Farmers State Bank of Oakley v. Cooper

• Decision Date: 05 April 1980
• Docket Number: No. 50419,50419
• Citation: 227 Kan. 547,608 P.2d 929
• Parties: , 28 UCC Rep.Serv. 733 The FARMERS STATE BANK OF OAKLEY, Appellee, v. Paul A. COOPER, Jr., Appellant, Michael P. Cooper and Georgia L. Cooper, Third Party Defendants.
• Court: Kansas Supreme Court

Page 929

608 P.2d 929

227 Kan. 547, 28 UCC Rep.Serv. 733

The FARMERS STATE BANK OF OAKLEY, Appellee, v. Paul A. COOPER, Jr., Appellant Michael P. Cooper and Georgia L. Cooper, Third Party Defendants.

No. 50419.

Supreme Court of Kansas.

April 5, 1980.

Syllabus by the Court

1. The renewal of a note signifies the substitution in place of one engagement of a new obligation on the same terms and conditions; that is, the reestablishment of a particular contract for another period of time.

2. When a note is ambiguous as to the applicability of the UCCC, K.S.A. 16a-1-101 et seq., the intent of the parties governs. Intent may be determined from the acts and statements of the parties and the circumstances surrounding the execution of the note.

3. The intention of the parties is the significant element in determining whether one who signs a note is an accommodation party or a principal maker.

4. Two primary factors are indicative of accommodation status: (1) no benefits from the proceeds of the instrument are received by the accommodation party, and (2) the signature is needed by the maker to acquire the loan.

5. Where a note is given merely in renewal of another and not in payment thereof, the renewal does not extinguish the original debt nor in any way change the debt except by postponing time of payment, and, as a general rule, the holder is entitled to the same rights and remedies as if he were proceeding on the original note.

6. An unperfected security agreement is valid and effective between the parties to the agreement according to its terms.

7. Except in the circumstances encompassed by K.S.A. 1979 Supp. 84-9-307, a secured party's interest in collateral is prior to that of a purchaser if the security interest is perfected; however, if the interest is not perfected, a buyer for value without knowledge takes free of the security interest.

8. K.S.A. 84-3-606(1)(b ) provides for discharge of any party to the extent that without such person's consent the holder unjustifiably impairs collateral. The release is only pro tanto.

9. An accommodation party who claims partial or full release under K.S.A. 84-3-606(1)(b ) has the burden of proof on that issue.

10. The judgment of a trial court, if correct, is to be upheld, even though the court may have relied upon a wrong ground or assigned an erroneous reason for its decision.

Kris L. Arnold, Roeland Park, argued the cause and was on the brief for appellant.

James A. Spencer, of Spencer & Spencer, P.A., Oakley, argued the cause and was on the brief for appellee.

MILLER, Justice:

This is an appeal by the defendant, Paul A. Cooper, Jr., from judgment entered against him in the Logan district court in an action brought by Farmers State Bank of Oakley on a past-due promissory note. The issues are (1) whether the note sued upon was subject to the Uniform Consumer Credit Code, K.S.A. 16a-1-101 et seq.; (2) whether defendant is entitled to recover civil penalties, costs, and attorney's fees; and (3) whether the bank unjustifiably impaired the collateral by failing to perfect its security agreement, and by allowing the removal of the collateral from the State of Kansas. In determining the last of these issues, we must also determine whether the defendant is an accommodation party or a principal maker of the note.

The factual background is necessary to an understanding of the issues. In July, 1971, Dr. Michael P. Cooper, son of defendant Paul A. Cooper, Jr., moved with his wife Georgia to Oakley, Kansas. Michael, a chiropractor, intended to establish a practice in Oakley. He approached the bank for a loan in order to purchase equipment and remodel his office, rented from the bank and located on an upper floor of the bank building. The bank committed a line of credit of five thousand dollars. The president of the bank testified that when the original commitment was made, the professional equipment, household items, and automobile that were offered as security were not sufficient to completely secure the loan; therefore Paul Cooper's signature was necessary to protect the bank for the total amount.

The first promissory note in the amount of three thousand dollars was executed on August 12, 1971. It was signed by Michael P. Cooper, Georgia L. Cooper, and Paul A. Cooper, Jr. The note was secured by a security agreement of the same date, designating all equipment, instruments, and furnishings in the office, and all household goods located in the Michael Cooper residence, and a 1967 Chevrolet, as security. Michael P. Cooper and Georgia Cooper, together with William B. Griffith as agent for the bank, signed the security agreement. The security agreement was never perfected.

