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Community First National Bank v. Nichols

Court of Appeals of Kansas

May 10, 2019

Community First National Bank, A Corporation Existing Under the Laws of the United States of America, Appellee,
v.
Sarah Grace Nichols, aka Sara Grace Lillich, aka Sarah Lillich, and Kurtis Lee Nichols, Appellants.

         SYLLABUS BY THE COURT

         Banks are not included in the definition of supplier under the Kansas Consumer Protection Act (KCPA) if the bank is subject to state or federal regulation related to disposition of repossessed collateral.

          Appeal from Wabaunsee District Court; Jeffrey R. Elder, judge.

          Tai J. Vokins and Krystal L. Vokins, of Sloan, Eisenbarth, Glassman, McEntire & Jarboe, L.L.C., of Lawrence, for appellants.

          David P. Troup and Melissa D. Richards, of Weary Davis, L.C., of Junction City, for appellee.

          Before Arnold-Burger, C.J., Pierron, J., and McAnany, S.J.

          ARNOLD-BURGER, C.J

         This case involves the foreclosure of two mortgages. Sarah Grace Nichols and Kurtis Lee Nichols (the Nichols) obtained two home loans from Community First National Bank (CFNB) and granted CFNB mortgages on the homes they purchased. When the Nichols failed to make payments on the loans, CFNB filed this foreclosure action. The Nichols made several counterclaims, which raised various violations of the Kansas Consumer Protection Act, Kansas Uniform Consumer Credit Code, and common-law claims. The district court granted judgment in favor of CFNB and denied the Nichols' counterclaims. The Nichols appealed and make several arguments on appeal. Finding no reversible error we affirm.

         FACTUAL AND PROCEDURAL HISTORY

         This case involves the foreclosure of two mortgages encumbering two houses located in Wabaunsee County, Kansas.

         CFNB is a national banking association. In April 2010, the Nichols obtained a $36, 000 loan from CFNB to purchase a home on Main Street in Alta Vista (Home 1). The parties executed a promissory note, designated Loan Number 32254 (2010 Loan). The 2010 Loan was a variable interest loan, with the interest rate initially set at 7.5%. Interest was to accrue on an "Actual/365" basis. Payments for the loan were due on the 15th of each month. Payments received more than 15 days after the payment due date were subject to a late charge equaling 5% of the unpaid amount, up to a maximum of $25.00. In total, the loan was estimated to require 179 monthly payments of $333.79. However, due to the variable interest rate, the promissory note stated that this amount may change after the 36th payment. The Nichols assigned CFNB a mortgage on the house they purchased to secure the loan.

         The Nichols' first payment was due on May 15, 2010. However, they did not pay until May 27, 2010-late but within the grace period. Their next payment was 29 days late-outside the grace period. The pattern of late payments continued. By February 2014, the Nichols had made 40 payments and all but one payment was late. Many of these late payments fell within the 15-day grace period. But some were made more than 15 days after the due date. CFNB assessed late charges on most, but not all, of the late payments.

         About six months after the loan was signed, in December 2010, CFNB's audit department determined that the 7.5% interest rate was too high. CFNB thought it was legally required to lower the interest rate to 6.25%. To rectify this mistake, the parties executed a new promissory note in January 2011. CFNB backdated the note to the original note date and recalculated the amount that the Nichols should have been paying. This resulted in a $370.20 credit towards interest. CFNB applied the credit to the Nichols' bill due on February 15, 2011. CFNB later discovered that it incorrectly interpreted the law, and that the 7.5% interest rate was not illegal. However, CFNB continued to honor the 6.25% interest rate provided for in the new promissory note.

         In May 2011, CFNB discovered what it believed to be another error. Until that point, CFNB had been applying the Nichols' payments on a "bill date to bill date" basis. This meant that the Nichols' payments were applied to the principal and to interest accrued between bill dates. For example, their August 15, 2010 bill was for principal and for interest accrued from July 15 through August 15, 2010. Even though they did not pay the August 15, 2010 bill until August 27, 2010, their payment was applied to the interest gained during the bill period and then to principal. Robert Stitt Jr., president of CFNB, believed that because the loan was an Actual/365 loan, the bill date to bill date payment application method was incorrect. Stitt opined that the payments should have been applied to interest accrued between payment dates, not bill dates. After May 2011, CFNB began applying the Nichols' payments on a payment date to payment date basis. The Nichols' prior payment date had been May 31, 2011. Their June bill, due June 15, 2011, showed that they needed to pay interest accrued between May 31 and June 15. However, because they did not pay their June bill until June 30, their payment was applied to interest accrued between May 31 and June 30, and then it was applied to principal. Each payment after this was applied on a payment date to payment date basis.

