James R. Poston, Jr. v. Thomas Welch ( 2022 )

RENDERED: MARCH 11, 2022; 10:00 A.M.
NOT TO BE PUBLISHED
Commonwealth of Kentucky
Court of Appeals
NO. 2021-CA-0362-MR
JAMES R. POSTON, JR. AND AQS
AUTOMOTIVE QUALITY
CONTROL, LLC APPELLANTS
APPEAL FROM KENTON CIRCUIT COURT
v. HONORABLE KATHLEEN S. LAPE, JUDGE
ACTION NO. 17-CI-00464
THOMAS WELCH AND JOHN 3:16
LLC F/N/A AUTOMOTIVE QUALITY
SUPPORT, LLC APPELLEES
OPINION
AFFIRMING
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BEFORE: CLAYTON, CHIEF JUDGE; GOODWINE AND JONES, JUDGES.
GOODWINE, JUDGE: Appellants James R. Poston, Jr. (“Poston”) and AQS
Automotive Quality Control, LLC (“Control”) appeal from the Kenton Circuit
Court’s March 12, 2021, order granting summary judgment in favor of Appellees
Thomas Welch (“Welch”) and John 3:16 LLC F/N/A Automotive Quality Support,
LLC (“Support”).1 After careful review, finding no error, we affirm.
This appeal arises out of Poston’s failure to pay Welch $130,000
owed under a promissory note. On December 14, 2012, Control, owned by Poston,
and Support, owned by Welch, executed an asset purchase agreement. Under the
purchase agreement, Control purchased an auto parts sorting business from
Support for a total purchase price of $750,000. Control agreed to pay $150,000 at
closing and pay the remaining $600,000 under the terms of the promissory note.
The note required Control to make forty-seven monthly payments of $10,000 and a
single balloon payment of $130,000 due on January 1, 2017. Poston executed a
personal guaranty of the $130,000 balloon payment.
The purchase agreement contained an indemnity clause, which
provides:
Seller [Support] and Member [Welch], jointly and
severally, covenant and agree to defend, indemnify and
hold harmless Purchaser [Control] and its officers,
directors, members and employees (collectively, the
“Purchaser Indemnitees”) from and against, and pay or
reimburse the Purchaser Indemnitees for, any and all
claims, demands, liabilities, strict liabilities, obligations,
losses, fines, costs, expenses, royalties, litigation,
deficiencies or damages (whether absolute, accrued,
conditional or otherwise and whether or not resulting
from third party claims), including interest and penalties
1
Support changed its name to John 3:16 LLC shortly after the execution of the note and
guaranty. Throughout the proceedings, most documents refer to the business as Support.
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with respect thereto and out of pocket expenses and
reasonable attorneys’ and accountants’ fees and expenses
incurred in the investigation or defense of any of the
same or in asserting, preserving or enforcing any of their
respective rights hereunder resulting from or arising out
of:
(i) any breach of any warranty, covenant,
obligation or agreement of Seller or Member in
this Agreement or in any schedule, document or
agreement furnished or to be furnished by Seller or
Member under this Agreement;
(ii) the ownership and operation of the Business
prior to the Closing or arising in connection with
any liabilities of Seller or Member; and
(iii) any liens, claims, encumbrances or similar
restrictions encumbering the Assets as of the
Closing Date or the failure to deliver the Assets to
Purchaser clear of all liens, claims and
encumbrances of any kind or nature.
All obligations and covenants of Seller and
Member contained in this Agreement shall survive the
execution and delivery of this Agreement for a period of
two (2) years after the Closing Date. Upon thirty (30)
days prior written notice specifying the basis for the
claimed indemnification, Purchaser shall be entitled to
offset against the Promissory Note executed in
connection herewith any amounts owed by Seller or
Member to Purchaser pursuant to the terms of this
Agreement. Notwithstanding the foregoing
indemnification by Seller and Member to Purchaser
Indemnitees, nothing herein shall be deemed or construed
to be an acceptance, assumption or guaranty of any
liability or obligation of the Seller by the Members as to
any other person or entity other than the Purchaser
Indemnitees. Notwithstanding any provision herein,
under no circumstances shall the indemnification
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obligations of Seller and Member, jointly and
severally, to Purchaser Indemnitees pursuant to this
Section exceed the Purchase Price.
