First Security Bank v. Buehne ( 2020 )

NOT DESIGNATED FOR PUBLICATION
No. 121,765
IN THE COURT OF APPEALS OF THE STATE OF KANSAS
FIRST SECURITY BANK,
Appellee,
v.
DAVID BUEHNE and LINSAY BUEHNE, et al.,
Appellants.
MEMORANDUM OPINION
Appeal from Meade District Court; E. LEIGH HOOD, judge. Opinion filed September 18, 2020.
Affirmed.
Zachary D. Schultz, of Schultz Law Office, P.A., of Garden City, for appellants.
James C. Dodge, of Sharp McQueen, P.A., of Liberal, for appellee.
Before ATCHESON, P.J., BRUNS and POWELL, JJ.
PER CURIAM: First Security Bank filed this foreclosure action against David
Buehne and Linsay Buehne after they defaulted on a commercial promissory note in the
principal amount of $323,000. The commercial promissory note was secured by a real
estate mortgage as well as a security agreement in car wash equipment used in the
Buehnes' business. It is undisputed that the Buehnes have failed to make any payments
under the terms of the commercial promissory note.
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The Buehnes responded to the foreclosure petition by alleging that the Bank's
claim is barred by the five-year statute of limitations set forth in K.S.A. 60-511. In
response, the Bank asserted—among other things—that the Buehnes had waived their
right to assert the statute of limitations as an affirmative defense based on the express
terms of the commercial promissory note. Subsequently, both the Bank and the Buehnes
filed motions for summary judgment. After holding a hearing on the competing motions,
the district court entered summary judgment in favor of the Bank as a matter of law.
Ultimately, the district court entered a final judgment of foreclosure in favor of the Bank
and against the Buehnes.
On appeal, the Buehnes contend that the district court erred by failing to find that
the Bank's foreclosure action was barred by the statute of limitations. However, based on
the plain and unambiguous language of the commercial promissory note, we find that the
Buehnes waived their right to assert the statute of limitations as an affirmative defense.
Moreover, we do not find that the waiver provision in the promissory note violates public
policy. Because Kansas law recognizes the freedom to contract and presumes contracts to
be legal, we conclude that the Buehnes' waiver of the statute of limitations in this
commercial promissory note to be valid and enforceable. Thus, we affirm.
FACTS
On June 28, 2005, David Buehne and Linsay Buehne executed and delivered to
First Security Bank of Beaver, Oklahoma, a commercial promissory note in the principal
amount of $323,000 plus interest. As security for the business loan, the Buehnes granted
the Bank a commercial real estate mortgage in certain real property located in Meade
County, Kansas. In addition, the Buehnes granted the Bank a security interest in all of the
car wash equipment used in their business. On the same day that the promissory note was
signed by the Buehnes, the Bank recorded the mortgage in the Office of the Register of
Deeds of Meade County.
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The commercial promissory note had a maturity date of October 28, 2025. Under
the terms of the note, the Buehnes were to make four payments of interest only beginning
on July 28, 2005. These payments were to be followed by 240 payments of $2,524.09
beginning on November 28, 2005, until the obligation was paid in full. The promissory
note also gave the Bank the option to accelerate the unpaid balance in the event of default
and included a box that was checked stating that the "obligation is payable on demand."
In addition, the commercial promissory note contained the following provision:
"WAIVER OF CERTAIN RIGHTS—If the Lender delays enforcement or decides not to
enforce any of the provisions of this Note, including my Note to make timely payments,
it will not lose its right to enforce the same provisions later nor any other provisions of
this Note. I waive the right to receive any notice of any waiver or delay or presentment,
demand, protest, or dishonor. I also waive any applicable statute of limitations to the full
extent permitted by law and I waive any right I may otherwise have to require the Lender
to proceed against any person or security before suing me to collect this loan."
