Louisville Galleria, LLC v. Kentucky Pub Investments, LLC ( 2021 )

RENDERED: AUGUST 13, 2021; 10:00 A.M.
NOT TO BE PUBLISHED
Commonwealth of Kentucky
Court of Appeals
NO. 2020-CA-0983-MR
LOUISVILLE GALLERIA, LLC APPELLANT
APPEAL FROM JEFFERSON CIRCUIT COURT
v. HONORABLE ANGELA MCCORMICK BISIG, JUDGE
ACTION NO. 12-CI-005734
KENTUCKY PUB INVESTMENTS, LLC;
SHEILA SANDERS; AND
WALLACE NICHOLSON SANDERS APPELLEES
AND
NO. 2020-CA-1024-MR
KENTUCKY PUB INVESTMENTS, LLC;
SHEILA SANDERS; AND
WALLACE NICHOLSON SANDERS CROSS-APPELLANTS
CROSS-APPEAL FROM JEFFERSON CIRCUIT COURT
v. HONORABLE ANGELA MCCORMICK BISIG, JUDGE
ACTION NO. 12-CI-005734
LOUISVILLE GALLERIA, LLC CROSS-APPELLEE
OPINION
AFFIRMING IN PART, REVERSING IN PART, AND REMANDING
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BEFORE: CLAYTON, CHIEF JUDGE; ACREE AND LAMBERT, JUDGES.
CLAYTON, CHIEF JUDGE: Louisville Galleria, LLC (“Galleria”) appeals the
Jefferson Circuit Court’s post-remand order awarding Galleria $0 in damages and
$150,000 in attorneys’ fees arising from Kentucky Pub Investments, LLC’s (the
“Pub”) breach of contract and awarding the Pub $478,946.26 in conversion
damages. Additionally, the Pub has cross-appealed as to the issue of attorneys’
fees. After a review of the record and applicable law, we affirm in part, reverse in
part, and remand for further proceedings.
FACTUAL AND PROCEDURAL BACKGROUND
In 2004, the Pub began leasing a 5,000 square foot premises at Fourth
Street Live! in downtown Louisville (the “Premises”) from Galleria in which the
Pub was to operate a bar and restaurant. The Pub signed a lease (the “Lease”) with
Galleria for the Premises which stipulated that the Pub was to pay rent and a pro
rata share of common area maintenance (“CAM”) charges. In informal letters
between the parties outlining basic terms and conditions, such CAM charges were
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estimated to total $6.00 per square foot. No specific amount was contained in the
Lease. Moreover, the Lease contained no cap on the CAM charges, and stated that
the CAM charges were subject to adjustment should the actual amount of Pub’s
CAM expenses for an operating year exceed what it had paid in monthly
installments. Further, the Lease indicated that Galleria could, with notice to the
Pub, alter its estimate of total CAM charges.
On August 5, 2010, Galleria sent notice to the Pub that it owed
$57,490.52 in unpaid CAM charges for the 2008 operating year and $38,718.69 for
the 2009 operating year. On November 16, 2010, Galleria sent another round of
notices informing the Pub it owed $63,846.88 in unpaid CAM charges for
operating year 2005, $58,877.00 in unpaid CAM charges for operating year 2006,
and $58,476.79 for operating year 2007. Following these notices, Galleria also
raised the Pub’s total estimated CAM charges for the 2011 operating year from
$6.00 per square foot to $17.33 per square foot.
After the Pub refused to pay the outstanding CAM charges owed for
the previous years or the monthly payments at the new estimated rate, Galleria
filed a forcible detainer action against the Pub in Jefferson District Court in
September of 2012. On November 7, 2012, the Jefferson District Court held a
forcible detainer hearing and ultimately found that Galleria was entitled to
possession of the Premises. The Pub subsequently vacated the Premises.
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Meanwhile, on October 20, 2012, the Pub filed an action in Jefferson
Circuit Court seeking a declaratory judgment that Galleria did not have the right to
collect either the unpaid CAM charges or the CAM charges billed at the higher
estimated rate for the 2011 operating year. The Pub also claimed that Galleria had
breached its implied covenant of good faith and fair dealing when it allowed a
competitor to open across the street; had committed fraud in the inducement when
it represented that the Pub’s CAM charges would be between $5.00 and $6.00 per
square foot; had constructively evicted the Pub by retroactively imposing CAM
charges and then miscategorizing rent payments as payments of disputed CAM
charges; had waived its right to collect payments from the Pub; and was equitably
estopped from imposing “retroactive” CAM charges on the Pub. In December of
2012, the Pub amended its complaint to add a claim for conversion, alleging that
Galleria had refused to allow the Pub to retrieve its property from the Premises.