Record (“R.”) at 36. Additionally, the note provides the following regarding
indemnification:
Upon thirty (30) days prior written notice specifying the
basis of the claim for indemnification, Maker shall be
entitled to offset against principal or interest due
hereunder any amounts owed by Holder to Maker under
that certain Asset Purchase Agreement executed in
connection herewith. This Note is subject to the terms
set forth in that certain Security Agreement dated of even
date herewith executed by Maker and Holder.
R. at 4.
Control and Welch also executed a consulting agreement. Welch
agreed “to make himself available at reasonable times during the Term . . . to assist
in the transition of the Business and customer accounts from [Support] to [Control]
and to perform such other duties as are assigned to him from time to time by
supervisory employees of [Control] in furtherance of such transition.” R. at 186-
87. The “Term” of the consulting agreement was eighteen months. For the first
three months, Welch was to be available for “up to forty (40) hours per week, as
[Control] may determine, during normal business hours[.]” R. at 187. For the
remaining fifteen months, Welch was to be available by phone “for up to ten (10)
hours per week[.]” Id. In the event Control had not hired a general manager “by
the end of the initial three (3) month period, [Control] may choose to retain
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[Welch’s] in person services for up to thirty (30) hours per week for an additional
six (6) months, provided it compensates [Welch] at the rate of thirty dollars
($30.00) per hour for such services[.]” Id.
After closing, Control and Poston requested Welch’s assistance in
locating a new general manager or “president” for Control. In late January or early
February 2013 (within the initial three-month consulting period), Control hired
Alan Stelzer (“Stelzer”) to serve as president of Control. For a month following
Stelzer’s hire, Welch shared office space with him, and then Welch moved to
Florida.
Control became dissatisfied with Stelzer’s performance as president.
In October 2013, Control terminated Stelzer after his arrest for public urination and
DUI. Nearly two years later, Control stopped making $10,000 monthly payments
on the note in July 2015 and went out of business about six months later. Although
Poston blames Stelzer for costing Control its largest customer and for Control’s
financial failure, Control stayed in business for two years following Stelzer’s
termination.
In May 2016, Support assigned the note and Poston’s guaranty to
Welch via an allonge. Welch remains the holder of the note.
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Control and Poston failed to make the balloon payment on January 1,
2017, after prematurely terminating monthly payments in 2015. Poston refused
Welch’s demands for payment on the guaranty.
On March 17, 2017, Welch filed a complaint against Poston in the
Kenton Circuit Court. On May 1, 2017, Welch filed a motion to dismiss the
complaint, which the circuit court denied on October 23, 2018. The circuit court
found Welch was the holder of the note and had standing to enforce the guaranty
against Poston via the allonge.
On November 2, 2018, Poston filed an answer and counterclaim. On
May 6, 2019, the circuit court granted Control permission to intervene in the suit,
and Poston brought in Support by a third-party complaint. Welch and Support
moved to dismiss Poston’s counterclaim and third-party claims against Support for
breaching the consulting agreement.
Welch moved for summary judgment on his claim on the guaranty
and Appellants’ claims. Poston moved for summary judgment on his breach of
contract claim. On March 12, 2021, the circuit court granted Welch’s motion for
summary judgment awarding him $130,000 plus interest at the statutory rate from
January 1, 2017 until payment. The court disposed of all other pending
dispositive motions and made the order final and appealable. This appeal
followed.