It is undisputed that the Buehnes failed to make any of the payments as required
by the terms of the commercial promissory note. As a result, the Bank sent the Buehnes a
letter dated August 17, 2006, stating that "demand is hereby made that the unpaid balance
of principal, accrued interest and penalty, if applicable, be paid on or before ten days
from the date of this letter." When the Buehnes failed to respond to the initial letter, the
Bank sent them another letter on November 27, 2006, which stated: "Since DEMAND
has been made on the unpaid balance and you have failed to respond, we regret that we
have no alternative but to turn this matter over to the bank's ATTORNEY for legal
action."
More than seven years later, on May 21, 2014, the Bank filed this foreclosure
action against the Buehnes. Although the lawsuit was originally filed in Seward County,
it was eventually transferred to Meade County. In their answer, the Buehnes asserted the
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statute of limitations as an affirmative defense. Subsequently, the Bank moved for
summary judgment, and the Buehnes responded by filing a summary judgment motion of
their own.
On March 5, 2019, the district court held a hearing on the motions for summary
judgment. At the end of the hearing, the district court announced that it was granting the
Bank's motion and denying the Buehnes' motion. Later, on April 15, 2019, the district
court entered a journal entry in which it found that there were no genuine issues of
material fact and that the Bank was entitled to judgment as a matter of law. In particular,
the district court found that the Bank "did not affirmatively act toward enforcing the
option [to accelerate the loan] until 2014 and [this] action began within the statute of
limitations."
About two months later, on June 25, 2019, the district court entered a final
judgment in favor of the Bank. In addition to entering a judgment against the Buehnes for
the amount due under the terms of the commercial promissory note, the district court
ordered that the commercial real estate mortgage be foreclosed, that the property be sold,
and that the proceeds from the sale—after the payment of costs—be applied toward the
monetary judgment. The district court also granted the Buehnes the right of redemption
for a period of three months. Thereafter, the Buehnes filed a timely notice of appeal.
ANALYSIS
On appeal, the Buehnes contend that the Bank's claim under the commercial
promissory note and real estate mortgage is barred by the statute of limitations. In
particular, they suggest that the statute of limitations began to run when the Bank sent
them letters in 2006 demanding payment in full and stating that the matter would be
turned over to an attorney for legal action. As a result, the Buehnes argue that the statute
of limitations expired prior to the Bank filing this foreclosure action in 2014.
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In response, the Bank contends that the statute of limitations did not start to run
until 2014 when it took the affirmative step of retaining an attorney to pursue this
foreclosure action. Additionally, the Bank argues that under the terms of the commercial
promissory note, the Buehnes waived their right to assert the statute of limitations as an
affirmative defense. In reply, the Buehnes argue that the waiver provision in the
promissory note is "void against public policy and unenforceable."
This case comes to us after the district court granted summary judgment in favor
of the Bank. When the pleadings, depositions, answers to interrogatories, and admissions
on file, together with the affidavits, show that there is no genuine issue of material fact
and that the moving party is entitled to judgment as a matter of law, summary judgment
is appropriate. K.S.A. 2019 Supp. 60-256(c)(2); see Kansas Supreme Court Rule 141
(2020 Kan. S. Ct. R. 205). When opposing a motion for summary judgment, an adverse
party must come forward with evidence to establish a dispute as to a material fact. In
order to preclude summary judgment, the facts subject to the dispute must be material to
the conclusive issues in the case. In considering a motion for summary judgment, a
district court is to resolve all facts—as well as inferences that may reasonably be drawn
from the evidence—in favor of the party against whom the ruling is sought. On appeal,
we apply the same rules as the district court. Patterson v. Cowley County, Kansas, 307
Kan. 616, 621, 413 P.3d 432 (2018).
The resolution of this appeal requires us to interpret the terms of the commercial
promissory note that the Buehnes signed to obtain a business loan from the Bank. At the
outset, we note that "'the paramount public policy is that freedom to contract is not to be
interfered with lightly.'" Marshall v. Kansas Med. Mut. Ins. Co., 276 Kan. 97, 108, 73
P.3d 120 (2003) (quoting Foltz v. Struxness, 168 Kan. 714, 721-22, 215 P.2d 133[1950]); see Pfeifer v. Federal Express Corp., 297 Kan. 547, 551, 304 P.3d 1226 (2013);
Wasinger v. Roman Catholic Diocese of Salina, 55 Kan. App. 2d 77, 80, 407 P.3d 665(2017). Furthermore, contracts are presumed to be legal and the burden rests on the party
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challenging a written agreement—or any provision thereof—to prove that it is illegal or
violates public policy. Nat'l. Bank of Andover v. Kansas Bankers Sur. Co., 290 Kan. 247,
257, 225 P.3d 707 (2010).