Thereafter, Galleria filed an answer and counterclaim, alleging that
the Pub had breached the Lease by failing to pay rent when due; that the Pub had
abandoned the Premises by closing the restaurant prior to the end of the Lease
term, entitling Galleria to recover liquidated damages; that Galleria was entitled to
collect late fees in addition to deficiencies in the rent under the Lease; that Galleria
was entitled to collect reasonable attorneys’ fees under the Lease; and that Galleria
had performed all obligations under the Lease. Galleria alleged that it was owed a
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total of $2,655,105.80, calculated as follows: $309,053.00 in back rent as of
November of 2012; $585,513.20 in unpaid rent through the remainder of the Lease
term; and $1,759,539.60 in liquidated damages for the Pub’s breach of the Lease.
In 2017, the circuit court found that Galleria had committed fraud in
the inducement, had breached the implied covenant of good faith, and had
converted the Pub’s property. Galleria appealed, and the Pub cross-appealed, the
circuit court’s order.
A panel of this Court affirmed in part and reversed in part, holding
that while Galleria did convert the Pub’s property, Galleria did not commit fraud in
the inducement or breach the implied covenant of good faith and fair dealing. The
Court also held that the Pub breached the lease when it failed to pay rent and
remanded the matter back to the circuit court with the following instructions:
On remand, the circuit court shall determine the amount
of damages due to Galleria for the Pub’s breach of the
Lease. Those damages shall be offset by any damages
awarded to the Pub for Galleria’s conversion of its
property, which amount shall be determined based on the
fair market value of the Pub’s property at the time of
conversion.
However, the Court further held that Galleria’s claim that the Pub’s action in
vacating the Premises following final judgment in the forcible detainer action did
not trigger Galleria’s right to liquidated damages under the Lease, as Galleria had
filed the writ for forcible detainer and had prosecuted the action to final judgment.
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Following a hearing, the circuit court entered a post-remand order on
July 22, 2020, finding that: (1) Galleria had waived its claim for any deficiencies
owed under the lease because it retained the Pub’s property rather than disposed of
it in accordance with Article 9 of the Uniform Commercial Code (the “UCC”),
and, therefore, that Galleria’s damages for breach of the lease were zero dollars;
(2) the fair market value of the Pub’s converted property was $478,946.26; and (3)
Galleria was entitled to an award of attorneys’ fees amounting to $150,000. This
appeal and cross-appeal followed.
STANDARD OF REVIEW
The circuit court’s findings of fact shall not be set aside unless clearly
erroneous. Kentucky Rule of Civil Procedure (CR) 52.01. “If the trial judge’s
findings of fact in the underlying action are not clearly erroneous, i.e., are
supported by substantial evidence, then [this] court’s role is confined to
determining whether those facts support the trial judge’s legal conclusion.”
Commonwealth v. Deloney, 20 S.W.3d 471, 473-74 (Ky. 2000). We review the
circuit court’s legal conclusions de novo. Barber v. Bradley, 505 S.W.3d 749, 754
(Ky. 2016) (citing Sawyers v. Beller, 384 S.W.3d 107, 110 (Ky. 2012)).
ANALYSIS
On appeal, Galleria argues that (1) the circuit court’s holding that
Galleria waived any breach damages when it failed to dispose of the Pub’s
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property in accordance with UCC Article 9 contravenes the plain language of the
UCC; (2) Galleria should be entitled to future rent as part of its breach damages;
(3) the circuit court erred by not rejecting the Pub’s expert testimony and by
awarding the Pub $478,946.26 in conversion damages; and (4) the circuit should
have awarded Galleria $599,919.00 in attorneys’ fees. On cross-appeal, the Pub
contends that Galleria was not the prevailing party in the dispute, and, therefore, its
claim for attorneys’ fees has no merit. We will consider each argument in turn.