         In early 2012, the Nichols decided to buy a bigger house on Main Street (Home 2) in Alta Vista to accommodate their growing family. Kurtis contacted CFNB to discuss obtaining a new loan to finance the purchase. Kurtis testified that he asked CFNB if they could combine his existing loan and the new loan into a 30-year mortgage because he did not think they could afford to make two payments on two 15-year mortgages. Jay Terrill, vice president of CFNB, denied that the Nichols requested a 30-year note. Ultimately, the Nichols borrowed an additional $38, 000 and agreed to a 15-year mortgage, designated Loan Number 32410 (2012 Loan). The 2012 Loan had a lower interest rate, 5.5%, than the 2010 Loan. The terms regarding interest accrual and late fees were the same. The parties executed the promissory note for the loan in March 2012.

         At the time the Nichols got their new house, they intended to rent their old house to a family member. However, that did not occur. The Nichols failed to make payments on the 2010 Loan, so CFNB sent them a notice of right to cure default. The Nichols asked CFNB for a deferral on the 2010 Loan to allow them time to look for another renter. In June 2012, CFNB agreed to defer payment for two months. The deferral agreement stated that the $502.10 payments due on May 15, 2012, and June 15, 2012, would be deferred to the maturity of the note in April 2025. The Nichols would have to pay $200 towards escrow on June 29, 2012, and their next regularly scheduled payment of $502.10 would be on July 15, 2012. The deferral agreement stated that "[e]xcept as specifically amended by this agreement, all other terms of the original obligation remain in effect."

         The Nichols were unable to rent or sell Home 1 by the end of the deferral agreement. So, they entered into a second deferral agreement with CFNB for the 2010 Loan. In the second deferral agreement, CFNB agreed to defer four payments due between July 2012 and October 2012. On the same day, the parties executed a deferral agreement for the 2012 Loan under which CFNB agreed to defer the Nichols' August and September payments until the maturity of the note in April 2027.

         The Nichols resumed their payments at the end of the deferral period. They contacted CFNB, confused as to why their payments were only being applied to interest. Terrill explained that they were paying the interest that accrued during the deferral period. The Nichols believed that the extension agreements stopped interest from accruing.

         Kurtis met with Terrill at the bank in June 2013. Kurtis had just noticed how CFNB handled the $370.20 credit it had granted him after recalculating the interest rate, and Kurtis disagreed with how CFNB applied the credit. Several people at the bank spent two days calculating by hand the effect of the reduced interest rate. They concluded that the Nichols were billed appropriately. But, the Nichols continued to disagree.

         On August 15, 2013, the Nichols filed a complaint with the Office of the Comptroller of Currency (OCC). They did not agree with the way CFNB handled the $370.20 credit it granted them after changing the interest rate from 7.5% to 6.25%. They also thought CFNB inappropriately allowed interest to accrue on the loans during the deferral periods.

         Unaware of the OCC complaint, CFNB sent the Nichols a letter on August 23, 2013, to address the disputed accounting. CFNB explained again how it applied the $370.20 credit. Then, CFNB addressed the Nichols concern that interest accumulated during the deferral period. CFNB disputed that it agreed to defer interest accumulation during the period, explaining that it only deferred the Nichols' obligation to make payments on the interest and principal. In order to accommodate the misunderstanding, CFNB offered the Nichols a $958.58 credit to offset the interest that accrued during the deferral period. To conclude the letter, CFNB reminded the Nichols that they were past due by four months on the 2010 Loan and by two months on the 2012 Loan. It threatened to begin the collection process if the Nichols did not pay all of their past due payments.

