Opinion
No. 110297.
07-02-2015
MONTY TITLING TRUST 1, Appellee, v. TERRA–BENTLEY II, L.L.C. et al., (Village of Overland Point, L.L.C .), Appellants.
Eldon J. Shields, of Gates, Shields & Ferguson, P.A., of Overland Park, for appellants. Robert A. Hammeke and Jennifer K. Vath, of Dentons U.S. LLP, of Kansas City, MO, for appellee.
Eldon J. Shields, of Gates, Shields & Ferguson, P.A., of Overland Park, for appellants.
Robert A. Hammeke and Jennifer K. Vath, of Dentons U.S. LLP, of Kansas City, MO, for appellee.
Before ARNOLD–BURGER, P.J., PIERRON and BUSER, JJ.
Opinion
BUSER, J.
In this appeal, we are asked to review a foreclosure order granted by the Johnson County District Court to a predecessor in interest of Monty Titling Trust 1 (Bank). A prior appeal regarding the same real estate development is found at TerraBentley II, L.L.C. v. Village of Overland Pointe, L.L.C., No. 101,957, 2014 WL 2619372 (Kan.App.2014) (unpublished opinion). We affirm the foreclosure order of the trial court.
Factual and Procedural Background
The background facts are well known to the parties. Highly summarized, the Bank held a promissory note from Terra–Bentley II, L .L.C. (TB II), secured by a mortgage (Mortgage) on about 16 acres of land to be developed as “Mission Comer” in Leawood, Kansas (Property). On October 12, 2005, the Mortgage was recorded in the Johnson County Register of Deeds office.
The Bank had a copy of TB II's operating agreement when it accepted the Mortgage. It also was aware of an ordinance enacted by the City of Leawood rezoning the property and providing that a cross access/parking easement for the entire development shall be recorded prior to issuance of a building permit. In short, the Bank knew Mission Comer would be a commercial subdivision with a declaration of restrictions to address the conditions or stipulations of the Leawood ordinance. TB II, however, granted the Mortgage to the Bank before TB II had drafted or recorded its declaration of restrictions, the future Declaration.
On June 14, 2006, Village of Overland Pointe, L.L.C. (Village) purchased a parcel of Mission Comer from TB II. The Bank then released the Mortgage as to that parcel.
On July 23, 2007, Village entered into a development agreement with TB II, known as the “Mission Comer Declaration of Covenants, Restrictions, Easements, Reservations and Assessments” (Declaration). On July 25, 2007, the Declaration was recorded in the Johnson County Register of Deeds office. L. Gray Turner and John Sweeney, who simultaneously controlled Village and managed TB II, were soon removed as managers of TB II, and the litigation which led to the prior appeal began. See TerraBentley II, L.L.C., 2014 WL 2619372, at *10.
Over 4 years later, on October 24, 2011, the Bank filed the present foreclosure action. It named Village as a defendant based on any right or interest in the Property that Village might claim under the Declaration. After a bench trial, the trial court issued a written order granting foreclosure. The trial court concluded, in relevant part, that the Mortgage had recording priority over the Declaration, and there was no agreement to subordinate the Mortgage to the later Declaration. Village appeals, arguing its rights and interests under the Declaration should not have been extinguished.
Summary Judgment
The first issue raised on appeal concerns the relationship between the district court's summary judgment ruling and the bench trial. The Bank moved for summary judgment on foreclosure, but the district court denied the motion after making enumerated findings of uncontroverted fact. At the start of the bench trial, the judge informed counsel, “by virtue of the summary judgment order, which I made very clear, we were not going to have to redo all those findings.”
On appeal, Village now contends the trial court erred by “reversing” its summary judgment findings during the trial. It is difficult to categorize or analyze this argument. We accept Village's suggestion that our review is unlimited since “there is no factual dispute” on the conduct at issue here.
Village's argument on this issue identifies no summary judgment findings which were reversed at trial. As a consequence, we conclude the issue is waived or abandoned on appeal. See Superior Boiler Works, Inc. v. Kimball, 292 Kan. 885, 889, 259 P.3d 676 (2011). Moreover, the district court stated in its summary judgment ruling, “there are genuine issues of material fact on whether the Bank had actual or constructive knowledge of the [Declaration] so ... summary judgment must be denied.” At the start of trial, the judge stated to Village's counsel, “The priority issue is really your burden as to your affirmative claim as to whether the [Declaration]—somehow [the Bank] had notice of it, et cetera. So I think it makes logical sense for you to put forth evidence on that.” The trial then proceeded as the judge indicated, which was not error because a trial is conducted to resolve any issues of fact remaining after summary judgment. See K.S.A.2014 Supp. 60–256(d)(1).
Recording Priority
Next, Village contends the Declaration has priority over the Mortgage. Asserting there are no issues of material fact, Village argues based on documents admitted in evidence in the district court. Since the underlying facts are uncontroverted and the issue turns on the interpretation of documents, our review is unlimited. See Boucek v. Boucek, 297 Kan. 865, 874, 305 P.3d 597 (2013) ; Matney v. Matney Chiropractic Clinic, 268 Kan. 336, 338–39, 995 P.2d 871 (2000).
