Farmers Bank & Trust v. Homestead Cmty. Dev.

• Citation: 476 P.3d 1,58 Kan.App.2d 877
• Decision Date: 02 October 2020
• Docket Number: No. 120,671,120,671
• Parties: FARMERS BANK & TRUST, Appellant, v. HOMESTEAD COMMUNITY DEVELOPMENT, et al., Appellees.
• Court: Court of Appeals of Kansas

58 Kan.App.2d 877

476 P.3d 1

FARMERS BANK & TRUST, Appellant,

v.HOMESTEAD COMMUNITY DEVELOPMENT, et al., Appellees.

No. 120,671

Court of Appeals of Kansas.

Opinion filed October 2, 2020

Steven E. Mauer and Christine T. Roto, of Mauer Law Firm, PC, of Kansas City, Missouri, for appellant Farmers Bank & Trust.

Mark S. Gunnison and Christopher J. Sherman, of Payne & Jones, Chartered, of Overland Park, for appellee Terry Heldstab.

Thomas V. Murray and Catherine P. Logan, of Lathrop Gage LLP, of Overland Park, for appellee Junction City.

Derrick L. Roberson and Matthew B. Sondergard, of Arthur-Green, LLP, of Manhattan, for appellee Colleen Woodruff.

David R. Cooper, of Fisher, Patterson, Sayler & Smith, LLP, of Topeka, for appellee Charles Zimmerman.

No appearance by appellee Homestead Community Development.

Before Hill, P.J., Green and Warner, JJ.

Hill, J.:

When you do business with a city in Kansas, you must be cautious. It differs from doing business with an ordinary person or company. There are many complex laws and rules that govern a city's actions that do not apply to others. A failure to understand this complexity can lead to losing what once was thought certain. This case is an example of that peril.

Farmers Bank & Trust thought it had a loan guaranty from the City of Junction City but later found it was unenforceable. Farmers also made tort claims against the City and some of its officers but disregarded a fundamental notice provision in the law. Farmers lost when the court granted summary judgment to the City and the individual officials. Because the laws and the cases that interpret them constrain what cities may do with tax expenditures and how they can be sued for redress, we hold the district court's grant of summary judgment to the City and the other defendants was proper. We affirm.

The factual background

In 2007, Farmers lent $600,000 to Homestead Community Development, Inc. to remodel a property called the Bartell House in downtown Junction City. Terry Heldstab, who was Mayor at the time, signed a letter of guaranty to Farmers. Colleen Woodruff, the City Clerk, attested to Heldstab's signature. And Charles Zimmerman, the City Attorney, sent a letter to Farmers stating the City had the authority under Kansas law to make the guaranty. He stated that Heldstab was authorized to sign on behalf of the City, and that the guaranty was a binding legal obligation of the City.

When Homestead failed to pay the loan, Farmers sued Homestead on its note and foreclosed its mortgage. The court granted Farmers judgment when Homestead failed to pay the loan. Farmers then turned to the City and sought to enforce the guaranty. But now, the City maintained that the guaranty was void and unenforceable. Farmers never filed a notice with the City Clerk or the City Commission of Junction City, in compliance with K.S.A. 12-105b(d), before filing its lawsuit against the City and the individual defendants.

Farmers sued the City for breach of the guaranty. It also sued the City, Heldstab, Woodruff, and Zimmerman for fraud and negligent misrepresentation. Farmers later added a claim of civil conspiracy against Heldstab, Woodruff, and Zimmerman. Farmers lost when the court denied its motion for summary judgment and granted summary judgment to all defendants. Farmers appeals.

How we will proceed

To efficiently deal with the issues, we will first review two laws that control all cities in Kansas—the Cash-Basis Law and the Budget Law. They are both pivotal in deciding if the court erred. The well-established rules of summary judgment are next. We will then decide whether the court properly granted summary judgment to the City on the guaranty. After that, we will review the court's dismissal of all of the tort claims.

Two laws control the outcome of the guaranty claim.

The Cash-Basis Law and the Budget Law, enacted during the economic depression in the 1930s, have a common goal and must be construed together. See Shouse v. Board of Cherokee County Comm'rs , 151 Kan. 458, 462, 99 P.2d 779, affirmed Shouse v. Board of Cherokee City Comm'rs , 152 Kan. 41, 102 P.2d 1043 (1940). The purpose of the Cash-Basis Law and the Budget Law is to prevent a deficit in the funds of a municipality at the end of the fiscal year. To achieve that purpose, a city's budget must be carefully made. A municipality must "keep account of all claims allowed, allocating each claim to its respective budgeted item or fund." 151 Kan. at 465, 99 P.2d 779. Each of the budgeted items are separate and distinct, "earmarked for a particular purpose." 151 Kan. at 464, 99 P.2d 779. We review the Cash-Basis Law first.

