Earley M. Johnson, II v. Kentucky Enterprises, LLC

RENDERED: APRIL 22, 2022; 10:00 A.M.
TO BE PUBLISHED
Commonwealth of Kentucky
Court of Appeals
NO. 2020-CA-1574-MR
EARLEY M. JOHNSON, II APPELLANT
APPEAL FROM BOURBON CIRCUIT COURT
v. HONORABLE JEREMY M. MATTOX, JUDGE
ACTION NO. 15-CI-00065
KENTUCKY ENTERPRISES, LLC APPELLEE
OPINION
REVERSING AND REMANDING
** ** ** ** **
BEFORE: COMBS, GOODWINE, AND LAMBERT, JUDGES.
LAMBERT, JUDGE: Earley M. Johnson, II, the defendant below, has appealed
from summary and final judgments of the Bourbon Circuit Court related to his
counterclaim against Kentucky Enterprises, LLC. Issues include the application of
the parol evidence rule and the statute of frauds to his breach of contract
counterclaim, whether Johnson was entitled to recover under a quantum meruit
theory, and whether the amount he recovered under his unjust enrichment claim
was proper. We reverse and remand.
The underlying case began with the filing of a verified complaint by
Kentucky Enterprises, LLC, (KE) with the Bourbon Circuit Court on March 13,
2015. Johnson was the sole named defendant. KE alleged that on January 31,
2012, Johnson executed and delivered to it a promissory note in the amount of
$200,000.00. The promissory note stated:
FOR VALUE RECEIVED, the undersigned
(Maker) does hereby promise to pay to the order of
Kentucky Enterprises, LLC, 1800 South Main Street,
Paris, Kentucky, the sum of Two Hundred Thousand
Dollars ($200,000.00), with interest thereon at the rate of
two and one half percent (2.5%) per annum on
DEMAND but no earlier than February 1, 2013. Upon
demand for payment being made and communicated to
Maker in writing, the Maker shall then have twelve
months to fully pay the entire remaining unpaid principal
balance and accrued interest thereon at the rate set forth
above. In the event of default of these terms of payment,
the default rate of interest for both prejudgment and
postjudgment amounts shall be four (4%) percent per
annum[.]
All parties hereto, whether makers, endorsers,
sureties, guarantors and otherwise hereby waive notice of
dishonor, protest, notice of protest, and notice of non-
payment of this obligation, and further waive all
exemptions, whether Homestead or otherwise, to which
they or any of them may now or hereafter be entitled
under the laws of this state or any other state.
All notices to the Maker shall be provided in
writing to the address set forth below.
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KE alleged that Johnson had subsequently defaulted on the note and owed the
entire sum of the note along with interest. Therefore, KE demanded a judgment
against Johnson for the amount of the note, plus interest, as well as court costs and
attorney fees.
In response to the complaint, Johnson filed an answer and
counterclaim seeking a declaration of rights and damages. In the answer, Johnson
alleged several affirmative defenses, including that he was entitled to a set-off for
sums KE owed to him and that KE’s claims were barred by the doctrine of unjust
enrichment. In his counterclaim, Johnson alleged that in January 2012, he and KE
had entered into an oral agreement whereby he would provide or make available to
KE certain goods and services for its use and benefit, in exchange for the payment
of the goods and services. They agreed to address the value of the goods and
services at a subsequent date, when they would be able to determine the fair market
value. Johnson believed that the goods and services he provided were valued at an
amount in excess of the amounts KE claimed in its complaint. He also alleged that
he had fully performed under the oral agreement and had provided the goods and
services as promised. KE had failed to pay Johnson for any of the goods and
services provided and was, therefore, in default. Based upon these allegations,
Johnson alleged a claim for breach of contract and sought a declaration of rights
pursuant to Kentucky Revised Statutes (KRS) 418.040 that the value of the goods
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and services he provided to KE exceeded the amounts claimed by KE. In addition,
Johnson alleged claims under unjust enrichment and quantum meruit theories.
In its answer, KE denied the allegations Johnson raised in his
counterclaim, and it specifically denied the existence of an oral agreement or that
there was an agreement to address the value of the goods and services at a later
date. It raised the affirmative defenses of waiver and estoppel, the statute of
frauds, the statute of limitations, laches, and fraud.
In his answers to KE’s interrogatories, Johnson identified the specific
goods and services that he claimed were the subject of the alleged oral agreement
between him and KE:
Goods and services include, but are not limited to the
following: 1) Extensive and complicated backside
building of website and development of web workings
for gitguns.com; 2) guidance, advice, mentoring and
assistance in getting established with distributors of guns
and related accessories; 3) web tie-in to Gunbroker; 4)
business set up and consulting including electronic bound
book for firearms sales, POS [point of sale], federal-
related compliance and licensing matters; 5) wholesaling
to Gitguns and gitguns.com; 6) Five Kimber 45 caliber
pistols at $2500 each.
As to the valuation technique to be used, Johnson stated:
The value of the goods and services were to be
determined based upon the costs incurred, the value of
time and effort invested by Defendant and his agents and
employees and by the overall value of the product
produced. Such valuation would take into account
categories of items and work outlined in Answer to
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Interrogatory No. 2, above. At the time of the initial
discussions and entering into the agreement, it was
anticipated that the value of the goods and services to be
provided by Defendant would be at least $200,000 and in
all likelihood more because of the needs of Plaintiff and
his agents and employees.