The interpretation and legal effect of a written instrument are matters of law over
which our review is unlimited. Prairie Land Elec. Co-op v. Kansas Elec. Power Co-op,
299 Kan. 360, 366, 323 P.3d 1270 (2014). "The primary rule in interpreting written
contracts is to ascertain the intent of the parties. If the terms of the contract are clear,
there is no room for rules of construction, and the intent of the parties is determined from
the contract itself." Liggatt v. Employers Mutual Cas. Co., 273 Kan. 915, 921, 46 P.3d
1120 (2002). In other words, where there is no ambiguity, we ascertain the intent of the
parties from the four corners of the written agreement, construing all provisions in
harmony with each other. Iron Mound v. Nueterra Healthcare Management, 298 Kan.
412, 418, 313 P.3d 808 (2013).
As they did before the district court, the parties focus much of their attention in
their briefs on the question of when the statute of limitations began to run. In particular,
they concentrate on the acceleration provision in the commercial promissory note. "An
acceleration clause provides that the entire balance of the obligation becomes due and
payable upon the occurrence of any event of default." Foundation Property Investments
v. CTP, 286 Kan. 597, 603, 186 P.3d 766 (2008) (citing 1 Clark, The Law of Secured
Transactions under the Uniform Commercial Code, ¶ 2.02[5], p. 2-66 [rev. ed. 2008]). In
Kansas, two types of acceleration clauses are recognized. "In one type of clause, upon
default the acceleration is automatic. In the other type of clause, upon default whether
acceleration occurs is optional with the lender." 286 Kan. at 603. "No particular words
are necessary to convey the concept [of optional acceleration], but certainly the use of
'option' is strongly indicative, if not dispositive." 286 Kan. at 604.
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In FGB Realty Advisors, Inc. v. Keller, 22 Kan. App. 2d 853, 855, 923 P.2d 520(1996), this court held that "[t]he holder of a note containing an option to accelerate must
clearly and unequivocally express an intention to exercise the option and then
affirmatively act toward enforcing that intention in order to properly exercise the option."
Under these circumstances, "the statute of limitations does not begin to run until the
holder exercises the option to accelerate the entire amount" and "[i]f the holder elects not
to exercise the option upon default, 'the statute would not run earlier than the time
originally fixed for the maturity of the note.'" 22 Kan. App. 2d at 854 (quoting Kennedy
v. Gibson, 68 Kan. 612, 617, 75 P. 1044 [1904]); see McCain, Judicial Foreclosures in
Kansas: Recent Developments Following the Subprime Mortgage Crisis, 83 J.K.B.A. 20,
25 n.61 (September 2014).
The district court relied upon FGB Realty Advisors in granting the Bank's motion
for summary judgment. However, we find that it is unnecessary for us to resolve the
question of when the statute of limitations began to run in this case. Even if we assume
the Buehnes are correct that the statute of limitations began to run when the Bank sent the
demand letters in 2006, we find that they waived their right to assert the statute of
limitations as an affirmative defense in this action based on the plain and unambiguous
terms of the commercial promissory note they signed in order to obtain a business loan
from the Bank.
The parties agree that the statute of limitations applicable to this case is found in
K.S.A. 60-511(1). It provides that any action on a written agreement or contract must be
brought within 5 years. "Statutes of limitations . . . find their justification in necessity and
convenience and serve the practical purpose of sparing courts from litigating stale claims
and people from being put to the defense of claims after memories fade and witnesses
disappear." Pfeifer, 297 Kan. at 558 (citing KPERS v. Reimer & Kroger, Assocs., Inc.,
262 Kan. 635, 676, 941 P.2d 1321 [1997], and Harding v. K.C. Wall Products, Inc., 250
Kan. 655, 831 P.2d 958 [1992]). However, "the statute of limitations is an affirmative
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defense that can be waived and is not jurisdictional." State v. Sitlington, 291 Kan. 458,
463, 241 P.3d 1003 (2010).