Village asserts that “actual notice to the Bank” of the planned development of Mission Comer, which for all practical purposes means something like the Declaration, “subordinated the Mortgage to the Declaration and any foreclosure of the Mortgage would be subject to the Declaration remaining in place.” But Village cites no authority for the proposition that a mortgage holder's notice of future commercial development, including notice of future unspecified easements, covenants, and restrictions, prevents the mortgage holder from gaining priority by recording its mortgage before the actual easements, covenants, and restrictions are recorded. Instead, Village cites caselaw stating that parties are presumed to contract with reference to the law. But the law in Kansas is contrary to Village's position: “The general rule is that the first to record a mortgage has priority. The priority continues as long as the mortgage is not released.” Bank Western v. Henderson, 255 Kan. 343, 348, 874 P.2d 632 (1994).
The rule is based on the Kansas recording statutes. K.S.A. 58–2221(d) states instruments in writing which convey interests in land or “whereby any real estate may be affected,” may be recorded in the office of register of deeds. K.S.A. 58–2222 states such an instrument imparts notice of the contents thereof, and that all subsequent purchasers are deemed to purchase with notice. Our Supreme Court long ago explained the importance of these provisions:
“The evident purpose of these two sections of the statutes is so plainly expressed by the legislature that there is no room for construction.... This statute, with some variation of phraseology, has been in force ever since the third year of our territorial existence, and has resulted in a plain, easy and practical method by which title to land and written instruments affecting real estate can be determined by men of ordinary intelligence in almost every case, with that reasonable certainty that is so much to be desired.... It is a wise state policy that sweeps away the accumulated cobwebs of an obsolete system, that hang about the muniments and are entwined around the chains of the titles to real estate within its borders, and adopts a plain, easily understood, and perfectly just rule of public registration, founded upon the maxim, ‘First in time, first in right,’ qualified by notice of the existence of other liens, and the rights of a party in possession. [Citations omitted.]” Hayner & Co. v. Eberhardt, 37 Kan. 308, 313, 15 P. 168 (1887).
The qualification our Supreme Court noted to the maxim, “first in time, first in right,” is found in the next statute in sequence, K.S.A. 58–2223 : “No such instrument in writing shall be valid, except between the parties thereto, and such as have actual notice thereof, until the same shall be deposited with the register of deeds for record.” Village cites this statute, but any assertion that the Bank had actual notice of the Declaration would be contrary to the uncontroverted facts, including TB II's representation to the Bank that the Property was unencumbered. Based on these facts, the law does not support Village's position.
Absent a legal basis for priority, Village asks us to find “a contractual consent to the Declaration ... which subordinated the Mortgage to the Declaration.” We see no evidence of this in the record. As the trial court stated in remarks from the bench, “There's no evidence of a subordination agreement [with the Bank]. And, essentially, we have, at best, a presentation of evidence that says the Bank knew something was coming ... but we don't have anything specifically at the time [Lot 4] was purchased.” The trial court repeated its conclusion in its written order:
“[The] Mortgage was recorded on October 12, 2005. At that time, [Village] had not acquired an interest in the Property and the [Declaration] had not been created, executed and/or recorded.... Neither [Village] nor TB II requested that [the Bank] subordinate its Mortgage to the [Declaration]. Because [the Bank] did not have and could not have had knowledge of the [Declaration] prior to recording its Mortgage, and because [the Bank] did not subordinate its Mortgage, [the Bank] is entitled to foreclose upon the [Declaration].”
We agree with the trial court that mere notice to the Bank of the planned development at Mission Comer did not create a subordination agreement giving the Declaration priority over the Mortgage. See U.S.D. No. 446 v. Sandoval, 295 Kan. 278, 282, 286 P.3d 542 (2012) (“In order to form a binding contract, there must be a meeting of the minds on all the essential elements.”); 12 Thompson on Real Property § 101.06(d)(1) (2d Thomas ed. 2008) (“A subordination agreement, like any other contract, must be certain in its terms.”). We have also considered Village's remaining arguments related to this issue, and we do not find them persuasive. The trial court did not err in giving the Mortgage priority.
Equitable Priority
Village also contends the trial court abused its discretion by refusing to give the Declaration priority over the Mortgage under equitable principles. In particular, Village argues that the Bank “entered this equitable foreclosure action with unclean hands.” Village asks us to “reverse the [trial court's] determination and deny [the Bank] a foreclosure which subordinates the Declaration.”
“In this jurisdiction it is settled that all actions to foreclose mortgages are equitable in nature.” Hill v. Hill, 185 Kan. 389, 400, 345 P.2d 1015 (1959). However, “only under limited circumstances” should a court refuse foreclosure on equitable grounds. First Nat'l Bank of Omaha v. Centennial Park, 48 Kan.App.2d 714, 722, 303 P.3d 705, rev. denied 297 Kan. 1244 (2013). “Under Kansas law, the application of an equitable doctrine rests with the sound discretion of the trial court.” 48 Kan.App.2d 714, Syl. ¶ 1 ; see also Wichita Clinic v. Louis, 39 Kan.App.2d 848, 867, 185 P.3d 946, rev. denied 287 Kan. 769 (2008) (the unclean hands doctrine is “applied at the court's discretion”). Discretion is abused when a judicial action is arbitrary, fanciful, or unreasonable, or when it is based on an error of fact or law. First Nat'l Bank of Omaha, 48 Kan.App.2d 714, Syl. 2.