On November 29, 2016, KE filed a motion for summary judgment on
its complaint and on Johnson’s counterclaim, stating that there were no genuine
issues of material fact to be decided and that it was entitled to a judgment as a
matter of law. As to its own complaint, KE stated that there had not been any
evidence presented that that promissory note was unenforceable, and Johnson
admitted in his response to KE’s requests for admissions that he had executed the
promissory note attached to the complaint and that a demand for payment had been
made. Further, Johnson admitted that he was not challenging the enforceability of
the promissory note in his response to a motion to compel. As to the counterclaim,
KE argued that Johnson failed to produce any documentary evidence to support his
allegations that an oral agreement existed; that the parol evidence rule would not
permit the introduction of any proffered evidence or testimony to vary the terms of
an unambiguous contract (the promissory note); that the statute of frauds had been
violated; and that Johnson failed to establish the essential elements of his case.
In response, Johnson stated that summary judgment was not
appropriate as material issues of fact remained to be decided. While he had not
contested the authenticity of the note, Johnson argued that he had asserted a
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counterclaim and the right to set off the amount due under the promissory note.
The extent and the value of the goods and services that Johnson, along with his
agents and employees, provided to KE was an issue of fact to be decided. He also
disputed KE’s arguments related to the parol evidence rule and the statute of
frauds.
The parties presented oral arguments to the court on their respective
positions, after which the court entered an order on October 12, 2018, granting in
part and denying in part the pending motion for summary judgment.1 First, it held
that, because the promissory note was not ambiguous but was an integrated
agreement, parol evidence of a contemporaneous agreement was inconsistent and
inadmissible. Second, it held that the alleged oral agreement violated the statute of
frauds, noting that neither party had addressed whether the oral agreement could
have been completed in less than one year. In addition, modifying the promissory
note to the extent that repayment would be set off by the provision of goods and
services would materially affect the terms of the written agreement and must be
reduced to writing to be enforceable and comply with the statute of frauds.
Therefore, the court granted summary judgment on KE’s verified complaint.
1
The court also denied KE’s motion to dismiss Johnson’s counterclaim, which addressed
whether Johnson was the real party in interest.
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As to Johnson’s counterclaim, the court granted summary judgment
on the breach of contract counterclaim as there was no contract, and on the
declaration of rights claim as Johnson failed to present any affirmative evidence
showing the value of the goods and services. It, however, denied summary
judgment on the unjust enrichment and quantum meruit claims.
Rather than holding a trial, the parties agreed they would present their
witnesses via deposition and would orally argue their respective sides and follow
up with written arguments once additional depositions were completed. The
record contains the depositions of Cliff Shumate, the president of KE; Johnson,
who had been the owner of Security Safe Outlet (SSO), a gun store in Paris,
Kentucky; Jedidiah Reader, who worked for KE in tech support, networking, and
web development; Jennifer Arnett, who had been the vice president of SSO; and
Matthew Denninghoff, who worked as a web developer for SSO.
Cliff Shumate testified by deposition on October 11, 2016. He and his
wife, Kim, are the sole members of KE, a limited liability company located in
Paris, Kentucky, that was formed to be a packaging and fulfillment center. KE
obtained a federal firearms license (FFL) in 2012 and began to distribute firearms
and sporting goods equipment related to hunting and fishing. KE sold merchandise
through internet orders as well as in a retail store, GitGuns, later called
GitOutfitted.
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Shumate met Johnson when he was a partner with Bud Wells at Bud’s
Gun Shop, located in Paris (this became SSO). Shumate stopped in the store in
January 2012 to tell Johnson he planned to start his own firearms distribution
business, both retail and online, and that they would be competitors. He described
this as a “gentlemen’s discussion” as it was a small town. Shumate said Johnson
responded, “Why don’t you buy mine?” Shumate knew about litigation pending
between Bud and Johnson, as well as the other partners, and, therefore, declined
Johnson’s offer to purchase the business. Shumate described his understanding as
“I think it was the gentlemen’s agreement that we would try to help each other out
until the lawsuit was settled, and then open the discussion again. That was my
understanding.” The promissory note with Johnson was dated January 31, 2012.
His discussion with Johnson about money began following their first meeting in
early January when they discussed that Shumate would be opening his own
business. Johnson needed short-term capital and asked to borrow money from
him.
Shumate detailed the gentlemen’s agreement between him and
Johnson as including: 1) Shumate’s providing office labor and shipping materials
for free; 2) Johnson’s providing guidance, advice, mentoring, and assistance in
getting KE established with gun distributors/related accessories; and 3) Johnson’s
offering to have Mr. Denninghoff assist KE’s IT person, Mr. Reader, in building
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the website to sell firearms and accessories. Shumate testified that, “based on
the . . . interactions, we were cooperating. I was helping him where I could pitch
in and help. He offered to pitch in and help wherever he could. There was no
contractual, no mutual agreements, and there were no cost sheets or price quotes.”
Shumate denied that there was an agreement to settle up at some point, and no
demand for payment was ever made. His belief was that the help each was
offering was provided for free. He went on to state that the deal with Johnson
unraveled quickly when distributors revoked Johnson’s credit. He also denied that
Johnson had helped with the electronic bound book for firearm sales, the POS
system, related federal compliance, or licensing matters.
