Monday, August 15, 2011

Confidential Relationships, Statute Of Limitations & Sale Leaseback Peddler's Effort To Snatch Financially Strapped Couple's Home Equity

The following facts have been extracted from a recent ruling by the Kentucky Court of Appeals:

  1. Homeowners, hubby and wife, found themselves facing foreclosure.

  2. An evangelical preacher and his wife approach homeowners and talk them into a sale leaseback (the parties actually used a land sale contract (ie. contract/agreement for deed) rather than an actual leaseback) deal to save the home from foreclosure, with preacher's wife buying the home.

  3. On August 30, 2001, the parties consummate the deal, with the transaction yielding net cash proceeds for homeowners, which represented their equity in the property, of $22,581.

  4. As part of the deal, the check for said amount was endorsed by homeowner back to the preacher, with the understanding that the preacher would credit homeowner with said amount upon the repurchase of the premises.

  5. In November of 2001, homeowner-wife passes away.

  6. Subsequent thereto, preacher provided grief counseling sessions to homeowner-hubby after the loss of his wife.

  7. On November 7, 2002, after making installment payments to preacher throughout the next year in accordance with the land sale contract, homeowner-hubby repurchased the home with a mortgage brokered by preacher and preacher's wife.

  8. In consummating the buyback of the home, somebody apparently 'forgot' to credit the probably still-grieving homeowner-hubby for the $22,581 equity check that he endorsed back to preacher and his wife upon the closing of the initial deal on August 30, 2001.

  9. This oversight went undetected by homeowner-hubby at the November 7, 2002 closing.

  10. In October 2007, almost five years later, homeowner-hubby was attempting to refinance the home when he discovered that the $22,581 equity check he had endorsed back to preacher and wife had never been credited toward his repurchase of the home.

  11. Homeowner-hubby thereafter retained counsel and, on October 29, 2007, sued preacher, his wife and their company, alleging fraud.

  12. Rather than giving back the money rightfully belonging to homeowner-hubby, preacher and wife decided it would be better for them to simply keep the cash, and file a motion to dismiss the lawsuit, arguing that homeowner-hubby waited too long to ask for his money back, and asserting his claim was barred by the applicable Kentucky statute of limitations, which requires an action for relief or damages on the ground of fraud or mistake to be commenced within five years after the cause of action accrued, which, as far as preacher & wife were concerned, was August 30, 2001, the date of the initial deal.

  13. Because homeowner-hubby's suit was not filed until October 29, 2007 (over 6 years after the date of the initial deal) the applicable 5-year statute of limitations had expired as far as preacher & wife were concerned.

Question: Was preacher and wife entitled to keep the $22,581 that rightfully belonged to homeowner-hubby on the grounds of an expired statute of limitations?

Answer: No.

In reaching this conclusion (and affirming a lower court ruling reaching this result), the Kentucky Court of Appeals appears to take a 'belt and suspenders' approach in ruling favorably for homeowner-hubby.

  1. First, the appeals court agreed with the trial court's ruling that found that there existed a confidential relationship between homeowner-hubby and preacher, and accordingly (and pursuant to Kentucky state law), the statute of limitations did not begin to run until the date homeowner-hubby actually discovered the fraud (generally, the limitations period begins to run on the date the fraud took place ).(1)

    Regarding this point, the court made the following observation (bold text is my emphasis):

    "In this case, it was the Emersons who first approached Robertson about helping him and his wife to avoid foreclosure.

    Further, during the course of the transactions between the parties, Mr. Emerson, who was an evangelical preacher, provided grief counseling sessions to Robertson after the loss of his wife.

    As such, we are of the opinion that sufficient evidence was presented that a confidential relationship existed between the parties, and therefore, actual notice rather than constructive notice of the fraud was necessary.

    Consequently, the trial court properly found that the statute of limitations was tolled until Robertson's actual discovery of the fraud in 2007

  2. After agreeing with the trial court that the statute of limitations was properly tolled, the appeals court then went on to say that the actual date of the fraud suffered by homeowner-hubby was not the date of the initial deal (August 31, 2001), but was the date of the second deal (November 7, 2002), the date the 'oversight' in properly crediting homeowner-hubby with the $22,581 took place). Therefore, the filing date of the lawsuit (October 29, 2007) beat the expiring statute of limitations by nine days (November 7, 2007). Accordigly, the appeals court found that the lawsuit was filed before the expiration of the statute of limitations.

(It seems to me that either of these two rationales, standing alone, would have been sufficient to sustain the lower court ruling.)

For the ruling, see First Fidelity Mortgage, Inc. v. Robertson, No. 2010-CA-000990-MR (Ky. App. August 5, 2011).

(1) The appeals court discussed the applicable Kentucky law on the commencement of the applicable state statute of limitations below (bold text is my emphasis):

  • KRS 413.120(12) provides, "The following actions shall be commenced within five (5) years after the cause of action accrued: . . . (12) an action for relief or damages on the ground of fraud or mistake."

    The general rule is that an action "accrues" on the date of injury, and the limitations period begins to toll from that date. Caudill v. Arnett, 481 S.W.2d 668, 696 (Ky. App. 1972).

    Nevertheless, where it would not have been reasonable for the plaintiff to have discovered the injury on the actual date the fraud was perpetrated, the limitations period does not begin to toll until the date that the fraud was discovered or, through the exercise of reasonable diligence, should have been discovered.

    KRS 413.130(3); Hernandez v. Daniel, 471 S.W.2d 25, 26 (Ky. 1971). KRS 413.130(3) is only available where the plaintiff is able to demonstrate why the fraudulent act could not, through reasonable diligence, have been discovered sooner. McCoy v. Arena, 295 Ky. 403, 174 S.W.2d 726, 729 (1943).

    While the statute requires a plaintiff to meet a "reasonable diligence" test, Kentucky Courts have interpreted this demonstration rather expansively in certain circumstances. In Shelton v. Clifton, 746 S.W.2d 414, 415 (Ky. App. 1988), a panel of this Court noted:

    The courts have been willing to interpret this rule expansively when the "discovery" of fraud involved a fraud between persons in a confidential relationship.

    "When a confidential relationship exists between the parties . . . the statute does not begin to run until actual discovery of the fraud or mistake. Constructive notice such as the recordation of the instrument containing the mistake [or fraud] is not sufficient to commence the operation of the statute." Hernandez v. Daniel, 471 S.W.2d 25, 26 (Ky. 1971).

    The explanation for the actual notice is that, "[p]ersons in a confidential relationship do not have the reasons or occasions to check upon (sic) each other that would exist if they were dealing at arms length." McMurray v. McMurray, 410 S.W.2d 139, 142 (Ky. 1966).

No comments: