Bank of Alton v. Tanaka

• Decision Date: 26 October 1990
• Docket Number: No. 64475,64475
• Citation: 799 P.2d 1029,247 Kan. 443
• Parties: BANK OF ALTON, individually and in its capacity of trustee and representative and assignee of the City of Kansas City, Kansas, Appellee, v. Tom T. TANAKA and Nancy Tanaka, d/b/a Tanaka Brothers Farms, Defendants, and Charles Sullwold and Dorothy Mae Charboneau, Appellants.
• Court: Kansas Supreme Court

Page 1029

799 P.2d 1029

247 Kan. 443

BANK OF ALTON, individually and in its capacity of trustee and representative and assignee of the City of Kansas City, Kansas, Appellee, v. Tom T. TANAKA and Nancy Tanaka, d/b/a Tanaka Brothers Farms Defendants and Charles Sullwold and Dorothy Mae Charboneau, Appellants.

No. 64475.

Supreme Court of Kansas.

Oct. 26, 1990.

Syllabus by the Court

1. A lease provision which obligates the lessee to purchase the property upon expiration of the lease does not convert the lease into a mortgage. As long as the lessee refrains or is prevented from exercising the option to purchase prior to termination of the lease, the lessee remains a lessee with no more than a leasehold interest in the property. Where the purchase obligation requires the lessee to purchase the property upon expiration of the lease for a fixed price and full payment of bonds issued, the lessee acquires none of the equitable rights of an owner if the obligation conditions are not satisfied.

2. A lease agreement entered into pursuant to the Economic Development Revenue Bonds Act, K.S.A. 12-1740 et seq., which authorizes the municipal lessor to issue revenue bonds and enter into leases, does not create a mortgage. Thus, the lessee, who does not hold an equitable mortgage, cannot assign an equitable interest in the leased property.

3. The issuance and re-funding of industrial revenue bonds is in accordance with the stated purpose of the Economic Development Revenue Bonds Act to develop the general welfare and economic prosperity of the state. K.S.A. 12-1740. Mere failure of a business does not render issued industrial revenue bonds unlawful.

4. Where the provisions of a trust indenture provide express authority for the trustee to take possession of the trust property and lease or sell it, a claim that the trustee entered into an oral contract assigning the right to sell the trust property is not barred by the argument the trustee lacked authority to so act.

5. Under the Statute of Frauds an oral contract for the sale of land is not enforceable. The oral contract can be enforced for equitable purposes, however, to avoid gross injustice. Partial performance by one party of an oral contract for the sale of land has generally been accepted as the kind of compelling equitable consideration justifying the removal of the contract from the operation of the Statute of Frauds.

6. Delivery of possession of real estate to the purchaser and the making of improvements to real estate are common acts of partial performance relied upon to prevent operation of the Statute of Frauds in oral real estate contract cases.

7. Under the facts of this case, defendants' contention that an oral contract existed for the right to sell property possessed by the defendants in exchange for renovating the property, maintaining utilities, and attempting to market the property expeditiously presents a proper question of fact barring summary judgment.

David W. Carson, of Carson & Fields, Kansas City, argued the cause, and Blaise R. Plummer, argued the cause and was on the brief, for appellants.

R. Michael Steele, of Sherman, Wickens & Lysaught, P.C., Overland Park, argued the cause, and Steven F. Coronado, was with him on the brief, for appellee.

HERD, Justice:

This is another chapter in the continuing drama of Kansas local government efforts to promote industrial development by the use of Industrial Development Bond financing with a ten-year ad valorem tax moratorium on the property involved. This civil action grew out of that effort and was instituted to determine the right of the Bank of Alton, Alton, Illinois, (Bank) as trustee for the City of Kansas City, Kansas, (City) to collect back rent and to possess certain real estate and personal property held by defendants/appellants Charles Sullwold and Dorothy Mae Charboneau under a lease from the City. The district court granted the Bank's motion for summary judgment, holding Sullwold and Charboneau had no interest in the property, and granted judgment for back rent. Sullwold and Charboneau appealed to the Court of Appeals, and the case was transferred to this court pursuant to K.S.A. 20-3018(c).

