MANUFACTURING LLC v. HARLAN COUNTY INDUSTRIAL DEVELOPMENT AUTHORITY INC

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Court of Appeals of Kentucky.

C&H MANUFACTURING, LLC, Appellant v. HARLAN COUNTY INDUSTRIAL DEVELOPMENT AUTHORITY, INC. and Hurberries, Inc., Appellees

NO. 2018-CA-001222-MR

Decided: March 13, 2020

BEFORE: COMBS, JONES, AND L. THOMPSON, JUDGES. BRIEFS FOR APPELLANT: Scott M. Webster, London, Kentucky. BRIEF FOR APPELLEE HARLAN COUNTY INDUSTRIAL DEVELOPMENT AUTHORITY, INC.: Jonathan C. Shaw, Shawn C. Conley, Paintsville, Kentucky. BRIEF FOR APPELLEE HURBERRIES, INC.: Danny Lee Lunsford, Jr., Harlan, Kentucky.

OPINION

Appellant, C&H Manufacturing, LLC (“C&H”), initiated the underlying action against Hurberries, Inc. (“Hurberries”) and Harlan County Industrial Development Authority, Inc. (“HCIDA”) on several claims of conversion. The circuit court entered summary judgment for both Hurberries and HCIDA on June 20, 2018, upon finding that C&H had effectively abandoned the equipment on the premises leased by Hurberries from HCIDA. C&H now appeals this judgment. Following our review of the record and applicable law, we affirm.

I. Background

This appeal arises from an extraordinarily convoluted procedural history involving multiple parties and claims. We recite only the facts and procedural history relevant to the parties to this appeal.

Appellant, C&H, was involved in the manufacturing of metal parts, some of which were sold for use in the coal mining industry. On June 19, 2001, C&H sought and obtained its first loan, a grant agreement with the Harlan Fiscal Court, Kingdom Come Industrial Development Authority, Inc. (“Kingdom Come”),1 Nu Way Manufacturing, Inc. (“Nu Way”) and the Kentucky Economic Development Finance Authority. This grant agreement provided for the construction of a manufacturing facility on property owned by Kingdom Come in Lynch, Kentucky (“the Lynch property”) to be operated by C&H.

In 2001, C&H entered into a second loan agreement with Cumberland Valley Area Development District (“Cumberland Valley”) for the purpose of purchasing equipment “for the use in operations of C&H” at the facility on the Lynch property. C&H provided Cumberland Valley with a promissory note for $100,000 and a corresponding security agreement. The security agreement provided Cumberland Valley with a first priority lien on three (3) pieces of equipment: a press brake, a shear, and a cutting system. All parties acknowledge that C&H defaulted on the loan and never attempted to make another payment or cure its default.

Despite having received reprieves on their loans, both C&H’s and Kingdom Come’s businesses continued to suffer. In either 2006 or 2007, C&H and Kingdom Come began negotiating the sale of the facility and the equipment therein to Hurberries, a commercial competitor of C&H. The proposed terms of sale at one point included Hurberries assuming the obligations of C&H’s third defaulted loan, this one from Cumberland Valley.

C&H, however, ultimately abandoned its lease of the Lynch property altogether in 2007 2 due to declining business, leaving the three items of secured collateral in the facility. After C&H left, Kingdom Come continued to negotiate the sale with Hurberries throughout the cessation of C&H’s business but concluded once Kingdom Come’s business dissolved. At this point, HCIDA assumed control of the Lynch property and facility and continued negotiations with Hurberries as Kingdom Come’s successor-in-interest.

These negotiations, however, were fruitless.3 Instead, Hurberries entered into a verbal agreement with HCIDA to lease the Lynch property. In approximately March of 2007, a few weeks after C&H left the facility, Hurberries began using the real property under its lease. Hurberries also made use of the equipment left behind by C&H.

