Born v. Born

• Decision Date: 10 June 2016
• Docket Number: No. 108,963,108,963
• Citation: Born v. Born, 304 Kan. 542, 374 P.3d 624 (Kan. 2016)
• Parties: Betty A. Born, as Trustee of the John H. Born, Jr. Revocable Trust, and The John H. Born, Jr. Revocable Trust, Appellants/Cross–Appellees, v. Sharon L. Born, Appellee/Cross–Appellant, and Todd J. Born and Janel M. Born, Co–Trustees of the Todd J. Born Revocable Trust, Intervenors/Appellees/Cross–Appellants.
• Court: Kansas Supreme Court

304 Kan. 542

374 P.3d 624

Betty A. Born, as Trustee of the John H. Born, Jr. Revocable Trust, and The John H. Born, Jr. Revocable Trust, Appellants/Cross–Appellees,

v. Sharon L. Born, Appellee/Cross–Appellant,andTodd J. Born and Janel M. Born, Co–Trustees of the Todd J. Born Revocable Trust, Intervenors/Appellees/Cross–Appellants.

No. 108,963

Supreme Court of Kansas.

Opinion filed June 10, 2016

James A. Walker, of Triplett, Woolf & Garretson, LLC, of Wichita, argued the cause, and Shane A. Rosson, of the same firm, was with him on the briefs for appellants/cross-appellees.

Todd E. Shadid, of Klenda Austerman LLC, of Wichita, argued the cause and was on the brief for appellee/cross-appellant Sharon L. Born.

The opinion of the court was delivered by Johnson, J.:

Betty Born (Betty), in her capacity as a trustee of the inter vivos, revocable trust created with her late husband, John H. Born, Jr. (John), hereafter referred to as “the Born Trust,” brought this injunctive and declaratory judgment action against Sharon Born (Sharon). Sharon held two installment promissory notes upon which the Born Trust assets had been pledged as security when John died. When Betty attempted to make payments on the notes, Sharon took the position that the notes were in default because of John's death; that, pursuant to the notes' acceleration clauses, the entire remaining balances were immediately due and payable; and that Sharon's only remedy under the security agreements was to accept all of the Born Trust's pledged assets in full satisfaction of the note balances. This action challenged Sharon's right to unilaterally effect an acceptance-of-collateral remedy.

The district court granted summary judgment in favor of Sharon, finding that the Born Trust had failed to properly object to Sharon's acceptance of the collateral in full satisfaction of the notes and that the Born Trust had failed to properly redeem the collateral after being notified that Sharon had accepted it. The district court therefore ordered the Born Trust to turn over the collateral to Sharon.

The Court of Appeals affirmed the district court. The panel found that, although the Born Trust did properly object to Sharon's proposed acceptance of collateral, the Uniform Commercial Code (UCC) required that the trust also redeem the collateral. The panel determined that the Born Trust had not effectively attempted to redeem the collateral, so that the district court's result could be affirmed. Born v. Born , No. 108,963, 2014 WL 1096602, at *14 (Kan. App. 2014) (unpublished opinion).

This court granted the Born Trust's petition for review of the Court of Appeals' decision. Finding that the Born Trust had the right under the promissory notes to pay the accelerated balances due thereon to prevent Sharon's acceptance of the pledged assets under the security agreement, we reverse both the Court of Appeals and the district court. The matter is remanded to the district court to calculate the amount due on the notes at the time they were accelerated, and upon payment of that amount, to order the release of Sharon's lien on the Born Trust assets.

Factual and Procedural Overview

The promissory notes and security agreements at issue in this case were executed in connection with the sale of a business interest; the persons involved in the sale and this lawsuit are related by blood or marriage. At the time of the sale, John owned a successful stone mason company. His cousin, Sharon, owned all but nine shares of H.J. Born Stone, Inc. (Born Stone, Inc.), a family corporation that had owned and operated a stone and quarry business since 1949. Sharon's son, Todd Born (Todd), held the other nine shares of Born Stone, Inc., stock and was employed by the corporation.

In September 2010, the cousins reached an agreement for John to purchase a majority interest in the stone and quarry business, which would then be operated jointly by John and Todd. The transaction was structured to include both an asset purchase and a stock purchase.

First, the Born Trust and Todd formed a separate company, TJ Leasing, LLC (TJ Leasing), to be used to purchase certain equipment, vehicles, and real estate from Born Stone, Inc. The Born Trust's membership interest in TJ Leasing was 51%; Todd owned 49%. Although Todd later transferred his interest in TJ Leasing to the Todd J. Born Revocable Trust, we will refer to his interest as individually owned to avoid further confusion.