Some background is necessary to understand this issue. Gary Hall was an owner of TB II through a trust controlled by him and his wife, and he had, along with his wife and another trust controlled by him (the Halls), guaranteed the original promissory note. The Halls later guaranteed an amended promissory note to a limit of $1,705,932. On August 31, 2011, the Halls entered into a “Deficiency Agreement” with the Bank. The Halls asked the Bank not to join them as guarantors in the foreclosure action that is now on appeal. In return, the Halls promised to pay the Bank the lesser of the deficiency due upon sale of the Property, or $1,200,000. The Deficiency Agreement terminated the prior guaranties.
In the district court, Village contended the Bank came to the foreclosure with unclean hands due to the Deficiency Agreement. The trial court did not discuss equity in its ruling, but it obviously declined to apply the unclean hands doctrine. We are persuaded the district court did not abuse its discretion.
Beginning with the Halls, they were not a party to the foreclosure action and their acts are not at issue here. See Home Bank & Tr. Co. v. Cedar Bluff Cattle Feeders, Inc., 25 Kan.App.2d 152, Syl. ¶ 6, 959 P.2d 934, rev. denied 265 Kan. 885 (1998). As for the Bank, Village does not argue with respect to the Mortgage or any other document of the actual foreclosure. Village only argues with respect to the Deficiency Agreement, a separate and distinct transaction. The unclean hands doctrine “provides that no person can obtain affirmative relief in equity with respect to a transaction in which that person has been guilty of inequitable conduct. The objectionable conduct must bear an immediate relation to the subject matter of the litigation and affect the relations existing between the parties.” (Emphasis added.) In re Marriage of Johnson, 24 Kan.App.2d 631, Syl. 6, 950 P.2d 267 (1997), rev. denied 264 Kan. 821 (1998). Since the Bank was not seeking affirmative relief in this foreclosure action with respect to the Deficiency Agreement, and the conduct Village alleges regarding the Deficiency Agreement did not bear an immediate relation to the foreclosure relief the Bank was seeking, the district court did not abuse its discretion. See Fuqua v. Hanson, 222 Kan. 653, 656–57, 567 P.2d 862 (1977).
Moreover, even if the unclean hands doctrine applied here, the district court still did not abuse its discretion. The doctrine of unclean hands “is applied sparingly and only to willful conduct which is fraudulent, illegal, or unconscionable and that shocks the moral sensibilities of the judge.” Bank of America v. Inda, 48 Kan.App.2d 658, Syl. ¶ 16, 303 P.3d 696 (2013). But Village does not allege such conduct. Village contends the Deficiency Agreement reduced the Halls' liability of approximately $1.7 million to $1.2 million, but there was testimony explaining the $500,000 difference by two $250,000 certificates of deposit the Halls had “pledged directly to the loan.” Village complains that the Halls extracted from the Bank an option to buy the Property if the Bank purchased it at sale, but Village does not establish that such an arrangement is fraudulent, illegal, or unconscionable. We find no basis to reverse the district court.
For its final issue, Village asserts the trial court's “final order foreclosing the Declaration ... is directly contrary to the court's announcement and determination that comity should be granted.” The district court did refer to “comity,” but Monty Titling Trust 1 correctly frames the issue as whether the rulings at issue in the prior appeal are res judicata in the present case. Whether res judicata applies is a question of law subject to unlimited review. Miller v. Glacier Development Co., 293 Kan. 665, 668, 270 P.3d 1065 (2011).
In the prior appeal, our court rejected TB II's argument that the Declaration was a “ ‘ity.’ “ Terra–Bentley II, L.L.C., 2014 WL 2619372, at *9. During the trial of the present case, Village attempted to elicit evidence regarding such prior rulings on the “validity” of the Declaration. After an objection, the district court clarified that the validity of the Declaration was not in question, stating “on comity grounds, the dispute as between [Village] and [TB II] is done.” In its comments after the trial, the district court repeated that “we have two parties [Village and TB II] that are bound together by certain contractual agreements they reached, and those are called [the Declaration], and those parties as between them are bound by those.”
While the validity of the Declaration between Village and TB II was established prior to trial, Monty Titling Trust 1 correctly states, “[t]he issue of priority of the Mortgage was not determined” in any prior litigation. Village's counsel recognized this before trial in the present case, stating that Monty Titling Trust 1 had “some obligation to come forward and prove up ... the fact that it has priority over us; I mean, priority is a main issue in a foreclosure case.” The trial court's later acknowledgement that the Declaration was enforceable between Village and TB II did not determine whether other purchasers at the foreclosure sale would be bound by the Declaration. Since the Mortgage had priority over the Declaration, they would not have priority.
Affirmed.