Arbor Lake, LLC v. Enter. Bank & Trust
| Decision Date | 19 September 2014 |
| Docket Number | 110,501,110,502.,109,757 |
| Citation | 334 P.3d 344 (Table) |
| Parties | ARBOR LAKE, LLC, Appellant, v. ENTERPRISE BANK & TRUST, Appellee, v. Ground Control Unlimited, L.L.C., Appellee. Enterprise Bank & Trust, as Successor in Interest to First National Bank of Olathe, Appellee, v. Steven VanLerberg, Successor Co–Trustee of the Albert C. VanLerberg Revocable Trust Agreement Dated 1/27/00, as may be Amended, et al., (Gregory D. Prieb, et al.), Appellants. |
| Court | Kansas Court of Appeals |
Lawrence L. Ferree, III, of Ferree, Bunn, Rundberg, Radom & Ridgway, Chtd., of Overland Park, and J. Donald Lysought, Jr., of Evans and Mullinex, P.A., of Shawnee, for appellant.
Barry L. Pickens and J. Loyd Gattis, of Spencer Fane Britt & Browne LLP, of Kansas City, Missouri, for appellee Enterprise Bank & Trust.
Before STANDRIDGE, P.J., GREEN and ATCHESON, JJ.
In these cases consolidated on appeal, we pick over the legal remains of a failed multimillion dollar real estate project in Johnson County. We have been first asked to determine if the Johnson County District Court erred in finding the $3.1 million price paid for the property in a foreclosure sale to be reasonable. The issue boiled down to a battle between appraisers over the value of the property. There was substantial evidence to support the district court's finding, so we see no error. We next have been asked whether the district court erred in refusing to apply the proceeds of the sale to a judgment against the guarantors of a bank loan for the project. On this point, the district court should have relied on the terms of the judgment alone without considering the language of the guaranties because the judgment superseded those agreements. The district court, therefore, should have credited the sale proceeds in partial satisfaction of the judgment. We affirm in part, reverse in part, and remand to the district court to recalculate the guarantors' outstanding obligations on the judgment against them. We also rule on motions made in each case to recover attorney fees and costs incurred in the appeals.
We need not recount the sad history of the real estate venture. It foundered during the recent economic downturn, as did many other land development projects. Likewise, much of the legal battle over this venture has little or nothing to do with the issues before us. We dispense with a detailed rendition of that jousting. The parties know well those particulars. We pause, however, to identify the parties. Enterprise Bank is the successor-in-interest to First National Bank of Olathe, the financial institution that loaned the money for the project. Enterprise Bank has sought to recoup on the debt. Arbor Lake, LLC, was formed to step in and complete the development after another corporation couldn't continue. First National Bank essentially refinanced the project with Arbor Lake. Arbor Lake signed a promissory note for the loan. And the bank held a mortgage on the real property as collateral. Gregory D. Prieb, the Gregory D. Prieb Inter Vivos Trust, the Albert C. VanLerberg Revocable Trust, and Roger T. Campbell signed guaranty agreements obligating themselves for portions of the loan to Arbor Lake. Prieb and his trust guaranteed 25 percent of the loan to Arbor Lake, as did the VanLerberg Trust. Campbell guaranteed 12 1/2 percent of the loan.
At the times relevant to this litigation, the Arbor Lake project consisted of 26 acres of undeveloped land planned for commercial use, 43 acres of undeveloped land for single-family homes, and 29 lots already developed with homes. Ultimately, Arbor Lake fared no better than the corporation it replaced—it ceased work on the development and defaulted on the loan.
In No. 109,757, Enterprise Bank obtained a judgment against Arbor Lake and then foreclosed on the real property. The guarantors were not parties to that action. In Nos. 110,501 and 110,502, Enterprise Bank obtained a judgment against the guarantors. Arbor Lake unsuccessfully sought to intervene at the district court level. (Those two appeals are from the same district court action and were consolidated here before briefing.) The guarantors have been jointly represented and have advanced a unified position on appeal. We do not generally distinguish among them. After briefing and argument of the cases, Campbell dismissed his appeal.
The various amounts allegedly due and the judgments entered in the cases have been figured to the penny by the parties and the district court. We deal in round numbers because the precise computations have no bearing on the legal issues we decide and they otherwise simply bog down the discussion. In short, the exact figures are irrelevant at this juncture.
In December 2012, Arbor Lake confessed judgment to Enterprise Bank for $5.3 million. The district court ordered foreclosure and sale of the Arbor Lake property. The sheriff's sale took place about 6 weeks after the confession of judgment. Enterprise Bank made the highest bid of $3.1 million and then sought a court order confirming the sale.
At the confirmation hearing, Enterprise Bank presented Daniel W. Craig, a real estate appraiser, who testified the bid price reflected a reasonable or fair value for the property. Arbor Lake countered with Kevin O'Bryan, also an appraiser, who concluded the price to be substantially below fair value. Arbor Lake, therefore, sought to set aside the sale. The district court confirmed the sale, effectively finding the bid price to be legally sufficient; credited that amount toward the judgment against Arbor Lake; and entered a deficiency judgment of about $2.2 million plus interest. Arbor Lake has appealed the confirmation order. That much of the narrative brings us to the appeal in No. 109,757.
Under K.S.A. 60–2415, governing foreclosure sales, a district court may refuse to confirm the sale “where the bid is substantially inadequate” or it may, among other options, hold a hearing to determine the property's “fair value” and require that value rather than the bid price be credited against the judgment.
In considering confirmation of a foreclosure sale, a district court exercises equitable powers and acts with broad discretion. See Olathe Bank v. Mann, 252 Kan. 351, 357, 845 P.2d 639 (1993) ; Citifinancial Mortgage Co. v. Clark, 39 Kan.App.2d 149, 151, 177 P.3d 986 (2008). A district court exceeds that sort of discretion if it rules in a way no reasonable judicial officer would under the circumstances, if it ignores controlling facts or relies on unproven factual representations, or if it acts outside the legal framework appropriate to the issue. See Northern Natural Gas Co. v. ONEOK Field Services Co., 296 Kan. 906, 935, 296 P.3d 1106, cert. denied 134 S.Ct. 162 (2013) ; State v. Ward, 292 Kan. 541, Syl. ¶ 3, 256 P.3d 801 (2011), cert. denied 132 S.Ct. 1594 (2012). As the party challenging the district court's ruling, Arbor Lake must establish an abuse of discretion. Northern Natural Gas Co., 296 Kan. at 935.
The “fair value” of real estate, as the term is used in K.S.A. 60–2415, reflects “the intrinsic value” of the property, taking into account all of the circumstances bearing on its worth at the time of the sale. Olathe Bank, 252 Kan. at 362–63 ; Citifinancial Mortgage Co., 39 Kan.App.2d at 153. But fair value does not automatically equate with market value, since there may be a substantially depressed market or no market at all—a circumstance that would account for the property being in foreclosure in the first place. Olathe Bank, 252 Kan. at 362. In many situations, however, fair value and market value may be comparable, as the Olathe Bank case itself illustrates. There, the court found the essentially undisputed fair market value of the property to reasonably reflect fair or intrinsic value and disallowed a discounted bid price based on the bank's belief it might be unable to resell the property for several years. 252 Kan. at 363. In sum, the considerations bearing on fair value are exceptionally broad and may be quite case specific. 252 Kan. at 361.
At the outset, Arbor Lake contends Craig, Enterprise Bank's appraiser, was required by Kansas law to follow the Uniform Standards of Professional Appraisal Practice and that he failed to do so, essentially rendering his expert opinion and report inadmissible in the confirmation hearing. We assume the first premise—application of the appraisal standards was legally required—without deciding it to be so. See K.S.A. 58–4121. But the standards set out general or “best practice” precepts effectively requiring appraisers to fully and fairly consider relevant information in rendering valuations. They do not establish specific methods to be used in undertaking an appraisal. Arbor Lake's attack on Craig's work, however, delved into the particulars of the methodology, the specific properties he considered as comparable in arriving at his valuation of the Arbor Lake real estate, and the omission of other properties that might be considered better comparables. Those are all matters falling outside the appraisal standards, so Arbor Lake's argument fails on its second premise that Craig failed to comply with those standards. Craig testified that he did adhere to those standards, and that testimony was undisputed.
Craig prepared his appraisal for Enterprise Bank before the foreclosure sale and valued the Arbor Lake property at $3.1 million. In turn, Enterprise Bank used that figure as the basis for its “fair value” bid at the sale. O'Bryan, Arbor Lake's appraiser, placed a fair value of $4.5 million on the property.
At the confirmation hearing, the district court faced a prototypical battle of experts. Both appraisers outlined their respective methods for valuing the property. Each of them separately valued the undeveloped commercial land, the undeveloped residential land, and the developed residential lots and then added those values to arrive at an overall dollar...
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