Here, we find that First Security Bank granted the Buehnes a loan for business
purposes in the principal amount of $323,000 plus interest. Under the terms of the
commercial promissory note, the Buehnes were obligated to repay the Bank in full by the
maturity date of October 28, 2025. As security for this indebtedness, the Buehnes
delivered to the Bank a commercial real estate mortgage on property located in Meade
County. In addition, the Buehnes granted the Bank a security interest in the car wash
equipment used in their business.
In order to repay the Bank by the maturity date, the Buehnes agreed to make four
payments of interest only beginning on July 28, 2005, to be followed by 240 payments of
$2,524.09 beginning on November 28, 2005. It is undisputed that the Bank fulfilled its
end of the bargain by delivering the $323,000 to the Buehnes as agreed upon in the
commercial promissory note. However, it is also undisputed that the Buehnes have failed
to make any payments—of principal or interest—in fulfillment of their obligations under
the terms of the commercial promissory note.
As a result of the Buehnes' failure to make the required payments, the Bank
declared the loan to be in default and demanded payment in full in 2006. Assuming for
the purposes of this appeal that the demand letters sent to the Buehnes triggered the
statute of limitations as the Buehnes contend, the Bank would have had until 2011 to file
a foreclosure action pursuant to K.S.A. 60-511(1). However, for reasons that are not
apparent from the record on appeal, the Bank waited until 2014 to file this action.
It is undisputed that the Buehnes voluntarily signed the commercial promissory
note containing a provision indicating the Bank would not lose its right to seek recourse
as a result of a delay in enforcement. Likewise, the parties do not dispute that the same
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provision in the promissory note also provides that the Buehnes agreed to waive their
right to assert the statute of limitations as a defense "to the full extent permitted by law."
Nevertheless, the Buehnes argue that we should find the waiver provision to be
unenforceable because it violates public policy.
It is important to recognize that the Buehnes do not contend that the waiver
provision they agreed to by signing the commercial promissory note is illegal, nor do
they argue that the language of this provision is ambiguous. Likewise, they do not claim
that they are incompetent, nor do they assert that the waiver provision was entered into as
a result of fraud, mistake, or duress. As a result, the only obstacle to enforcement of the
waiver provision in the commercial promissory note would be a finding that it is against a
well-defined public policy. Consequently, we must "determine whether its terms are so
wide of the mark that to enforce them would violate the public policy of our state." Santa
Rosa KM Assocs., Ltd., P.C. v. Principal Life Ins. Co., 41 Kan. App. 2d 840, 851, 206
P.3d 40 (2009).
In support of their argument that the waiver provision violates public policy, the
Buehnes cite the case of Hornick v. First Catholic Slovak Union, 115 Kan. 597, 224 P.
486 (1924). In Hornick, a widow attempted to redeem a death benefit certificate—similar
to an insurance policy—issued by a fraternal society after her husband died in Kansas.
The certificate had been issued in Pennsylvania when the husband became a member of
the organization. Moreover, the fraternal society that issued the death benefit certificate
was incorporated in Ohio. As such, the Hornick court was initially presented with a
choice of law issue. 115 Kan. at 597-98.
After determining that Kansas law applied, the Hornick court turned to the issue of
whether a provision in the death benefit certificate that attempted to shorten the statute of
limitations from 5 years to 18 months following the husband's death was valid. 115 Kan.
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at 599-600. In reviewing this issue, the court cited a number of authorities from various
jurisdictions in which insurance companies attempted to shorten the time in which a
beneficiary could assert a claim to recover a death benefit. 115 Kan. at 603-04. The
Hornick court concluded that "[a]greements in advance to waive statutes of limitation
altogether, are held void on the grounds that such statutes are for the repose, the peace,
and the welfare of society." (Emphasis added.) 115 Kan. at 600-01.