The Cash-Basis Law

The Cash-Basis Law provides that "it shall be unlawful ... for the governing body of any municipality to create any indebtedness in excess of the amount of funds actually on hand in the treasury of such municipality at the time for such purpose ." (Emphasis added.) K.S.A. 10-1112. The municipality must keep a record of the debt and the "particular fund from which payment is to be made," and "any person contracting with the municipality shall be chargeable with knowledge of what such records contain." K.S.A. 10-1117. "Any contract entered into between the governing body of any municipality and any person, which violates the provisions of this act, shall be void." K.S.A. 10-1119.

Shortly after its passage, our Supreme Court held that the purpose of the Cash-Basis Law was to prevent a city from spending money it did not have:

"Broadly speaking, it is designed to have such governmental units operate their respective functions on a cash basis—not to spend money they do not have or incur obligations they cannot meet promptly. Some of them, for one reason or another, had not been doing that, but had conducted their business somewhat on a credit basis. In some, proper books had not been kept, or sufficient publicity given, so that its citizens could know its financial status. It was thought waste, extravagance and an undue burden on taxpayers resulted from such methods of doing business, and the legislature deemed it prudent to change such practices and put all such governmental units on a cash basis." State ex rel. Boynton v. Bd. of Educ. of City of Topeka , 137 Kan. 451, 452, 21 P.2d 295 (1933).

Thus, early on, the Supreme Court recognized that this law was to protect taxpayers.

Here, to comply with the Cash-Basis Law, the City had to have enough money in its treasury for the purpose of paying its obligation whenever it was due under the guaranty. See State ex rel. Hecht v. City of Topeka , 296 Kan. 505, 511-12, 293 P.3d 713 (2013). We turn now to the Budget Law.

The Budget Law

The Budget Law similarly provides that it

"shall be unlawful for the governing body of any ... municipality ... to create an indebtedness in any manner or in any fund after the total indebtedness created against such fund shall equal the total amount of the adopted budget of expenditures for such fund for that budget year." K.S.A. 79-2935.

An appropriation for a fund "shall not be used for any other purpose." K.S.A. 79-2934. "Any indebtedness incurred by the governing body or any officer ... of such ... municipality in excess of said amount shall be void." K.S.A. 79-2935.

To comply with this law, the City needed to set out in its budget how much it anticipated to spend on the guaranty. In other words, the budget must be itemized and classified so that revenues are earmarked for a particular purpose. Shouse , 151 Kan. at 464, 99 P.2d 779. "[A]ll proposed expenditures [are] itemized and published for the scrutiny of the public, to the end that every constituent of the governing body may examine the items of anticipated expenditures." Washington Township of Nemaha County v. Hart , 168 Kan. 650, 654, 215 P.2d 180 (1950).

Transactions in violation of the two laws are void.

Our courts have enforced these laws by holding that violative agreements are unenforceable. Some people and companies have learned this lesson the hard way. When a municipality signs a contract in violation of either law, the contract has been ruled void and unenforceable and not even estoppel may save the agreement. Hecht , 296 Kan. 505, Syl. ¶¶ 1-3, 293 P.3d 713. A party contracting with a municipality is "bound at his or her peril to know the authority of the municipal body with which he or she deals." 296 Kan. 505, Syl. ¶ 4, 293 P.3d 713. No further inquiry into the contract's validity is necessary. See 296 Kan. at 512, 293 P.3d 713. In Hecht , a contract with the City of Topeka for the purchase of a helicopter was "void when entered into" because the City did not have $740,000 in its treasury "for the purpose of buying the helicopter." 296 Kan. at 511, 293 P.3d 713. In Superior Grade School Dist. No. 110 v. Rhodes , 147 Kan. 29, 30-31, 75 P.2d 251 (1938), the court held that the payment by the school district for building a swimming pool was unlawful and void because the budget had not specifically provided for it. Rather, the payment was drawn on a miscellaneous fund.

To recapitulate, these two tandem laws limit the spending of tax moneys by cities to certain established procedures. In common parlance, the first states a city cannot spend what it does not have. The second states that before a city can spend tax money, the city must first tell the taxpayers in a published budget how much and to whom it is to be paid. All transactions in violation of either law are void and unenforceable. The violation of these two laws renders the purported guaranty claimed by Farmers void.

The rules of summary judgment govern us.

Summary judgment is appropriate when the pleadings, depositions, answers to interrogatories, and admissions on file, together with any affidavits, show that there is no genuine issue on any material fact and the moving party is entitled to judgment as a matter of law. The trial court must resolve all facts and inferences which may reasonably be drawn from the evidence in favor of the party against whom the ruling is...