Opinion
NO. 2015-CA-001833-MR
05-05-2017
TIMOTHY JONES APPELLANT v. THE BANK OF HARLAN APPELLEE
BRIEF FOR APPELLANT: John H. Dwyer, Jr. Karen Campion Jaracz Louisville, Kentucky BRIEF FOR APPELLEE: Keith Moorman Kathryn Kendrick Laraclay Drake Parker Lexington, Kentucky
NOT TO BE PUBLISHED APPEAL FROM HARLAN CIRCUIT COURT
HONORABLE KENT HENDRICKSON, JUDGE
ACTION NO. 15-CI-00279 OPINION
AFFIRMING
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BEFORE: DIXON, NICKELL, AND THOMPSON, JUDGES. DIXON, JUDGE: Appellant, Timothy Jones, appeals from an order of the Harlan Circuit Court granting Appellee, the Bank of Harlan's ("BOH"), motion for a judgment on the pleadings and dismissing Jones' declaratory judgment action. Finding no error, we affirm.
In February 2008, Jones and his wife executed a promissory note in the amount of $222,100.00 in favor of BOH. The rate of interest to be charged on the loan was agreed to and set forth in the note as follows:
VARIABLE INTEREST RATE: The Interest on this Note is subject to change from time to time based on changes in an index which is the Bank of Harlan Real Estate Base Rate as set by the Board of Directors of the Bank of Harlan (the Index). The Index is not necessarily the lowest rate charged by the Lender on its loans and is set by the Lender in its sole discretion. If the Index becomes unavailable during the term of this loan, Lender may designate a substitute Index after notifying me. Lender will tell me this current Index rate upon my request. I understand that Lender may make loans based on other rates as well. The interest rate change will not occur more often than each month. The Index currently is 10.740% per annum. The Interest rate to be applied to the unpaid principal balance of this Note will be at a rate of 3.750 percentage points under the Index, adjusted if necessary for the minimum and maximum rate limitations described below, resulting in an initial rate of 6.990% per annum. Notwithstanding any provision of this Note, the variable interest rate or rates provided for in this Note will be subject to the following minimum and maximum rates. NOTICE: Under no circumstances will the interest rate on this Note be less than 6.000% per annum or more than the lesser of 21.000% per annum or the maximum rate allowed by applicable law. Notwithstanding the above provisions, the maximum increase or decrease in the interest rate at any one time on this loan will not exceed 1.000 percentage points. Unless waived by Lender, any increase in the interest rate will increase the amount of my final payment.From the time Jones signed the promissory note in 2008 until 2015, the Index was 10.740% and the interest rate on Jones' note remained at 3.750 percentage points below the Index (6.990% per annum) in accordance with the terms of the note.
On June 30, 2015, Jones filed a class action complaint in the Harlan Circuit Court against BOH seeking a declaration of rights that the BOH's failure to modify his interest rate or the Index after 2008 constituted an abandonment of such, rendering the Index "unavailable." Accordingly, Jones alleged he was entitled to an injunction requiring BOH to "identify, provide notice of, and apply a replacement index." Jones further sought damages for breach of contract and breach of good faith and fair dealing. Essentially, Jones alleged that because BOH ceased adjusting the Index, the interest rate of his loan never varied and he was deprived the benefit of a variable rate note during a period of historically low interest rates. BOH thereafter filed an answer, responding to Jones' allegations as well as objecting to Jones' intent to assert a class action claim.
Following a short period of discovery, BOH filed a motion for judgment on the pleadings on September 25, 2015. Therein, BOH asserted that it was entitled to judgment because the loan agreement between the parties did not require BOH to change the Index, substitute a new Index, or make any changes to the rate of interest charged on Jones' loan. Instead, the language of the note granted BOH complete discretion to adjust the interest rate from time to time, subject only to a designated floor and ceiling rate. Accordingly, BOH argued that because the note did not require any change in the rate or Index, Jones could not rely on his personal expectations or an implied obligation of good faith and fair dealing to alter the express terms of the written contract.
