Baxter State Bank v. Bernhardt

• Decision Date: 03 November 1997
• Docket Number: No. 96-2460-JWL.,96-2460-JWL.
• Citation: 985 F.Supp. 1259
• Parties: The BAXTER STATE BANK, Plaintiff, v. Charles H. BERNHARDT and Shirley V. Bernhardt, Defendants.
• Court: U.S. District Court — District of Kansas

985 F.Supp. 1259

The BAXTER STATE BANK, Plaintiff, v. Charles H. BERNHARDT and Shirley V. Bernhardt, Defendants.

No. 96-2460-JWL.

United States District Court, D. Kansas.

November 3, 1997.

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Joseph Y. Holman, Holman, McCollum & Hansen, P.C., Prairie Village, KS, Frank B.W. McCollum, E. John Edwards, III, Holman, McCollum & Hansen, P.C., Kansas City, MO, for Baxter State Bank, plaintiff.

G. Michael Fatall, Kansas City, MO, for Charles H. Bernhardt, Shirley V. Bernhardt, defendants.

MEMORANDUM AND ORDER

LUNGSTRUM, District Judge.

In this action, plaintiff seeks to recover from defendants on various personal guaranties of business loans made by plaintiff to a corporation that is not a party to this case. On May 22, 1997, the court held a hearing, at which it denied plaintiff's motion for summary judgment and permitted plaintiff to amend its complaint. The matter is presently before the court on plaintiff's renewed motion for summary judgment (Doc. 25) and defendants' motion for partial summary judgment on plaintiff's claim for contractual attorney fees (Doc. 26).

Plaintiff's motion for summary judgment is granted in part and denied in part. The motion is denied with respect to plaintiff's claims based on the 1989 guaranties signed by defendants for amounts due on the "SBA" and "SPM" loans. The motion is granted with respect to plaintiff's claims based on the 1989 guaranties for amounts due under the original operating loan. The motion is also granted with respect to plaintiff's claim based on the 1993 guaranty signed by defendant Charles Bernhardt.

Accordingly, judgment is ordered against Charles Bernhardt in the amount of $231,280.99, with interest accruing hereafter at a rate of $52.95 per day, which amount accounts for the total balance due on all three loans based on the 1993 guaranty. In the alternative, Charles Bernhardt is liable on his 1989 guaranty in the amount of $126,317.70, with interest continuing to accrue hereafter at a rate of $28.77 per day, which amounts represent the balance and interest due on the original operating loan. Judgment is also awarded against defendant Shirley Bernhardt on her 1989 guaranties in the amount of $126,317.70, plus interest hereafter at a rate of $28.77 per day.

Because the court concludes that the statute permitting contractual attorney fees in this context does not apply retrospectively, defendants' motion for partial summary judgment is granted, and plaintiff's claim for contractual attorney fees based on the 1989 guaranties is dismissed.

I. Facts¹

This action involves three loans made by plaintiff The Baxter State Bank (the Bank) to Engineering Reduction Systems, Inc. (ERS), a Kansas corporation owned by Ted Bernhardt and his wife, Mary Bernhardt. ERS manufactures tire-shredding equipment. Ted Bernhardt's parents, defendants Charles H. Bernhardt and Shirley V. Bernhardt, owned 50 percent of ERS until September 1, 1989 when they sold their interest to Ted and Mary Bernhardt and removed themselves from any participation in the business. Plaintiff now seeks to recover the amounts due on the three loans by enforcing three guaranties signed by Charles and Shirley Bernhardt in 1989 and one guaranty signed by Charles Bernhardt in 1993. Plaintiff also seeks to enforce a 1995 guaranty signed by Charles Bernhardt with respect to one of the loans, although that claim has not been made a part of plaintiff's present motion for summary judgment.

On May 4, 1989, plaintiff and ERS executed a promissory note by which plaintiff loaned ERS $150,000 (the operating loan).² That loan was renewed on nine occasions over the next six years: October 19, 1990; January 17, 1991; January 27, 1992; July 25, 1992; January 28, 1993; November 10, 1993; May 9, 1994; November 5, 1994; and May 4, 1995. The last renewal note was in the principal amount of $100,100. The loan is now past due. As of March 1, 1997, the balance remaining on this loan was $100,020 in principal and $19,191.51 in interest, with interest accruing thereafter at a rate of $28.77 per day.

On April 27, 1990, plaintiff made a second loan to ERS, approved and guaranteed by the United States Small Business Association, in the amount of $342,000 (the SBA loan). This loan is also past due. As of March 1, 1997, a balance of $74,505.46 in principal and $8,848.15 in interest remained, with interest accruing thereafter at a rate of $20.91 per day.

