TMG Life Ins. Co. v. Ashner

• Court: Kansas Court of Appeals
• Writing for the Court: Before LARSON, P.J., ROYSE, J., and NELSON E. TOBUREN; LARSON
• Citation: TMG Life Ins. Co. v. Ashner, 898 P.2d 1145, 21 Kan.App.2d 234 (Kan. App. 1995)
• Decision Date: 23 June 1995
• Docket Number: No. 71829,71829
• Parties: TMG LIFE INSURANCE COMPANY, Successor in Interest by Virtue of Merger of Association Life Insurance Company, Inc., and Western States Life Insurance Company, Appellant/Cross-Appellee, v. Barney ASHNER, Rex A. Bertram, James H. Ferrick, Mike Hales, George H. Kister, Karen M. Kister, Malcolm W. Martin, and Christian B. Peper, Jr., Appellees/Cross-Appellants.

Page 1145

898 P.2d 1145

21 Kan.App.2d 234

TMG LIFE INSURANCE COMPANY, Successor in Interest by Virtue of Merger of Association Life Insurance Company Inc., and Western States Life Insurance Company, Appellant/Cross-Appellee, v. Barney ASHNER, Rex A. Bertram, James H. Ferrick, Mike Hales George H. Kister, Karen M. Kister, Malcolm W Martin, and Christian B. Peper, Jr. Appellees/Cross-Appellants.

No. 71829.

Court of Appeals of Kansas.

June 23, 1995.

Syllabus by the Court

1. Regardless of the construction of a written contract made by the trial court, on appeal a contract may be construed and its legal effect determined by the appellate court.

2. Rules regarding the construction of an unambiguous written instrument are stated and applied.

3. The liability of a guarantor upon an obligation cannot be extended by implication and should not be held beyond the precise terms of the contract.

4. A guarantor, like a surety, is a favorite of the law, whose liability is never to be extended beyond the precise terms of the obligation.

5. It is a basic rule of contract law that courts will allow parties to choose the terms by which they are bound under written agreements.

6. As with all problems of interpreting or construing contracts, the facts of each case are of extreme importance; therefore, prior decisions are generally not controlling on questions involving different contracts of guaranty.

7. The wording "from time to time outstanding" used in documents of indebtedness normally describes the amount on which interest is charged.

8. The wording "from time to time outstanding" in a contract means as occasion may arise, at intervals, or now and then occasionally.

9. Wording limiting the liability of guarantors to one-third of the amount of the loan "from time to time outstanding" establishes the amount of the liability as of the time judgment is determined or when payment is made.

10. Under the facts of this case, when the lenders repossessed secured property before the amount of the guarantors' obligation was determined, recovery on the guaranty is limited to one-third of the amount of the loan outstanding after the collateral was repossessed.

11. Prepayment clauses in promissory notes received by insurance companies making long-term loans are designed to provide the lender additional protection so it can receive the contractual benefit of the loan it makes.

12. The default provision in the promissory notes in issue in this case specifically provides the principal sum and interest together with the prepayment premium shall become due and payable at the option of the holder after default.

13. The determination of whether a contractual provision in a promissory note requiring a prepayment premium in the event of default is a valid liquidated damages clause rather than an impermissible penalty requires, first, that the amount stipulated is conscionable or reasonable in view of the subject matter of the contract and of the probable or presumptive loss in case of breach and, second, that the amount of actual damages resulting from default would not be easily and readily determinable.

14. The burden of proving that a liquidated damages clause is an unenforceable penalty falls upon the guarantors.

15. A prepayment premium is conscionable unless it is so outrageous and unfair in its wording or application that it shocks the conscience or offends the sensibilities of the court or is against public policy.

16. A prepayment premium attempts to estimate the damages that the creditor might face as a result of prepayment under future market conditions unknown at the time of execution.

17. The parties to a promissory note that requires a prepayment premium in the event of default are not required to make a perfect estimation of damages, just one that is reasonable. It is immaterial that the actual damages suffered are higher or lower than the amount specified.

18. When considering a prepayment provision in a promissory note, Kansas adheres to the view that competent adults may make contracts on their own terms provided they are neither illegal nor contrary to public policy, and, that, in the absence of fraud, mistake, or duress, a party who has fairly and voluntarily entered into such a contract is bound thereby, notwithstanding it was unwise or disadvantageous to that party.

19. The reasonableness of a liquidated damages clause should be determined as of the time the contract was executed, not with the benefit of hindsight.