TJ Leasing paid Born Stone, Inc., for the purchased assets by executing a “Purchase Price Note” for the full purchase price of $825,877, together with annual interest to be calculated each year pursuant to a formula. By the terms of the note, TJ Leasing, as “Borrower,” was to pay H.J. Born Stone, Inc., as “Lender,” annual payments of $50,000, until the note was paid in full. The payments were due each September 30, beginning in 2011. Although the Court of Appeals' opinion referred to this instrument as “Note 1,” we will refer to it more descriptively as the “TJ Leasing note.” As collateral for the TJ Leasing note, Todd and the Born Trust executed a Pledge Agreement, granting Born Stone, Inc., a security interest in and to all of their ownership interests in TJ Leasing. We will refer to this instrument as the “TJ Leasing security agreement.”

The day before the September 30, 2010, effective date of the TJ Leasing note, Sharon resigned as an officer and director of Born Stone, Inc. Then, on the same date as the asset sale to TJ Leasing, Born Stone, Inc., used the sale proceeds, along with other remaining corporate assets, to fund the repurchase of 144 shares of Sharon's Born Stone, Inc., stock, pursuant to a Stock Redemption Agreement. The corporation partially paid for the stock redemption by giving Sharon a written assignment of its interests and rights in and to the TJ Leasing note and TJ Leasing security interest. In other words, Sharon became the holder of those instruments, assuming the rights and obligations of Born Stone, Inc. After the stock redemption on September 30, 2010, Born Stone, Inc., had 194 shares outstanding; Sharon owned 185 shares and Todd owned 9 shares.

The following day, October 1, 2010, the Born Trust obtained one-half of the outstanding shares of Born Stone, Inc., by purchasing 97 shares from Sharon. The Born Trust paid for the stock purchase by executing an installment promissory note (“Stock Purchase Note”) in the principal amount of $708,300, together with interest, payable to Sharon in annual payments of $50,000, due on September 30 of each year, beginning in 2011. To secure those payments, the Born Trust, by written agreement hereafter referred to as “stock security agreement,” pledged its Born Stone, Inc., stock as collateral. That same day, Sharon gifted her remaining 88 shares of Born Stone stock to Todd, which resulted in Todd and John both holding 97 shares of Born Stone stock.

Unusual events ensued. Shortly after the sales transactions, John was diagnosed with terminal cancer. He informed Sharon of his diagnosis and kept her apprised of his medical condition. In April 2011, Sharon requested and received a lump sum payment of $375,000 from TJ Leasing so that she could pay her income taxes. That voluntary lump sum payment within the first 6 months of the TJ Leasing note reduced its principal amount by approximately 45%. In June 2011, Todd sold 1.94 shares of his Born Stone, Inc., stock to the Born Trust for $14,166, which made the Born Trust's interest in Born Stone, Inc., 51% and left Todd with 49% ownership, the same proportional ownership as it held in TJ Leasing. Then, on September 8, 2011, approximately 3 weeks before the first annual payments were due on the two notes, John died.

On or about September 19, 2011, Betty contacted Sharon in an attempt to make the annual payment on both notes, but Sharon avoided the attempt, claiming she was busy. Instead, 2 days later, on September 21 (9 days before the due date of the first annual installment), Sharon's attorney hand-delivered two letters to Betty in her capacity as trustee of the Born Trust. One letter addressed the September 30, 2010, TJ Leasing note and security agreement; the other referenced the October 1, 2010, documents. In both letters, Sharon made the following declaration and notification, with the addition of parenthetically describing the collateral for each note:

“As a result of the death of John H. Born, Jr., I, pursuant to paragraph 3 of the Note, declared the entire balance of the Note in default and immediately due and payable. Pursuant to paragraph 4 of the Pledge Agreement, this letter is notice to the John H. Born, Jr. Revocable Trust, as restated and amended u/a/d December 15, 2005, that I have accepted the Collateral listed in the Pledge Agreement.”

Additionally, in the TJ Leasing note and security agreement letter, Sharon made the following declaration: “As a result, all of the membership interest in TJ Leasing, LLC, held by the John H. Born, Jr. Revocable Trust, as restated and amended u/a/d December 15, 2005, is forfeited, ceased to exist and terminated.” Sharon then directed Betty to “immediately surrender the trust's original Unit Membership Certificate of TJ Leasing, LLC, to my attorney, Todd E. Shadid,” at his Wichita office address.

Sharon sent a similar letter to her son, Todd, instructing him to surrender his original Unit Membership Certificate of TJ Leasing to her. Todd complied with his mother's demand, forfeiting his 49% interest in TJ Leasing to her.

The letter to Betty declaring a default under the Stock Purchase Note and security agreement, included the additional declaration: “As a result, all of interest [sic ] of the trust as stockholder in H.J. Bron [sic ] Stone, Inc. is forfeited, ceased to exist and terminated.” That letter demanded that Betty “immediately surrender the trust's original Stock Certificate(s) for H.J. Born Stone, Inc., to my attorney, Todd E. Shadid,” at his Wichita office address.

The day after Sharon's attorney...