Posted by: Patricia Salkin | February 13, 2017

KY Supreme Court Holds Unjust Enrichment did Not Apply to Excuse Developer’s Payment of Performance Bonds Pursuant to Terms of Bond Agreements

Developer, Furlong Development Company and its owner, Gordon Stacy, owned a 26–acre tract of land in Georgetown, Kentucky. Developer intended to develop the property into 90 single family residential lots known as “The Enclave.” Pursuant to a local municipal ordinance, Developer was required by the Georgetown-Scott County Planning and Zoning Commission, to provide a surety bond in the amount equal to 125% of the estimated cost of building certain infrastructure. Platt River Insurance Company (“Insurer”) backed the bonds. In 2008, the real estate market crashed, and “The Enclave” development was worth less than the amount remaining on the loan. Despite this, the Bank agreed to accept a deed in lieu of foreclosure, and transferred the property to another internal holding company, EKT. The Bank also sent a letter to the Commission requesting that the Commission call Developer’s bonds and that the proceeds be placed in escrow for the purpose of reimbursing the Bank for the completion of the necessary infrastructure projects required by the Developer’s approved plat.

Developer Furlong then brought action against county zoning and planning commission and bank, seeking a declaration regarding developer’s obligations under bonding agreements following its default and transfer of property to bank by deed in lieu of foreclosure. The Circuit Court entered summary judgment in favor of defendants. The Developer appealed, and the Court of Appeals affirmed. On appeal, Developer asserted that the bonds were not callable because no homes had been built on the development property prior to Developer’s default. The court found that the relevant documents in the present case were very clear that Insurer, on behalf of Developer as principal, was obligated to pay the bonds. Here, the Bank release documents specifically stated that “there is no assumption by EKT of the obligations and liabilities under any instruments or agreements with third parties and all such obligations and liabilities remain the responsibility of Developer…” Thus, the court found that unjust enrichment was unavailable, since the terms of an express contract controlled.
The record in the present case also indicated that Developer completed significant aspects of the development prior to Developer’s default and subsequent transfer of the property to the Holding Company. The court determined that even though Developer had not yet begun to build a single house on the property, the property had been developed to the point where houses could be built, and the Developer had even attempted to sell individual parcels. The court therefore found that the property had been irreparably converted from rural farm land and had undergone significant stages of sub-division development. Accordingly, the court affirmed the decision of the Court of Appeals.
Furlong Development Co., LLC v. Georgetown–Scott County Planning and Zoning Commission, 504 S.W.3d 34 (2016)

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