Following a hearing, the trial court entered an order granting BOH's motion and dismissing Jones' complaint. Therein, the trial court observed,
Because of the discretion left to the Defendant to designate a replacement index and rate, the Complaint is without merit. As stated by the Defendant, "any change in the BOH [Bank of Harlan] Index, and, consequently, any change in the rate under the Note was left to the Bank's sole discretion, subject only to the rate floor and ceiling set out in the Note." . . . Moreover, the use of the word "may" in the note, which the Plaintiff uses as the keystone in his argument that the Bank was required to implement a substitute index, only reinforces the point that such changes are within the Bank's discretion. "[T]he word may [however] generally signifies something as being permissive in nature . . . ." Fox v. Grayson, 317 S.W.3d 1, 13 (Ky. 2010) (emphasis in the original). Interpreting the promissory note in a light most favorable to the Plaintiff, the Court holds the terms of the note, in regards to the bank's index and rate, are malleable at the discretion of the Defendant. Consequently, the Bank is entitled to judgment as a matter of law.Jones thereafter appealed to this Court.
Because this Court finds that the terms of the promissory note are unambiguous and that the Bank has not breached its terms, there is no need to rule on the Plaintiff's other arguments.
Jones first argues that the trial court should have converted BOH's motion into a motion for summary judgment and considered it under the standard set forth in CR 56. Jones points out that BOH's responses to interrogatories and requests for production of documents revealed that from 1994 to 2008 the BOH Board of Directors maintained and made adjustments to the Index fifteen times, yet made no adjustments after 2008 nor provided any rationale for keeping the Index at the same level after that point. Further, there is a reference in BOH's internal documents to "the old TBOH R/E Base Rate" that Jones contends is evidence supporting his claim that BOH abandoned the Index, rendering it "unavailable" and making the designation of a new Index necessary. Jones attached these documents to his response to BOH's motion and he believes that the trial court should have considered them and made a ruling pursuant to CR 56. We disagree.
Kentucky Rules of Civil Procedure.
CR 12.03 permits a party to move for a judgment on the pleadings. A motion for judgment on the pleadings is intended "to expedite the termination of a controversy where the ultimate and controlling facts are not in dispute. It is designed to provide a method of disposing of cases where the allegations of the pleadings are admitted and only a question of law is to be decided." City of Pioneer Vill. v. Bullitt County ex rel. Bullitt Fiscal Court, 104 S.W.3d 757, 759 (Ky. 2003). The Court must accept as true the nonmovant's allegations of fact and all fair inferences that flow from those facts. See Archer v. Citizens Fidelity Bank & Trust Co., 365 S.W.2d 727 (Ky. 1962). However, a court "need not accept as true legal conclusions or unwarranted factual inferences." Gahafer v. Ford Motor Co., 328 F.3d 859, 861 (6th Cir. 2003) (Quoting Morgan v. Church's Fried Chicken, 829 F.2d 10, 12 (6th Cir 1987)). "The judgment should be granted if it appears beyond doubt that the nonmoving party cannot prove any set of facts that would entitle him/her to relief." City of Pioneer Vill., 104 S.W.3d at 759.
"[A] motion for judgment on the pleadings may be treated as one for summary judgment and disposed of in that manner." Hoke v. Cullinan, 914 S.W.2d 335, 338 (Ky. 1995). Further, when affidavits or evidence outside the pleadings are considered, the motion is properly addressed under the summary judgment standard. Cabinet for Human Res. v. Women's Health Servs., Inc., 878 S.W.2d 806, 807 (Ky. App. 1994). While CR 12.03 provides the trial court with the discretion to convert a motion for judgment on the pleadings to a motion for summary judgment, "[i]t is within the discretion of the court whether or not . . . extraneous matter shall be considered[.] Vigue v. Underwood, 139 S.W.3d 168, 170 n.8 (Ky. App. 2004). Likewise, if reliance on qualifying matters outside the pleadings is not demonstrated, we must presume such matters were excluded by the court and the motion to dismiss was not converted to one for summary judgment.
We are of the opinion that it was unnecessary to convert BOH's motion to a motion for summary judgment. Jones' claims turned on a legal interpretation of the terms of the note. "It has been uniformly held . . . that when the cause of action is founded upon a written contract which constitutes a portion of the pleading and the contract contradicts the allegations of the pleading, the provisions of the contract control." Ingram v. State Prop. & Buildings Comm'n, 309 S.W.2d 169, 172 (Ky. 1957). As the trial court found, the terms of the note refuted Jones' claims as a matter of law.