As to the promissory note, Shumate stated that Johnson presented it to
him in his (Johnson’s) office. KE’s finance director, Chris Sherman, notarized
Johnson’s signature. Shumate made his first demand on the promissory note in a
letter dated May 9, 2013, which was hand-delivered to Johnson on May 9th at
Johnson’s office. Shumate understood the promissory note to be outside of the
various services that were provided. There was never any discussion that these
were connected.
Earley Johnson testified by deposition on December 8, 2016. He was
retired and living in Carson City, Nevada. In 2012, he was involved with SSO, a
retail establishment in Paris, Kentucky. Johnson was the sole owner of SSO,
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which was dissolved on December 28, 2013. Johnson admitted that he signed a
promissory note in January 2012, and he did not contest the legitimacy or
enforceability of the note. His version of the circumstances surrounding the
execution of the note is as follows:
Well, the note came by Clifton to me in early ‘12,
maybe the end of 2011, and he told me that he was
thinking about getting into the gun business, and that he
would be a person that would be, you know, a
competitor, and he just wanted to let me know. And I
said thank you. I said, If there’s anything I can do to help
you out, let me know. And I said, I’m in a little financial
jam here. And I offered to sell him my store, and he said,
well, he wasn’t interested in doing that right now. I said,
Well, Security Safe Outlet needs some operating capital,
and we have – my two associates, people that work for
me, Jennifer Arnett and Matthew Denninghoff, we’ve
been trying to figure out some way, besides selling the
guns and having the retail, and the Internet business was
to expand our activities.
So we had come up with a model to help level the
playing field between small gun dealers and big gun
dealers that have a large Internet presence. And the
model would be one in which the problems with the
small gun store was inventory, storing a lot of inventory
on their premises, the cost of that inventory, and freight
for the inventory to come in, the dollars it took to carry
that inventory, and then their customer base, because
most of their customer base was just walk-in traffic.
And so for the bigger gun dealers that had retail
outlets and very large Internet presence, they were able to
acquire the – what they could do was that – the
manufacturers would sell guns to the distributor and the
distributors then would distribute it to the dealers, to the
small dealers. And for the big guys, what they could do,
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that had the technology and the Internet IT guys to write
the programs, what they could do was take the inventory
of a distributor, however many thousands of guns they
had, and then they could then put it on – write a program
that then would take their inventory, once the distributor
allowed them to do it. And they would take that
inventory, and then they could put it on their computers
in their store so that if a customer came in and said I want
a gun, and he sees a gun laying in the cabinet, but I like
that. But I really would like something else. What do
you have? And the guy could go and show them their
computer and say, oh, well, here’s a gun with a little
different flavor, whatever. Are you interested in it? Yes.
I want that one.
So then the customer – he would say it would take
me a couple of days to get it. So then the customer
would buy the gun, if they were interested, buy the gun.
The dealer would have it shipped to him from his
distributor, and then he would already have sold it to the
customer.
Johnson told Shumate he could offer his expertise to him in setting up his own
store, and Shumate agreed.
[S]o I said, If you’re interested, we can help you get set
up, started. I have an operation that would compete with
the big gun dealers. And he said, Let me think about
that. So then he left, and we met back maybe a week
later, whatever, and he said he would like to pursue that
adventure. I said, That’s fine with me. I’ll get Jennifer
and Nancy and use our IT guy working on that part of it.
And I said that I could use some operating capital and he
said how much? I said, Well, I don’t know how much
this project is going to cost because we’re just putting it
together. And I said, But I personally need some
operating costs of 200,000. And he said, okay, I’ll loan
you the money for that. I said, Well, then I’ll help you
set up your Internet business and help you with your
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store as much as – whatever you need, and contacts with
the different distributors and buying groups, if he was
interested in getting into some buying groups in order to
get the product at the right price. And there was
advantages to all of that.
Johnson said that he asked his law firm to draft the promissory note.
He did not obtain any other documents from the law firm related to his dealings
with KE. SSO employee Matthew Denninghoff wrote the code for the computer
system; he had previously designed and written the code for a large internet gun
business. Johnson discussed the goods and services provided to KE pursuant to the
alleged verbal agreement between him and Shumate. He sold firearms to Shumate
at his costs, plus a dollar or two, as well as accessories, and he provided help with
distributors. Johnson stated that the value of Mr. Denninghoff’s involvement with
Shumate was $200,000.00, which was based on the knowledge and expertise he
brought to the program. He did not recall the cost to himself or SSO to build the
website. Johnson stated that Shumate sent two employees to help him at the store
with fulfilling orders; he considered this to be training for when Shumate opened
his own retail store.
Shumate made a demand on the note in writing, but Johnson had
never made a payment on it. He told Shumate and his wife at a meeting at Billy’s
Barbeque that he did not have the money to repay the note as the bank had
foreclosed on the store, and he was trying to sell it. The mortgage note was
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between $350,000.00 and $375,000.00. He told Shumate that he could not pay the
note and that the only thing he could offer was his real estate: “[T]he best they can
do is give you this building for the mortgage, and then you could turn around and
sell it and make money because of the prime location of the building[.]” Johnson
valued the real estate he offered to sell at $700,000.00. He was still intending to
pay the note, and Shumate understood that. Johnson never told Shumate that he
did not owe the money; he did not think the timing was right to present to him that
the goods and services he provided were worth $200,000.00.