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On appeal Poston argues the circuit court erred in: (1) granting
summary judgment in favor of Welch because Welch breached the consulting
agreement first; (2) awarding Welch interest at the legal rate; and (3) rejecting his
“circuitry of indemnity” defense. We review a circuit court’s grant of summary
judgment de novo. Coomer v. CSX Transp., Inc., 319 S.W.3d 366, 370-71 (Ky.
2010). Under de novo review, we owe no deference to the circuit court’s
application of the law to the established facts. Grange Mut. Ins. Co. v. Trude, 151
S.W.3d 803, 810 (Ky. 2004).
First, Poston argues the circuit court erred in granting summary
judgment in favor of Welch because Welch breached the consulting agreement
before Poston defaulted on the balloon payment. Welch argues, under the plain
language of the consulting agreement, Welch did not warrant or guarantee
Stelzer’s performance. We interpret a contract “by looking solely to the four
corners of the agreement. Unambiguous terms contained within the contract
are interpreted in accordance with their ordinary meaning, without resort to
extrinsic evidence.” Smith v. Crimson Ridge Development, LLC, 410 S.W.3d 619,
621 (Ky. App. 2013) (internal quotation marks and citations omitted).
Under the consulting agreement, Welch agreed to work as a
consultant for Poston during the transition of the business under the following
terms:
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Consultant agrees to make himself available at
reasonable times during the Term as set forth in Section 1
above to assist in the transition of the Business and
customer accounts from Seller to AQS and to perform
such other duties as are assigned to him from time to time
by supervisory employees of AQS in furtherance of such
transition. Consultant agrees to devote so much of
Consultant’s time and energy in the performance of the
services hereunder as Consultant and AQS deem
advisable in order to satisfactorily perform Consultant’s
duties and obligations hereunder, subject to the
limitations provided in Section 1 above.
R. at 187-88.
Poston argues the consulting agreement required Welch to perform his
duties to Poston’s good faith subjective satisfaction on behalf of Control, and
Welch’s deposition testimony supports his argument that Welch did not perform to
his satisfaction. He asserts that within a few months of hiring Stelzer, it became
apparent that he was an unsatisfactory president due to his personal and
professional misbehavior.
Our Supreme Court has defined “satisfaction” as “‘the fulfillment of a
need or want.’ When the phrase ‘satisfactory to Buyer’ is read in conjunction with
the ordinary meaning of the word ‘satisfactory,’ the contract clearly requires that
the buyer’s needs or wants in relation to the [contract] be satisfied.” Crimson
Ridge Development, 410 S.W.3d at 621 (quoting MERRIAM WEBSTER’S
COLLEGIATE DICTIONARY 1035 (10th ed. 2002)).
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Although Poston disagrees, the circuit court found, “Obviously,
Poston was satisfied with Welch’s recommendation when he interviewed and
ultimately hired Stelzer.” R. at 497. The circuit court noted, “More importantly,
the Personal Guaranty was not made contingent upon the subjective satisfaction of
Welch’s performance under the Consulting Agreement.” R. at 498. Based on the
plain, unambiguous language of the consulting agreement, Welch agreed to work
for Control as a consultant as part of the purchase price and perform duties as
assigned. One of his duties was to help Control identify a general manager.
Nothing in the agreement certified that Welch was liable for the success or failure
of the new general manager. Although Stelzer ultimately was not a good fit for the
business, nothing in the record indicates any hesitation on Poston’s part in
accepting Welch’s recommendation of hiring Stelzer as president. Poston, as the
business owner, was solely responsible for the success or failure of the business
and should have done his due diligence before hiring Stelzer. Thus, we agree with
the circuit court that Welch was not responsible for the viability of the business
under the plain language of the consulting agreement and Poston’s personal
guaranty.
