Gilmer v. Kansas City West Land Co., Inc.
| Decision Date | 05 August 1977 |
| Docket Number | No. 48340,48340 |
| Citation | 571 P.2d 36,1 Kan.App.2d 509 |
| Parties | Ben S. GILMER et al., as Trustees of Tri-South Mortgage Investors, Appellants, v. KANSAS CITY WEST LAND COMPANY, INC., et al., Appellees. |
| Court | Kansas Court of Appeals |
Syllabus by the Court
1. Under the Kansas business trust act of 1961 (K.S.A. 17-2027 et seq.), applicable statutes governing foreign and domestic corporations also apply to foreign and domestic business trusts unless inconsistent with some specific provision of the business trust act.
2. There is nothing in K.S.A. 17-7303 () which is inconsistent with any provision of the business trust act.
3. K.S.A. 17-7303 exempts from registration a foreign corporation, and hence a foreign business trust, whose only activity in Kansas is the lending of money and dealing in security interests acquired in connection with such loans.
4. In an action to foreclose a mortgage on Kansas real estate brought by a foreign business trust whose only activity in Kansas was to make secured loans, held : it was error to require the trust to qualify to do business in Kansas before proceeding with the foreclosure action.
Paul Hasty, Jr., and Richmond M. Enochs of Wallace, Saunders, Austin, Brown & Enochs, Overland Park, for appellants.
Edward H. Powers, Sr., Kansas City and Robert E. Fabian of McAnany, Van Cleave & Phillips, Prairie Village, for appellees.
Before HARMAN, C. J., and FOTH and SPENCER, JJ.
The basic issue in this case is whether a foreign business trust must qualify to do business in this state if its only activity here is to lend money secured by a mortgage on Kansas real estate. The trial court found that the foreign business trust operated by plaintiffs was required to qualify, and restrained further proceedings in this suit to foreclose a mortgage on Kansas real estate until it did so. Plaintiffs have appealed from that ruling, and the defendants have cross-appealed from the court's refusal to dismiss the suit altogether.
Plaintiffs are trustees of Tri-South Mortgage Investors, a business or "Massachusetts" trust having its principal place of business in Georgia. On June 30, 1972, it lent $1,300,000.00 to the defendant Kansas City West Land Company, Inc., a Kansas corporation, secured by a mortgage on some 33 acres of land in Wyandotte county. This action was filed June 5, 1975. The petition alleges a breach of the mortgage agreement by failure to pay interest due on August 11, 1974, and seeks foreclosure and judgment for the full principal amount plus accrued interest.
In addition to Kansas City West, the mortgagor, several individuals were named as defendants. As to three, liability was asserted on the basis of their personal guarantees of the loan. Others were named as stockholders, officers or directors, and in some cases as spouses of such interested parties. As to the nonguarantor individuals, liability was based variously on (1) their status as transferees of the mortgagor's assets after a certificate of its dissolution was filed with the Kansas secretary of state on December 26, 1974; or (2) their status as stockholders of an undercapitalized corporation; or (3) their status as incorporators or stock subscribers of a corporation which had not complied with the statutory prerequisites to doing business. As a result of a series of motions most of the individual defendants, except those who had guaranteed the loan, were dismissed from the case. Although Tri-South appealed from the dismissals, it has since dismissed its appeal as to six of the individual appellees. In any event, the status of the individual defendants is not before us, except as it may be affected by the main issue.
That issue was raised by various motions to dismiss based on the fact that Tri-South had never qualified to do business in Kansas. Tri-South responded by an affidavit of one of its trustees to the effect that Tri-South's only activities in Kansas have been to lend money on real and personal property situated in this state and to deal in the security interests acquired in connection with such loans. The affidavit was not contested, and it appears conceded by defendants that if Tri-South were a corporation it would be exempt from qualifying in this state by virtue of K.S.A. 17-7303. That section defines what is "doing business" in Kansas so as to require a foreign corporation to register, and goes on to say:
"Provided, That foreign corporations shall have the right to receive, take, purchase and hold, by mortgage or otherwise, any securities or liens executed, given, transferred or intended to represent or secure loans upon real or personal property situated in this state, and to sell, assign, transfer, sue upon, foreclose or otherwise enforce the same; and any foreign corporation which engages in Kansas solely and exclusively in the activities enumerated in this proviso shall not be required to obtain authority under this act to engage in such activities in this state."