20. In the absence of clear evidence to the contrary, when parties of equal sophistication negotiate a loan agreement, courts should presume that the creditor gave value, in the form of some other term of the agreement or otherwise, for terms favorable to the creditor in calculating the discount rate and formula to be used in computing the prepayment premium.

21. The provision in the promissory note herein which specifically required a prepayment premium in case of acceleration upon default does not violate public policy and is enforceable.

22. Where parties freely contract for a higher interest rate upon default than is required by statute and that higher interest rate is not otherwise illegal and is prospective from the date of default and not retroactive, it does not constitute a penalty regardless of the type of default and is not prohibited by K.S.A. 16-205(a).

23. Late fees are not void on public policy grounds but compensate the lender for administration of late payments prior to acceleration and are properly recoverable.

24. Under the facts of this case, the valuation of the apartment complex at the time of transfer to the lender is necessary to compute the guarantors' liability on the guaranty, and the apartment's value must be determined by the trial court.

25. In Kansas, the assignment of rents as security for a mortgage does not automatically vest the mortgagee with title to the rents at default.

26. A mortgagee's right to receive rents and profits validly assigned to it vests when the mortgagee initiates proper legal action to enforce its right.

27. Under the facts of this case, the lender did not vest its rights to post-default rents as required by the loan documents and has no such rights against the guarantors.

Anne Lamborn Baker, of Wright, Henson, Somers, Sebelius, Clark, & Baker, Topeka, for appellant/cross-appellee.

Benjamin F. Mann, Price A. Sloan, and Tessa K. Jacob, of Blackwell Sanders Matheny Weary & Lombardi, L.C., Kansas City, MO, for appellees/cross-appellants.

Before LARSON, P.J., ROYSE, J., and NELSON E. TOBUREN, District Judge, Assigned.

LARSON, Presiding Judge:

This is an appeal from TMG Life Insurance Company's (TMG or lender) attempt to enforce the terms of a personal guaranty against the individuals who are the general partners of Royal Crest Associates (RCA), subsequent to RCA's bankruptcy and the transfer to TMG of the collateral securing TMG's loan to RCA.

Involved in this appeal are the provisions of notes, guaranties, mortgage and security agreements, and assignments of lease and rents, plus actions by and in the United States Bankruptcy Court for the District of Kansas. We must of necessity set forth the facts in considerable detail so the background and basis for each legal argument can be established.

TMG is the successor to two life insurance companies who in 1989 loaned RCA, a Missouri partnership, a total of $3,525,000 to acquire the Kreekside Manor apartment complex in Kansas City, Kansas. The apartment complex was given as security for the borrowings which were structured as nonrecourse loans secured by a mortgage and security agreement plus an assignment of leases and rents. The eight general partners of RCA, Barney Ashner, Rex A. Bertram, James H. Ferrick, Mike Hales, George H. Kister, Karen Moculeski Kister, Malcolm W. Martin, and Christian B. Peper, Jr., (Guarantors), in their individual capacities, executed a guaranty "limited to an amount equal to one-third of the amount of the loan from time to time outstanding," which gives rise to the principal issue of this appeal.

RCA defaulted in early 1991 on its obligations to the lender on the notes. The lender notified RCA on May 31, 1991, of its intent to accelerate RCA's obligations on the unpaid principal balance of $3,471,477.97, which with interest, default charges, late charges, and reinvestment premium totaled approximately $4,009,150 at the time of the default.

On June 5, 1991, RCA filed for relief under Chapter 11 of the bankruptcy code. The lender did not make demand to collect the apartment rents and agreed in the bankruptcy case to allow RCA to use the rents for maintenance and operation of the Kreekside Manor Apartments. In December 1991, RCA proposed a Plan of Reorganization which essentially called for RCA to deed the apartment complex to TMG in complete payment of the notes.

TMG sued the guarantors in their individual capacities under the limited guaranties in February 1992. TMG amended its petition to seek recovery of post-default rents in November 1992.

TMG objected to RCA's proposed Plan of Reorganization and claimed the amounts owed to it were secured not only by the apartment complex, but also by the rents received by RCA after acceleration of the loan. Because of TMG's objection, an issue before the bankruptcy court was whether the value of the apartment complex was sufficient to satisfy both of the lender's claims. After the confirmation hearing, where evidence was presented as to the value of the complex, the lender did not press its claim for the rents received by RCA during the pendency of the bankruptcy. Consequently, the bankruptcy court confirmed RCA's plan and held the lender was not impaired.

As the result of the confirmed plan, in June 1992, Kreekside Manor was conveyed to TMG. TMG sold the complex in November 1993 for $1,325,000 and received net sale proceeds of $1,170,139.39.

The trial court in this case entered summary judgment...