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Baughman v. Commonwealth

Supreme Court of Kentucky

June 13, 2019




          COUNSEL FOR APPELLEE: John S. West Daniel Cleveland Office of General Counsel Kentucky Energy and Environment Cabinet



         The Energy and Environment Cabinet (Cabinet) is tasked with regulating Kentucky's environment to protect public health, including preventing degradation of the waters of the Commonwealth. Beginning in 2004, the Cabinet notified Jeffrey Bowling (Bowling), the owner of five wastewater treatment plants in Johnson County, Kentucky, that his plants were improperly operated and maintained. These plants were discharging untreated sewage into Kentucky waters, posing health hazards to people in the area. After Bowling failed to resolve the plant conditions, the Cabinet filed a complaint against him seeking a temporary injunction and requesting that the trial court appoint a receiver. At the conclusion of the litigation - almost nine years later - the court-appointed receiver was owed $27, 005. Recognizing the difficulty the receiver would have collecting from Bowling, the trial court assessed this amount against the Cabinet. On appeal, the Court of Appeals reversed the trial court, holding that only Bowling could be liable for the monies owed to the receiver. John B. Baughman, the receiver, sought discretionary review on behalf of himself and his predecessor receiver. The sole issue for review is whether the trial court abused its discretion in assessing the receiver's outstanding balance[1] against the Cabinet. Finding no abuse of discretion, we affirm the Court of Appeals' opinion reversing the Franklin Circuit Court's order requiring the Cabinet to pay the receiver's outstanding balance and remand to the circuit court for entry of a new order consistent with this Opinion.

         Before turning to the facts and analysis of this particular case, we note the absence in the record before us of any regular accounting by the receiver during the course of the receivership. Periodic accountings, whether quarterly, semi-annually, or even annually, provide the trial court with a clearer picture of the status of the receivership at any point in time and, when disputes do arise, allow for more effective trial court and appellate review. Although periodic accounting by a receiver is not mandatory, it is very strongly encouraged.


         The Energy and Environment Cabinet is the administrative agency duly charged with the statutory duty to enforce all rules, regulations and orders promulgated for environmental protection, including those related to wastewater treatment and the prevention of water degradation. Bowling was the operator of several wastewater treatment plants (treatment plants) servicing residential subdivisions in Johnson County, Kentucky.[2] The plants owned by Bowling were improperly operated and maintained and continued to discharge untreated sewage into the waters of the Commonwealth, posing serious health risks to area residents.

         Beginning in 2004, the Cabinet repeatedly issued notices of violations of wastewater regulations resulting from Bowling's inadequate operation and maintenance of the treatment plants.[3] Bowling took no action to resolve the conditions cited by the Cabinet as noncompliant. On July 26, 2005, the Cabinet filed a complaint seeking to enjoin Bowling, as the operator, from ongoing environmental degradation by continuing to discharge untreated sewage into Kentucky waters. The complaint also requested that Bowling be required to retain a Kentucky-licensed wastewater operator to operate the plants at issue, or, in the alternative, that a receiver be appointed to take possession of the plants in question, receive the assets (including monthly payments from the subdivision residents), and perform any other necessary duties. The trial court issued a temporary injunction against Bowling that same day.

         On August 11, 2005, a Cabinet representative inspected the treatment plants and found ongoing violations of the Kentucky regulations, meaning Bowling had not complied with the temporary injunction. The trial court issued a show cause order, which Bowling ignored. He was eventually arrested on November 29, 2005, and a $10, 000 cash bond was posted on his behalf that same day. Despite his arrest, Bowling continued to disregard the court's temporary injunction. An inspector with the Division of Water branch of the Cabinet noted that as of May 12, 2006, some of the treatment plants were septic and nearly all the plants were in very poor condition. After Bowling's failure to comply with a second show cause order, he was arrested for the second time on December 19, 2006. A $33, 000 cash bond was posted on his behalf the next day.

