Opinion
NO. 2018-CA-000548-MR
05-24-2019
JOHN MORSE APPELLANT v. RICHARD MORSE; AND CLAY DANIEL WALTON & ADAMS, PLLC APPELLEES
BRIEFS FOR APPELLANT: Joseph H. Mattingly, III Lebanon, Kentucky BRIEF FOR APPELLEES: Garry R. Adams Pete Lay Louisville, Kentucky
NOT TO BE PUBLISHED APPEAL FROM JEFFERSON CIRCUIT COURT
HONORABLE A.C. MCKAY CHAUVIN, JUDGE
ACTION NO. 16-CI-004066 OPINION
AFFIRMING IN PART, REVERSING IN PART, AND REMANDING
** ** ** ** **
BEFORE: COMBS, DIXON, AND GOODWINE, JUDGES. GOODWINE, JUDGE: Appellant, John Morse ("John"), appeals from a Jefferson Circuit Court order entered February 22, 2017, granting Appellee, Richard Morse ("Richard"), a default judgment on the issue of liability, and from an opinion and order entered March 19, 2018, awarding: (1) Richard $16,700 for labor and materials, and (2) Appellee, Clay Daniel Walton & Adams, PLLC, attorney's fees totaling $34,015. After careful review, finding error, we affirm in part, reverse in part, and remand.
Richard's complaint alleged seven causes of action: (1) breach of contract; (2) promissory estoppel/ detrimental reliance; (3) fraud; (4) quantum meruit; (5) violations of Kentucky's Wage and Hour Act (6) breach of fiduciary duty; and (7) punitive damages. The trial court dismissed Richard's punitive damage claim but failed to specify the causes of action for which it granted default. The trial court subsequently clarified the order, declaring Richard a 50% owner in the Hepburn Avenue properties.
BACKGROUND
John and Richard are brothers entangled in a contentious dispute regarding property allegedly gifted to them from their aunt, Anna Casey ("Casey"). Casey and her friend, Mary Ann Graves ("Graves"), jointly owned, with right of survivorship, four properties on Hepburn Avenue in Louisville, Kentucky. Collectively, the properties were valued at $900,000. Graves died April 3, 2014, and Casey became the sole owner. After attending Graves' funeral together, John, Richard, and Casey met at 1501 Hepburn Avenue and discussed the properties. The parties disagree about the specifics of the conversation.
The Hepburn Avenue properties are rental units: 1431 and 1501 have five units, 1507 has two, and 1508 has eight.
Richard alleges Casey promised to gift all four properties to them as co-owners but was concerned about his wife's claiming a marital interest in the properties if they divorced. To address this problem, the three agreed all four properties would be deeded solely to John. Richard contends the three made an oral agreement that each would be 50% co-owners and John would hold Richard's interest. John and Casey contend she deeded the properties solely to him, and no written agreement exists transferring 50% ownership to Richard.
Richard testified at the damages hearing that he and John were each to acquire title in fee simple to two of the properties. However, he introduced into evidence a recorded telephone conversation between him and Casey, wherein Casey stated: "I didn't say that you got two houses and he got two houses, or anything like that. It was just in both names. That's all." (Plaintiff's Exhibit 2B).
The properties needed extensive renovation to be marketable. In April 2014, John and Richard began renovating the properties. Casey paid them each $700 per week for their labor and provided them with a Lowe's credit card in her name to buy materials. Richard admits that he was paid in full by Casey for his work from April 2014 until October 6, 2014, when the property was conveyed to John.
John and Casey allege Richard purchased items from Lowe's on Casey's credit card, returned said items, and kept the cash refund.
After the conveyance, John returned to Massachusetts to care for their mother. Richard got a divorce and moved into 1507 Hepburn Avenue, Unit #2. Richard never paid rent nor utilities. Richard contends John agreed to continue to pay him $700.00 per week for renovation work and general upkeep of the properties after October 6, 2014. John paid Richard for two months of work and then stopped, contending Richard could not accurately calculate the hours worked. Richard suffered a heart attack on August 21, 2015, and could not work on the properties after that date. Richard remained in the apartment thereafter, without paying rent. John filed a forcible detainer action against Richard to evict him, but the action was ultimately dismissed by the circuit court on appeal.
Monthly rent was $900 per unit.
