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Donald COOK and DKCD, Inc., Appellants v. Dr. Norman RADTKE, M.D. and the Estate of Dr. Donald McAllister, M.D., Appellees
OPINION
Donald Cook and DKCD, Inc., bring this appeal from a January 5, 2018, Opinion and Order and a June 13, 2018, Opinion and Order of the Jefferson Circuit Court awarding $467,911.82 in damages for default upon sundry promissory notes. We reverse and remand.
Relevant to this appeal, Donald Cook, DKCD, Inc., Norman Radtke, Donald McAllister, and Ernest Eggers were members of Renaissance Realty Investments, LLC (Renaissance Realty). It was founded in 1999. Renaissance Realty created two subsidiary corporations – Renaissance/St. Andrews, LLC (St. Andrews) and Woodridge Lake Builders, LLC (Woodridge Lake). St. Andrews sought to develop condominium/apartment buildings, and Fifth Third Bank provided financing for St. Andrews’ development in the amount of $16.6 million. Woodridge Lake sought to develop patio and single dwelling homes, and King Southern Bank provided financing for the Woodridge Lake development.
Renaissance Realty started experiencing financial difficulties sometime in 2008 and was unable to meet its debt obligations. The loan from Fifth Third Bank matured on December 16, 2010, and the bank demanded payment of all outstanding sums. After initiating legal action, Fifth Third Bank eventually agreed to an extension of the loan if Renaissance Realty paid the sum of $739,083 in principal reduction, $130,000 representing default interest, and the outstanding 2009 and 2010 real property taxes. As Renaissance Realty lacked the necessary funds, Radtke and McAllister personally advanced the money in order to secure the extension of the Fifth Third loan. Concomitantly therewith, Eggers, Radtke, McAllister, DKCD, Cook, and St. Andrews entered into a Contribution and Indemnity Agreement on March 29, 2011. Relevant herein, it was agreed that DKCD and Cook would reimburse Radtke and McAllister 25 percent and that Eggers would also reimburse Radtke and McAllister 25 percent of the entire amount. And, also on March 29, 2011, Eggers executed two Subordinated Promissory Notes – one for the principal amount of $32,500 and another for the principal amount of $184,770.25. Both notes were payable to Radtke and McAllister. The Subordinated Promissory Note of $32,500 was due on May 31, 2011, and the Subordinated Promissory Note of $184,770.25 was due on March 31, 2012. Likewise, on March 29, 2011, Cook and DKCD executed two Subordinated Promissory Notes – one for the principal amount of $32,500 and another for the principal amount of $184,770.25. The Subordinated Promissory Notes were payable to Radtke and to McAllister. The Subordinated Promissory Note of $32,500 was due on May 31, 2011, and the Subordinated Promissory Note of $184,770.25 was due on March 31, 2012.
In 2013, Radtke and McAllister also personally paid loans owed to King Southern Bank in connection with the Woodridge Lake project. Radtke and McAllister each paid 1.5 million dollars to retire the loans.1 Renaissance Realty was thereafter dissolved.
On May 1, 2014, and May 13, 2015, Radtke and the Estate of Donald McAllister, by Administratrix Diane McAllister (McAllister), filed a complaint and amended complaint against Eggers. Therein, Radtke and McAllister claimed that Eggers failed to pay pursuant to the terms of the 2011 Subordinated Promissory Notes executed by Eggers and defaulted upon both Subordinated Promissory Notes. Radtke and McAllister also alleged that Renaissance Realty and its subsidiaries received loans from King Southern Bank in connection with the Woodridge Lake development. Radtke and McAllister asserted that they personally paid the loans owed to King Southern Bank, and that Eggers failed to contribute “cash calls” to Renaissance Realty for the payment of such debt.
Eggers filed an answer, and Radtke and McAllister filed a motion for partial summary judgment. They argued the facts were undisputed that Eggers defaulted under the terms of the Subordinated Promissory Notes executed by him and sought judgment against him as a matter of law.