Four additional notes for amounts under one thousand dollars, signed only by Michael P. Cooper, were made in subsequent months. The five notes were consolidated on February 12, 1972, when a note for five thousand dollars, secured by the security agreement of August 12, 1971, was executed. This note was signed by Michael, Georgia, and Paul Cooper. This note was renewed by the execution of new notes signed by all three persons on August 12, 1972, February 12, 1973, December 1, 1973, and July 1, 1974. Some payments of principal and interest were made; the face amount of the final renewal note, due January 1, 1975, was $4,550.63. The majority if not all of the payments on the notes were made by defendant Paul Cooper. The final note is on a form substantially different from the earlier notes; it includes provisions for applicability of the UCCC.

Michael's chiropractic practice did not prosper. During 1975 he moved from Oakley to the State of Washington. It then appeared that Dr. Cooper had a splendid opportunity in Washington, and the bank was hopeful that his practice would prosper there enabling him to satisfy the note. The bank gave permission to Dr. Cooper to remove the collateral to Washington. The move was not financially successful, and Dr. Cooper returned to Oakley for a short time during 1976. He then moved to Macksville, Kansas, and later returned to his home in Shawnee, Kansas. He has not practiced chiropractic medicine since his return to Kansas. Dr. Cooper disposed of some of the collateral; the only items the defendant has seen in his recent possession are a handheld vibrator, a sewing machine, and the automobile. The record does not indicate any attempt of the bank to obtain payment from Dr. Cooper or to foreclose on the remaining collateral.

On October 26, 1977, the bank filed suit against defendant Paul Cooper for the balance due on the note plus accrued interest. Paul Cooper filed an answer and counterclaim, and later filed a third- party petition against his son, Dr. Michael Cooper, and his son's wife, Georgia, for indemnity in the event a judgment is entered against Paul Cooper and in favor of the bank. Neither Michael nor Georgia Cooper have answered or otherwise appeared in this action.

The trial court made findings of fact substantially similar to the foregoing recitation, and then made conclusions of law as follows:

"1) Under K.S.A. 16a-1-301(14)((a))(ii), a business loan is not a consumer loan. Under K.S.A. 16a-1-109, the parties may make such a loan subject to the UCCC by agreement in writing signed by both parties. The Court would conclude that the parties did not intend the renewal note (Plaintiff's exhibit 10) to be subject to the UCCC for the following reasons:

(a) The loan was a business loan before the passage of UCCC and this was merely a renewal note.

(b) Plaintiff's exhibit 10 is not signed by the bank as required to bring 16a-1-109 into play.

(c) The typed-in comment 'business loan' in the blank for a finance charge controls over the printed form language relating to the UCCC.

"2) The Court does not feel that the plaintiff bank's failure to perfect its security in the collateral constitutes unjustifiable impairment of recourse or collateral under K.S.A. 84-3-606 in this case for the following reasons:

(a) The security in the collateral was unperfected in 1971, and this fact was easily ascertainable by defendant before he signed the 1974 note.

(b) The plaintiff never misled the defendant by promises that it would protect him or look to the collateral first or perfect its security. It should have been obvious to the defendant by 1974 that the plaintiff was looking primarily to his signature rather than the aging collateral for the payment of this loan.

(c) The defendant was in a better position than plaintiff to know the whereabouts of 3rd party defendants and to take steps to protect his right of recourse under K.S.A. 84-3-415.

"For the above and foregoing reasons judgment is rendered for the plaintiff and against the defendant in the sum of $4,550.63 with interest at the rate of 9% from and after July 1, 1974. The defendant is given a right of recourse and a judgment over against the 3rd party defendants in the same amount and at the same rate of interest."

Judgment was entered in accordance with those conclusions. This appeal followed.

The first issue is whether the final renewal note, the one forming the basis for this lawsuit, is subject to the provisions of the Uniform Consumer Credit Code, K.S.A. 16a-1-101 et seq. K.S.A. 16a-1-109 provides in substance that the parties to loans which are not consumer credit transactions may agree in writing to the application of the act. The trial court concluded that it did not apply. We concur.

There is no dispute that the original loan was for a business purpose and that the original and the first several renewal notes were not subject to the UCCC. "A renewal signifies the substitution in place of one engagement of a new obligation on the same terms and conditions; that is, the re-establishment of a particular contract for another period of time." 11 Am.Jur.2d, Bills and Notes § 307. We adopted that view in Fourth National Bank v. Hill, 181 Kan. 683, 695, 314 P.2d 312 (1957).

Most of appellant's arguments rely...