On examination from his attorney, Johnson testified that he believed
that at the time he signed the promissory note, he and Shumate had a meeting of
the minds on the deal that Johnson and his employees would build the website for
Shumate and would advise and assist Shumate’s employees to get his gun business
started. He believed that the providing of goods and services, advice, consultation,
and assistance would be in exchange for some future payment. Johnson advised
Shumate on the basics of the gun business, including pricing, compliance, ATF
issues, licensing, the point of sale system, the bound book, and federal rules and
regulations. He did not know what the payment would be at the time because he
did not know the extent of goods and services that would be needed. He believed
Shumate understood this and that they would reconcile what he owed to Johnson at
some point. He believed the value of goods and services provided was in excess of
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$200,000.00. He believed the promissory note and the oral agreement about what
he would be providing were parts of the same transaction.
Jedidiah Reader testified by deposition taken March 30, 2017. He
received a four-year degree in computer science from Morehead State University
in December 2008, and he began working for KE in September 2011 as a
programmer. He was also the IT liaison between KE and Bud’s Gun Shop. He
eventually worked with Matthew Denninghoff to set up KE’s website server,
which he said for the most part was installing programs and setting up accounts.
Mr. Reader had never done this before. They spent two weeks to set up the
website, and Mr. Reader spent another two weeks to set up any web front Shumate
wanted. The website went live in late March or early April 2012.
Matthew Denninghoff testified by deposition on October 23, 2019.
He works in the computer programming and web development field. He began
working in web development and customizing at Bud’s Gun Shop in 2003. Mr.
Denninghoff began working for Johnson and SSO in 2010 when Johnson and Bud
split, and he continued to work there until 2013. He began working on GitGuns,
KE’s website, in early 2012. He remembered doing at least two months of work
for KE while he was employed and paid by Johnson. His website planning notes
begin on February 9, 2012, and end on July 12, 2012. He was told, “we’re
working with Cliff [Shumate]. I want you to do what you’ve done for us and make
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it work for him. He’s going to sell guns, too.” Mr. Denninghoff testified about the
cost involved in web development based upon his experience in designing,
programming, and maintaining KE’s website as well as his exposure to these types
of products in the area of business software development. He said his current
employer contracts its programmers out at $150.00 to $300.00 per hour to do work
similar to what he did to build KE’s website. The cost to hire a professional
company to build and maintain a similar website, licensing a year’s worth of
software code, and training on the use of the system could exceed $200,000.00.
Mr. Denninghoff spent one to two months training Mr. Reader on the system. He
said Mr. Reader did not contribute to the building, designing, or completion of the
website.
Jennifer Arnett testified by deposition, also taken October 23, 2019.
She began working for SSO in 2000, and she worked there for 14 years until the
business closed. As to the relationship between Johnson and Shumate, Ms. Arnett
stated that Shumate approached SSO about setting up his own FFL and website to
sell firearms online, and they walked him through the process to get started. Based
on her experience in the business, she had the connections and infrastructure to
create a turnkey operation for Shumate and mentor him. There was no formal
agreement between the two sides. She described the relationship between her and
the Shumates as a friendship, and she wanted to help. Johnson/SSO was going to
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provide Shumate with Mr. Denninghoff to give him the back end of their website
so that KE would be able to tie into SSO’s inventory, which would permit KE to
sell firearms at a better cost. Shumate also sent his employees to SSO’s store to
help out. She was not in any meetings where Johnson and Shumate discussed the
underlying agreement that would permit her to provide any specific information
about it. She said there were no discussions about the value Johnson would be
bringing to the equation as far as the buying group price point and the website.
She said this was the first time they had tried to set up something like this. Her
view of the value of what Shumate received from having a turnkey business
handed to him to sell firearms online was a $1 million benefit from creating the
relationship with the distributors. Any buying benefit that Johnson could have
conferred ended when the business was shut down in 2014. She was aware of the
promissory note after it had been executed.
In his pretrial brief, Johnson assessed the value of goods and services
provided to KE totaled between $1,414,000.00 and $1,724,000.00, and included:
• $1,000,000.00 in buying power, advice, relationship, consulting, and turnkey
operation.
• $300,000.00 - $600,000.00 to build the website.
• $64,000.00 to customize the website.
• $50,000.00 - $60,000.00 for tutoring.
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Johnson requested that the court find the value of the goods and services he
provided to KE totaled $1,660,000.00 and enter a final judgment against KE in that
amount. The judgment, he stated, would serve to offset the prior ruling on KE’s
promissory note. In its brief, KE argued that there was no factual support for
Johnson’s unjust enrichment claim.
On December 5, 2019, the court held a short bench trial and heard
testimony from Shumate as well as arguments from the parties. Shumate discussed
the testimony from the two depositions that had recently been taken, including
Jennifer Arnett’s reference to a “million dollars’ worth of value.” He denied ever
discussing or being promised such an opportunity, and it never materialized.