On April 12, 2016, Radtke and McAllister filed a second amended complaint against Eggers and Cook. In relevant part, Radtke and McAllister asserted:
12. [Renaissance Realty] or its subsidiaries took out loans or mortgages with King Southern Bank and Fifth Third Bank for the development of the properties they developed.
13. The Plaintiff’s [sic] signed a release of claims releasing Donald Cook from any responsibility in paying back the money paid to King Southern Bank. However, that release was made under duress, in [sic] unconscionable, and should not be enforced.
14. On or about May 23, 2012[,] the Plaintiff’s [sic] and Defendant’s [sic], signed personal guarantees with King Southern Bank on a line of credit for [Renaissance Realty]. The Defendant’s [sic] did not pay their required portion to have this loan released.
15. In March of 2011[,] the Plaintiff’s [sic] agreed to make two personal loans to [St. Andrews] to pay off mortgage debt and financing expenses owed to Fifth Third Bank.
16. In March 2011[,] the Defendant, Ernest Eggers, signed a contribution and indemnity agreement and two subordinate promissory note[s] agreeing to be personally responsible if the Plaintiff’s [sic] were not paid back for the loan they made to Fifth Third Bank[.]
17. [Renaissance Realty] began having financial issues around 2008 after the “housing bubble” burst.
18. Due to the troubled financial times [St. Andrews] had to sell the apartments in 2010.
19. The Defendant was supposed to repay loans regarding [St. Andrews] on May 31, 2011[,] and the other by March 31, 2012[.]
20. On or about October 31, 2012[,] the [St. Andrews] condos had to be sold.
21. In order to dissolve the [Renaissance Realty], the Plaintiff’s [sic] personally paid off the loans to King Southern Bank. [Renaissance Realty] was dissolved in 2013. The Defendant’s [sic] refused to pay.
22. The Plaintiff’s [sic] do not know if they [sic] money they gave to Donald Cook actually went to the businesses. They believe the funds may have been misappropriated.
23. To date the Defendant, Ernest Eggers, has not paid the funds due under the Subordinate Promissory Notes for the 2011 loans to [St. Andrews] and neither Defendant has reimbursed the Plaintiff’s [sic] for funds owed to pay off King Southern Bank.
24. The Defendant’s [sic] have not made any payments to the Plaintiff’s [sic].
25. The Defendant breached the Subordinate Promissory Note causing injury to the Plaintiff’s [sic].
26. When the Defendant’s [sic] failed to contribute or reimburse the Plaintiff’s [sic] for the cash calls they paid on his behalf, it caused injury to the Plaintiff’s [sic].
27. When the Defendant’s [sic] did not reimburse the Plaintiff’s [sic] back for paying the King Southern Note they caused injury to the Plaintiff’s [sic].
April 12, 2016, Amended Complaint at 3-4 (citations omitted).
By order entered May 4, 2016, the circuit court granted Radtke’s and McAllister’s motion for partial summary judgment on the issue of Eggers’ liability for defaulting under the terms of the Subordinated Promissory Notes. The circuit court reserved the issue of damages for later adjudication.
Approximately four months thereafter, on September 23, 2016, Radtke and McAllister filed a third amended complaint against, inter alios, Eggers, Cook, and DKCD. Therein, Radtke and McAllister pointed out that DKCD, Cook, and Eggers were members of Renaissance Realty. In relevant part, Radtke and McAllister asserted:
13. The operating agreements for [Renaissance Realty] and it’s [sic] subsidiaries indicated that each owner would “upon call of the Manager” make capital contributions to the business.
14. When the Defendant, Don Cook, did call for capital contributions the Defendant’s [sic] did not contribute as required. The Plaintiff’s [sic] would cover the Defendant’s [sic] share expecting to be paid back. However, the Defendant’s [sic] did not ever pay.
15. [Renaissance Realty] or its subsidiaries took out loans or mortgages with King Southern Bank and Fifth Third Bank for the development of the properties they developed.