The trial court reasoned as follows:
We agree with the trial court that the controlling statute is K.S.A. 17-2035, part of the Kansas business trust act of 1961, quoted in part in finding number 4, above. The real question is whether the exemption of 17-7303 for foreign corporations which only lend money in Kansas is inconsistent with any of the "specific provisions" of the business trust act.
That act (Laws 1961, ch. 127) was the culmination of a long series of problems arising from the operation in this state of those hybrid business entities known as business trusts or, more commonly, "Massachusetts" trusts. The court was repeatedly faced with determining whether they should be treated as corporations, partnerships true trusts, or simply illegitimate creatures of whom the law should take no cognizance whatever. A few of our cases will illustrate those problems.
The seminal case is Lumber Co. v. State Charter Board, 107 Kan. 153, 190 P. 601. The plaintiff trust there was organized to engage in a general manufacturing, mercantile or commercial business. The court first held that because the trust had not complied with our corporation code the state charter board was not required to consider its application to sell stock in Kansas. As a result of a post-decision motion to modify, however, it was recognized that such an organization met the definition of a "corporation" found in Article 12, § 6 of our Constitution. As a constitutional "corporation" it was entitled to have its shares considered for registration under our Blue Sky law, although its right to qualify to do business in this state was again questioned because the statutes covering qualification to do business were couched solely in terms of corporations.
In Harris v. Oil Co., 110 Kan. 532, 204 P. 754, the court upheld a judgment against a Massachusetts trust which was operating as an oil driller and producer. For that purpose the trust was a viable business entity upon whom service could be made by publication in its trade name. The court had occasion to reaffirm that " 'Massachusetts trusts' are corporations within the meaning of our statutes where reasonably applicable." (p. 537, 204 P. p. 757.)
In Hamilton v. Young, 116 Kan. 128, 225 P. 1045, the court held that the trustees of another oil producing trust were not personally liable on a promissory note they executed in the name of the trust. Thus limited liability, one of the prime attributes of a corporation, was apparently extended to a Massachusetts trust. However, in Weber Engine Co. v. Alter, 120 Kan. 557, 245 P. 143, the court noted that the nonliability in Hamilton was predicated on the peculiarities of the negotiable instrument law, and not on the nature of the business entity. When it came to an ordinary contract for the purchase of machinery for use in the trust's business the trustees were personally liable only by adhering to the letter of the corporation act could they secure the benefits of a corporation's limited liability.
Weber was followed in Linn v. Houston, 123 Kan. 409, 255 P. 1105, where trustees of a Wyoming based Massachusetts trust were held personally liable on an oil drilling contract.
The conceptual difficulties in dealing with such a creature are graphically illustrated in the assorted litigation involving United Royalty Company. That was an Oklahoma based Massachusetts trust which conducted a vast oil royalty pooling operation in Kansas from the 1920's through the 1950's without either qualifying to do business or registering its securities under the Blue Sky laws. In Fitch v. United Royalty Co., 143 Kan. 486, 55 P.2d 409, it was held that a Kansas landowner could not avail himself of United's failure to qualify in...
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...out-of-state LLCs at Kan. Stat. Ann. §17-7932. The application of §17-7303 to LLCs is supported by Gilmer v. Kansas City West Land Co ., 571 P.2d 36 (Kan. 1977). The Kansas Supreme Court held that §17-7303 was not in conflict with any specific section of the Kansas Business Trust Act and th......