Despite vacating the premises and leaving behind the equipment, C&H never made a demand to HCIDA or Hurberries for the return of the equipment, nor did it attempt to collect the equipment. C&H’s owner, Herman McKnight, testified that he left the equipment behind believing that Hurberries’ rent payments would be applied to his debt on the equipment. He explained that he planned to retrieve the equipment only after the debt on the equipment had been satisfied. There was never a formal agreement reached between C&H and HCIDA and/or Hurberries in this regard. It appears that Mr. McKnight based his understanding on statements by various Harlan County officials during preliminary negotiations with Hurberries.

It was not until 2017 that C&H, motivated to recoup rental payments in hopes that it would be able to reclaim the equipment, initiated this claim against HCIDA and Hurberries, alleging conversion of the manufacturing equipment at the Lynch property. C&H claimed that HCIDA had converted the equipment by leasing the facility, and thereby the equipment contained therein, to Hurberries and receiving lease payment for its use. In the alternative, C&H contended that Hurberries converted the equipment by using it at the Lynch facility. C&H also alleged that Hurberries converted a $2,881.56 check payable to C&H from Kentucky Utilities Company by signing the check as C&H and depositing the check into its own accounts.4

The parties undertook considerable discovery, and on February 28, 2017, the circuit court set a trial for February 6, 2018. During this discovery period, Mr. McKnight admitted in deposition that at no point did he, in either his personal or professional capacity for C&H, make a demand for the return of the equipment or the check.

Following these admissions, Hurberries filed a motion for summary judgment on May 24, 2017. Hurberries argued that C&H’s claim failed because C&H could not prove an essential element of conversion – the demand for the return of the equipment. HCIDA also filed a motion for summary judgment on September 18, 2017, adding that C&H was barred from asserting a claim for conversion because it abandoned the equipment at the Lynch property. HCIDA also asserted laches and statute of limitation defenses.

The circuit court heard the parties’ arguments for summary judgment on January 11, 2018. C&H argued that because Hurberries had originally attempted to purchase the equipment from C&H and then continued to use the equipment after negotiations failed, Hurberries had intentionally and unlawfully converted the equipment. The circuit court, however, viewed C&H’s failure to collect the equipment from the Lynch factory as abandonment and additionally noted that C&H never made any demand for the equipment’s return. Consequently, the circuit court granted summary judgment to both Hurberries and HCIDA. This appeal followed.

II. Analysis

“Because summary judgment involves only legal questions and the existence of any disputed material issues of fact, an appellate court need not defer to the trial court’s decision and will review the issue de novo.” Lewis v. B & R Corp., 56 S.W.3d 432, 436 (Ky. App. 2001) (footnote omitted).

C&H contends that Hurberries and HCIDA converted the equipment left behind at the Lynch property facility. Both Hurberries and HCIDA counter that C&H’s conversion claim fails for two reasons: (1) C&H failed to provide evidence of a demand for the return of the equipment and a refusal to do so; and (2) C&H abandoned the equipment when it prematurely vacated its lease. C&H specifically maintains that it did not need to make a demand for the return of the equipment to state a conversion claim because Hurberries and HCIDA knew that the equipment belonged to C&H and therefore committed a wrongful taking at the outset.

Conversion is an intentional tort defined as “the wrongful exercise of dominion and control over property of another[.]” State Auto. Mut. Ins. Co. v. Chrysler Credit Corp., 792 S.W.2d 626, 627 (Ky. App. 1990). The elements of the tort of conversion are as follows:

(1) the plaintiff had legal title to the converted property;

(2) the plaintiff had possession of the property or the right to possess it at the time of the conversion;

(3) the defendant exercised dominion over the property in a manner which denied the plaintiff’s rights to use and enjoy the property and which was to the defendant’s own use and beneficial enjoyment;

(4) the defendant intended to interfere with the plaintiff’s possession;

(5) the plaintiff made some demand for the property’s return which the defendant refused;

(6) the defendant’s act was the legal cause of the plaintiff’s loss of the property; and

(7) the plaintiff suffered damage by the loss of the property.