In contrast to Hornick, the present case does not involve the collection of
insurance benefits, nor does it involve any other type of consumer transaction. Likewise,
this case does not involve a situation in which a party is seeking to shorten the time in
which a party may file a lawsuit or other derogation of the parties' access to the courts.
Instead, this case involves a commercial transaction in which the Buehnes borrowed a
substantial amount of money from the Bank for business purposes. In consideration for
obtaining this commercial loan, the Buehnes voluntarily agreed to the waiver provision,
which included waiving the statute of limitations to the extent allowed by law. Thus, we
find the facts of Hornick to be distinguishable from the circumstances presented in this
case.
We also find that Hornick does not support the broad proposition that all waivers
of the statute of limitations violate public policy. Significantly, the Hornick court limited
its holding to situations in which advance agreements attempt to "to waive statutes of
limitations altogether." (Emphasis added.) 115 Kan. at 600. In the present case, the
Buehnes agreed to waive the statute of limitations "to the full extent permitted by law"
but did not attempt to waive the statute of limitations entirely. The Buehnes still had the
right to assert that the waiver was unenforceable on the grounds of illegality, fraud,
duress, mistake, or—as they have done in this case—violation of public policy.
In determining whether the waiver provision in the commercial promissory note
violates public policy, we start from the premise that the freedom to contract is of
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"paramount importance" and is "not to be interfered with lightly." Pfeifer, 297 Kan. at
551 (citing Idbeis v. Wichita Surgical Specialists, P.A., 279 Kan. 755, 770, 112 P.3d 81[2005]). Although we recognize that the "freedom to contract" is not absolute, it is a well-
settled and well-defined public policy that has been recognized by the Kansas Supreme
Court since 1885. See Kansas Pac. Ry. Co. v. Peavey, 34 Kan. 472, 478, 8 P. 780 (1885).
As a result, "[c]ompetent parties may make contracts on their own terms, provided such
contracts are neither illegal nor contrary to public policy, and in the absence of fraud,
mistake or duress a party who has entered into such a contract is bound thereby."
Manhattan Buildings, Inc. v. Hurley, 231 Kan. 20, Syl. ¶ 7, 643 P.2d 87 (1982); see
National Bank of Andover v. Kansas Bankers Surety Co., 290 Kan. 247, 257, 225 P.3d
707 (2010).
In Pfeifer, the Kansas Supreme Court found that "[t]he plain language of K.S.A.
60-501 . . . does not preclude parties from entering into contracts shortening the statute of
limitations period set out by statute. And nothing implicitly supplies that prohibition."
297 Kan. at 553. The Pfeifer case involved a dispute arising out of a contract between an
employee and her employer in which our Supreme Court was presented with trying to
resolve a conflict between "two long-standing public policy interests"—the freedom to
contract and the protection of injured workers against retaliatory discharge for filing a
workers compensation claim. 297 Kan. at 548. Although it concluded that an attempt to
shorten the statute of limitations for an employee to bring a retaliatory discharge claim
against her employer for seeking workers benefits was unenforceable, our Supreme Court
found that interference with the freedom to contract should be "limited to the
circumstances in which there is a strongly held public policy interest at issue." 297 Kan.
at 559.
As the United States Supreme Court has found, an otherwise legal contractual
provision between competent parties will only be found to be void if enforcement would
violate an "'explicit public policy'" that is "'well defined and dominant, and is to be
11
ascertained "by reference to the laws and legal precedents."'" United Paperworkers
Intern. Union v. Misco, Inc., 484 U.S. 29, 43, 108 S. Ct. 364, 98 L. Ed. 2d 286 (1987). In
other words, "there must be found definite indications in the law of the sovereignty to
justify the invalidation of a contract as contrary to that policy." Muschany v. United
States, 324 U.S. 49, 66, 65 S. Ct. 442, 89 L. Ed. 744 (1945). "Without this sense of
caution, there would . . . be no limit to the contracts we might find policy reasons to
invalidate." Severn Peanut Co. v. Industrial Fumigant Co., 807 F.3d 88, 93 (4th Cir.
