Appeal from Johnson District Court; GERALD T. ELLIOTT, judge.
SYLLABUS BY THE COURT 1. Under Kansas law, the application of an equitable doctrine rests within the sound discretion of the trial court. 2. A judicial action constitutes an abuse of discretion if the action: (1) is arbitrary, fanciful, or unreasonable; (2) is based on an error of law; or (3) is based on an error of fact. 3. An abuse of discretion occurs if discretion is guided by an erroneous legal conclusion or goes outside the framework of or fails to consider proper statutory limitations or legal standards. 4. The party asserting that the trial court abused its discretion bears the burden of showing this abuse of discretion. 5. Generally, courts may invoke equitable principles to relieve a mortgagor from acceleration of the maturity of a debt secured by a mortgage or deed of trust. Even so, courts should use their power to refuse to accelerate the maturity of a debt on equitable grounds sparingly and should refuse to foreclose a mortgage only under certain clearly defined circumstances. 6. Courts also may use equity to relieve the mortgagor against acceleration where the default results from accident, mistake, or where strict enforcement of acceleration would impose an inconceivable hardship on the mortgagor and give the mortgagee an unconscionable advantage. 7. Under the principles of contract law, the doctrine of substantial performance provides that a party's performance may be considered complete if the essential purpose of the contract is accomplished and that party has made a good-faith attempt to comply with the terms of the agreement even though he or she fails to meet the precise terms of the agreement. 8. Substantial performance is the antithesis of material breach. If it is determined that a breach is material, it follows that substantial performance has not be rendered. 9. A material breach is one where the promisee receives something substantially less or different than what he or she bargained for. 10. The doctrine of substantial performance does not apply where a breach is willful. The willful transgressor must accept the penalty of his or her transgression. 11. The legal effect of a written instrument is a question of law. It may be construed and its legal effect determined by an appellate court regardless of the construction made by a trial court. 12. Promissory notes and mortgages are contracts between the parties, and the ordinary rules of construction applicable to contracts apply to them. 13. Under Kansas Law, waiver is an intentional relinquishment of a known right and intention may be inferred from conduct. 14. Generally, a mortgagee's acceptance of a late or partial payment will result in a waiver of the right to declare default and accelerate a debt because of the lateness of that payment. 15. A past practice of excusing defaults occasioned by late payments may under certain circumstances be construed as an implied waiver of an acceleration clause. 16. When the language of a contract states an unambiguous anti-waiver provision, no inference of such a waiver can be drawn and acceptance of a late payment does not waive a mortgagee's contractual right to accelerate the loan after default. 17. Under Kansas law, the duty of good faith and fair dealing is implied in every contract, with the exception of employment-at-will contracts. The duty requires that contractual parties refrain from intentionally doing anything to prevent the other party from carrying out his or her part of the agreement or from doing anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract. 18. Whether the good faith standard was met is a question of fact. Nevertheless, when the underlying facts are undisputed, a court may determine whether the implied covenant of good faith and fair dealing was violated.
The opinion of the court was delivered by: Green, J.
Before ARNOLD-BURGER, P.J., GREEN, J., and HEBERT, S.J.
On appeal, the defendants, Centennial Park, LLC, Bradley D. Vince, and Richard H. Sailors, challenge the trial court's summary judgment granted in favor of First National Bank of Omaha as successor by merger to First National Bank of Kansas (FNB). Specifically, the defendants raise four arguments on appeal: (1) that equitable principles should have prevented FNB from accelerating the defendants' loan debt obligation even though FNB was entitled to accelerate the loan under the terms of the promissory note; (2) that the trial court erred when it found that the defendants had not substantially performed under the terms of the loan documents and therefore had committed a material breach of the contract; (3) that FNB waived its right to accelerate the loan debt when it accepted the defendants' late payment of $9,349 by depositing the check in its account; and (4) that FNB breached the implied covenant of good faith and fair dealing when it sent the defendants a billing statement requiring a principal payment of $1,350,000. We disagree.
First, the equitable principle that the defendants rely on-mistake-does not apply here because there was no mistake made. Second, the trial court correctly held that the defendants had not substantially performed under the terms of the note and the loan documents, and, therefore, had materially breached the contract. Third, FNB did not waive its right to accelerate the loan debt when it accepted the defendants' late payment because the parties' note contained multiple anti-waiver provisions. Finally FNB did not breach the implied covenant of good faith and fair dealing when it sent the defendants a billing statement requiring a principal payment of $1,350,000. Even though the trial court determined that the defendants did not owe a principal payment of $1,350,000 on April 10, 2010, the trial court found that Centennial Park owed an unpaid balance of $176,880.57 on that date. Accordingly, we affirm.
Generally, the underlying facts of this case are undisputed. On May 7, 2008, FNB entered into a loan agreement with the defendants. The defendants wanted this loan to start a commercial real estate development project located on the borders of Johnson County, Kansas, and Jackson County, Missouri. Under the terms of the promissory note (note), FNB agreed to loan the defendants $9,716,600. The note contained the following payment terms:
"(1) Monthly installments of accrued and unpaid interest shall be due and payable on the tenth day of each month commencing with the payment due on May 10, 2008; (2) A principal payment in a minimum amount of $1,350,000.00 on or before April 10, 2010; and (3) A final payment of all unpaid principal and all accrued and unpaid interest shall be due and payable April 10, 2011."