         On the Cabinet's motion, the trial court appointed then-deputy master commissioner Squire Williams III as temporary receiver (the receiver) on December 21, 2006, to collect rates for the treatment plants and directed the Cabinet to petition the Public Service Commission (Commission) to pursue appointment of a permanent receiver to take over the treatment plants. On December 28, 2006, counsel for Bowling made an appearance of record. That same day, the Cabinet initiated abandonment proceedings with the Commission pursuant to Kentucky Revised Statute (KRS) 278.021.[4] In May 2007, the Commission conducted a hearing to determine if the treatment plants were abandoned, but neither Bowling nor his counsel appeared.

         On February 22, 2007, the trial court ordered, by agreement of the parties, that the $10, 000 bond previously posted for Bowling be turned over to the receiver, to be used in furtherance of the operation, repair, and maintenance of the treatment plants. On March 7, 2007, the trial court entered an Agreed Order on behalf of the Cabinet, the receiver, and Prestonsburg City's Utilities Commission (PCUC) that appointed PCUC as operator of the five treatment plants. The order stated that the receiver would pay PCUC $60 per month, per customer (the 90 subdivision residents serviced by the treatment plants), for its services. If the fees collected from the customers were insufficient for the receiver to pay PCUC, the court ordered the receiver to use proceeds from Bowling's forfeited bond, or other funds made available to the receiver by the Cabinet.

         Over the next several months, the receiver made distribution motions to the trial court for payment to PCUC for its services, totaling approximately $5, 400 per month, and for payment of the fees and expenses incurred by the receiver. Over the course of this litigation, these distributions to the receiver ranged from approximately $300 to $20, 000.[5] The trial court ordered Bowling to submit a proposal to the court, Cabinet, and receiver outlining a payment plan and any other contributions Bowling could make to aid in the cleanup efforts for the treatment plants. On October 12, 2007, Bowling proposed that he could pay $1, 000 per month "until the reasonable amount of the repair and maintenance bills [were] paid." Bowling questioned some of the costs being assessed, but nonetheless agreed to pay the receiver for overseeing the operation of the treatment plants.

         The receiver responded, stating that approximately 71% of the residents regularly pay their sewer bill, resulting in an average monthly income for rate collection of approximately $3, 600. At the time the receiver responded to Bowling's proposal, payment to PCUC for the basic contract charge of $5, 400 per month was four months behind, and PCUC was owed for the initial repairs and maintenance of the treatment plants necessary to get them in operable condition, leaving an outstanding balance to PCUC of $33, 539.03. Additionally, despite a few periodic distributions to the receiver for his services, the receiver stated that as of September 2007, he was owed approximately $17, 600.[6] On October 31, 2007, the trial court entered an order directing Bowling to pay $1, 000 per month to the clerk, who was directed to deposit the payments into the receiver's account for the operation of the treatment plants.

         On January 24, 2008, the trial court ordered that the $33, 000 cash bond posted on Bowling's behalf be forfeited and transferred to the receiver to help service the outstanding debt owed to PCUC and the receiver. In June 2008, the court began authorizing distributions to the Paintsville Utilities Commission (PUC), who assumed operation of four of the five treatment plants.[7] The trial court continued to approve distributions to PUC and others for operation of the treatment plants and distributions to the receiver for partial costs and fees. "In September 2009, when the then-receiver, Williams, was appointed to serve as a family court judge, the trial court appointed John B. Baughman as the substitute receiver.[8]

         For the following two years, the receiver continued to seek distribution orders from the trial court to pay PUC and the receiver fees. As of September 9, 2011, Bowling was delinquent in his monthly payments, owing a balance of $10, 000. The court revised his payment plan to cure the deficiency and continue payments of $425 per month. This amount was to cover the costs of operating one of the treatment plants, since the four other plants were then operated by PUC. After almost another 17 months of reconfigured payment plans and Bowling's failure to pay, Bowling owed a considerable outstanding balance to the receiver, and the receiver had insufficient funds to pay for the continued operation of the single treatment plant still under his control.