16. The Plaintiff’s [sic] signed a release of claims releasing Donald Cook from any responsibility in paying back the money paid to King Southern Bank. However, that release was made under duress, in [sic] unconscionable, and should not be enforced.
17. On or about May 23, 2012[,] the Plaintiff’s [sic] and Defendant’s [sic], signed personal guarantees with King Southern Bank on a line of credit for [Renaissance Realty]. The Defendant’s [sic] did not pay their required portion to have this loan release.
18. In March of 2011[,] the Plaintiff’s [sic] agreed to make two personal loans to [St. Andrews] to pay off mortgage debt and financing expenses owed to Fifth Third Bank.
19. In March 2011[,] the Defendant, Ernest Eggers, signed a contribution and indemnity agreement and two subordinate promissory note[s] agreeing to be personally responsible if the Plaintiff’s [sic] were not paid back for the loan they made to Fifth Third Bank[.]
20. [Renaissance Realty] began having financial issues around 2008 after the “housing bubble” burst.
21. Due to the troubled financial times [Renaissance Realty] had to sell the apartments in 2010.
22. The Defendant was supposed to repay loans regarding [St. Andrews] on May 31, 2011[,] and the other by March 31, 2012[.]
23. On or about October 31, 2012[,] the [St. Andrews] condos had to be sold.
24. In order to dissolve the [Renaissance Realty], the Plaintiff’s [sic] personally paid off the loans to King Southern Bank. [Renaissance Realty] was dissolved in 2013. The Defendant’s [sic] refused to pay.
25. The Plaintiff’s [sic] do not know if they [sic] money they gave to Donald Cook actually went to the businesses. They believe the funds may have been misappropriated.
26. To date the Defendant, Ernest Eggers, has not paid the funds due under the Subordinate Promissory Notes for the 2011 loans to [St. Andrews] and none of the Defendant’s [sic] has reimbursed the Plaintiff’s [sic] for funds owed to pay off King Southern Bank.
27. The Defendant’s [sic] have not made any payments to the Plaintiff’s [sic].
28. The Defendant breached the Subordinate Promissory Note causing injury to the Plaintiff’s [sic].
29. When the Defendant’s [sic] failed to contribute or reimburse the Plaintiff’s [sic] for the cash calls they paid on his behalf, it caused injury to the Plaintiff’s [sic].
30. When the Defendant’s [sic] did not reimburse the Plaintiff’s [sic] back for paying the King Southern Note they caused injury to the Plaintiff’s [sic].
September 23, 2016, Amended Third Complaint at 3-4.
An answer was filed by Cook and DKCD. And, a trial by the circuit court was set to begin on November 4, 2016. Cook and DKCD filed a trial brief on October 28, 2016. Therein, Cook and DKCD contended:
Based on the Complaint, it appears that the issues for purposes of this trial will be the rights of Plaintiffs to recover from DKCD and Don Cook portions of loans paid by Plaintiffs which they are now either treating as loans or capital contributions to the business. Most importantly, however, is the fact that when the lion’s share of the loan payments were made by Plaintiffs to King Southern Bank, they entered into a release (the “Release”) of Mr. Cook and DKCD. Specifically, it provides:
5. Release. Dr. Radtke and Dr. McAllister, for themselves and their respective successors and assigns, do hereby release and discharge Mr. Cook and DKCD and their respective successors, assigns, affiliates, shareholders, and officers of and from all liability arising with respect to Dr. Radtke[’s] and/or Dr. McAllister’s payment and/or satisfaction of some or all of the loans made by King Southern Bank to the Companies pursuant to their guarantys [sic] or otherwise including, without limitation, liability arising by virtue of the common law “right of contribution.”