The facts disclose that on June 1, 1982, the City issued industrial revenue bonds to finance the purchase of and improvements on a food processing warehouse at 5252 Speaker Road, Kansas City, from Midwest Boneless Meat Co. The building was then leased to Midwest Boneless Meat Co., which defaulted on its lease. At this juncture, the City sought to sell the property and engaged the services of Charles Sullwold, a licensed real estate broker. Sullwold produced Tom and Nancy Tanaka, who were interested in purchasing the property for the agreed purchase price of $500,000, to be paid $50,000 down with the balance in monthly payments over a ten-year period. The negotiations between the City and the Tanakas ultimately resulted in the City re-funding the original bond issue for $450,000 and leasing the warehouse to the Tanakas for a term of ten years at a monthly rental of $5,946.79. The lease provides that after the bonds and interest are paid off at the end of the term, the Tanakas shall purchase the property for $100. The lease also provides three remedies in case of default: acceleration of payments, termination and right to possession, and right to reenter and possess without termination. The lease was entered into pursuant to the Economic Development Revenue Bonds Act, K.S.A. 12-1740 et seq.

To administer the lease and retire the bonds, the City entered into a trust indenture with the Bank. The property was pledged and assigned to the Bank as security for the retirement of the bonds. The Bank was obligated to collect the rent, to make payments on bonds and interest thereon as they fell due, and to look after the property on behalf of the City and the bondholders. The trust indenture further made provision for the Bank's remedy in case of default. This provision and its interpretation is the heart of the controversy herein. It will be discussed more fully later in this opinion.

After approximately one year, the Tanakas abandoned the property and assigned their lease to Sullwold and Charboneau. Sullwold informed the Bank of the assignment. The Bank made no immediate response. The Bank denies that it, the City, or any bondholder consented to the substitution of tenants. Sullwold and Charboneau, however, contend they assumed the Tanakas' lease obligations and made the monthly rental payments from July 1986 to August 1987 and that the Bank's receipt and acceptance of the rent constituted an acknowledgement of their rights under the lease.

In August 1987, appellants Sullwold and Charboneau advised the Bank they were no longer able to continue paying the rent. They sought an option to sell the property so they could pay off the bonds and recoup their investment. In their counter-claim, Sullwold and Charboneau contend the Bank, through its president, Paul Utterback, agreed orally to allow them to sell the property. Further, they allege they made contact with several prospective purchasers but found the prospective purchasers' interest in purchasing evaporated after they talked to the Bank or bondholders. Sullwold and Charboneau claim these actions by the Bank and bondholders constitute tortious interference with their prospective contracts and breach of contract; they seek damages from the Bank and bondholders or to have the property placed in a constructive trust. Finally, appellants contend the bonds were unlawfully issued because they were not issued in compliance with the statutory purposes of the Economic Development Revenue Bond Act.

The district court granted the Bank's motion for summary judgment, ruling that Sullwold and Charboneau had no interest in the property, and awarded the Bank immediate possession and a judgment of $142,722.96 for unpaid rent. Sullwold and Charboneau appeal.

The scope of appellate review of a summary judgment is well established. The trial court is required to resolve all facts and inferences which may be reasonably drawn from the evidence in favor of the party against whom the ruling is sought. The same rule is applied on appeal, and where reasonable minds could differ as to the conclusions drawn from the evidence, summary judgment must be denied.

Bacon v. Mercy Hosp. of Ft. Scott, 243 Kan. 303, 306-07, 756 P.2d 416 (1988); Progress Enterprises, Inc. v. The Litwin Corporation, 225 Kan. 212, 213, 589 P.2d 583 (1979). With these rules in mind, we consider the issues.

ISSUE I

The first issue is whether Sullwold and Charboneau had an equitable mortgage interest in the property. Sullwold and Charboneau allege they hold equitable rights in the property because the lease between the Tanakas and the City was actually a mortgage. They premise this argument upon the lease provision obligating the Tanakas to purchase the property upon the expiration of the lease.

In Misco Industries, Inc. v. Board of Sedgwick County Comm'rs, 235 Kan. 958, 685 P.2d 866 (1984), we considered a similar issue. The City of Wichita issued industrial revenue bonds to finance the purchase and construction of an office building. 235 Kan. at 959, 685 P.2d 866. To pay off the bonds, the City entered into a lease with Misco Industries (Misco) which contained an option to purchase clause. 235 Kan. at 959, 685 P.2d 866. Misco brought the action to protest the payment of a mortgage registration tax. 235 Kan. at 960, 685 P.2d 866.

Initially, we determined that if a mortgage existed, the City was the mortgagor as owner of the property pledged to secure a debt and the industrial revenue bondholders were the mortgagees, not Misco. 235 Kan. at 961, 685 P.2d 866. But in the final analysis we determined that a mortgage did not exist. 235 Kan. at 966, 685 P.2d 866. We held that to constitute a mortgage there must be an intent by the mortgagor to pledge property for the payment of a sum of money or...