Riley State Bank of Riley v. Spillman

• Decision Date: 19 February 1988
• Docket Number: No. 60726,60726
• Citation: 750 P.2d 1024,242 Kan. 696
• Parties: , 6 UCC Rep.Serv.2d 990 RILEY STATE BANK OF RILEY, Appellee, v. James A. SPILLMAN and Beverly Spillman d/b/a Old Town Coin and Gun Shop, Appellants.
• Court: Kansas Supreme Court

Page 1024

750 P.2d 1024

242 Kan. 696, 6 UCC Rep.Serv.2d 990

RILEY STATE BANK OF RILEY, Appellee, v. James A. SPILLMAN and Beverly Spillman d/b/a Old Town Coin and Gun Shop, Appellants.

No. 60726.

Supreme Court of Kansas.

Feb. 19, 1988.

Syllabus by the Court

1. Modification of a written contract by course of dealing between the parties must be supported by consideration independent and separate from the original consideration supporting the contract.

2. This court will uphold a security agreement which contains explicit limitations on the ability of the parties to modify its terms through a course of conduct.

3. A bank has no duty to give notice of default before repossessing security when the security agreement is silent on this issue.

4. The UCC does not apply to interests in or liens upon real estate.

5. Forced entry into a debtor's premises, whether residential or commercial, is a breach of the peace.

6. A bank does not breach its duty to exercise good faith by enforcing the terms of a security agreement, despite prior nonenforcement and lack of warning the agreement would be enforced.

Michael E. Riling, of Riling, Norwood, Burkhead, Fairchild & Nitcher, Chartered, of Lawrence, argued the cause and was on the brief for appellants.

Jeffrey W. Jones, of Sloan, Listrom, Eisenbarth, Sloan & Glassman, of Topeka, argued the cause and Thomas L. Theis, of the same firm, was with him on the brief for appellee.

HERD, Justice:

This is a civil case by the Riley State Bank against James and Beverly Spillman for judgment on a note and to foreclose a security agreement. The Spillmans deny the allegations of the Bank's petition and counterclaim against the Bank for unlawfully possessing their property and for conversion. The trial court bifurcated the case and granted summary judgment for the Bank on the issues raised in the counterclaim. The Spillmans appeal.

This dispute arose from the following facts: James Spillman and his former wife, Beverly, d/b/a the Old Town Coin and Gun Shop, had been commercial credit customers of the Riley State Bank of Riley since 1982. The Bank had made eight to ten loans to them during that time. On October 15, 1985, the Spillmans executed a renewal note for preexisting indebtedness to the Bank in the amount of $28,733.47. The payments were to begin on November 15, 1985, and continue on the 15th day of each month thereafter for 11 months, with a balloon of $25,077.93 due on October 15, 1986.

Incident to this loan, the Spillmans executed a security agreement in favor of the Bank which gave as collateral the following:

"All present and future inventory and stock in trade, all machinery, equipment, tools, fixtures* and supplies now owned or hereafter acquired; all present and future contract rights, accounts and notes receivable, and all as set forth on the attached Schedules 'A' and 'B', incorporated by reference herein, but not limited to.

....

" * Fixtures used in the business operation of Old Town Coin & Gun Shop located at 532 South 17th Street, Old Town Mall, Manhattan, Kansas."

Schedules A and B listed the inventory of the shop, which was valued at $41,520. The Spillmans also executed financing statements to the same effect.

James Spillman claims he had been told by agents of the Bank it was the Bank's standard practice to allow a 10-day grace period to make a payment from the date the installment was due. Spillman said he had always relied on this understanding and had never been charged a late fee for any payments made within 10 days.

The Spillmans made their first payment on November 26, 1985, 11 days after the November 15 due date. The December payment was made on January 2, 1986, 16 days after the December 15 due date. These payments were accepted by the Bank without objection.

The Bank received no payment from the Spillmans on January 15. It deemed its loan insecure and the Spillmans in default and decided to seize the remaining collateral, having heard Spillman had made an unreported bulk sale from the inventory. The Bank did not notify the Spillmans, but called the wife of the Spillmans' landlord, Vern Osborne, and informed her of the Bank's intention to enter the premises for the purpose of repossessing the collateral. The Bank also contacted the Manhattan Police Department and informed it of its intentions.

