Turon State Bank v. Bozarth

• Citation: 235 Kan. 786,684 P.2d 419
• Decision Date: 13 July 1984
• Docket Number: No. 55195,55195
• Parties: , 39 UCC Rep.Serv. 319 TURON STATE BANK, Appellant, v. William R. BOZARTH, Appellee.
• Court: United States State Supreme Court of Kansas

Page 419

684 P.2d 419

235 Kan. 786, 39 UCC Rep.Serv. 319

TURON STATE BANK, Appellant, v. William R. BOZARTH, Appellee.

No. 55195.

Supreme Court of Kansas.

July 13, 1984.

Syllabus by the Court

1. Affirmative defenses must be set forth in a responsive pleading or be deemed waived. Equitable estoppel must be specifically pled and may not be proved under a general denial. It is not necessary, however, that a party thoroughly explain its legal theory for relief. All that is required is fair notice to the opposing party as to the claim and the ground upon which the claim rests. Thus, as long as a party has pled the facts constituting the defense of estoppel, the failure to use the word "estoppel" in a responsive pleading is not conclusive.

2. Equitable estoppel exists when a party by its acts, representations, admissions, or silence induced another party to believe certain facts existed upon which it detrimentally relied and acted. See Levi Strauss & Co. v. Sheaffer, 8 Kan.App.2d 117, 122, 650 P.2d 738 (1982).

3. Silence may give rise to an estoppel where there should have been a disclosure. Where a duty to speak exists, silence is tantamount to dissimulation. See Bruce v. Smith, 204 Kan. 473, 477, 464 P.2d 224 (1970).

4. A bank's security interest continues after a sale of secured property in the proceeds of the sale. In the absence of a specific agreement otherwise, the proceeds from the sale of secured property must be applied on the note the property secured.

5. In order for a debtor to be entitled to direct a creditor as to how the proceeds of the sale of security shall be applied, the right must have been established in the original contract.

Robert E. Nugent, III, of Branine, Chalfant & Hill, Hutchinson, argued the cause and was on the brief for appellant.

William F. Bradley, Jr., of Martindell, Carey, Hunter & Dunn, Hutchinson, argued the cause and was on the brief for appellee.

HERD, Judge:

This is an action on a note. The Turon State Bank appeals from a decision of the Reno County District Court which estopped it from denying receiving payment on a note. The note was made by Rex Fowler and signed by William R. Bozarth, appellee, as an accommodation party. The Court of Appeals reversed and remanded, directing Bozarth to pay the bank.

Rex Fowler, a Reno County farmer, obtained his bank financing from the Turon State Bank. Over a period of time, he had accumulated a total debt to the bank of $106,474.76. The debt was secured by all of Fowler's cattle, crops and machinery. In the spring of 1980, Mr. Fowler sought an additional $18,000 from the bank for the purpose of sowing his spring crops. He was advised by the bank that his request to increase his loan was denied because his assets would not secure the additional amount needed. The bank suggested Fowler produce other security. On May 15, 1980, Fowler obtained the signature of William Bozarth, his son-in-law, as an accommodation party on his note for the $18,000. Bozarth filed a financial statement in support of his signature. The bank accepted Bozarth's signature as sufficient security for the new loan. There were no special instructions or agreements between the bank and Fowler and Bozarth pertaining to the loan. The loan proceeds were paid to Fowler on June 13, 1980.

The 1980 crops were sold and the proceeds applied to the note they secured. In March, 1981, Fowler sold $15,962.61 worth of cattle and deposited that amount in his checking account in the bank on March 16. A few days later, Fowler spoke with Arden Vernon, bank officer, and requested permission to use approximately $2000 from the sale to pay a feed bill and asked that the balance be applied on the $18,000 note. Vernon made no response to the request but subsequently debited Fowler's account in the amount of $13,962.15. This amount was then applied on the note for which it was collateral rather than the note secured by Bozarth's signature as Fowler had requested. Money was left in Fowler's account to pay the feed bill. Unaware of the bank's action, Fowler notified Bozarth the $13,962.15 had been applied to the note he had signed.