As indicated below, the legal issues for purposes of trial will be the extent to which this Release releases Mr. Cook and DKCD for their respective pro rata portions of any responsibility. The evidence will show at trial that the reason this Release was entered into was because although King Southern Bank agreed to extending the terms of the loan for additional time, Plaintiffs wanted to stop the bleeding, end the relationship and, on an expedited basis, liquidate the company’s assets in transactions to which Cook and DKCD objected. It is believed that the reason Cook and DKCD were not sued initially when the suit was filed in May of 2014 was because of the existence of this Release.
Cook and DKCD’s Trial Brief at 3-4 (footnotes and citations omitted).
Some four days before trial, on October 31, 2016, Radtke and McAllister filed a pretrial memorandum. Radtke and McAllister identified the following three claims for trial:
1. Are the Defendant’s [sic] responsible for paying their portion of capital contributions covered by the Plaintiff’s [sic].
2. Is Eggers responsible for paying his portion of the King Southern Bank payoff. Further, is Don Cook responsible for paying King Southern Bank payments made before the release was signed on July 12, 2013.
3. Is [sic] Don Cook and DKCD responsible for repaying the loan made to the Company regarding the Fifth Third Bank payment.
Radtke and McAllister’s Memorandum at 1-2. As to the third claim, Radtke and McAllister asserted that Cook and DKCD “signed Subordinated Promissory Notes for a payment that Plaintiff’s [sic] made to Fifth Third Bank for $739,083.00.” Pretrial Memorandum at 3.
During the bench trial held on November 4 and November 18, 2016, Radtke and McAllister sought to introduce evidence concerning claims that Cook and DKCD defaulted under the terms of two Subordinated Promissory Notes executed by them in the principal amounts of $32,000 and $184,770.25 and were liable for damages. Cook and DKCD objected and argued that Radtke and McAllister did not raise any claims in their complaints as to the Subordinated Promissory Notes executed by Cook and DKCD. The circuit court overruled the objections and admitted the evidence.
After the trial concluded, Cook and DKCD filed a post-trial brief. They argued that any claims based upon the Subordinated Promissory Notes executed by them were not pleaded in the complaints and should not be considered by the court. Cook and DKCD pointed out that Radtke and McAllister brought claims against Eggers for his default under Subordinated Promissory Notes. These claims against Eggers were clearly set forth in the complaints; however, no such claims were made in the complaints concerning the Subordinated Promissory Notes executed by Cook and DKCD.
By Opinion and Order entered January 5, 2018, the circuit court determined that neither Eggers, Cook nor DKCD was responsible to Radtke and McAllister for additional capital contributions made to Renaissance Realty or for their payment of the King Southern loan. As to the Subordinated Promissory Notes, the circuit court concluded:
The final issue before the Court is whether, and to what extent, Dr. Eggers, Mr. Cook and DKCD are liable to Dr. Radtke and Dr. McAllister under the terms of their respective promissory notes. The Court, having previously granted summary judgment against Dr. Eggers on this issue, finds that Mr. Cook and DKCD are likewise liable. The Court has no cause to find that the notes themselves are invalid or unenforceable․
January 5, 2018, Opinion and Order at 6. The circuit court rendered “judgment ․ against Mr. Cook and DKCD and in favor of Dr. Radtke and Dr. McAllister in the amount of $467,911.82, along with their reasonable costs, plus interest to be calculated at the rate of 6% per annum from the date of judgment until paid in full.” January 5, 2018, Opinion and Order at 8.
Radtke and McAllister filed a motion to alter, amend, or vacate the Opinion and Order. Radtke and McAllister pointed out that the court erroneously failed to determine the amount of damages owed by Eggers. Cook and DKCD also filed a motion to alter, amend, or vacate the Opinion and Order. Cook and DKCD argued that Radtke and McAllister never raised the claim as to either Cook or DKCD’s default under the Subordinated Promissory Notes in the complaints. Cook and DKCD maintained that the claims as to the Subordinated Promissory Notes “were not properly before the Court and cannot form the basis of any judgment against them.” Motion at 12. As they lacked notice of such claims, Cook and DKCD alleged they were unable “to mount a defense to a claim that they did not know about.” Motion at 14.