On February 10, 1993, plaintiff made a third loan to ERS, secured by collateral from SPM, an ERS customer, in the amount of $100,020 (the SPM loan). This loan was renewed once in November of 1993. The renewed note is now past due, and as of March 1, 1997, a balance of $13,865.50 in principal and $771.72 in interest remained, with interest accruing thereafter at a rate of $3.27 per day.

On May 8, 1989, Charles Bernhardt and Shirley Bernhardt each signed unlimited guaranties, which guaranteed all present and future obligations of ERS to the Bank. Shirley Bernhardt also executed a guaranty guaranteeing her husband's unlimited guaranty.

After they sold their interest in ERS in September of 1989, Charles and Shirley Bernhardt decided that they no longer wished to be responsible for any future indebtedness of ERS. They instructed Ted Bernhardt to tell the Bank that they would not guarantee any future loans to ERS and that they did not wish to be responsible for any further debt beyond the $100,000 letter of credit they had given the Bank. Ted Bernhardt then told the Bank that his parents would honor their guaranties of the existing operating loan but that they would not guarantee additional loans.

In the original note and the first four renewals for the operating loan, Charles Bernhardt executed guaranties limited to that one loan. In each of those five instances, the note and corresponding security agreement were combined in a single form. Charles Bernhardt signed the provision on the reverse side that read as follows:

GUARANTEE: By signing below, I unconditionally guarantee the payment of any amounts owed under this note and any security agreement. I also agree that all the other terms of the note and any security agreement apply to me.

The security agreement portion of the form included as secured property the "PERSONAL GUARANTEE OF CHARLES BERNHARDT".

The operating loan was renewed for a fifth time on January 28, 1993. For the first time, the Bank used separate forms for the note and the security agreement. The guaranty provision was no longer located on the reverse side of the note; instead, the same language and signature lines were typed in on the front of the note as an "additional term." Charles Bernhardt signed the guaranty provision. Moreover, the security agreement had an additional section for the first time, which required that one of two boxes be checked to denote whether the agreement secured a specific debt or all existing and future debts of ERS. In this case, the "All Debts" box was checked. As before, the secured property included the "PERSONAL GUARANTY OF CHARLES BERNHARDT". Finally, Mr. Bernhardt separately initialed the security agreement.

In this action, plaintiff has brought a claim to enforce this January 28, 1993 guaranty signed by Charles Bernhardt. Plaintiff contends that this guaranty is not limited to the operating loan but guarantees all three loans at issue. At his deposition, when asked whether he read the documents before signing on January 28, 1993, Charles Bernhardt testified as follows:

I did, but apparently not too carefully because had I realized what that signature implied by the wording, I would not have accepted it. Particularly in view of the fact it's one of ten that I signed that had that kind of wording on it on the security agreement. I just missed it. I wouldn't have done it otherwise.³

The same note and security agreement forms were used the final four times the operating loan was renewed, except the guaranty provision was not typed onto the note. In each case, the "Specific Debt" box on the security agreement was checked, and the agreement only secured the obligation on the specific corresponding note. The secured property continued to include Charles Bernhardt's personal guaranty. Any accompanying guaranty was executed by Charles Bernhardt on a separate guaranty form.

With the sixth and seventh renewals of the operating loan on November 10, 1993 and May 9, 1994, the guaranty form that was provided to Charles Bernhardt had a box checked that made the guaranty applicable to all present and future debts of ERS. In each case, Charles Bernhardt altered the form to make the guaranty apply only to the corresponding renewal note before he signed it. No guaranty was signed with respect to the eighth renewal note, which was executed on November 9, 1994. For the last renewal on May 4, 1995, the separate guaranty indicated that it only guaranteed the specific loan, and Charles Bernhardt signed the form without alteration. The May 9, 1994 and May 4, 1995 guaranties also contained the following provision:

12. The liability of the Undersigned under this guaranty is in addition to and shall be cumulative with all other liabilities of the Undersigned to Lender as guarantor or otherwise, without any limitation as to amount, unless the instrument evidencing or creating such other liability specifically provides to the contrary.

In 1989, when the operating loan to ERS was made, Charles Bernhardt had his bank in Ohio issue a standby letter of credit in the amount of $100,000 to plaintiff; the letter of credit was renewed every year until 1996. By its terms, the letter made $100,000 available to plaintiff upon presentation of evidence of any past due note guaranteed by Charles Bernhardt. On April 22, 1996, an attorney for Ted Bernhardt wrote a letter to plaintiff setting out a plan for repayment of the three loans. The letter stated that the $100,000 letter of credit would be called and...