On August 23, 2016, Richard filed suit against John, seeking: (1) a declaration of rights declaring him joint owner of the properties; and (2) payment for labor and materials from September 2014 through August 2015.
Richard and Casey testified at the damages hearing that he was paid in full by Casey for his work from April 2014, through October 6, 2014.
This case has a lengthy procedural history consisting of delays and continuances. Immediately after filing suit, Richard attempted to serve John: (1) through the Secretary of State under KRS 454.210; (2) through the attorney who represented him in the forcible detainer action; (3) through the closing attorney he employed when he attempted to sell one of the subject properties; (4) by filing a counterclaim in the district court forcible detainer action; and (5) through a warning order attorney. On December 6, 2016, the warning order attorney filed her report, deeming John constructively served under CR 4.05.
Kentucky Revised Statutes.
Additionally, Richard filed a mechanic's lien on the subject properties as another form of notice.
Kentucky Rules of Civil Procedure.
On December 12, 2016, Richard filed a motion for default judgment. The trial court entered an order giving John until January 23, 2017, to respond to the motion. John filed nothing. Seven days later, the trial court entered an order to show cause. On February 22, 2017, the trial court granted a default judgment in favor of Richard on the issue of liability and scheduled a hearing on damages.
Seven weeks later, John filed a motion to set aside the default judgment and a motion to file an answer and counterclaim. In his motion to set aside the default judgment, John argued that he: (1) had not received notice of the suit; (2) had not been personally served; and (3) was preoccupied with caring for his ailing mother. John contends the trial court lacked personal jurisdiction over him because he was only constructively served via warning order attorney under CR 4.05. We disagree.
KRS 454.165 prohibits our courts from rendering personal judgments against constructively summoned defendants, except as provided in KRS 454.210 (Kentucky's long-arm statute). "A Kentucky court may exercise personal jurisdiction over a nonresident in an claim arising from that person's "transacting any business in Kentucky, KRS 454.210(2)(a)1[,]" Davis v. Wilson, 619 S.W.2d 709 (Ky. App. 1980), or "having an interest in, using, or possessing real property within the Commonwealth[.]" KRS 454.210(2)(a)6. John's hiring Richard to work at the properties he owned in Kentucky were transactions of business in Kentucky and "were sufficient to satisfy the minimum contacts principle enunciated in International Shoe Co. v. Washington, 326 U.S. 310, 66 S.Ct. 154, 90 L.Ed. 95 (1945)." Id. at 710.
A summons under the long-arm statute was promptly served upon the Secretary of State, who, in turn, promptly forwarded it by certified mail, restricted delivery, return receipt requested to John Morse, 109 Adams Street, Holliston, MA 01746. The envelope containing that summons was returned to the Secretary of State marked "unclaimed." We conclude that John was properly served under the long arm statute and the trial court properly exercised jurisdiction over him. Davis, 619 S.W.2d at 710-11.
The trial court heard John's motion to set aside the default judgment acknowledging in its order that default judgments are not favored under Kentucky law. (R. at 123.) Ultimately, the trial court denied the motion, stating that John received proper notice of the lawsuit and his obligations thereunder and failed to participate or to produce a valid excuse for not doing so. (R. at 124.)
On October 20, 2017, the trial court conducted a hearing on damages. John did not attend the hearing. His counsel attended and called Casey to testify. Richard testified and called his friend, Tina Scoggins, to testify. She calculated the damages owed to Richard. She conceded she has no background or expertise in construction or renovation work and used an internet website to calculate the amount listed in the mechanic's lien. She could not recall the name of the website or provide any additional justification or corroboration for her numbers. Richard testified that he did not know the exact amount of damages owed nor the exact number of hours worked.
The parties filed post-hearing briefs on December 22, 2017. An AOC-280 form was filed on February 21, 2018, and the matter stood submitted. The trial court entered its opinion and order on March 19, 2018, granting Richard: (1) 50% ownership interest in the Hepburn Avenue properties; (2) $16,700 in compensatory damages; and (3) $34,015 in attorney's fees. This appeal followed.