Jones v. Marquis Terminal, Inc., 454 S.W.3d 849, 853 (Ky. App. 2014) (emphasis added) (quoting Ky. Ass'n of Counties All Lines Fund Trust v. McClendon, 157 S.W.3d 626, 632 n.12 (Ky. 2005)).

Conversion can be subdivided into two categories: (1) conversion by way of a wrongful taking at the outset; and (2) conversion by lawful taking at the outset which becomes wrongful. If the taking is wrongful from the outset, the fifth element of demand and refusal need not be proven. Joseph Goldberger Iron Co. v. Cincinnati Iron & Steel Co., 153 Ky. 20, 154 S.W. 374, 375 (1913). This is because “[w]here conversion has occurred by way of a wrongful taking at the outset ․ demand and refusal need not be proved, which is logical since the taking is hostile at the forefront and demand for its return likely futile.” Madison Capital Co., LLC v. S & S Salvage, LLC, 765 F. Supp. 2d 923, 932 (W.D. Ky. 2011) (quoting Kendrick v. Standard Fire Ins. Co., No. 06-141-DLB, 2007 WL 1035018, at *13 (E.D. Ky. Mar. 31, 2007)).

Regardless of whether the conversion is alleged to have begun lawfully or unlawfully, the doctrine of abandonment precludes any claim for conversion. See Greer v. Arroz, 330 S.W.3d 763, 766 (Ky. App. 2011). Abandoned property is defined as property “to which the owner has voluntarily relinquished all right, title, claim[,] and possession with the intention of terminating his ownership, but without vesting it in any other person[.]” Goss v. Bisset, 411 S.W.2d 50, 53 (Ky. 1967) (citation omitted). Abandoned property may be “appropriated by anyone, if it has not been reclaimed by the former owner, and ownership of it vests by operation of law, in the person first lawfully appropriating it and reducing it to possession with the intention to become its owner, provided such taking is fair.” Greer, 330 S.W.3d at 765 (quoting Kelley v. Nationwide Auto Restoration, LLC, 246 S.W.3d 470, 473 (Ky. App. 2007)).

Our Court has previously recognized a presumption of abandonment when a commercial tenant turns over its lease to another commercial tenant in the same business and leaves behind equipment or personal property. Goss, 411 S.W.2d at 53. In Goss, a lessor and her lessee disputed ownership of several items of property that a previous tenant left behind at its former lease when it moved to an adjacent building. Id. at 52. The items of property originally belonged to another company which abandoned the property when it assigned its lease to the company that eventually became the lessee company. Id. When confronted with these facts, the Goss Court made two findings of particular relevance to the appeal at hand.

First, the Court found that the lessor did not obtain “any possession, actual or constructive, of property not covered by the lease,” as there was nothing in the record to suggest that either tenant intended to hold the equipment on the landlord’s behalf. Id. at 53. As our Court pointed out in a later case, “[p]roperty which is abandoned becomes subject to appropriation by the first taker or finder who reduces it to possession. Such person thereupon acquires absolute ownership in the property abandoned, as against both the former owner and any person upon whose land it happens to have been left.” Greer, 330 S.W.3d at 765 (quoting Kelley, 246 S.W.3d at 473). Thus, it stands that a landlord does not assert an ownership interest in property left behind at a leased premises when reletting the premises.

Second, the Court held that possession of such chattels left behind on commercial property by one lessee “passe[s] directly and immediately from one tenant to the other[.]” Goss, 411 S.W.2d at 53.

Unless there is evidence to the contrary, we think it must be presumed that when the owner of a [ ] business has turned his lease over to another tenant whose purpose is to engage in the same type of business, and has left major items of equipment without returning for them within a reasonable time thereafter, his intention was either to abandon the property or pass title to the successor․

Id.