I. Breach of Lease Damages
A. Waiver of Deficiency
As previously discussed, on remand, this Court instructed the circuit
court to “determine the amount of damages due to Galleria for the Pub’s breach of
the Lease” and to offset that number by any damages awarded to the Pub for
Galleria’s conversion of its property. The circuit court instead found that Galleria
had waived any claim it had to breach of lease damages because it had failed to
comply with the UCC’s requirements for the disposition of collateral. Galleria
asserts that the circuit court’s holding is at odds with provisions of the UCC
codified in state law and this Court’s prior holding that Galleria is liable to the Pub
for conversion of its property. We agree.
In the parties’ first appeal, this Court held that although the Lease
gave Galleria, as the secured party, a right to possess the Pub’s property should the
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Pub default, Galleria nonetheless converted the Pub’s property. Under the UCC as
it is codified in Kentucky, Kentucky Revised Statutes (KRS) 355.9-609(1) allows a
secured party to take possession of a debtor’s collateral following an event of
default. However, this right does not allow a secured party to retain the debtor’s
property in perpetuity. The secured party has two options: “He must either sell the
property in a ‘commercially reasonable’ manner with notice provided to the debtor
of the sale . . . or he may elect to retain the collateral in satisfaction of the debt.”
Herring Min. Co. v. Roberts Bros. Coal Co., Inc., 747 S.W.2d 616, 618-19 (Ky.
App. 1988) (citations omitted). If the latter option is chosen, written notice must
be provided to the debtor, who may object to retention of the property and require
disposition of the property by sale. Id.This Court previously held that Galleria had not attempted either of
these alternatives, as Galleria had made no efforts to sell the property and had
made “no suggestion” that it elected to retain the property in satisfaction of Pub’s
debt. Thus, this Court concluded that “[Galleria’s] retention of the Pub’s property
appears to be nothing more than a taking, and amounts to conversion.” Based on
such conclusion, this Court remanded the circuit court’s opinion with instructions
to calculate damages for breach of the Lease and to offset those damages by the
fair market value of the property that had been converted.
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In its post-remand order, the circuit court held that once a secured
party takes possession of a debtor’s collateral, a commercially reasonable sale of
such collateral is always a prerequisite to any remaining deficiency that the debtor
owes the secured party, and, therefore, Galleria’s failure to conduct such a sale
waived any right it had to collect breach damages from the Pub. In doing so, the
circuit court misconstrued the prior rule employed by this Court, which explicitly
provides for an alternative: acceptance of the collateral in full or partial
satisfaction of the debt. KRS 355.9-620. (Emphasis added.) Indeed, the statute
provides that, where a secured party accepts collateral in partial satisfaction of a
debt, the secured party may then recover any remaining deficiencies, even in the
absence of a commercially reasonable sale. The UCC provides that the Pub’s
liability for a deficiency is in “an amount by which the sum of the secured
obligation, expenses, and attorney’s fees exceeds . . . [t]he amount of proceeds that
would have been realized had” Galleria conducted a commercially reasonable sale
of the collateral. KRS 355.9-626(1)(c)(2) (emphasis added). Therefore, under the
specific wording of the statute, the failure to conduct a sale does not waive a
deficiency.
Even further, when faced with a secured party that has failed to prove
its compliance in conducting a commercially reasonable sale or proper acceptance
of collateral - as Galleria has - provisions of the UCC codified in KRS 355.9-
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626(1)(c)(2) explicitly instruct the Court in calculating the amount of deficiency
owed. In those circumstances, a determination is made to the amount of proceeds
that would have been realized had the secured party actually conducted the sale,
and that amount is then credited against the debtor’s obligation. And that is
precisely the calculation this Court instructed the circuit court to make on remand.
Galleria had converted the Pub’s property, failed to conduct a sale of the property,
never made any suggestion it intended to retain the property in satisfaction of the
debt, and was therefore liable to the Pub for the value of what a commercially
reasonable sale of the property would yield. It is clear “waiver” is not applicable
in this instance as the Pub contends.
The Pub bases a great deal of its argument on the Court’s decision in
Lee & Mason International Agency, Inc. v. Daugherty, 828 S.W.2d 677 (Ky. App.
