pursuant to a settlement agreement, crucially, the same litigation resolved the very issue of
-9-
those funds’ proper disbursement. Thus, as in Bowman v. City of Olmsted Falls, 756 F. App’x
526, 532 (6th Cir. 2018) (applying Ohio law), the gravamen of this claim is the same as that
involved in previous litigation. Under these circumstances, the Court perceives no danger that
the application of issue preclusion will “contravene an overriding public policy or result in
manifest injustice.” Contra Specialty Auto Parts USA, Inc., 771 F. App’x at 593.
Finally, before moving to the other claims, the Court pauses to note that the remainder of
the claim for breach of the settlement agreement is premised upon the acts taken by the courtappointed Receiver who has been explicitly relieved of any liability, [R. 5-13 p. 7], which of
course fails to state a claim against NBH, an entirely separate-entity.
B.
Other Claims
The remaining claims (tortious interference with prospective business advantage and
economic relationships; breach of contract as to the letter agreement; breach of the covenant of
good faith and fair dealing; and punitive damages) likewise fail to state a claim, mainly because
of the express release contained within the settlement agreement, which provides as follows:
Upon the timely payment of the Settlement Sum, the Parties agree to release each
of their respective directors, officers, employees, attorneys, agents, insurers,
representatives, heirs, assigns, affiliates, participants, predecessors, successors,
related entities, and subsidiary and parent organizations from any claims, demands,
obligations, liabilities of [sic] causes of action relating to the Loan, the Loan
Documents, the Kentucky Litigation and/or the Missouri Litigation.
[R. 9-1 p.2]
The action complained of in the count for tortious interference with prospective business
advantage is NBH’s “initiation of the foreclosure action.” [R. 1 p. 8] This is clearly barred under
the terms of this express waiver, because it relates to the Loan, the Loan Documents, and the
Kentucky Litigation (defined in the settlement agreement as the foreclosure action against
Borrower in Kentucky, [R. 9-1 p. 1], i.e., the state court action).
- 10 -
Similarly, the claim for breach of contract as to the letter agreement is barred by this
waiver, for the same reason. The conduct that this count complains of is “seeking to appoint a
receiver . . . not on . . . [the] approved list.” [R. 1 p. 9] The letter agreement is one of the Loan
Documents; the appointment of the Receiver was in the course of the Kentucky Litigation (and
VP Louisville opposed that appointment vigorously in that litigation), and the reason the
Receiver was appointed was VP Louisville’s default on the Loan.
VP Louisville expressly states that Count IV, the count for breach of covenant of good
faith and fair dealing, “is not a separate cause of action, but is clearly a part of VP’s claim for
breach of the Settlement Agreement.” Since this claim has already been addressed above, this
count likewise fails to state a claim upon which relief can be granted.
Finally, as NBH points out, punitive damages are not themselves a standalone claim. See,
e.g., Ammon v. Welty, 113 S.W.3d 185, 188, 2002 Ky. App. LEXIS 1400, *9-10 (Ky. Ct. App.
July 12, 2002) (“the claim for punitive damages cannot succeed since the failure to assert a claim
on which actual damages can be awarded precludes [plaintiffs] from seeking punitive
damages.”). Thus, in the absence of any other predicate claim to which it might attach, the count
for punitive damages likewise fails to state a claim upon which relief can be granted.
VP Louisville implicitly cedes that these claims are barred by the waiver, when it argues
that these claims can survive if the settlement agreement is “void because NBH is in breach of
the Settlement Agreement.” [R. 9 p. 12] There are two problems with that argument. First, VP
Louisville does not actually claim that the settlement agreement is void, merely that it is
voidable. See R. 9 p. 12. The latter is a far cry from the former, even assuming without deciding
that the settlement agreement is in fact voidable. Second, there is no predicate breach on the part
of NBH to serve as a basis to void the settlement agreement. As explained above, VP
- 11 -
Louisville’s claim that NBH is in breach of the Settlement Agreement is partly issue precluded
and partly fails to state a claim because it complains about the Receiver’s actions, not NBH’s
actions.
Accordingly, and the Court being otherwise sufficiently advised,
IT IS HEREBY ORDERED as follows:
1. The Defendant’s Motion to Dismiss for Failure to State a Claim [R. 5] is
GRANTED.
2. A separate Judgement will be entered consistent with this Order.
This the 6th day of November, 2019.
cc:
Counsel of record
- 12 -
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?