Under Kentucky law, abandonment is the voluntary relinquishment of possession along with an intent to repudiate ownership. Ellis v. McCormack, 309 Ky. 576, 218 S.W.2d 391, 392 (1949). “[C]onduct on the part of the owner inconsistent with an intention to continue to claim the property or right may, in fact, raise a presumption or inference of abandonment.” 1 C.J.S. Abandonment § 12 (2020) (footnote omitted). When considering intent, the question is not focused on the parties’ internal objective but what can be gathered from their external conduct. Cameron v. Lebow, 338 S.W.2d 399, 406 (Ky. 1960), overruled on other grounds as recognized in Carrs Fork Corp. v. Kodak Mining Co., 809 S.W.2d 699 (Ky. 1991) (citing Seaboard Oil Co. v. Commonwealth, 193 Ky. 629, 237 S.W. 48, 50 (1922)). The intent to repudiate ownership may be inferred from the facts; for example, the lapse of a long period of time following relinquishment of possession constitutes significant evidence of the intention to abandon the property. Greer, 330 S.W.3d at 765 (citing Ellis, 218 S.W.2d at 392). The use of abandoned property therefore cannot be deemed unlawful from the outset if the previous owner is presumed to have relinquished all rights and title to the property.

Under the holding of Goss, we agree with the circuit court that C&H abandoned its equipment, thereby invalidating its conversion claims. At the time that Hurberries began its lease, C&H had already effectively abandoned the equipment under Goss and passed possession of it to Hurberries “directly and immediately.” Goss, 411 S.W.2d at 53. C&H was aware that Hurberries began to lease the same premises for the same business purpose shortly thereafter, particularly in light of their failed sales negotiations. C&H’s failure to even attempt to collect the equipment in the weeks prior to any sales negotiations or after the failed negotiations demonstrates an intent to abandon the equipment, which was heavily burdened with unpaid debt. C&H additionally failed to request relief at this time from the court to recover the equipment at the Lynch property. Moreover, C&H did not make any demand for the return of any property during the eight or nine years between the time C&H left its lease and the time it filed the underlying action, nor did it make any attempts to remove the subject equipment from the property or make payments on it. There was nothing about C&H’s outward behavior to suggest that C&H did not intend to abandon its equipment.

Likewise, we find no error in the circuit court’s granting summary judgment to HCIDA. C&H claimed that HCIDA asserted ownership and “exercised dominion over” the equipment by leasing the factory containing the equipment to Hurberries, thereby committing conversion against C&H’s secured creditor. It is clear under Goss that a lessor is never in constructive possession of a tenant’s property, preventing a lessor from claiming prior possession over any chattels left behind on leased property against any future lessee. 411 S.W.2d at 54. As lessor, HCIDA had neither possession nor the right to interfere with Hurberries’ possession of C&H’s abandoned equipment. HCIDA leased out the Lynch property, as was its right as owner of the premises, which happened to contain the equipment C&H left behind. This is not an exercise of dominion over the property in a manner denying C&H’s rights to use and enjoy the property it abandoned. To hold otherwise would prevent lessors from leasing facilities in which lessees left behind property for fear of ensuing litigation.

Furthermore, C&H makes the broad legal conclusion that secured collateral left behind on leased premises must be distinguished from unsecured collateral because of the secured creditor’s “explicit or tacit permission” for its use by a third party. C&H fails to provide any supporting case law for this distinction and instead provides reference to Kentucky Revised Statute (“KRS”) 355.9-207(3)(b), which requires that a secured party “apply money or funds received from the collateral to reduce the secured obligation[.]” SeeKRS 355.9-207(3)(b). Unfortunately for C&H, it has neglected to bring this claim against its actual secured creditor, and we do not find any legally supported reasoning for applying a statute governing secured creditors to a tangentially related third party. At this point, it is immaterial what C&H’s secured creditor should have done or not done with regard to its secured collateral, as neither Hurberries nor HCIDA can or should be held liable for C&H’s failure to bring this claim against its actual secured party. For these reasons, we affirm the court’s summary judgment for HCIDA.