Second, Poston argues the circuit court erred in awarding Welch
interest at the legal rate because his guaranty set forth no interest rate for
nonpayment of the $130,000 balloon payment. Welch argues Kentucky law
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mandates the award of prejudgment interest absent an agreement or equitable
reason not to. “The longstanding rule in this state is that prejudgment interest is
awarded as a matter of right on a liquidated demand[.]” Hall v. Rowe, 439 S.W.3d
183, 188 (Ky. App. 2014) (quoting 3D Enters. Contracting Corp. v. Louisville &
Jefferson County Metro. Sewer Dist., 174 S.W.3d 440, 450 (Ky. 2005)). “[E]quity
and justice demand that one who uses money or property of another . . . should at
least pay interest for its use in the absence of some agreement to the contrary.”
University of Louisville v. RAM Engineering & Const., Inc., 199 S.W.3d 746, 748
(Ky. App. 2005) (quoting Curtis v. Campbell, 336 S.W.2d 355, 361 (Ky. 1960)).
The legal interest rate for contracts is “eight percent (8%) per annum” unless the
parties agree otherwise, and when a contract does not specify an interest rate the
payee “shall be entitled to recover interest after default and until judgment at the
legal rate of interest.” Kentucky Revised Statutes (“KRS”) 360.010.
Here, the note provides, “No amounts owed hereunder shall bear
interest unless [Control] does not make a payment owed hereunder within thirty
(30) days of the due date in which case such past due amount shall bear interest at
the rate of eight percent (8%) per annum until paid.” R. at 4. Poston’s guaranty on
the signature page of the note states the guaranty relates only to the $130,000
balloon payment, and Poston’s liability under the guaranty “shall under no
circumstances exceed $130,000.” Id.-10-
Poston argues because the guaranty purports to cap his liability at
$130,000, no prejudgment interest may be assessed. However, the guaranty does
not specify a rate of interest, nor does it explicitly exclude accrual of interest in the
event of nonpayment. Although the guaranty limits Poston’s liability to $130,000
under the guaranty, the prejudgment interest was awarded under Kentucky statute.
Had the parties intended for no interest to accrue in the event Poston did not make
the balloon payment, they could have excluded an award of prejudgment interest in
the guaranty. As the guaranty did not impose an interest rate, the circuit court
correctly followed KRS 360.010(4) in awarding 8% prejudgment interest. This
amount is also consistent with the 8% interest rate included in the note.
Finally, Poston argues the circuit court erred in rejecting his “circuity
of action” or indemnification defense. Poston argues the purchase agreement
indemnified him from owing Welch the $130,000 balloon payment. Welch argues
the parties clearly intended for the note and guaranty to be enforceable, and to hold
otherwise would be absurd. The circuit court found Poston’s interpretation of the
purchase agreement would render the note and guaranty meaningless.
It is well-settled in Kentucky that “[a] writing is interpreted as a whole
and all writings that are part of the same transaction are interpreted together.”
Cook United, Inc. v. Waits, 512 S.W.2d 493, 495 (Ky. 1974). The purchase
agreement contains an indemnification clause, which holds harmless Control “and
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its officers, directors, members, and employees” for any breach of the purchase
agreement or “any schedule, document or agreement furnished or to be furnished
by Seller or Member under this Agreement.” R. at 36. When Poston executed the
note and guaranty, he agreed to make a $130,000 balloon payment. The note also
included provisions for procedures in the event Poston and Control failed to make
payments under the note.
Based on our reading of the purchase agreement, note, and guaranty, it
is illogical to read the indemnification clause in the purchase agreement as holding
Poston harmless for failure to make the balloon payment. Clearly, the parties
intended Poston to pay the purchase price in exchange for the business. We agree
with the circuit court that holding otherwise would be absurd.
For the foregoing reasons, we affirm the judgment of the Kenton
Circuit Court.
ALL CONCUR.
BRIEFS FOR APPELLANT: BRIEF FOR APPELLEE:
Christopher Markus Susan M. Argo
Crestview Hills, Kentucky Thomas A. Prewitt
Darren W. Ford
Kent Seifried Ft. Mitchell, Kentucky
Ft. Mitchell, Kentucky
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