STANDARD OF REVIEW
Kentucky law disfavors default judgments, and the law vests trial courts with very broad discretion in whether to set them aside. Asset Acceptance, LLC v. Moberly, 241 S.W.3d 329 (Ky. 2007); CR 55.02; CR 60.02. Kentucky courts place the burden on the party seeking to set aside a final judgment to affirmatively prove entitlement to such extraordinary relief. "The moving party . . . cannot have the judgment set aside and achieve his day in court if he cannot show good cause and a meritorious defense." Green Seed Co., Inc. v. Harrison Tobacco Storage Warehouse, Inc., 663 S.W.2d 755, 757 (Ky. App. 1984). To show entitlement to such relief, a defendant must offer sufficient proof of three elements: (1) a valid excuse for the failure to participate; (2) a meritorious defense to the plaintiff's claim, and (3) absence of prejudice to the opposing party. S. R. Blanton Dev., Inc. v. Investors Realty and Mgmt. Co., Inc., 819 S.W.2d 727, 729 (Ky. App. 1991).
On appeal, we cannot reverse a trial court's decision to deny a motion to set aside a default judgment absent an abuse of discretion. Howard v. Fountain, 749 S.W.2d 690, 692 (Ky. App. 1988). A trial court abuses discretion when its decision is arbitrary, unreasonable, unfair, or lacks support from sound legal principles. Commonwealth v. English, 993 S.W.2d 941, 945 (Ky. 1999).
Additionally, "[CR] 12.03 provides that any party to a lawsuit may move for a judgment on the pleadings." City of Pioneer Village v. Bullitt Cty., 104 S.W.3d 757, 759 (Ky. 2003). A judgment on the pleadings 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." Id. "[T]he circuit court is not required to make any factual determination; rather, the question is purely a matter of law." James v. Wilson, 95 S.W.3d 875, 883-84 (Ky. App. 2002). We review a judgment on the pleadings de novo. Schultz v. Gen. Elec. Healthcare Fin. Servs., Inc., 360 S.W.3d 171, 177 (Ky. 2012).
We review a trial court's factual findings for clear error and will set them aside when they lack substantial evidence to support them. Mere doubt as to findings will not lead us to reverse the trial court. Moore v. Asente, 110 S.W.3d 336, 353-54 (Ky. 2003). Clearly erroneous findings are those not supported by substantial evidence. Mullins v. Picklesimer, 317 S.W.3d 569, 581 (Ky. 2010).
ANALYSIS
Civil Rule 55.02 authorizes the setting aside of default judgments. That rule, in its entirety, provides: "For good cause shown the court may set aside a judgment by default in accordance with Rule 60.02." The two provisions of CR 60.02 which apply here to allow for the reopening of the judgment are subsection (e) "the judgment is void" and, the catch-all provision of subsection (f): "any other reason of an extraordinary nature justifying relief."
In its order denying John's motion to set aside the default judgment, the trial court stated: "Accordingly, the Court generally goes, and has gone in this case, to appropriately great lengths to ensure that litigants are provided a full and fair opportunity to meaningfully participate in the litigation process." (R. at 124.) In order to prevail on a motion to set aside a default judgment, one must show "(1) a valid excuse for default, (2) a meritorious defense to the claim, and (3) absence of prejudice to the non-defaulting party." S.R. Blanton Dev., 819 S.W.2d at 729. "All three elements must be present to set aside a default judgment." Id. The trial court was not satisfied that John had done so. (R. at 124.)
The trial court further stated: "[t]he degree to which the proffered defenses may be meritorious and/or [Richard] may have been prejudiced by [John's] failure to participate in this litigation may be open to debate, but the degree to which his excuses for his failure to participate are valid is not." Id. However, whether John was in default or not, Richard was not entitled to the relief he sought on his claims for 50% ownership interest in the four properties under the Statute of Frauds and for wages and attorney's fees under KRS Chapter 337. Thus, John was entitled to a judgment on the pleadings on those claims. To deny it was an abuse of discretion.
Kentucky's Statute of Frauds provides:
No action shall be brought to charge any person: . . . (6) Upon any contract for the sale of real estate, or any lease thereof for longer than one year . . . 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 . . . .KRS 371.010. Richard argues that the alleged agreement was not for the "sale" of the properties, but for a gift of a half interest in them. For purposes of the law, this is a distinction without a difference. "[A]n alleged oral contract for the conveyance of real estate is within the statute of frauds." Bennet v. Horton, 592 S.W.2d 460, 462 (Ky. 1979) (citing Head v. Schwartz' Ex'r, 304 Ky. 798, 202 S.W.2d 623 (1947)). Therefore, the Statute of Frauds renders the alleged oral contract between John and Richard unenforceable, and Richard's claim becomes unsustainable as a matter of law. The trial court erred by refusing to grant John's motion for judgment on the pleadings and dismiss Richard's claim for 50% ownership interest in the properties.