Radtke and McAllister then filed a motion to amend the pleadings to conform with the evidence under Kentucky Rules of Civil Procedure (CR) 15.02. Radtke and McAllister maintained that Cook and DKCD “were well aware” of the claims relating to the Subordinated Promissory Notes. As the claims were litigated at trial, Radtke and McAllister sought to amend their complaints to set forth the claims.
In their response, Cook and DKCD argued that the motion to amend the pleadings should be denied per CR 15.02. Cook and DKCD maintained that they objected to evidence at trial concerning the Subordinated Promissory Notes and that they would be unfairly prejudiced by an amendment.
By Opinion and Order entered June 13, 2018, the circuit court denied Cook and DKCD’s motion to vacate. The court, however, granted Radtke and McAllister’s motion to amend the pleadings pursuant to CR 15.02. The court also amended the January 5, 2018, Opinion and Order to reflect that Eggers was also liable for the damage award.
Cook and DKCD timely filed a notice of appeal from both the January 5, 2018, and the June 13, 2018, Opinion and Orders.
Cook and DKCD contend the claims related to the Subordinated Promissory Notes executed by them were never raised in a pleading as required by CR 8.01. Cook and DKCD point out that Radtke and McAllister specifically and clearly raised such claims against Eggers in the complaints. In fact, in their complaints, Cook and DKCD assert that Radtke and McAllister repeatedly claimed that Eggers defaulted under the Subordinated Promissory Notes and owed damages therefore. Cook and DKCD maintain that Radtke and McAllister failed to raise such cause of action against them in any of the complaints and that the circuit court erred by rendering judgment based upon the Subordinated Promissory Notes against Cook and DKCD.
Upon careful review of the complaints filed by Radtke and McAllister, we agree they did not raise claims against Cook and DKCD for their alleged default under the Subordinated Promissory Notes executed by them. Although inartfully drawn, Radtke and McAllister’s complaints solely raised claims of Eggers’ default under Subordinated Promissory Notes. No allegations or claims against Cook and DKCD as to their Subordinated Promissory Notes are found in any complaint. Radtke and McAllister only first raised the claims of Cook and DKCD’s default under the Subordinated Promissory Notes in Radtke’s and McAllister’s pretrial memorandum filed a mere four days before trial. In fact, the record does not include a copy of the Subordinated Promissory Notes executed by Radtke and McAllister until trial, when such notes were introduced as exhibits.
It is incumbent upon the plaintiff to set forth each cause of action against a defendant in the complaint. CR 8.01(1); O'Rourke v. Lexington Real Estate Co., L.L.C., 365 S.W.3d 584, 587 (Ky. App. 2011). Where a claim against a defendant was not raised in the complaint but evidence was introduced at trial upon the claim, the court may grant a motion to amend the pleadings to include the claim under CR 15.02.
CR 15.02 reads:
When issues not raised by the pleadings are tried by express or implied consent of the parties, they shall be treated in all respects as if they had been raised in the pleadings. Such amendment of the pleading as may be necessary to cause them to conform to the evidence and to raise these issues may be made upon motion of any party at any time, even after judgment; but failure so to amend does not affect the result of the trial of these issues. If evidence is objected to at the trial on the ground that it is not within the issues made by the pleadings, the court may allow the pleadings to be amended and shall do so freely when the presentation of the merits of the action will be subserved thereby and the objecting party fails to satisfy the court that admission of such evidence would prejudice him in maintaining his action or defense upon the merits. The court may grant a continuance to enable the objecting party to meet such evidence.
Pursuant to CR 15.02, a trial court may grant a motion to amend the pleadings to conform with the evidence at any point during trial or after trial. 6 Kurt A. Philipps, Jr., David V. Kramer, and David W. Burleigh, Kentucky Practice, CR 15.02 (June 2019). When considering a motion to amend the pleading, the motion should be granted if the claim was litigated at trial by the parties’ consent. Nucor Corp. v. Gen. Elec., Co., 812 S.W.2d 136, 145-46 (Ky. 1991); Mays v. Porter, 398 S.W.3d 454, 457-58 (Ky. App. 2013). However, if a party objects to evidence concerning the claim during trial:
During the trial when an objection to evidence is made on the ground that is it not within the issues presented by the pleadings, the court is authorized to permit amendments freely if the presentation of the merits of the action will be subserved and the objecting party will not be actually prejudiced or seriously disadvantaged.