We are also not persuaded by Jones' argument that BOH's denial of certain allegations contained in his complaint, namely that the Index was unavailable, created genuine issues of fact precluding a judgment on the pleadings. The allegations denied by BOH were nothing more than unwarranted factual inferences and legal conclusions that were not required to be accepted by BOH or the trial court. Nevertheless, as we will discuss herein, we are of the opinion that even if the trial court had considered the extraneous evidence submitted by Jones, a summary judgment in favor of BOH would still have been warranted because the language of the note made it "impossible for [Jones] to produce evidence at the trial warranting a judgment in his favor . . . ." Steelvest v. Scansteel Serv. Ctr., Inc., 807 S.W.2d 476, 483 (Ky. 1991) (Quoting Paintsville Hosp. Co. v. Rose, 683 S.W.2d 255, 256 (Ky. 1985)).
Jones next argues that, contrary to the trial court's findings, he is not claiming that the terms of the note required BOH to adjust the Index in any particular manner, but rather that BOH failed to administer the Index in good faith and wholesale abandoned the Index to intentionally freeze interest rates and prevent their decline. As such, Jones contends that BOH breached the express terms of the loan agreement by not "maintaining" the Index, by not selecting a substitute Index, and by not reducing the interest rate on his loan in accordance with current economic conditions. Such effectively converted Jones' note from a variable rate note to a fixed rate note, and denied him the benefit of lower interest rates during a time period marked by historically low rates.
"It is elementary contract law that the courts will undertake to enforce the contract according to its terms." Fuller v. Pepsi-Cola Bottling Co. of Lexington, Ky., Inc. 406 S.W.2d 416, 418 (Ky. 1966) In so doing, "[i]t is not the function of this Court to change obligations of a contract which the parties have made, nor to add a condition which was not written into the original contract." White v. Winchester Land Dev. Corp., 584 S.W.2d 56, 64 (Ky. App. 1979), overruled on other grounds in Inter-Tel Techs., Inc. v. Linn Station Props., LLC, 360 S.W.3d 152 (Ky. 2012) (citation omitted). "The fact that one party may have intended different results . . . is insufficient to construe a contract at variance with its plain and unambiguous terms." Money v. Money, 297 S.W.3d 69, 72 (Ky. App. 2009) (Citation omitted).
As clearly expressed in the note, (1) the Index was set at 10.74% per annum at the time Jones entered into the loan; (2) the interest rate was set 3.75 percentage points below the Index, making the initial rate 6.99% per annum; (3) BOH had the right to change the interest rate periodically based on changes to the Index so long as the interest rate was not less than 6% per annum nor higher than the lower of 21% per annum and the maximum legal rate; (4) BOH's board of directors retained the sole discretion to set the Index; and (5) in the event the Index became unavailable, BOH could, but was not required to, select a new Index.
We must agree with the trial court that the terms of the note belie Jones' claims herein. Jones fails to recognize that the terms of the parties' agreement, namely the express language of the note, simply did not obligate BOH to make changes to the Index, to select a new Index, or to adjust the interest rate. While the note permitted changes to the interest rate on the loan based on changes to the Index, it did not require a change in either. In fact, the language of the note explicitly recognized that the Index was set by BOH's Board of Directors "in its sole discretion."
Jones argues that BOH's sole discretion to adjust the Index or the interest rate under the note was limited by a duty to act in good faith. He points out that under a variable interest rate note, the parties share the risk of index fluctuations. When the rate goes up, a borrower incurs greater interest expense; when the rate goes down, a bank collects less interest income. Jones contends that BOH enjoyed the benefits of a variable rate interest note when the market was strong but intentionally avoided having to bear the complimentary risks when the market declined by refusing to adjust the Index, which he argues is evidence of bad faith. Jones fails to recognize, however, that he expressly agreed to a different risk allocation, however, as the terms of his note permitted, but did not require, BOH to adjust the Index or interest rate based on outside forces or economic conditions. "[P]arties to a private agreement may allocate risks in any manner they choose, absent a violation of law." Hendrix v. Fireman's Fund Ins. Co., 823 S.W.2d 937, 941 (Ky. App. 1991).
The record indicates that Jones is a mortgage broker so presumably he had more expertise in negotiating mortgage documents than an average layman. --------
As this Court recognized in Allen v. Lawyers Mut. Ins. Co. of Kentucky, 216 S.W.3d 657, 660 (Ky. App. 2007), "an implied covenant of good faith will not override express contract terms . . . ." In other words, an implied duty of good faith cannot provide the basis for modifying express terms of a written contract. See Epps Chevrolet Co. v. Nissan North America, Inc., 99 F.Supp.3d 692 (E.D. Ky. 2105). The note provided the only limitation on BOH's sole discretion to alter the interest rate by precluding a rate lower than 6.00% or higher than the lower of 21.00% and the maximum rate allowed by law.