In the summer of 1981, Fowler filed a petition in bankruptcy. On September 2, 1981, the bank sued William Bozarth on the $18,000 note. Bozarth answered challenging the court's jurisdiction over him and alleging payment of approximately $16,000 on the note by Fowler. Estoppel was not pled. After a trial to the court, it found the note unsecured, and that

"when the $13,962.15 was tendered with the request that it be applied to the Bozarth note and the Turon State Bank's representative kept silent, and when the Bank subsequently refused to apply the tender to the note in question, the Bank was estopped to deny that the money should have been applied to the co-signed note. For that reason, the defendant should be given credit in the amount of $13,962.15 on the debt outstanding."

The Court of Appeals, 677 P.2d 584, reversed holding that although the elements of equitable estoppel had been established against the bank, Bozarth could not rely on estoppel because there was no detrimental reliance on his part due to a lack of privity. We granted review.

The bank first asserts the trial court erred in basing its decision on estoppel when that defense was not pled.

Kansas statutes provide affirmative defenses must be set forth in a responsive pleading or be deemed waived. See K.S.A. 60-208(c), which provides:

"In pleading to a preceding pleading a party shall set forth affirmatively ... estoppel ... and any other matter constituting an avoidance or affirmative defense."

Additionally, Kansas courts have consistently held equitable estoppel must be specifically pled and may not be proved under a general denial. See McClintock v. McCall, 214 Kan. 764, Syl. p 2, 522 P.2d 343 (1974); Geis Irrigation Co. v. Satanta Feed Yards, Inc., 214 Kan. 373, 521 P.2d 272 (1974); North River Ins. Co. v. Aetna Finance Co., 186 Kan. 758, 352 P.2d 1060 (1960); and Painter v. Fletcher, 81 Kan. 195, 105 Pac. 500 (1909).

It is not necessary, however, that a party thoroughly explain its legal theory for relief. See Febert v. Upland Mutual Ins. Co., 222 Kan. 197, 563 P.2d 467 (1977). All that is required is "a short and plain statement of a claim that will give the [opposing party] fair notice of what the [other party's] claim is and the ground upon which it rests." Rinsley v. Frydman, 221 Kan. 297, 302, 559 P.2d 334 (1977). These rules apply to a defendant's pleading of an affirmative defense, such as in this case, as well as plaintiff's petition. See 61A Am.Jur.2d, Pleading § 154, p. 154.

The purpose of requiring a defendant to affirmatively plead estoppel is fairness. See 61A Am.Jur.2d, Pleading § 152, p. 152. Thus, as long as defendant has pled the facts constituting the defense of estoppel, the failure to use the word "estoppel" in his answer is not conclusive. See Yeoman v. Morris, 135 Kan. 566, 570, 11 P.2d 683 (1932).

In the instant case, the word "estoppel" is not set out in any of the pretrial motions. The only facts pointing towards estoppel are first in Bozarth's answer where he stated: "[A] payment was made to the Turon State Bank by the maker, Rex Fowler, in the approximate amount of $16,000.00, and payment and credit was not shown by Plaintiff." Second, appellant's pretrial questionnaire to Bozarth listed as a question of fact: "Did defendant's co-signer give proceeds of certain collateral under other notes to the Bank and directed those proceeds be applied to this note?" Third, Bozarth's affidavit dated July 30, 1982, states he "had received news from Fowler that the Bank continued to claim an obligation due on the subject Note and that they had failed to comply with his specific instructions to apply the recent payment to our Note." We hold the facts as alleged by Bozarth could be grounds for estoppel. This constitutes notice of the defense to the bank thus nullifying any possible unfairness. This issue is without merit.

The next issue is whether there is evidence to support the trial court's decision that the bank was estopped to deny application of the funds to the Bozarth note.

The Court of Appeals recently summarized the doctrine of equitable estoppel in Levi Strauss & Co. v. Sheaffer, 8 Kan.App.2d 117, 122, 650 P.2d 738 (1982), quoting Bowen v. Westerhaus, 224 Kan. 42, 45-46, 578 P.2d 1102 (1978), and United American State Bank & Trust Co. v. Wild West Chrysler Plymouth, Inc., 221 Kan. 523, 527, 561 P.2d 792 (1977):

"Equitable estoppel is the effect of the voluntary conduct of a person whereby he is precluded, both at law and in equity, from asserting rights against another person relying on such conduct. A party asserting equitable estoppel must show that another party, by its acts, representations, admissions, or silence when it had a duty to speak, induced it to...