         On February 25, 2013, the court determined that PUC was in possession of funds, provided by the Cabinet, for a Separate Environmental Project ("SEP") to repair three treatment plants, including the one under the receiver's control. Counsel for the Cabinet and the receiver represented that the Cabinet anticipated more funds would be available for the repair of the plants. Given the anticipation of additional and excess funds, the court ordered that $50, 000 be transferred to the receiver to cover the ongoing expenses being incurred.[9]

         Ultimately, all of the plants were transferred and were under the control of PUC. On December 13, 2013, the receiver filed a motion to terminate the receivership. The motion stated that the remaining balance in the receiver's account was $1, 481.56. Further, the receiver alleged that Bowling had paid the receiver $28, 000 to date, but the receiver was still owed $27, 005 in fees, representing $21, 500 owed to Williams, the original receiver, and $5, 505 owed to Baughman, the current receiver. In response, Bowling alleged that he made periodic payments totaling $40, 000 in the case and reminded the trial court that he forfeited two bonds totaling $53, 000.[10] No party objected to the accounting presented by the receiver, but Bowling asserted that he had paid enough and should not be required to make any more payments.

         The trial court entered an order on December 23, 2013, terminating the receivership. The court noted that the Cabinet had paid $50, 000, and the Commission provided $3, 000, for improvements, construction, and other necessary expenses for transferring the treatment plants to PUC. But the issue as to which party was responsible for paying the receiver's deficiency remained. The court recognized that the receiver was necessary to protect the public interest at stake, and that while the Cabinet requested that a receiver be appointed, it was Bowling's conduct that gave rise to the issues. The court gave the parties two weeks to file memoranda regarding the court's authority to order the Cabinet to pay the receiver's fees.

         On July 27, 2016, the court entered an order stating as follows:

The issue remaining is whether the Receiver's costs should be paid by the Plaintiff ("the Cabinet"), or by the Defendant, Jeffrey Lance Bowling. . . . [T]he Court concludes it has the authority to order the Plaintiff to pay the Receiver's costs pursuant to AP IV, Section 1(3). The Court finds the Defendant is responsible for the payment of the costs herein, but further finds and recognizes the difficulty of the Receiver collecting a Judgment from this individual Defendant. Accordingly, the court directs and orders the Cabinet to pay the Receiver his costs in the amount of $27, 005.00. . . . Upon payment of the Receiver's costs by the Cabinet, it shall be awarded a Judgment against the Defendant, Jeffrey Lance Bowling, in the same amount.[11]

         The Cabinet appealed, and the Court of Appeals unanimously reversed the trial court. The Court of Appeals stated "[w]e know of nothing that authorizes the circuit court to impose upon the Cabinet as costs this receiver's expenses." After examining the order assessing costs to the Cabinet, the Court of Appeals noted that the only authority cited by the trial court was Administrative Procedures of the Court of Justice Rule (AP) Part IV, § 1(3).[12] Further, the Court of Appeals observed that the Cabinet was the prevailing party in this case, and it was atypical of our jurisprudence to require the prevailing party to bear costs. The Court of Appeals cited Kentucky precedent which states that "the receiver's compensation and expenses are payable from the funds in his hands, no part thereof being taxable against the party at whose instance the receiver was appointed." Crump & Field v. First National Bank, 17 S.W.2d 436, 437-38 (Ky. 1929). Declining to make the Cabinet a guarantor or financier for Bowling in the absence of statutory authorization, the Court of Appeals noted that the inequities of requiring taxpayers to bear the costs, would not be offset by the court's simultaneous award of a second judgment in favor of the Cabinet against Bowling.

         On appeal, Baughman argues that the Court of Appeals erroneously reversed the trial court and imposed an injustice on him as the ...

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