Mid-Continent Specialists, Inc. v. Capital Homes

Decision Date18 February 2005
Docket NumberNo. 91,069.,91,069.
Citation106 P.3d 483,279 Kan. 178
PartiesMID-CONTINENT SPECIALISTS, INC., Appellant, v. CAPITAL HOMES, L.C., Appellee.
CourtKansas Supreme Court

Chris J. Sherman, of Payne & Jones, Chartered, of Overland Park, argued the cause, and J. Tyler Peters, of the same firm, was with him on the brief for appellant.

Bruce F. Landeck, of Overland Park, argued the cause and was on the brief for appellee.

The opinion of the court was delivered by

NUSS, J.:

Mid-Continent Specialists, Inc. (Mid-Continent) sued Capital Homes, L.C. (Capital Homes) for conversion based on a $50,000 check to Capital Homes written on Mid-Continent's corporate bank account by Mid-Continent employee Lynn Smith for her personal debt. After a bench trial, the court held that K.S.A. 84-3-420(a) barred Mid-Continent from suing for conversion as a matter of law. Mid-Continent appealed, and the case was transferred to this court pursuant to K.S.A. 20-3018(c).

The issues on appeal, and this court's accompanying holdings, are as follows:

1. Does K.S.A. 84-3-420(a) bar Mid-Continent's cause of action for conversion of the check? Yes.

2. Does K.S.A. 84-3-420(a) bar Mid-Continent's cause of action for conversion of the check when its representative merely acted outside the scope of her authority? Yes.

3. Does Mid-Continent have a separate, valid claim for conversion of the $50,000 in its bank account? No.

Accordingly, the judgment of the trial court is affirmed.

FACTS

Defendant Capital Homes, Inc. has been building custom residential homes since 1997. Effective August 16, 2001, Capital Homes, as Seller, and Harry J. and/or Joyce Lynn Smith, as Buyers, entered into a written Residential New Construction Sale Contract. This contract provided that Capital Homes would build a custom home for the Smiths in Valley Brooke Estates, Stilwell, Kansas, for the price of $688,000 (excluding cost of lot). Mrs. Smith told David Broockerd, owner and member of Capital Homes, that she would purchase the 7-acre lot upon which this home would be built and would provide a warranty deed to Capital Homes.

After the August 16, 2001, contract was executed, Smith advised Broockerd that she had purchased the subject lot for $155,000 and that it still had an approximate $110,000 mortgage against it. After learning of this mortgage, Broockerd advised her that the August 16, 2001, contract for the construction of the "home only" could not be closed. He also advised that Capital Homes would have to purchase the lot and pay off the mortgage; that the parties would need to enter into a second sales contract; and that the Smiths would need to pay a nonrefundable earnest deposit of $50,000. On November 14, 2001, Broockerd and Smith met, and she delivered a check in the amount of $50,000 as the nonrefundable earnest deposit. The check was a Mid-Continent Specialists, Inc. business check drawn on the Hillcrest Bank, payable to "Capital Homes" and signed "J. Lynn Smith."

Broockerd knew that Mid-Continent, a business concentrating on residential construction and roofing, was not a party to the sales contract. In delivering this check, Smith told Broockerd that, although the check was drawn on Mid-Continent's corporate account, the $50,000 proceeds were from an unpaid company draw that was due her for the year 2000. Smith had previously told Broockerd that she was a partner in Mid-Continent. Broockerd endorsed the check in the name of Capital Homes and deposited it in the corporate account at Valley View Bank on November 16, 2001.

Almost immediately after depositing the earnest check, Capital Homes commenced its construction work.

On about November 28, 2001, Capital Homes and the Smiths entered into a second Residential New Construction Sale Contract, which contained the written requirement for the $50,000 nonrefundable earnest deposit — previously paid on November 14 — and a new construction price of $844,761.18 (including now the lot purchased by Capital Homes). As the parties had previously agreed, Capital Homes paid off the Smiths' existing lot mortgage. Capital Homes continued its construction process, and on December 10, 2001, secured a construction loan for $646,566.

In the last week of December 2001, Broockerd received a phone call from Tony Evans, Mid-Continent's president, who advised Capital Homes not to do further construction work on the Smith house because there was something "funny" going on with the Mid-Continent books. Mid-Continent had first learned that Smith was embezzling company funds around mid-December 2001. Capital Homes quit construction work when it learned of the embezzlement and listed the lot for sale in early 2002 for $135,500. In mid-January 2002, Mid-Continent's Greg Prieb called Broockerd and demanded the $50,000 check be returned to Mid-Continent. On February 1, 2002, Capital Homes received a letter from Smith's attorney, asking Capital Homes to return all the money that it had received from her. On March 28, 2002, Capital Homes also received a letter from Mid-Continent's attorney demanding that it repay the money to Mid-Continent. As of the date of oral arguments, Capital Homes had not turned over any of the monies received from Smith, an amount totaling $55,000. Nor had Mid-Continent received repayment of the $50,000 from Capital Homes, its representative Broockerd, or Smith.

