Kaw Valley State Bank & Trust Co. v. Riddle

• Decision Date: 08 May 1976
• Docket Number: No. 47845,47845
• Citation: 549 P.2d 927,219 Kan. 550
• Parties: , 19 UCC Rep.Serv. 869 The KAW VALLEY STATE BANK AND TRUST COMPANY, Appellant, v. John H. RIDDLE d/b/a Riddle Contracting Company, and Planters State Bank and Trust Company, a Banking Corporation, Appellees.
• Court: Kansas Supreme Court

Page 927

549 P.2d 927

219 Kan. 550, 19 UCC Rep.Serv. 869

The KAW VALLEY STATE BANK AND TRUST COMPANY, Appellant, v. John H. RIDDLE d/b/a Riddle Contracting Company, and Planters State Bank and Trust Company, a Banking Corporation, Appellees.

No. 47845.

Supreme Court of Kansas.

May 8, 1976.

Syllabus by the Court

1. When a judgment or decree of the trial court relates to two or more distinct matters of demands, acquiescence as to one of such matters or demands will not bar an appeal as to the others which remain in dispute, except for payment of costs.

2. K.S.A. 84-3-306 provides that unless a holder of an instrument is a holder in due course he takes the instrument subject to the defenses of want or failure of consideration.

3. K.S.A. 84-3-302 states that a holder in due course is a holder who takes the instrument (1) for value, (2) in good faith, and (3) without notice of any defense against it.

4. 'Good faith' is defined in K.S.A. 84-1-201(19) as 'honesty in fact in the conduct or transaction concerned.'

5. From the history of the Uniform Commercial Code it would appear that 'good faith' requires no actual knowledge or participation in any material infirmity in the original transaction.

6. A person has 'notice' of a fact when from all the facts and circumstances known to him at the time in question he has reason to know that it exists. (K.S.A. 84-1-201(25)(c).)

7. The holder of a negotiable instrument may be prevented from assuming holder in due course status because of knowledge of the business practices of his transferor or when he is so closely aligned with the transferor that transferor may be considered an agent of the holder and the transferee is charged with the actions and knowledge of the transferor.

8. After it is shown that a defense exists a person claiming the rights of a holder in due course has the burden of establishing that he or some person under whom he claims is in all respects a holder in due course. (K.S.A. 84-3-307(3).)

9. Findings of the trier of fact if based upon substantial competent testimony are conclusive on appeal.

10. This court does not consider questions immaterial to a determination of the controlling issue.

11. In an action brought by the holder of a note claiming due course status but admitting a total failure of consideration for the note, the record on appeal is examined and it is held the trial court's findings and conclusion that the holder of the note was not a holder in due course are supported by substantial competent evidence as set forth in the opinion.

Jan W. Leuenberger, of Glenn, Cornish & Leuenberger, Topeka, argued the cause, and John W. Huey, Topeka, was with him on the brief for the appellant.

Ralph E. Skoog, of Skoog & Reed, Topeka, argued the cause and was on the brief for John H. Riddle d/b/a Riddle Contracting Company, appellee.

W. Dean Owens, of Hampton, Royce, Engleman & Nelson, Salina, argued the cause and was on the brief for Planters State Bank and Trust Company, a Banking Corporation, appellee.

FROMME, Justice.

This action was brought by The Kaw Valley State Bank and Trust Company (hereinafter referred to as Kaw Valley) to recover judgment against John H. Riddle d/b/a Riddle Contracting Company (hereafter referred to as Riddle) on two notes and to determine the priority of conflicting security agreements. The two notes were covered by separate security agreements and were given to purchase construction equipment. The Planters State Bank and Trust Company (hereafter referred to as Planters) held a note and security interest on the same and other construction equipment acquired by Riddle. Kaw Valley had acquired the two notes and the security agreements by assignment from Co-Mac, Inc. (hereafter referred to as Co-Mac), a dealer, from whom Riddle purchased the construction equipment.

In a trial to the court Kaw Valley was found not to be a holder in due course of one of the notes. Its claim on said note, totaling $21,904.64, was successfully defended on the grounds of failure of consideration. It was stipulated at the trial that none of the construction equipment for which the note was given had ever been delivered by Co-Mac. Kaw Valley has appealed. appealed.

The facts underlying this controversy are lengthy and complex but they must be set forth to adequately understand the issues on appeal. The parties submitted the case to the trial court upon a written stipulation of facts supplemented by testimony and exhibits. The following facts are taken from either the stipulation or the facts found by the trial court.

