InterFirst Bank Greenspoint v. FIRST FED. S. & L. ASS'N
Docket: 59,782
Court: Supreme Court of Kansas; December 11, 1987; Kansas; State Supreme Court
First Federal Savings and Loan Association of Beloit (First Federal) appealed a summary judgment in favor of InterFirst Bank Greenspoint (InterFirst) due to First Federal's dishonor of letters of credit. The appeal also contested a judgment favoring InterFirst on First Federal's counterclaim regarding impairment of collateral. First Federal argued that the summary judgment motion was untimely, there were unresolved factual issues, and that the drafts drawn against the letters did not comply with their terms. Additionally, First Federal claimed InterFirst elected remedies by pursuing a direct action in Texas and improperly released collateral consisting of 209,000 shares of Fuddruckers common stock.
The case involved First Federal issuing an Irrevocable Transferable Letter of Credit for $300,000 to InterFirst on July 26, 1983, at the request of Paul J. Chainey, Jr. and Walter J. Kassuba, who were to draw on it upon certain conditions. Following a loan of $300,000 to Chainey and Kassuba secured by this letter of credit, a second letter of credit for $100,000 was issued on October 20, 1983, for another loan to the same individuals. Both loans went unpaid, leading to InterFirst's demand for payment on the letters of credit and First Federal's refusal to honor them, prompting this legal action.
First Federal, a federally chartered savings and loan association, was primarily owned by First Kansas Holding Company, which held a 63% stock interest in First Federal. Chainey served as executive vice-president of First Kansas Service Corporation, a subsidiary of First Federal involved in mortgage brokerage, beginning in March 1983, and later became vice-president of First Federal until his resignation in September 1984. During this period, Chainey owed First Federal $325,000, secured by a mortgage, and held a 50% interest in the Holding Company.
Chainey co-founded Texas Mortgage Resources (TMR) with Kassuba, Niewald, and Douthitt, where he was a 25% owner and officer. TMR operated alongside Service Corp. in Houston’s mortgage brokerage sector. Niewald, also an officer and director of First Federal, issued letters of credit that secured loans from InterFirst to Chainey and Kassuba, intended for TMR's working capital. Jerry Clark, a senior vice-president at InterFirst, was aware of the loans' purpose and reviewed financial statements from Chainey and Kassuba prior to loan approval.
On March 15, 1984, InterFirst issued a third loan of $250,000 to Chainey and Kassuba, secured by previous letters of credit through cross-collateralization, to purchase a time certificate of deposit for TMR. The loan application stated that collateral would be 45,000 shares of Fuddruckers stock, despite the absence of stock certificates. Chainey provided a Voting Trust Certificate for 209,905 shares of Fuddruckers and executed documents to establish a security interest in the 45,000 shares. InterFirst notified the Voting Trust trustee of this assignment, and the trustee confirmed the assignment in writing.
Original loans of $300,000 and $100,000 matured, leading to a new loan application and the execution of a $400,000 promissory note by Chainey and Kassuba, with letters of credit as collateral. The new note required monthly interest and quarterly principal payments. Following a $250,000 note maturity, Chainey and Kassuba reduced the principal by $25,000, renewing it at $225,000 without changing collateral. Interest payments were made on the $225,000 note, keeping it current until November 15, 1984, while a $20,000 principal payment and interest were made on the $400,000 note until October 15, 1985. On January 25, 1985, InterFirst prepared sight drafts and letters for First Federal, which acknowledged receipt on January 28, 1985. InterFirst's vice-president stated that Chainey and Kassuba had not performed satisfactorily under their obligations. InterFirst demanded payment on both notes on January 28, 1985, and initiated legal action in the District Court of Mitchell County, Kansas, on February 25, 1985, followed by a second action in Harris County, Texas, on April 24, 1985. In September 1985, InterFirst sold Fuddruckers stock for $275,000, using proceeds to pay off the $225,000 note and applying the remaining balance to the $400,000 note.