Shumate said KE began helping Johnson’s company around the time the
promissory note was signed at the end of January 2012, and they stopped assisting
each other in July 2012. Shumate discussed the fact that there was a lawsuit
Johnson’s company was involved in with an ex-partner. He did not know the
details of the lawsuit, but he did know that Johnson needed short term capital to
“stay alive” until the lawsuit ended, which was part of the promissory note.
Johnson’s business was struggling, and Shumate sent his employees to help out
once the creditors had closed Johnson’s line of credit. Shumate provided shipping
cartons, and KE’s employees answered the telephone and greeted customers.
Shumate never asked for compensation for their agreement had been to assist each
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other at arm’s length as best as possible. He understood that Johnson would
provide assistance to them and they would assist Johnson. There was no mutual
agreement, and there was never an invoice for any of the services between them.
Regarding the website, Shumate stated that it had not been perfected
when his IT person, Mr. Reader, came in. It was a work in progress, and there
were many flaws to correct. Mr. Reader rewrote the whole program due to these
flaws. Shumate closed his operation in mid-2013. By the end of 2012, the losses
were so significant, he and the owners decided to wind the company down. It took
awhile to do this because they had inventory. Tax forms showed a $366,185.00
loss for 2012.
Shumate testified that the agreement to assist each other had nothing
to do with the promissory note. There were no further written mutual agreements
between him and Johnson. Shumate understood that it was a gentlemen’s
agreement to help each other until Johnson could get through the lawsuit, when
they would then discuss further business ventures together. There were no written
agreements, and Johnson was rarely at the building to discuss anything. Shumate
took action to collect on the note when the term matured. Johnson had already
closed his business or it was in disarray. Shumate presented the demand to
Johnson in person in his office and followed up with other demand letters.
Johnson would make promises of payment, including installments, and said he had
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a deal in the works if Shumate could be patient. Johnson never followed up on his
promises to pay. There was never any discussion about offsets based on the work
and services Johnson provided until the counterclaim was filed. There were no
discussions of cost for the services.
On January 14, 2021, the circuit court entered its findings of fact,
conclusions of law, and final judgment related to Johnson’s surviving
counterclaims for unjust enrichment and quantum meruit as well as to determine
the value of goods and services Johnson provided to KE. For the unjust
enrichment claim, the court determined that the only amount Johnson could
recover was his expense for the benefit conferred on KE, which was $3,666.67, the
monthly pay for Mr. Denninghoff’s services in creating the website. For the
quantum meruit claim, the court held that Johnson failed to satisfy the fourth
element of the theory; namely, that he did not reasonably notify KE that he
expected to be paid. Accordingly, Johnson could not recover under a quantum
meruit theory. The court entered a judgment dismissing the unjust enrichment
claim as to the goods and services provided, other than for the website, and ordered
that Johnson was entitled to recover $3,666.67. That amount would be applied to
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the amount Johnson owed to KE under the promissory note. It also dismissed
Johnson’s quantum meruit claim. This appeal now follows.2
On appeal, Johnson argues that the circuit court erred in granting
summary judgment on his counterclaims for breach of contract and quantum
meruit, in holding that the benefits conferred on KE were not at Johnson’s expense,
and in finding that the value of the goods and services conferred on KE did not
exceed $3,667.67.
We shall first consider whether the circuit court properly granted
summary judgment on Johnson’s counterclaim for breach of contract. Our
standard of review is set forth in Patton v. Bickford, 529 S.W.3d 717, 723 (Ky.
2016), as modified on denial of reh’g (Aug. 24, 2017):
Summary judgment is a remedy to be used
sparingly, i.e. “when, as a matter of law, it appears that it
would be impossible for the respondent to produce
evidence at the trial warranting a judgment in his favor
and against the movant.” Shelton v. Kentucky Easter
Seals Society, Inc., 413 S.W.3d 901, 905 (Ky. 2013)
(citations omitted). We frequently caution, however, the
term “impossible” is to be used in a practical sense, not
in an absolute sense. See id. (citing Perkins v.
Hausladen, 828 S.W.2d 652, 654 (Ky. 1992)). The trial
court’s primary directive in this context is to determine
whether a genuine issue of material fact exists; if so,
summary judgment is improper, Steelvest, Inc. v.
Scansteel Service Center, Inc., 807 S.W.2d 476, 480 (Ky.
2
Johnson originally filed a premature notice of appeal on December 3, 2020, prior to the date the
circuit court entered its final judgment. He filed an amended notice of appeal once the court
entered its final judgment on January 14, 2021.
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1991). This requires that the facts be viewed through a
lens most favorable to the party opposing summary
judgment, here the Estate. Id. It is important to point out
that “a party opposing a properly supported summary
judgment motion cannot defeat it without presenting at
least some affirmative evidence showing that there is a
genuine issue of material fact for trial.” Id. at 482.
A motion for summary judgment presents only
questions of law and “a determination of whether a
disputed material issue of fact exists.” Shelton, 413
S.W.3d at 905. Our review is de novo, and we afford no
deference to the trial court’s decision.
Johnson contends that multiple factual issues exist regarding whether
the parties entered into an oral contract whereby Johnson would provide goods and
services to KE in exchange for compensation in the amount of the goods and
services provided, which would preclude summary judgment. The court, he stated,
did not address whether any disputed issues of material fact remained but rather
held that his counterclaim was barred as a matter of law by application of the parol
evidence rule and the statute of frauds.