2015). Here, we find no strongly held public policy interest to justify the invalidation of
the waiver provision of the commercial promissory note.
As noted above, the waiver provision agreed to by the parties in this case does not
attempt to shorten the five-year statute of limitations or otherwise attempt to limit a
party's access to the courts. Rather, the waiver provision grants the Bank the option to
delay filing a lawsuit after a default has been declared instead of rushing to the
courthouse to file a foreclosure action. Such a provision could potentially benefit debtors
by giving them additional time to work out a compromise or settlement with a lender.
Regardless, the Buehnes have not shown—or even alleged—that they were prejudiced by
the Bank's delay in instituting legal action against them.
In our research, we have discovered no Kansas cases that have found an agreement
to grant a party additional time to file a lawsuit to violate public policy. Moreover, the
Buehnes have not cited us to any such cases. On the other hand, we note that at least two
Kansas cases have enforced agreements to extend the statute of limitations. In the first
case, Younger v. Younger's Estate, 198 Kan. 547, 426 P.2d 67 (1967), our Supreme Court
enforced a provision extending the statute of limitations in a last will and testament. In
the second case, Barnes v. Gideon, 224 Kan. 6, 578 P.2d 685 (1978), our Supreme Court
enforced an agreement to extend the statute of limitations in a written agreement between
potential litigants.
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We do not find a strongly held public policy interest in Kansas that would override
the parties' freedom to contract or to justify the invalidation of the waiver provision in the
commercial promissory note signed by the Buehnes in order to obtain a loan from First
Security Bank. We are also reluctant to invalidate a contractual provision on public
policy grounds where—as in this case—the parties are involved in a commercial
transaction in which there are not the same concerns regarding unequal bargaining power
that are often present in consumer transactions. Likewise, we are also reluctant to partial
out one provision of the commercial promissory note when the law requires that we
consider the contractual provisions as a whole rather than in isolation. See Trear v.
Chamberlain, 308 Kan. 932, 936, 425 P.3d 297 (2018). Based on our review of the four
corners of the commercial promissory note, we find the terms agreed upon to be
reasonable.
As mentioned above, statutes of limitations serve "'the practical purpose of sparing
the courts from litigation of stale claims and people from being put to the defense of
claims after memories have faded and witnesses have disappeared.'" KPERS, 262 Kan. at
676. Here, we do not have such concerns. First, the promissory note was not set to mature
until October 28, 2025. As such, we do not find the Bank's claim to be stale, nor have the
parties expressed a concern about losing evidence. Second, it is undisputed that the Bank
loaned the Buehnes $323,000 and that they have made no payments on either the
principal or the interest. Consequently, there is little—if any—risk that fading memories
or disappearing witnesses would be a factor in this foreclosure action.
Moreover, the Buehnes have not shown that they were prejudiced by the Bank's
delay in instituting foreclosure proceedings. Had the Buehnes been prejudiced, they could
have potentially asserted a defense under the equitable doctrine of laches. See State ex
rel. Stovall v. Meneley, 271 Kan. 355, Syl. ¶ 17, 22 P.3d 124 (2001). However, the
Buehnes have not alleged that the doctrine of laches applies. Likewise, they have not
alleged that the Bank's delay was for an unreasonable length of time.
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Under the circumstances presented in this case, we find that the waiver provision
in the commercial promissory note does not violate a strongly held public policy interest.
Rather, we find that enforcement of the waiver provision in the commercial promissory
note promotes the paramount public policy of allowing competent parties to freely
contract. As a result, we conclude that the wavier provision in this case is valid and
enforceable. Accordingly, based on the plain and unambiguous language of the
commercial promissory note, we conclude that the Buehnes voluntarily waived their right
to assert the statute of limitations as an affirmative defense in this case. As such, we
affirm the judgment of the district court.
Affirmed.
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