Even if we were to conclude that BOH's discretion was somehow limited by an obligation of good faith and fair dealing, that obligation would not require it to adjust the Index or interest rates to please borrowers. As the Sixth Circuit Court of Appeals, applying Kentucky law, noted in Sallee v. Fort Knox Nat'l Bank, N.A., 286 F.3d 878 (6th Cir. 2002),
As a matter of business, banks seek to maximize their earnings by charging interest rates or fees as high as the market will allow. Banks seek as much security for their loans as they can obtain. In contrast, debtors hope to pay the lowest possible interest rate and fee charges and give as little security as possible. Without a great deal more, a mere confidence that a bank will act fairly does not create a fiduciary relationship obligating the bank to act in the borrower's interest ahead of its own interest.Id. at 893.
Jones next argues that the trial court erred in interpreting the use of the word "may" in the provision that "[i]f the Index becomes unavailable during the term of this loan, Lender may designate a substitute Index after notifying me[,]" to mean that BOH had the discretion to choose whether to designate a new Index. Rather, Jones believes that it is necessary to read the term "may" as creating a mandatory obligation on the part of BOH to designate a new Index in order to give effect to the other provisions of the note. Citing to the Texas case of Bailey, Vaught, Robertson & Co. v. Remington Invs., Inc., 888 S.W.2d 860 (Tx. App. 1994), Jones argues that if "may" is read to be permissive, then there would be no mechanism by which to determine the interest rate of his note if the Index became unavailable, which he contends that it did. Again, we must disagree.
"[T]he construction and interpretation of a contract, including questions regarding ambiguity, are questions of law to be decided by the court." Frear v. P.T.A. Indus., Inc., 103 S.W.3d 99, 105 (Ky. 2003) (Quoting First Commonwealth Bank of Prestonsburg v. West, 55 S.W.3d 829, 835 (Ky. App., 2000)). Further, words in a clear and unambiguous contract are to be given their commonly understood meanings unless they are technical terms. Cook United, Inc. v. Waits, 512 S.W.2d 493, 495 (Ky. 1974); see also Davis v. Siemens Med. Sols. USA, Inc., 399 F.Supp.2d. 785, 792 (W. D. Ky. 2005) ("In the absence of an ambiguity, Kentucky courts will enforce a written instrument strictly according to its terms and will assign those terms their ordinary meaning."). As noted by the trial court, "the word may generally signifies something being permissive in nature in contrast to the word shall, which generally signifies something being mandatory." Fox v. Grayson, 317 S.W.3d 1, 13 (Ky. 2010). We conclude that the trial court herein properly considered the language of the note in interpreting "may" in its commonly understood meaning. Contrary to Jones' argument, there is simply no indication that "may" as used in the note imposed any mandatory obligation on BOH.
We likewise find Jones' citation to the Bailey opinion not only unpersuasive but inapplicable to the current situation. Unlike the scenario herein, there was no dispute in Bailey that the lender's rate was no longer available because the lender bank failed and there was no provision in the note identifying a basis for selecting an alternative interest rate if the lender's rate ceased to exist. Here, simply because BOH opted not to change the Index did not constitute an abandonment of the Index, rendering it unavailable. As long as BOH is in existence, then by the express contractual language it retains sole discretion as to whether to substitute a new Index in the event the BOH Index becomes unavailable. As such, while the note permitted BOH to designate a new Index if it chose to adjust the interest rate at a time when the Index was unavailable, nothing in the terms of the agreement required the selection of a substitute Index, and just as BOH was not required to select a substitute Index, it was not required to adjust the interest rate based on such Index. Thus, Jones' contention that the Index is unavailable and there exists no mechanism to determine his interest rate is without merit.
For the reasons set forth herein, the order of the Harlan Circuit Court is affirmed.
NICKELL, JUDGE, CONCURS.
THOMPSON, JUDGE, DISSENTS AND WILL NOT FILE SEPARATE OPINION. BRIEF FOR APPELLANT: John H. Dwyer, Jr.
Karen Campion Jaracz
Louisville, Kentucky BRIEF FOR APPELLEE: Keith Moorman
Kathryn Kendrick
Laraclay Drake Parker
Lexington, Kentucky