Smith was not employed directly by Mid-Continent, but as a bookkeeper by an accounting firm that did accounting services for Mid-Continent. She was not entitled to a $50,000 draw or bonus or return of any equity in the 2001 time frame. While she had check-writing authority up to $50,000 for Mid-Continent's business purposes, she did not have authority to write checks for her personal debts. She later was determined to have embezzled $800,000 from Mid-Continent during 2000 and 2001.

Mid-Continent did not file any legal action against Smith for recovery of money because she was judgment proof. Mid-Continent was waiting for the attorney general to file criminal charges against her, so it could recover from the Kansas Crime Victims Compensation Fund. In the meantime, Mid-Continent brought the present suit against Capital Homes for conversion of the $50,000.

After a trial to the court on May 5, 2003, it issued its memorandum decision on May 28, 2003. The court rejected Capital Homes' defense as a holder in due course under K.S.A. 84-3-302 but, after accepting the argument that K.S.A. 84-3-420(a) barred Mid-Continent's claim, granted judgment for Capital Homes.

Mid-Continent filed a motion to alter or amend the judgment, which the trial court denied in its memorandum decision of June 30, 2003.

ANALYSIS
Issue 1: Does K.S.A. 84-3-420(a) bar Mid-Continent's cause of action for conversion of the check?

Mid-Continent argues that the trial court erred in holding K.S.A. 84-3-420(a) bars the conversion cause of action. Capital Homes responds that the clear language of the statute, as well as the Official UCC and Kansas Comments, support the trial court's holding. The interpretation of the Uniform Commercial Code is a question of law over which this court has unlimited review. King v. White, 265 Kan. 627, 632, 962 P.2d 475 (1998).

Mid-Continent further argues that the trial court erred in even considering K.S.A. 84-3-420(a) because this affirmative defense had been raised too late and was therefore waived. Capital Homes responds that 84-3-420(a) is not an affirmative defense and, even if so, Mid-Continent failed to object to the defense's late assertion and cannot raise such an objection for the first time on appeal. As discussed below, their disagreement is more accurately characterized as whether Mid-Continent has standing to bring the conversion action. Whether a party has standing to sue is a question of law subject to unlimited review. 312 Education Ass'n v. U.S.D. No. 312, 273 Kan. 875, 882, 47 P.3d 383 (2002).

Although the issue of standing is typically a threshold consideration, it cannot be clearly analyzed without first reviewing K.S.A. 84-3-420(a) and some of its interpretive case law.

The statutory bar

K.S.A. 84-3-420(a) states:

"The law applicable to conversion of personal property applies to instruments. An instrument is also converted if it is taken by transfer, other than a negotiation, from a person not entitled to enforce the instrument or a bank makes or obtains payment with respect to the instrument for a person not entitled to enforce the instrument or receive payment. An action for conversion of an instrument may not be brought by (1) the issuer or acceptor of the instrument or (2) a payee or endorsee who did not receive delivery of the instrument either directly or through delivery to an agent or a copayee." (Emphasis added.)

The UCC Official Comment explains that "[t]here is no reason why a drawer should have an action in conversion. The check represents an obligation of the drawer rather than property of the drawer."

In a similar fashion, the 1996 Kansas Comment states: "Plaintiffs are generally restricted to the persons to whom the instrument is payable and who have received the instrument. The maker or drawer of the instrument is not a proper plaintiff, nor is the payee of an instrument which is not delivered. This is a codification of prior decisions." (Emphasis added.) K.S.A. 84-3-420, Kansas Comment, 1996, subsection (a).

Here, Mid-Continent is the drawer, maker, or issuer. K.S.A. 84-3-103(3) (drawer is person who signs or is identified in a draft as a person ordering payment); K.S.A. 84-3-103(5) (maker is person who signs or is identified in a note as a person undertaking to pay); K.S.A. 84-3-105(c) (issuer means a maker or drawer of an instrument). Hillcrest Bank is the drawee or payor. K.S.A. 84-3-103(2) (drawee means a person ordered in a draft to make payment); K.S.A. 84-4-105(3) (payor bank is the bank that is the drawee in a draft). Capital Homes is the payee. See Black's Law Dictionary 1129 (6th...

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