The note was secured by a document entitled "Amended And Restated First Mortgage, Assignment of Leases and Rents, Security Agreement and Fixture Filing" that was signed by the defendants' manager on May 7, 2008. The parties also executed other loan documents that day, including: a construction loan agreement and personal guarantees executed by Centennial Park's managing members, Bradley D. Vince and Richard Sailors. Centennial Park and the guarantors did not negotiate any changes to the documents previously listed before they were signed by the parties. Under the terms of the construction loan agreement, FNB agreed to release part of its collateral each time lots in the development were sold in exchange for 75 percent of the net proceeds of sale. For more than a year, the parties' relationship continued as planned.
By the end of the second anniversary of the loan, May 7, 2010, the defendants had paid FNB $1,173,119.43 in principal payments. On March 31, 2010, FNB sent Centennial Park an automated invoice statement that indicated a payment of $1,350,000 was required for "Current Principal." After Centennial Park received the statement, defendant Vince, a Centennial Park managing member, contacted FNB's vice president, Christopher Willis, to ask about the statement. Willis told defendant Vince that he was unaware of the statement and that he was surprised such an amount would be due. The next morning, Willis sent an email to defendant Vince's attorney. In the email, Willis changed his position from the previous day. Specifically, Willis stated that his previous recollection on whether a $1,350,000 principal payment was required was "faulty" and he "did not remember this principal reduction payment, but it was clearly required by the terms of the Note."
The defendants failed to make any additional payments on the loan on or before April 10, 2010. Because the terms of the defendants' note required a minimum principal payment of $1,350,000 on or before April 10, 2010, and it had paid only $1,173,119.43, the defendants were in default according to the terms of the note. Although the terms of the note gave FNB the authority to accelerate the loan immediately after default and without notice, FNB did not accelerate the loan debt on April 10, 2010.
On April 23, 2010, FNB received the proceeds of a lot sale in Centennial Park's development project in the amount of $167,531.49. The proceeds brought the defendants' total principal paid balance to $1,340,650.80, which was $9,349 short of the amount that was due on April 10, 2010. On May 17, 2010, FNB sent the defendants a default letter stating that their account was delinquent for its failure to pay $1,350,000 on April 10, 2010. Even so, FNB still did not accelerate the loan then. Instead, FNB told the defendants that they would be allowed to cure the default by delivering a plan, acceptable to FNB, at its sole discretion, to cure the default on or before May 31, 2010. The letter also told the defendants that FNB would accelerate the loan debt on May 31, 2010, without further notice if the defendants failed to deliver an acceptable plan. Although the defendants offered a plan to cure the default, FNB apparently did not feel that the plan was acceptable, and on June 1, 2010, FNB told the defendants that it was accelerating the loan debt.
On September 17, 2010, defendant Vince's attorney sent FNB's attorney a letter concerning the payment dispute along with a check for $9,349.20. The check represented the difference between $1,350,000 and $1,340,650.80 before FNB accelerated the loan on June 1, 2010. FNB accepted the check and deposited it in its account.
On August 6, 2010, FNB sued Centennial Park and it guarantors, Vince and Sailors. Eventually, defendants Centennial Park, Vince, and Sailors, collectively moved for summary judgment. FNB then filed a competing motion for summary judgment. After the trial court conducted multiple hearings, it granted FNB's summary judgment motion and denied Centennial Park's summary judgment motion. The trial court's final judgment order granted FNB the following: (1) damages of $7,239,654.14 (principal), $550,587.57 (accrued interest), $1,659.087 (per diem interest), and $123,071.62 (attorney fees and costs) against Centennial Park; (2) judicial foreclosure of the Kansas portion of the Centennial Park property; and (3) damages of $7,239,654.14 (principal), $550,587.57 (accrued interest), $1,659.087 (per diem interest), and $123,071.62 (attorney fees and costs) against defendants Vince and Sailors, jointly and severally.
After an additional hearing, the trial court denied defendants Centennial Park, Vince, and Sailors' motion to reconsider.
Should equitable principles have prevented FNB from accelerating the defendants' loan debt obligation even though FNB was entitled to accelerate the loan based on the terms of the promissory note?
The defendants first argue that the trial court erred when it refused to prevent acceleration of its loan debt obligation under equity principles. Conversely, FNB maintains that the undisputed material facts defeat the defendants' equity arguments and that the trial court did not abuse its discretion when it denied the defendants' equity arguments.
The defendants expressly concede in their brief that they technically defaulted on their loan obligation on April 10, 2010: "It was clear error for the district court not to alleviate [the defendants] from this technical default." The defendants' concession is supported by the record on appeal. As mentioned earlier, paragraph three of the note provided that "a principal payment in a minimum amount of $1,350,000.00 [was due] on or before April 10, 2010." (Emphasis added.) Moreover, paragraph seven of the note provided: "This Note shall be in default upon the occurrence of any one of the following events ('Event of Default'): (a) if any payment of principal or interest is not made when the same becomes due and payable."
By April 10, 2010, the defendants had paid only $1,173,119.43 in principal payments. Because the terms of the defendants' note required a minimum principal payment of $1,350,000 on or before April 10, 2010, and they had not paid that amount, the defendants were in default under the note when they failed to pay the amount due on that date. After default, FNB was allowed to ...