We shall first address Johnson’s argument that the parol evidence rule
does not apply. In New Life Cleaners v. Tuttle, 292 S.W.3d 318 (Ky. App. 2009),
this Court explained the doctrine as follows:
Parol evidence has been defined as oral evidence rather
than written evidence. Black’s Law Dictionary 1006 (8th
ed. 2004). Under the parol evidence rule, when parties
reduce their agreement to a clear, unambiguous, and duly
executed writing, all prior negotiations, understandings,
and agreements merge into the instrument, and a contract
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as written cannot be modified or changed by prior parol
evidence, except in certain circumstances such as fraud
or mistake. Childers and Venters, Inc. v. Sowards, 460
S.W.2d 343, 345 (Ky. 1970). Only a mistake of fact will
affect the enforceability of a contract, not a mistake of
law. Raisor v. Burkett, 214 S.W.3d 895, 906 (Ky. App.
2006) (citations omitted). It is presumed that the written
agreement is final and complete and that all prior
negotiations between the parties have either been
abandoned or incorporated into the final written
instrument. See Childers v. Lucas, 301 Ky. 763, 192
S.W.2d 714 (1946). Kentucky courts have long
recognized that oral agreements made prior to a written
contract merge into the written contract. Prudential Life
Ins. Co. of America v. Bowling, 237 Ky. 290, 35 S.W.2d
322, 323 (1931).
It is also well settled that, “[i]n the absence of
ambiguity a written instrument will be strictly enforced
according to its terms.” Mounts v. Roberts, 388 S.W.2d
117, 119 (Ky. 1965); O’Bryan v. Massey-Ferguson, Inc.,
413 S.W.2d 891, 893 (Ky. 1966). Further, “[a] contract
is ambiguous if a reasonable person would find it
susceptible to different or inconsistent, yet reasonable,
interpretations.” [Cantrell Supply, Inc. v. Liberty Mutual
Insurance Co., 94 S.W.3d 381, 385 (Ky. App. 2002)];
Frear v. P.T.A. Industries, Inc., 103 S.W.3d 99, 105-106
(Ky. 2003). “[W]e are not permitted to create an
ambiguity where none exists even if doing so would
result in a more palatable outcome.” First
Commonwealth Bank of Prestonsburg v. West, 55 S.W.3d
829, 836 (Ky. App. 2000) [(]citing Friction Materials
Company, Inc. v. Stinson, 833 S.W.2d 388, 391 (Ky.
App. 1992)[)].
Words are to be accorded their “ordinarily used
meaning unless the context requires otherwise.” Bays v.
Mahan, 362 S.W.2d 732, 733 (Ky. 1962). “As a cardinal
principle relating to the construction of a contract, it has
long been recognized and held in this and other
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jurisdictions that where the instrument is so clear and free
of ambiguity as to be self-interpretive, it needs no
construction and will be performed or enforced in
accordance with its express terms.” Ex parte Walker’s
Ex’r, 253 Ky. 111, 68 S.W.2d 745, 747 (1933) (citations
omitted). The only purpose of judicial construction is to
remove ambiguity and doubt and to make certain that
which in itself is uncertain. Frear, 103 S.W.3d at 106.
While nothing can be added to or taken from a written
contract by prior parol evidence, it is the rule that
ambiguities may be explained by parol evidence.
Stubblefield v. Farmer, 291 Ky. 795, 165 S.W.2d 556,
557 (1942).
Long ago, Kentucky courts adopted the legal
analysis of I. Greenleaf on Evidence, Section 275:
When parties have deliberately put their
engagements into writing, in such terms as
import a legal obligation, without any
uncertainty as to the object or extent of such
engagement, it is conclusively presumed that
the whole engagement of the parties, and the
extent and manner of their undertaking, was
reduced to writing, and all oral testimony of
a previous colloquium between the parties or
of conversation or declarations at the time
when it was completed, or afterwards, as it
would tend in many instances to substitute a
new and different contract for the one which
was really agreed upon, to the prejudice,
possibly, of one of the parties, is rejected.
Russell v. Halteman’s Adm’x, 287 Ky. 404, 153 S.W.2d
899, 904 (1941) (citing J.I. Case Threshing Machine
Company v. Mattingly, 142 Ky. 581, 134 S.W. 1131,
1133 (1911)). In short, the import of the parol evidence
rule is “conclusively presumed” to extend to every
written contract, regardless of the presence of a merger or
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parol evidence clause, because it is a matter of
substantive law.
New Life Cleaners, 292 S.W.3d at 322-23.
Johnson cites to Texas Gas Transmission Corporation v. Kinslow, 461
S.W.2d 69, 71 (Ky. 1970), to argue that the oral agreement was a collateral
contract and thus not subject to the parol evidence rule:
The basic rule applicable is thus stated in 30 Am.Jur.2d,
Evidence, Section 1049, page 184:
‘An exception to the parol evidence rule,
which is similar in many respects to that of
the doctrine of partial integration, is known
as the ‘doctrine of collateral contract.’
Under this doctrine, a prior or
contemporaneous oral contract which is
independent of, collateral to, and not
inconsistent with, the written contract, may
be proved by parol evidence. A collateral
oral agreement is allowed to be proved
because it is a thing apart from the one
represented by the writing.’