         Due to what the Nichols believed was a deteriorating relationship with the bank, they stopped making payments on the loans. On March 24, 2014, CFNB's attorneys sent the Nichols a letter stating that CFNB had referred the Nichols' loans to them for foreclosure. The letter informed the Nichols that they were in default on both of their loans and that CFNB had chosen to accelerate the amounts due. At the time, the Nichols owed $33, 359.40 on the 2010 Loan and $37, 273.39 on the 2012 Loan. The Nichols were also delinquent on a checking reserve overdraft line and overdrawn on a checking account.

         On April 2, 2014, Kurtis brought cash to the bank with the intention of making his past due payments. According to Kurtis, he asked the bank teller how much he owed on each loan and paid that amount for a total payment of $5, 855.94. Kurtis received four receipts from the transaction. One stated that $3, 152.74 was applied to the 2010 Loan. The other three showed various amounts paid toward the 2012 Loan: $2, 500.00, $47.26, and $155.94.

         Several days later the bank sent the Nichols a letter acknowledging the payment and informing them that they were still past due on both of the notes. The letter stated that the bank applied the $5, 885.94 as follows:

Pay off of unrelated account

$337.79

Payments due for [2010 Loan]

$2, 693.40

Late charges for [2010 Loan]

$202.05

Payments due for [2012 Loan]

$2, 401.70

Late charges for [2012 Loan]

$221.00

Total

$5, 855.94

         The way that the payment was allocated left the Nichols owing $459.34 on the 2010 Loan and $301.50 due on 2012 Loan. CFNB directed the Nichols to catch up on the payments in full in order to avoid foreclosure.

         At trial, CFNB admitted that the bank did not apply the $5, 855.94 as Kurtis directed the teller. Terrill explained that bank tellers do not have the authority to apply payments. When the payment was accepted, it went to the loan operations department. The loan operations department discovered a special warning on the loans, and asked Stitt how they should apply the payments that Kurtis made. Stitt was unaware of the conversation that Kurtis had with the bank teller. Stitt did not immediately inform the Nichols that he changed the way the payments were applied until the letter sent several days later.

         The Nichols never responded to CFNB's letter. They stopped making payments on the loans. This prompted CFNB to file a petition against the Nichols on May 11, 2015- over a year after their last payment. CFNB asked the court to order the Nichols to pay the full principal balance, interest, escrow, and late charges accrued on each loan. It also asked the court for leave to foreclose against the two properties subject to the mortgages.

         In their answer, the Nichols alleged that CFNB was the first party to breach the agreements, and that CFNB's breach of contract excused the Nichols' obligations under the contract. The Nichols also made several counterclaims, including breach of contract, breach of duty of good faith and fair dealing, several Kansas Consumer Protection Act (KCPA) violations, and Kansas Uniform Consumer Credit Code (UCCC) violations.

         CFNB filed a motion for partial summary judgment arguing that it was not subject to the KCPA. The KCPA prohibits suppliers from engaging in deceptive acts or practices or from engaging in unconscionable acts or practices in connection with a consumer transaction. K.S.A. 2018 Supp. 50-626; K.S.A. 50-627. The Act defines "supplier" as:

"a manufacturer, distributor, dealer, seller, lessor, assignor, or other person who, in the ordinary course of business, solicits, engages in or enforces consumer transactions, whether or not dealing directly with the consumer. Supplier does not include any bank, trust company or lending institution which is subject to state or federal regulation with regard to disposition of repossessed collateral by such bank, trust company or lending institution." K.S.A. 2018 Supp. 50-624(1).

         CFNB argued that it was not a supplier as defined by the KCPA because it is a bank subject to state or federal regulation with regard to disposition of repossessed collateral.

         The district court granted CFNB's motion for partial summary judgment. It dismissed all of the Nichols' counterclaims brought under the KCPA, holding that CFNB was not a supplier within the meaning of the Act. The district court also granted judgment in favor of CFNB in the amount of $37, 330.96 plus any interest accrued after August 30, 2016, for the 2010 Loan and $40, 543.46 plus interest accrued after August 30, 2016, for the 2012 Loan. The district court did not include late fees in its award. The court also granted CFNB's foreclosure claims and allowed them to begin the foreclosure process.

         The Nichols' counterclaims for breach of contract, breach of the covenant of good faith and fair dealing, violations of the UCCC, and fraud proceeded to trial by the court. As explained more fully below, at the conclusion of the trial, the district court granted judgment in favor of CFNB on all claims.

         The ...


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