1992). In Daugherty, a panel of this Court held that a bank’s assignment of an
interest in an automobile to a third-party insurance agency did not constitute a
commercially reasonable sale as prescribed by UCC Article 9. Id. at 679. Because
a sale did not occur, the Court held that the debtors could not be held liable for a
deficiency that could not be determined. Id.As a preliminary matter, the Daugherty decision pre-dated the
enactment of KRS 355.9-626 by approximately eight years. Moreover, the case at
hand is distinguishable from Daugherty in that this Court did not rule on appeal
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that Galleria tried but failed to hold a commercially reasonable sale of the Pub’s
property. Nor did the Court find that the deficiency between Galleria’s breach
damages and the Pub’s conversion damages could not be determined. Indeed, this
Court remanded with explicit instructions for calculating that very deficiency.
Thus, we do not find Daugherty to be applicable in this situation.
We find Herring to address more fully the damages a debtor may
recover when a secured party fails to provide notice of its election to retain
collateral. Herring, 747 S.W.2d at 619. The Herring Court specifically limited
recovery to “loss caused by a failure to comply with the [UCC] provision.” Id.The Court dismissed Herring’s claim because “his damages could not be greater
than the fair market value of the collateral less the balance due . . . [.]” Id. By the
same reasoning, as the previous panel of this Court found, the Pub is entitled to an
offset representing the amount that would have been recovered had the converted
equipment been sold.
Moreover, the circuit court’s post-remand order is also flawed in that
it achieves an antithetical result by holding both that (1) Galleria is liable to the
Pub for conversion of its collateral property and (2) the Pub’s debt to Galleria is
extinguished by Galleria’s retention of the very same collateral property. In ruling
that Galleria’s failure to properly dispose of the Pub’s property barred it from
collecting breach damages, the circuit court effectively treated Galleria’s
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conversion of the property as acceptance of the collateral in full satisfaction of the
Pub’s debt. However, the circuit court also awarded the Pub damages for
Galleria’s conversion of that same property. It had already been established by this
Court that, as a matter of law, Galleria converted the Pub’s property and thus had
no legal title to the property. Jasper v. Blair, 492 S.W.3d 579, 582 (Ky. 2016).
But if Galleria was entitled to zero damages because the Pub’s debt is satisfied by a
full acceptance of the property, then Galleria had clearly taken title to the property.
Indeed, “[a] secured party’s acceptance of collateral in full or partial satisfaction of
the obligation it secures . . . [t]ransfers to the secured party all of a debtor’s rights
in the collateral[.]” KRS 355.9-622(1)(b).
Accordingly, because the circuit court’s conclusion that Galleria’s
retention of the Pub’s property waived its claim for any remaining deficiency was
in error, we reverse and remand with instructions for the circuit court to determine
the amount of damages due to Galleria for the Pub’s breach of the Lease, with such
damages offset by the damages awarded to the Pub for Galleria’s conversion of its
property.
B. Galleria’s Entitlement to Future Damages
Galleria next argues that it is entitled to all damages arising from the
Pub’s breach of contract except for liquidated damages, including past and future
rental, late charges, and interest. Alternatively, the Pub claims that Galleria is not
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entitled to future rents that came due during the remaining term of the Lease,
arguing that there is no distinction between Galleria’s claim for contractual future
liquidated damages for the remainder of the Lease term, which were denied by this
Court, and Galleria’s claim for contractual future rental damages for the remainder
of the same Lease term.
We disagree, as the Court’s determination that Galleria was not
entitled to liquidated damages for violation of the continuous occupancy clause is
not related to the clauses in the Lease concerning the Pub’s liability for future rent
damages. The terms of the Lease clearly provide for future rents to be paid as
damages for a breach, and the Pub has not cited us to any pertinent authority that
stands for the proposition that if a landlord seeks to evict a tenant in default, the
landlord necessarily waives any right to future rent damages.
Nevertheless, an injured party “claiming damages for a breach of
contract is obligated to use reasonable efforts to mitigate its damages occasioned
by the other party’s breach.” Deskins v. Estep, 314 S.W.3d 300, 305 (Ky. App.
2010) (citation omitted). Accordingly, we add to our instructions on remand that
the circuit court include future rents in its determination of the total amount of
damages, while also determining what mitigation of damages, if any, has occurred
in this action.