Johnson acknowledges that the promissory note was enforceable. The collateral
oral agreement, he argued, addressed a separate agreement that he would provide
assistance to KE in setting up its gun business and would be paid for this, which
would entitle him to a set-off.
We agree with Johnson that the promissory note memorialized
Johnson’s obligation to repay the $200,000.00 loan. The alleged oral agreement,
Johnson argues, did nothing to vary or contradict the written promissory note.
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Rather, it provided Johnson with a right to a set-off of that loan amount due to
KE’s breach and the mutuality of their respective debts. See Traylor v. Lafayette
Nat. Bank, 158 Ind. App. 552, 558-59, 303 N.E.2d 672, 676 (1973) (citation
omitted) (“The above-mentioned general [parol evidence] rule is not, however,
violated by allowing testimony of a distinct collateral or contemporaneous oral
agreement which is not in conflict with the terms of the written instrument. A
collateral independent parol agreement between the parties which has been acted
upon prior to the time of the writing may be proven, even as against the written
obligation. To admit evidence of a preliminary or contemporaneous oral
agreement in an action on a contract or other written instrument, it must be
consistent with the instrument and must not tend to vary or contradict its terms, and
the terms of the oral agreement must be independent of those expressed in the
writing, even though it may relate to the same subject matter.”). We hold that the
circuit court erred in concluding that the parol evidence rule applied in this
instance to bar any evidence of an alleged, contemporaneous oral agreement.
Next, we shall address whether the alleged oral agreement violates the
statute of frauds. KRS 371.010 provides, in relevant part, that:
No action shall be brought to charge any person:
....
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(7) Upon any agreement that is not to be
performed within one year from the making
thereof;
....
unless the promise, contract, agreement, representation,
assurance, or ratification, or some memorandum or note
thereof, be in writing and signed by the party to be
charged therewith, or by his authorized agent. It shall not
be necessary to express the consideration in the writing,
but it may be proved when necessary or disproved by
parol or other evidence.
The circuit court observed that neither party addressed whether the oral agreement
could have been completed in less than one year. However, it also observed that
Johnson testified that the services he provided to KE in 2012 were still being
presently used, apparently despite Johnson’s argument below that he had fully
performed his part of the oral agreement by providing goods and services. It
further held that modifying the promissory note to provide that its repayment could
be set off by the provision of goods and services by Johnson would materially
affect the terms of the note and would therefore need to be reduced to writing to be
enforceable and to comply with the statute of frauds.
Johnson argues that the circuit court erred in three respects. First, it
improperly concluded that the alleged oral agreement was not to have been
performed in less than one year, and thus subject to the statute of frauds, because
KE continued to have the benefit of services Johnson provided to it in 2012. This,
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he asserts, was not the relevant inquiry. Instead, “[i]n construing the Statute of
Frauds, the general rule is that, if a contract may be performed within a year from
the making of it, the inhibition of the Statute does not apply, although its
performance may have extended over a greater period of time.” Williamson v.
Stafford, 301 Ky. 59, 62, 190 S.W.2d 859, 860 (1945). We agree with Johnson
that there is no indication the agreement to provide goods and services would
extend beyond a year.
Second, Johnson contends that the circuit court misconstrued the
nature of the set-off when it stated that it would materially affect the terms of the
promissory note. Again, we agree with Johnson that the oral agreement did not
modify the promissory note in that there was no allegation that the parties had
agreed that the note would be forgiven or become unenforceable if the goods and
services were provided to KE.
Third, Johnson argues that the circuit court failed to apply the rule that
once an oral agreement has been fully performed, the statute of frauds no longer
applies. He cites to Pilcher v. Stadler, 276 Ky. 450, 457, 124 S.W.2d 475, 479
(1939), for the statement of the law that “a contract is no longer executory, and [the
statute of frauds] has no application thereto, where it has been fully performed
upon one side and the other party by its terms has a longer time than one year in
which to perform his part thereof.” Johnson presented evidence that he had
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fulfilled his obligation under the oral agreement to provide goods and services to
KE; KE was still obligated to pay him for the value of those goods. We agree with
Johnson that the circuit court misapplied this rule as Johnson had established that
he had completed his obligation under the alleged oral agreement. The circuit
court’s statement that full performance was the repayment of the loan and interest
is incorrect. Therefore, the statute of frauds did not render the alleged oral
agreement unenforceable.
The circuit court did not reach the question of whether an oral
agreement existed between the parties. But we agree with Johnson that there are
disputed issues of material fact as to whether there was an oral agreement between
KE/Shumate and Johnson and, if so, whether it was breached. Therefore, we hold
that the circuit court erred as a matter of law in granting summary judgment to KE
regarding Johnson’s counterclaim for breach of the oral agreement.
Next, in the event that Johnson fails to establish the existence and
breach of an oral contract on remand, we shall address whether the circuit court
erred in granting summary judgment to KE on Johnson’s counterclaim seeking
recovery in quantum meruit.
Recovery under the theory of quantum meruit can
be had regardless of the absence of an enforceable
contract. Baker v. Shapero, 203 S.W.3d 697 (Ky. 2006).
A contract implied by law allows for
recovery quantum meruit for another’s
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unjust enrichment. It is not based upon a
contract but a legal fiction invented to
permit recovery where the law of natural
justice says there should be a recovery as if
promises were made. The courts supply the
fiction of the promise to permit the recovery.
