Federal Land Bank of Wichita v. Krug

• Decision Date: 09 July 1993
• Docket Number: No. 67919,67919
• Citation: 253 Kan. 307,856 P.2d 111
• Parties: FEDERAL LAND BANK OF WICHITA, Kansas, Appellee/Cross-Appellant, v. Esther B. KRUG, et al., Appellants/Cross-Appellees.
• Court: Kansas Supreme Court

Page 111

856 P.2d 111

253 Kan. 307

FEDERAL LAND BANK OF WICHITA, Kansas, Appellee/Cross-Appellant, v. Esther B. KRUG, et al., Appellants/Cross-Appellees.

No. 67919.

Supreme Court of Kansas.

July 9, 1993.

Syllabus by the Court

1. As a general rule, the interpretation or construction and meaning and legal effect of written instruments are matters of law exclusively for the court and not questions of fact.

2. Regardless of the construction given a written contract by the trial court, an appellate court may construe a written contract and determine its legal effect.

3. An assumption agreement is an act of assuming or taking an obligation on one's self and can include the undertaking or adoption of a debt or obligation resting upon another.

4. When one contracts to assume a mortgage even though the documents are executed at different times, but in the course of the same transaction concerning the same subject matter, they will be construed together to determine the intent of the parties to the contract.

5. To warrant rescission of a contract for breach of contract, the breach must be material and the failure to perform so substantial as to defeat the object of the parties in making the agreement.

6. Generally, upon rescission of a contract the parties must be placed in substantially the same condition as they were when the contract was executed.

Mark Arthur, Jr., of Thompson, Arthur & Davidson, Russell, was on the briefs, for appellants, cross-appellees.

J. Randall Clinkscales, of Clinkscales & Clinkscales, Wichita, argued the cause and was on the briefs, for appellee, cross-appellant Federal Land Bank of Wichita, Kan.

LOCKETT, Justice:

Herman Krug Farms, Inc., Herman A. Krug, and Esther B. Krug (the Krugs) borrowed money from and executed a mortgage and note to the Federal Land Bank of Wichita to purchase farm and ranch land. The loan was to be repaid in 33 annual installments. Three years later the Krugs entered into a contract for the sale of the land to the partners in S & S Ranch. S & S executed an assumption agreement of the Krugs' loan from the Bank. S & S made two annual payments but refused to make additional payments when it was unable to obtain a deed from the Krugs or the Bank. The Bank petitioned for foreclosure, naming the Krugs and S & S as defendants. The Krugs cross-claimed against S & S for failure to make payments due under the real estate contract and indemnity for any liability the Krugs had to the Bank. The district court (1) rescinded the contract for sale between the Krugs and S & S; (2) ordered S & S to make an accounting to the court; (3) found S & S had no rights of redemption; (4) found S & S partners and the Krugs were liable to the Bank on the mortgage assumption agreement; and (5) found the Bank had violated the Equal Credit Opportunity Act. S & S appealed, claiming that rescission of the contract is a defense to a mortgage. The Court of Appeals reversed the trial court in an unpublished decision filed November 13, 1992, 840 P.2d 557. We granted the Federal Land Bank's petition for review.

Those involved in the action can be divided into three parties: The first party (the Krugs) includes Herman Krug Farms, Inc.; Herman A. Krug (deceased) and Esther B. Krug; and the Herman Krug Estate. The second party (S & S) includes Jack Yost, John Yost, and Bruce Miller, partners in S & S Ranch; and Eloise Yost and Terrie Miller, the wives of John Yost and Bruce Miller. The Federal Land Bank of Wichita (Bank) is the third party.

In 1981, the Krugs executed a promissory note for $584,000 and a 33-year mortgage on 2,720 acres of farm and ranch land to the Bank. The mortgage stated: "[M]ortgagee at its option may declare the debt immediately due in the event of change of ownership of the security, unless mortgagee has given its written consent to such change."

Because the Krugs could not make the annual payment on the note in 1984, they entered into a Contract For Sale of Real Estate with S & S. The contract provided that S & S was to acquire the land and the Krugs' stock in the Bank. In return, S & S was to assume the Krugs' debt to the Bank. The contract expressly stated: "[I]t is agreed and stipulated by and between the parties that such contract sale shall at all times be subject to the approval by The Federal Land Bank Association of Wichita, Kansas, of the assumption of the above referred to mortgage by Buyer."

A mortgage assumption agreement was prepared by the Bank and executed by S & S as purchaser of the land, and by Herman Krug Farms, Inc., as the seller of the land. Under the agreement, S & S assumed and agreed to pay to the Bank the unpaid balance of the Krugs' indebtedness and agreed to be bound by all the covenants, conditions, and obligations contained in the note, mortgage, and other loan instruments to the same extent as if the note, mortgage, and other loan instruments were executed by S & S.

After S & S had made the November 1, 1984, and November 1, 1985, annual payments on the mortgage, it refused to make the November 1, 1986, payment because it was unable to obtain a deed from the Krugs or the Bank. The Bank commenced a foreclosure action naming the Krugs and S & S as defendants. The Krugs cross-claimed against S & S for its failure to make the last of two payments under the real estate contract and for indemnity for any liability of the Krugs to the Bank. Other issues were raised and disposed of, and they will not be discussed in the opinion.

As relevant, the trial court found:

1. Defendants had defaulted on the note and mortgage in failing to pay the Bank the installments when due.

2. Defendants Krug and S & S were jointly and severally liable for the amounts due the Bank.

3. Defendants were entitled to credit against the judgment for their stock in the Federal Land Bank Association of Hays, and their interest in the stock was foreclosed.

4. The Bank was entitled to have its mortgage and security interest foreclosed. The Bank was entitled to have the property sold to satisfy payment of the amount of indebtedness.

5. Both S & S and the Krugs breached the terms and conditions of the real estate contract (the Krugs because they failed to timely deliver good and marketable title and refused to tender a warranty deed and S & S because it did not pay the Bank when payment was due).

6. S & S Ranch did not seek specific performance of the contract, nor did it seek damages for breach of contract. The court construed that to mean it sought the contract remedy of restitution and rescission. Accordingly, the trial court rescinded the contract; S & S was directed to make an accounting to the court; the Krugs were entitled to possession; S & S was entitled to have the $2,500 down payment returned to it; and S & S partners had no rights of redemption because, as a result of the rescission of the contract, they had no ownership interest in any of the subject property.

7. Breach of the sales contract between the Krugs and S & S ranch was not, as a matter of law, a defense to the claim for mortgage foreclosure by the Bank or a defense to the mortgage assumption agreement executed by S & S.

8. The property should be sold according to law and applied to the judgment.

9. If there remains any amount due the Bank, the Bank is entitled to a deficiency judgment against the defendants for such remaining amounts.

S & S appealed to the Court of Appeals, claiming that rescission of the contract is a defense to a mortgage.

The Court of Appeals reversed the district court, holding:

1. The trial court was correct in ordering rescission of the Contract for Sale of Real Estate because failure to tender marketable title was a material breach warranting rescission. The Court of Appeals equated failure to tender a deed with failure to tender marketable title.

2. The contract and mortgage assumption should be construed together to determine the intent of the parties to the contract because (a) the Bank was a necessary approving party to the contract for sale; (b) the Bank would not have approved the sale without the mortgage assumption; (c) the mortgage assumption is a contract between the Krugs and S & S and the Bank is not listed as a party to the mortgage assumption; and (d) the mortgage assumption states the parties are purchaser and seller and "this language" cannot stand without the sale because "there must be...