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II. Conversion Damages
In its post-remand order, the circuit court chose not to exclude either
party’s expert witness’ testimony regarding the valuation of the Pub’s converted
property. A trial court abuses its discretion in determining whether to admit expert
witness testimony when its “. . . decision [is] arbitrary, unreasonable, unfair, or
unsupported by sound legal principles.” Farmland Mut. Ins. Co. v. Johnson, 36
S.W.3d 368, 378 (Ky. 2000) (citing Goodyear Tire and Rubber Co. v. Thompson,
11 S.W.3d 575, 581 (Ky. 2000)).
We find that, based upon the foregoing standard of review, the circuit
court’s decision to admit both experts’ testimony did not constitute an abuse of
discretion. The circuit court correctly opined, and the record indicates, that both
the Pub’s expert Mr. Sherman and Galleria’s expert Mr. Schwartz each had ample
experience in the restaurant industry, and each of their competing valuations of the
Pub’s converted property drew from that relevant experience. While Galleria
continues to attack the qualifications of the Pub’s expert witness, the circuit court
was within its right to believe the Pub’s witness over Galleria’s. Our
determination is not whether we would have done the same, but whether the circuit
court abused its discretion. The circuit court was persuaded that Mr. Sherman’s
determination of the fair market value of the Pub’s converted property of
$478,946.26 was correct and was well within its right to do so.
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We are not persuaded by Galleria’s argument that the Pub is bound by
its prior valuation of the converted property at $359,000. Galleria contends that
the Pub’s first approximation that the converted property was worth $359,000
solidified that figure as the property’s “highest and best use” value. However, as
the circuit court observed, this valuation simply reflected what the Pub would have
been willing to pay for the property at a commercially reasonable sale, and not the
true fair market value of the property. Because this Court remanded with explicit
instructions to determine the value of the Pub’s converted property “based on the
fair market value . . . at the time [of] conversion,” Galleria’s argument is
misplaced, and we affirm as to this issue.
IV. Attorneys’ Fees
On appeal, Galleria contends that, as the one true “winner” of this
action, it is entitled to the full amount of the attorneys’ fees it had requested, or
$599,919.30. Conversely, the Pub argues that Galleria’s claim to any attorneys’
fees at all is improper. The reasonableness of an award of attorneys’ fees lies
within the sound discretion of the trial court. Ford v. Beasley, 148 S.W.3d 808,
813 (Ky. App. 2004).
KRS 411.195 states that a provision in a contract authorizing
reasonable attorneys’ fees is enforceable. Section 2701 of the Lease allowed
Galleria to recover its reasonable attorneys’ fees if it prevailed in a dispute.
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Indeed, each party has acknowledged that under the Lease the prevailing party in
this action is entitled to recover reasonable attorneys’ fees.
Unfortunately for both parties, however, there are no clear winners or
losers in this situation. We agree that because this Court previously determined
that the Pub had breached the Lease, Galleria was entitled to an award of
reasonable attorneys’ fees. Moreover, we agree with the circuit court that
Galleria’s “limited success” in the matter warranted a fee reduction from the
$599,919.30 requested by Galleria.
There is no disputing that both parties have argued long and hard as to
their respective positions, each side capturing victories and suffering losses at
different stages of litigation. Galleria was successful in showing that the Pub
breached the Lease but was also found to be liable on the Pub’s claim for
conversion. Galleria defeated the Pub’s initial fraud claim but lost its res judicata
argument. It is abundantly clear from the record that the circuit court exerted its
due diligence in weighing these relevant factors before coming to its determination
on the issue of attorneys’ fees. Accordingly, we find no abuse of discretion on the
part of the circuit court.
CONCLUSION
Thus, we affirm the circuit court’s order with regard to the conversion
damages ordered as well as the portion of the order awarding attorneys’ fees. We
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reverse the portion of the order finding that Galleria had waived its right to
damages from the Pub’s breach of contract. On remand, the circuit court shall
determine the amount of damages due to Galleria for the Pub’s breach of the
Lease. Such damages shall include future rents required to be paid under the
Lease, but the circuit court is instructed to determine what mitigation of damages,
if any, has occurred in this action. The amount of damages due for the Pub’s
breach of the Lease shall also be offset by the fair market value of the Pub’s
converted property which the circuit court determined was $478,946.26.
ALL CONCUR.
BRIEFS FOR APPELLANT/CROSS- BRIEF FOR APPELLEES/CROSS-
APPELLEE: APPELLANTS:
Clark C. Johnson Mark A. Smedal
Michael T. Leigh Louisville, Kentucky
Louisville, Kentucky
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