Furthermore recovery quantum meruit may
be had irrespective of the intentions of the
parties, and sometimes even in violation of
them.
Perkins v. Daugherty, 722 S.W.2d 907, 909 (Ky. App.
1987) (citations omitted). However, merely because
work was performed that benefited another does not
necessarily warrant recovery.
The party proceeding under a quantum meruit
theory must establish the following elements:
1. that valuable services were rendered, or
materials furnished;
2. to the person from whom recovery is
sought;
3. which services were accepted by that
person, or at least were received by that
person, or were rendered with the
knowledge and consent of that person; and
4. under such circumstances as reasonably
notified the person that the plaintiff expected
to be paid by that person.
66 Am.Jur.2d Restitution and Implied Contracts § 38
(2001).[3]
3
The elements of a quantum meruit claim are now found in the current (2022) version of this
publication at § 34.
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Quadrille Business Systems v. Kentucky Cattlemen’s Association, Inc., 242 S.W.3d
359, 365-66 (Ky. App. 2007).
The circuit court held that Johnson had satisfied the first three
elements of quantum meruit but failed to satisfy the fourth one, holding that
Johnson “did not reasonably notify Mr. Shumate that he expected to be paid.”
Johnson argues that he was not required to give any type of notice as to payment,
and we agree. In Quadrille, this Court observed:
Where no compensation is agreed upon in advance for
services requested by and performed for another, the
presumption that compensation was intended is rebutted
by circumstances which negative such an intention, and
one of such circumstances is a strong self-interest in the
outcome of the transaction by the person furnishing the
services. Thus, the expectation of a future business
advantage or opportunity cannot form the basis of a
quantum meruit claim; a company cannot recover for the
alleged services it renders in submitting a program to a
second company where it is conclusively established as a
matter of law that the alleged services were preliminary
services performed without any thought of direct cash
compensation but with a view to obtaining business
through a hoped-for contract.
The inference of a promise to pay for services is also
negatived where the circumstances or conduct warrant a
contrary inference or the person benefited has said or
done nothing from which such a promise may be
inferred, or where, at the time the services were rendered,
it was intended, understood, or agreed that no payment
should be made for them, or where the services were
performed without authority, express or inferred.
(footnotes omitted).
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Quadrille, 242 S.W.3d at 366-67 (citing 66 AM.JUR.2d Restitution and Implied
Contracts § 47 (2001)).4 In the present case, there is no indication that Johnson
provided the goods and services to obtain his own business advantage as they were
to be in direct competition and, thus, the presumption that compensation was
expected could not be rebutted under the circumstances. As Johnson states in his
brief, “there are no circumstances . . . to suggest that it was reasonable for Shumate
to assume that a competitor would provide him with a valuable and customized
website, guidance and advice on entering the gun business, and valuable
relationships with distributors for free.” Accordingly, the circuit court erred in
concluding that Johnson failed to satisfy the fourth element of his quantum meruit
claim.
We shall also address Johnson’s unjust enrichment argument, in
which he asserts that the circuit court erred in holding that the majority of the
benefits conferred on KE were not at Johnson’s expense and in limiting the value
of the goods and services to $3,666.67, which covered Mr. Denninghoff’s salary
for the time he was working on the website.
To recover on a claim of unjust enrichment a
plaintiff is required to “prove the following three
elements: ‘(1) benefit conferred upon defendant at
plaintiff’s expense; (2) a resulting appreciation of benefit
by defendant; and (3) inequitable retention of [that]
benefit without payment for its value.’”
4
The current (2022) version of this topic is now found in § 41.
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Superior Steel, Inc. v. Ascent at Roebling's Bridge, LLC, 540 S.W.3d 770, 777-78
(Ky. 2017), as corrected (Mar. 22, 2018) (citations omitted).
Because the circuit court found that he was entitled to recover the
salary paid to Mr. Denninghoff, Johnson argues that, logically, he was entitled to
recover the value for all of the goods and services conferred upon KE. In support
of this assertion, Johnson cites to Northern Shipping Funds I, L.L.C. v. Icon
Capital Corporation, 998 F. Supp. 2d 301, 330 (S.D.N.Y. 2014), for the following
statement: “Unjust enrichment claims are not limited to tangible monetary
enrichment, but also include the receipt of an intangible benefit at the expense of
another.” Much of the services conferred upon KE were comprised of expertise
and relationship building, which was provided through the time and energy of
Johnson and his employees. This meets the definition of an intangible benefit
provided at Johnson’s expense, and the circuit court erred in not so holding.
Based upon this holding, we need not address Johnson’s argument
that the circuit court erred in limiting the value of the goods and services conferred
on KE by Johnson to $3,666.67. If the court reaches this issue on remand, the
proper analysis would require the court to consider the overall value of the goods
and services provided, as appropriate.
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For the foregoing reasons, the orders of the Bourbon Circuit Court are
reversed, and this matter is remanded for further proceedings in accordance with
this Opinion.
ALL CONCUR.
BRIEFS FOR APPELLANT: BRIEF FOR APPELLEE:
Carroll M. Redford, III James Paul Brannon
Elizabeth C. Woodford Paris, Kentucky
Lexington, Kentucky
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