Agents of the Bank visited the shop and found it closed. The agents could see through the windows of the shop that most of the expected inventory was gone. At 11:45 a.m. on January 25, 1986, a locksmith hired by the Bank opened the locked doors to the unoccupied shop and removed and replaced the locks. The burglar alarm was deactivated. No one was present during the entry to the shop except the agents of the Bank and there was, therefore, no objection to their actions by anyone.

Spillman returned to the shop on Monday, January 27, 1986, and found what had happened. He had still not tendered the January payment or proceeds from the bulk sales on the note and has not offered to make any further payments on the note.

Spillman claims the shop was closed for inventory purposes and because of personal problems involving the dissolution of his marriage. Spillman admits he made at least one large bulk sale of inventory in the early part of January. The sale was made without the Bank's consent. Spillman testified it had never been his past practice to give the Bank notice of sales during the five years in which he had operated his business and the Bank had never protested this practice. He said the inventory was no lower than it had been at times in the past.

The Bank accused Spillman of using the proceeds from the sale for his own personal use rather than to replenish inventory or make payments on his note. Spillman said he did not intend to use the money from the sale for his own personal use. He claimed had the Bank notified him it was going to accelerate the note he would have used the proceeds to make payment. He was hoping to purchase new inventory and use the proceeds from the sale of that inventory to pay the Bank within three to five days after he reopened the business. He said he only used the money for personal purposes when he was denied his livelihood by the Bank's actions.

Rather than removing the inventory from the Spillmans' business, the Bank kept the items in the store without selling them for over three months. The Bank did not pay any rent to the Osbornes and Spillman states he is thus liable, under the terms of his lease agreement, for the rent during the Bank's occupancy.

The Bank brought suit against the Spillmans, and sought to "foreclose its security interest" and gain a money judgment. The Spillmans counterclaimed and sought damages for conversion and interference with contract rights. The district court granted the Bank's motion for summary judgment on February 13, 1987, and recommended a K.S.A.1987 Supp. 60-2102(b) appeal. The Court of Appeals denied the Spillmans' motion for an interlocutory appeal in an order filed March 9, 1987. On March 30, 1987, the district court ordered the inventory sold, but granted a stay of judgment for the amount still owing on the note pending the results of this appeal.

Summary judgment is proper when no genuine issue as to any material fact is found, despite a reading of the evidence which gives the benefit of all inferences which may be drawn from the admitted facts to the party against whom the judgment is sought. K.S.A.1987 Supp. 60-256(c); Professional Lens Plan, Inc. v. Polaris Leasing Corp., 238 Kan. 384, 390, 710 P.2d 1297 (1985). When summary judgment is challenged on appeal, the record is read in the light most favorable to the appellant. McAlister v. Atlantic Richfield Co., 233 Kan. 252, 662 P.2d 1203 (1983).

The first issue is whether the Spillmans were in default at the time the Bank repossessed the collateral.

The statutory guidelines regarding default in Kansas are set out in part 5 of the Kansas Uniform Commercial Code--Secured Transactions. K.S.A. 84-9-501(1) gives the secured party, with certain exceptions, those rights and remedies provided by the security agreement.

The 1983 Kansas Comment to K.S.A. 84-9-501 notes:

"[T]he creditor is given great latitude in defining 'default' broadly in the security agreement; normally, the definition would include not only failure to pay an installment, but other events such as failure to insure the collateral, refusal to allow inspection of the collateral upon demand, failure to pay taxes or insurance, taking collateral outside the state or selling it without permission of the secured party, death or insolvency of the debtor, failure of the debtor to make payments to other creditors, or whenever the secured party 'deems himself insecure.' See 84-1-208. The only limit is the creditor's subjective 'good faith.' "

The "Additional Provisions" of the security agreement signed by the Spillmans stated:

"Upon the happening of ... (i) default in the payment ..., the Secured Party at its option may declare all of the Obligations to be immediately due and payable and shall then have the remedies of a secured party under the Commercial Code, or other applicable law, including without limitation thereto, the right to take possession of the Collateral."

Although admitting they did not make the January payment on the due date, the Spillmans argue the security agreement was altered by the course of dealing between the parties in that the Bank told Spillman it had a standard practice of allowing a 10-day grace period and never objected or penalized the Spillmans for making a payment within that grace period.

The question thus before the court is whether a security agreement may be altered by the course of dealing between the parties. K.S.A. 84-1-205 states that:

"(1) A course of dealing is a sequence of previous conduct between the parties to a particular transaction which is fairly to be regarded as establishing a common basis of...