The first issue raised was the timeliness of a summary judgment motion filed by InterFirst in November 1985, which was denied but allowed to be re-presented at a pretrial conference. A second summary judgment motion was filed on June 5, 1986, addressing claims against First Federal for dishonor of letters of credit and First Federal's counterclaim for collateral impairment. The trial judge did not rule immediately but allowed supplemental memoranda. Ultimately, summary judgment was granted to InterFirst on both claims. First Federal had six months’ notice of the claims, and their participation in the pretrial conference was deemed sufficient. The court defined harmless error as one that does not prejudice substantial rights, referencing relevant case law.
Procedural errors concerning notice related to the motion for summary judgment were deemed harmless as First Federal's counsel did not object to proceeding with oral arguments and was given adequate opportunity to submit additional briefs. First Federal alleged fraud in the transaction, which typically presents a factual question for the jury. However, the court found that InterFirst's loan officer had sufficient information to know about Chainey’s interests in various entities and that the fraud originated from First Federal’s officers, not InterFirst. The court clarified that any alleged fraud must stem from the beneficiary's conduct against the customer, not the other way around. It ruled that there was no fraudulent action by InterFirst against Chainey or First Federal. The purpose of a letter of credit is for the beneficiary to rely on it, not solely on the customer’s credit, and the courts have narrowly defined exceptions to the issuer's duty to honor these letters. First Federal's claim of fraud was based on InterFirst’s supposed duty to investigate further; however, the court found no such duty existed. Summary judgment was upheld on this point, as well as on the issue regarding the authority of Niewald, First Federal’s president, to issue the letters of credit, despite First Federal's claims that Niewald needed board approval. The court disagreed, stating that InterFirst’s prior knowledge did not impair its reliance on Niewald's apparent authority.
First Federal ratified Niewald's issuance of letters of credit by receiving notification from the Federal Home Loan Bank in early September 1984 and failing to object or repudiate the act, which led to the presumption of ratification. Additionally, First Federal executed an escrow agreement on November 13, 1984, agreeing to honor the letters of credit, further solidifying the ratification of Niewald's actions. The court noted that an agent's unauthorized acts can be ratified by the principal, equating ratification to an original grant of authority. First Federal acknowledged Niewald's apparent authority to issue the letters of credit, although it later contested this, arguing that such authority would not be apparent to officers of other banks like InterFirst. The financial statement provided by Chainey did not raise concerns that would compel InterFirst to investigate Niewald's authority. Summary judgment was deemed appropriate on this issue.
On the matter of compliance with the letters of credit, First Federal claimed the drafts presented by InterFirst were not in strict compliance, as they sought payment of $400,000 while only $380,000 was due. Moreover, First Federal argued there was no evidence that Chainey and Kassuba had not performed satisfactorily on their notes. However, the trial court found no fraud on InterFirst's part and determined that the documentation was in substantial compliance with the letters of credit. The accrued interest of over $14,000 on the $400,000 note was noted, and it was established that Chainey and Kassuba were in substantial default on their obligations to InterFirst at the time of the payment demand. The court concluded that the drafts and documents submitted by InterFirst strictly complied with the letters of credit, rendering First Federal's arguments without merit.
First Federal claims that InterFirst elected remedies by filing a separate action against Chainey and Kassuba in Texas while this case was pending. Citing Griffith v. Stout Remodeling, Inc., First Federal argues that the doctrine of election of remedies prevents parties from asserting inconsistent positions. However, the court finds no inconsistency between InterFirst's actions, as both seek recovery based on Chainey and Kassuba's failure to fulfill their payment obligations under their notes. InterFirst is simply pursuing the proceeds from a bad loan, regardless of whether payment comes from First Federal or Chainey and Kassuba, with the understanding that once fully paid in one action, the other should be dismissed.
Additionally, First Federal contends that InterFirst improperly released 209,905 shares of Fuddruckers stock held as collateral, impairing its rights. The court refutes this claim, explaining that Chainey executed a security agreement granting InterFirst a security interest in only 45,000 shares of stock, and that InterFirst recorded this interest and subsequently sold the 45,000 shares while returning the Voting Trust Certificate for the remaining shares to Chainey, as it had no interest in them. The court concludes that InterFirst's actions did not impair collateral rights, affirming the judgment of the District Court of Mitchell County.