The trial court's failure to set aside the default judgment, as to Richard's claim for monies due for labor and materials, was not an abuse of discretion. However, its findings that Richard was John's employee under Kentucky's Wage and Hour Act, as well as the amount owed, and his entitlement to attorney's fees were clearly erroneous.
Richard contends he is entitled to liquidated damages, costs, and attorney's fees for John's alleged violation of KRS Chapter 337. However, Richard is not an employee as defined by the statute. KRS 337.055 provides:
Any employee who leaves or is discharged from his employment shall be paid in full all wages or salary earned by him; not later than the next normal pay period following the date of dismissal or voluntary leaving or fourteen (14) days following such date of dismissal or voluntary leaving whichever last occurs.In addition to the wages to which a former employee is entitled, the Act provides for other recovery.
[A]ny employer who pays any employee less than wages and overtime compensation to which such employee is entitled under or by virtue of KRS 337.020 to 337.285 shall be liable to such employee affected for the full amount of such wages and overtime compensation, less any amount actually paid to such employee by the employer for an additional equal amount as liquidated damages, and for costs and such reasonable attorney's fees as may be allowed by the court.KRS 337.385(1).
The trial court did not undertake an analysis of Richard's employment status under Kentucky law. Rather, it simply said "[w]hile this was by no means a traditional employer/employee relationship, the parties appear to have settled on a sum of $700 per week to be paid to [Richard] for his efforts." (R. at 306.) Simply setting on an amount of compensation is not determinative. We must answer the question of whether Richard is John's employee under either Kentucky common law or under Kentucky's Wage and Hour Act, KRS Chapter 337.
To answer this question under Kentucky common law, we consider the same multi-factor test set forth in the RESTATEMENT (SECOND) OF AGENCY § 220(2) ("RESTATEMENT"). See Kentucky Unemployment Insurance Commission v. Landmark Community Newspapers of Kentucky, Inc., 91 S.W.3d 575, 579-80 (Ky. 2002). The RESTATEMENT factors are:
(a) the extent of control which, by the agreement, the master may exercise over the details of the work;
(b) whether or not the one employed is engaged in a distinct occupation or business;
(c) the kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the employer or by a specialist without supervision;
(d) the skill required in the particular occupation;
(e) whether the employer or the workman supplies the instrumentalities, tools, and the place of work for the person doing the work;
(f) the length of time for which the person is employed;
(g) the method of payment, whether by the time or by the job;
(h) whether or not the work is a part of the regular business of the employer;
(i) whether or not the parties believe they are creating the relation of master and servant; and
(j) whether the principal is or is not in business.
The Kentucky Supreme Court has been clear that the factors are to be given equal weight with no one factor being determinative. "[W]e hold that not one of the aforementioned factors is determinative, and every case, where it must be determined whether an individual is an employee or an independent contractor . . . needs to be resolved on its own facts." Id. at 580.
Most of the factors weigh in favor of finding that Richard was an independent contractor, not John's employee. Richard did not work set hours. Richard's work required skill to perform certain tasks. He used his own tools and purchased supplies as needed. John did not train or otherwise control or dictate the specifics of Richard's work. He was concerned only with the final project. Richard worked for less than a year and was paid $700 per week. There was no evidence that John withheld payroll taxes nor that he was in the home improvement business.
Even though we find that Richard was an independent contractor, not an employee, under Kentucky's common law using the RESTATEMENT's factors, the inquiry doesn't end there. Richard's claims turn on whether he was an employee under Kentucky's Wage and Hour statute, KRS 337.010, et seq. It defines "employee" broadly as "any person employed by or suffered or permitted to work for an employer." KRS 337.010(1)(e). Kentucky's Administrative Regulations (KAR) clarify that employee status under KRS Chapter 337 is "broader than the traditional common law concept of the master and servant relation." 803 KAR 1:005 § 1(2).