6 Kurt A. Philipps, Jr., David V. Kramer, and David W. Burleigh, Kentucky Practice, CR 15.02 (June 2019). So, where a party objects to the introduction of evidence concerning the claim not pleaded at trial, the motion to amend must be denied if the opposing party would be prejudiced thereby. In this context, prejudice is recognized as the inability to present a defense to the claim not pleaded. Nucor Corp., 812 S.W.2d at 146.
In this case, Cook and DKCD objected to admission of evidence at trial concerning their Subordinated Promissory Notes. And, they argue that amendment of the pleadings after trial resulted in prejudice as they were unable to mount a suitable defense at trial. In particular, Cook and DKCD maintain that if they had proper notice of the claims relating to the Subordinated Promissory Notes:
Cook and DKCD would have: 1) asserted counterclaims related to corporate waste and breach of fiduciary duties; 2) worked up the evidence proving that the sale of [Renaissance Realty]’s assets was both financially ruinous and designed to protect Radtke and McAllister at the expense of Eggers and Appellants; 3) engaged in motion practice to test the validity of the alleged damages; and 4) argued that Appellants were entitled to an offset in any damages as a function of Radtke and McAllister’s unilateral decision to waste [Renaissance Realty]’s assets.
Cook and DKCD’s Brief at 14-15 (footnote omitted). Cook and DKCD particularly allege they would have filed counterclaims against Radtke and McAllister for breach of fiduciary duty for selling St. Andrews’ assets (financed by the Fifth Third Bank loan) far below market value, thus leaving less funds to be applied as an offset against sums owing under the Subordinated Promissory Notes. Additionally, Cook and DKCD maintain they would have secured an expert witness to value St. Andrews’ assets.
This case involved complicated business dealings among the parties that spanned several years. The first complaint was filed on May 1, 2014, and the final judgment was entered June 13, 2018. During such time, Radtke and McAllister filed four separate complaints, and the parties engaged in extensive discovery. As herein before stated, Radtke and McAllister did not raise the claims as to the Subordinated Promissory Notes executed by Cook and DKCD in any of the four complaints. In response to discovery requests, Radtke and McAllister made no reference to these notes in regard to Cook’s and DKCD’s liability. From a litigation perspective, we are unable to fathom a legal reason for this omission, given claims on the notes were then allowed to be asserted at trial over the objections of Cook and DKCD. It is patently clear to this Court that Cook and DKCD were definitely prejudiced in their defense of the claims. They were denied proper notice of the claims and the ability to adequately prepare a defense, as set forth above, including the opportunity to assert counterclaims against Radtke and McAllister. For these reasons, we hold that the circuit court committed reversible error by granting the motion to amend pleadings per CR 15.02.
We deem any other contentions of error moot and do not reach the issue raised on appeal regarding the circuit court’s sua sponte application of the business judgment rule.
In sum, we conclude that the circuit court committed reversible error by determining at trial that Cook and DKCD were liable to Radtke and McAllister for breach of the Subordinated Promissory Notes, where the issue was not raised by the complaint as amended or during discovery.
For the foregoing reasons, we reverse and remand the Opinion and Orders of the Jefferson Circuit Court for proceedings consistent with this opinion.
FOOTNOTES
1. A sale of assets from Woodridge Lake development resulted in $75,000, which was also applied to the loans with King Southern Bank.
TAYLOR, JUDGE:
ALL CONCUR.
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Docket No: NO. 2018-CA-000954-MR
Decided: February 21, 2020
Court: Court of Appeals of Kentucky.
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