C&H additionally appeals the issue of conversion with regard to a Kentucky Utilities check. C&H’s conversion argument on appeal is solely premised on KRS 355.3-420(1).5 KRS 355.3-420(1) provides:

The law applicable to conversion of personal property applies to instruments. An instrument is also converted if it is taken by transfer, other than a negotiation, from a person not entitled to enforce the instrument or a bank makes or obtains payment with respect to the instrument for a person not entitled to enforce the instrument or receive payment. An action for conversion of an instrument may not be brought by:

(a) The issuer or acceptor of the instrument; or

(b) A payee or indorsee who did not receive delivery of the instrument either directly or through delivery to an agent or a co-payee.

(Emphasis added.)

KRS 355.3-420 follows the Uniform Commercial Code theory of conversion of instruments. To be deemed converted under Kentucky commercial law, an instrument such as a check must be transferred by means other than negotiation.6 KRS 355.3-203(1) provides, “[a]n instrument is transferred when it is delivered by a person other than its issuer for the purpose of giving to the person receiving delivery the right to enforce the instrument.”

That same section limits who may bring an action for conversion of a negotiable instrument. According to KRS 355.3-420(1)(b), “payee[s] or indorsee[s]” who did not receive delivery of the instrument either directly or indirectly may not bring an action for conversion under the UCC. It is undisputed that C&H is the check’s payee, or the “person to whom [the] instrument is initially payable.” SeeKRS 355.3-110(1).

However, this is where C&H’s argument for conversion fails. For a payee to bring a conversion claim under KRS 355.3-420(1), he or she must have received delivery of the instrument. C&H never received the check in question, as the check was delivered to Hurberries, and C&H has never alleged that Hurberries received the check as C&H’s agent or co-payee. SeeKRS 355.3-420(1)(b). Without having received delivery of the check either directly or indirectly, C&H is expressly forbidden from making a claim under KRS 355.3-420(1) for conversion. C&H failed to present a proper basis upon which it could recover against Hurberries for conversion as related to the check.

III. Conclusion

In light of the foregoing, we affirm the judgment of the Harlan Circuit Court.

FOOTNOTES

1.   Kingdom Come is succeeded in interest by HCIDA, who assumed control of the Lynch property.

2.   C&H states in its argument that it left the Lynch facility in 2007 or 2008; however, the timeline provided by HCIDA suggests that the year C&H left was in fact 2007. For reasons more fully explained under our standard of review section, we accept HCIDA’s statement of the facts with some additional clarification of the facts by our Court.

3.   C&H contends that it was Cumberland Valley negotiating the sale of the subject equipment with Hurberries; however, it failed to provide any citation to the record to substantiate this assertion, and we have been unable to verify it. As such, we accept HCIDA’s version of events.

4.   C&H did not set out the factual background pertaining to the check in its Appellant’s brief nor did it devote much attention to the legal issues related thereto. We have done our best to piece together the facts related to the check from our review of the record.

5.   C&H vaguely references having made some additional arguments in its response to summary judgment. We are not obligated to consider arguments not made directly to us as part of the appeal. Milby v. Mears, 580 S.W.2d 724, 727 (Ky. App. 1979) (citations omitted) (“An appellant’s failure to discuss particular errors in his brief is the same as if no brief at all had been filed on those issues. Consequently, the trial court’s determination of those issues not briefed upon appeal is ordinarily affirmed.”).

6.   The process of negotiation is specific to the type of instrument at issue. KRS 355.2-201(2); KRS 355.3-202(1). At one point, C&H includes testimony in its argument referring to the check as a “negotiation.” However, from the appellate briefs presented to our Court, it does not appear that either party alleges that this transfer was a negotiation, and so further analysis is unwarranted.

JONES, JUDGE:

ALL CONCUR.

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