Prior to the transactions in question Riddle had purchased construction equipment and machinery from the dealer, Co-Mac. A number of these purchases had been on credit and discounted to Kaw Valley by Co-Mac. Including the Riddle transactions, Kaw Valley had purchased over 250 notes and security agreements from Co-Mac during the prior ten year period. All were guaranteed by Co-Mac and by its president personally.

In May, 1971, Riddle nogotiated for the purchase of a model 6-c Caterpillar tractor, a dozer and a used 944 Caterpillar wheel tractor with a two yard bucket. Riddle was advised that this machinery could be delivered but it would first be necessary for Co-Mac to have a signed note and security agreement to complete the transaction. An installment note, security agreement and acceptance of delivery of the machinery was mailed to Riddle. These were signed and returned to Co-Mac. Ten days later, the machinery not having been delivered, Riddle called Co-Mac and inquired about purchasing a D-8 Caterpillar and a #80 Caterpillar scraper in place of the first machinery ordered. Co-Mac agreed to destroy the May 11, 1971 papers and sell this larger machinery to Riddle in place of that previously ordered.

The sale of this substitute machinery was completed and the machinery was delivered after the execution of an additional note and security agreement. However, the May 11, 1971 papers were not destroyed. The note had been discounted and assigned to Kaw Valley prior to the sale of the substitute machinery. Thereafter Co-Mac, who was in financial trouble, made regular payments on the first note to Kaw Valley. The note was thus kept current by Co-Mac and Riddle had no knowledge of the continued existence of that note. The 6-c Caterpillar tractor, dozer and the used 944 Caterpillar wheel tractor were never delivered to Riddle. Riddle received no consideration for the May 11, 1971 note and no lien attached under the security agreement because the machinery never came into possession of Riddle. (See K.S.A. 84-9-204.) The debtor never had rights in any of the collateral.

On February 24, 1972, representatives of Riddle, Co-Mac and Kaw Valley met for the purpose of consolidating the indebtedness of Riddle on machinery notes held by Kaw Valley and guaranteed by Co-Mac. Riddle was behind in some of his payments and wanted to consolidate the notes and reduce his monthly payments to $4,500.00. Kaw Valley disclosed eight past due machinery notes, each representing separate purchase transactions by Riddle. Riddle objected to one of these notes dated July 16, 1971, because the machinery purchased under this particular transaction had been previously returned to Co-Mac.

It was agreed by Kaw Valley that Riddle did not owe for this machinery because of the previous settlement between Co-Mac and Riddle. Kaw Valley cancelled the $5,000.00 balance shown to be due from Riddle.

Thereupon a renewal note and security agreement for $44,557.70 dated February 24, 1972, was drawn consolidating and renewing the seven remaining notes. Riddle then asked Kaw Valley if this was all that it owed the bank and he was assured that it was. The renewal note was then executed by Riddle.

It was not until March 12, 1972, that Riddle was advised by Kaw Valley that it held the note and security agreement dated May 11, 1971, which Riddle believed had been destroyed by Co-Mac. This was within a week after a receiver had been appointed to take over Co-Mac's business affairs. Riddle explained the machinery had never been delivered and Co-Mac promised to destroy the papers. No demand for payment of the May 11, 1971 note was made on Riddle until this action was filed.

Prior to the time this action was filed, Riddle executed a note and granted a security agreement in all of its machinery and equipment to Planters. This included the machinery covered in the previous consolidation transaction of February 24, 1972, with Kaw Valley and Co-Mac.

Subsequently Kaw Valley obtained possession of the machinery covered by the February 24 transaction by court order. Thereupon by agreement in writing between Kaw Valley, Planters and Riddle an immediate sale of the collateral covered in the February 24 transaction was held. By the terms of this agreement the first $22,200.00 in proceeds was to be paid to Kaw Valley in full satisfaction of the note of February 24, 1972. The money received from the sale in excess of this amount was to be paid to the Merchants National Bank to hold as escrow agent, awaiting a determination of entitlement by the court.

At the time of the trial the $22,200.00 had been received by Kaw Valley and the balance of the proceeds of the agreed sale amounting to $25,371.15 was in the hands of the escrow agent.

In the court's memorandum of decision filed November 19, 1974, the court found:

'That the proceeds remaining in plaintiff's possession from the agreed equipment sale are $25,371.15. The plaintiff claims $21,904.64 of same is due on the transaction of May 11, 1971. The parties agree that the excess of $3,466.51 should be paid to defendant Planters State Bank to apply on its August 28, 1972 claim;'

On December 20, 1974, the court entered the following pay-out order:

'TO THE CLERK OF THE DISTRICT COURT:

'Now on this 20th day of December 1974, you are ordered to pay to The Planters State Bank and Trust Company the sum of $3,466.51 now in your...