The regulations identify factors similar to the RESTATEMENT factors discussed above, but also identify factors broadening the scope of statutory employees beyond the traditional common law factors.
The principal test for determining whether an employment relation exists is whether the possible employer controls or has the right to control the work to be done by the possible employee to the extent of prescribing how the work shall be performed. Additional considerations are the method of payment and how free the possible employer is to replace the possible employee with another. A determination of the employer-employee relationship cannot be based on isolated factors or upon a single characteristic, but rather upon the circumstances of the whole activity.803 KAR 1:005 § 4(1). The factors which are considered significant are:
(a) The extent to which the services in question are an integral part of the employer's business;Id. at § 4(2). "Where the facts clearly establish that the possible employee is the subordinate party, the relation is one of employment." Id. at § 4(3). Factors used to determine whether an individual is a subordinate are:
(b) The amount of the alleged contractor's investment in facilities and equipment;
(c) The alleged contractor's opportunities for profit and loss; and
(d) The amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent enterprise.
(a) Whether there are restrictive provisions in the contract between the possible employer and possible employee which require that the work must be satisfactory to the possible employer and detailing, or giving the possible employees the right to detail how the work is to be performed;
(b) Whether the possible employer has control over the business of the person performing work for him even though the possible employer does not control the particular circumstances of the work;
(c) Whether the contract is for an indefinite period or for a relatively long period;
(d) Whether the possible employer may discharge employees of the alleged independent contractor;
(e) Whether the possible employer may cancel the contract at his discretion, and on how much notice;803 KAR 1:005 §4(3)(a)-(f). Though we could find no case law to guide our interpretation of these regulations, we will follow the plain reading of the regulations' text and the explicitly stated purpose of broadening the scope of who is an employee beyond the common law.
(f) Whether the work done by the alleged independent contractor is the same or similar to that done by admitted employees.
Applying these factors, Richard clearly was not John's subordinate. John did not control what work was done nor how it was done. Richard worked for a relatively short period of time and John was not in the home improvement business. The factors weigh in favor of Richard as an independent contractor and not an employee for purposes of Kentucky's Wage and Hour Act. Thus, the trial court's finding to the contrary was clearly erroneous, and its award of attorney's fees must be set aside.
The fact that Richard was not John's employee, for purposes of the Kentucky Wage and Hour Act, does not mean he was not entitled to be paid for the work he performed—quite the contrary. John agreed he hired Richard to renovate the Hepburn Avenue properties. Richard testified that he worked for 47 weeks and 5 days for which he did not receive the agreed upon $700 per week payment.
Nowhere in the record is the week defined as a five or seven-day workweek. We will use a seven-day week, which equals payment of $100 per day.
Using these figures, Richard calculated and sought $33,400.00 in damages. The trial court awarded Richard $16,700 in compensatory damages, after erroneously concluding he had a 50% ownership interest in the properties ($33,400 ÷ 2 = $16,700). Because we find that Richard was not entitled to 50% ownership interest in the properties, he was entitled to all amounts due but not paid.
Richard's calculation of damages, however, is erroneous based on the evidence. He calculated 47 weeks and five days from September 1, 2014 through August 1, 2015, the date of his heart attack. However, Richard and Casey testified she paid him through October 6, 2014. Richard further testified that John paid him for a couple of months thereafter. Richard erroneously includes 97 days in his calculation for which the evidence shows he was paid. Therefore, we find Richard is entitled to a judgment in the amount of $23,700 ($33,400 - $9,700).
September 1, 2014 to October 6, 2014 is 36 days and October 6, 2014 through December 6, 2014 is 61 days. 97 days x $100 per day equals $9,700. --------
CONCLUSION
For the foregoing reasons, we affirm the Jefferson Circuit Court's order finding Richard entitled to damages for work done but not paid. However, we reverse the Jefferson Circuit Court's order: (1) declaring Richard to be a 50% owner in the Hepburn Avenue properties, and (2) awarding attorney's fees. We remand for entry of a judgment consistent with this opinion.
ALL CONCUR. BRIEFS FOR APPELLANT: Joseph H. Mattingly, III
Lebanon, Kentucky BRIEF FOR APPELLEES: Garry R. Adams
Pete Lay
Louisville, Kentucky