Court Opinion

ID: 9537512
Source: CourtListenerOpinion
Date Created: 2023-08-07 07:19:24.323847+00
Date Added: 2024-06-11T14:56:44.432736
License: Public Domain

Herd, J.,
dissenting: I dissent from the result reached by the court but concur that the relationship of the Bank and Bledsoe to plaintiff is not that of a fiduciary. I also concur that there is consideration supporting the $275,000.00 subordination agreement and that the funds were properly expended thereunder, but, neither the facts nor the law support the remainder of the opinion.
It is essential in analyzing this case to examine the relationship of the parties and the background of each.
The majority opinion is helpful in this endeavor when it holds there are no fiduciary relationships existing between plaintiff and any of the defendants, but there is a continuous inference, almost amounting to an allegation, that Nancy Dugan is an inexperienced widow, in failing health, incapable of evaluating what she was doing when she executed the subordination agreements. The facts do not support these assertions. In her deposition Mrs. Dugan recited from memory the approximate date of the original lease, who the parties were, the consideration and the description *213involved. She then proceeded to testify regarding the tract where she and her husband built the Standard Station for rent, the building of Wong’s Restaurant and the sale of the lots to Shepler’s Western Store. She remembered that Bledsoe had leased the lot behind Sheplers and that she still owned it. She also remembered that Mr. Katz owned a corporation called Equity Development which operated Diamond Inn and that she had sold a tract to Clinton Oil Co. and to Hudson Oil Co. She recalled the identity of all the property she and Mr. Dugan had given their five daughters and that it cost her $19,000.00 in gift tax for having done so.
Mrs. Dugan was aware of every instance where she had executed a subordination agreement and she evidenced an awareness of its need and effect. She admitted she knew a lot more about real estate development than the average person. Nancy Dugan is an astute, intelligent businesswoman with marvelous recall. She is a sophisticated business person and knows the consequences of her acts. Acting on such background and understanding, she executed both subordination agreements.
In the light of the foregoing information, let us examine the allegations of fraud and misrepresentation leveled at the Bank and Bledsoe.
It is important to remember the reasons Harry and Nancy Dugan executed the original lease in 1960. They owned 172 acres of undeveloped property just north of the Airport in the Wichita City limits straddling West Kellogg Avenue, U.S. Highway 54. It was prime property for commercial development. The Dugans chose to lease it under a 99-year lease in order to obtain industrial development without cost to them, giving them a secure annual income, saving income taxes and affording their children and grandchildren the benefits of the increased real estate values.
To attract lessees qualified to invest the capital needed for development, it was essential the Dugans draft an instrument authorizing the borrowing of money. The lease provides:
“9. Improvements. It is understood and agreed that the purpose of this ninety-nine year lease is the development of the leased premises for commercial purposes. In connection with the improvement of said leased premises, Lessee covenants that all new construction placed thereon shall meet all requirements of any applicable building, fire, police and health code or body of regulations.
“10. Protection of Premises. Upon completion of any new improvements upon the premises, Lessee assumes to maintain them at all times with due diligence, *214reasonable care and all good faith for the protection of the interests of Lessors. No businesses or other activities shall be conducted upon the said premises which are unlawful, extra hazardous or unreasonably destructive of the improvements. All repairs or replacements shall be effected promptly and efficiently and without cost to Lessors. No mechanics’ or materialmen’s liens shall at any time be permitted to remain unpaid upon the premises. In general, the improvements shall be maintained at all times so that upon any termination of this lease the same will be turned over to the Lessors in good order and condition, reasonable wear and tear alone accepted. Trade fixtures, constituting no part of the building structure, may be removed upon termination. Lessors retain the right to go upon the premises at all reasonable times for the purpose of making inspections necessary to ascertain whether Lessee is complying with the obligations hereof.
“11. Indemnity and Public Liability Insurance. Lessee hereby indemnifies Lessors against any loss or liability for damages claimed by any person whatsoever on account of any allegedly wrongful act or negligence occurring upon or in connection with the occupancy or use of the demised premises during the term of this lease, or in connection with any construction work carried on by Lessee. Lessee shall also maintain, for the joint benefit of itself and Lessors, liability insurance in the form customarily written for the protection of landlords and tenants against personal injury and property damage claims with a limit of liability of not less than $100,000.00 for any one occurrence, with reputable insurors authorized to do business in the State of Kansas.
“12. General Property Insurance. Lessee will at its own cost maintain insurance upon the improvements to be constructed upon the leased premises with reputable insurance companies authorized to transact business in the State of Kansas, for at least 90% of the full insurable value thereof against all the hazards usually covered by standard fire insurance policies with comprehensive endorsements. All policies of insurance shall be endorsed for the joint benefit of Lessors and Lessee as their interests may appear. In the event of any loss, the proceeds from the insurance shall be applied toward repairing or reconstructing at the expense of Lessee the said improvements so that the same will be restored to their original condition as nearly as possible.
“13. Mortgages. Nothing herein shall be deemed to prevent the Lessee from mortgaging the leasehold estate on any terms and conditions satisfactory to Lessee, except that any such mortgage will be subject to all the terms and conditions hereof by specific reference to this lease, and no mortgage shall affect the fee simple title of Lessors. It is also agreed that for the protection of mortgagee, the mortgagee shall be entitled to any notices of default hereunder, to the same extent that the Lessee shall be entitled, and that mortgagee shall have the same right to cure any defaults hereunder and shall be entitled to all the rights of Lessee hereunder for the protection of said mortgagee’s interests.”
The foregoing provisions illustrate the construction undertaken by Bledsoe was contemplated by the lease agreement.
The subordination provision in the lease provides:
“17. Special Provisions. The following special provisions shall apply during the term of this lease:
a) If the Lessee in financing new construction on the leased premises *215encounters a requirement requiring Lessors to subordinate in favor of a first mortgage, Lessors agree to cooperate with Lessee in said financial arrangements and subordinate their leasehold interest thereto.”
Since most commercial development is accomplished with borrowed capital, the lease would be of doubtful value were it not for the subordination provision. It is a substantive, material and essential clause in all long-term industrial development leases and therefore an important part of lessee’s rights purchased by the rental payment. If the lessee cannot borrow money, he cannot develop the property.
Harry D. Bledsoe negotiated the lease with Nancy Dugan. He then assigned it to K & B Development Corporation. It provided the lessee would pay Nancy Dugan and her heirs $750 per month rent on approximately one acre of land for 87 years, which amounts to in excess of $783,000, and all ad valorem taxes. In addition, the lessors retain title and regain possession with all improvements at the end of the term. K & B Development Corporation, obviously, is paying for the right to commercially develop the property, and to develop it must borrow money. The company purchased Nancy Dugan’s subordination in its rental payments, which are far in excess of rent on raw land. Therefore, there is substantial consideration supporting the subordination agreements, unlimited to number or amounts.
Since the court has approved the first subordination agreement with K & B Development Corporation, let us examine the circumstances surrounding the execution of the second agreement. It must be remembered the terms of the 1960 lease from the Dugans to Diamond Motor Inn were adopted by reference in the lease between Dugan and K & B. It contained the subordination clause quoted herein. Under the general authority of the lease clause, Dugan executed the following subordination agreement, which states:
“Whereas, as set out in the Lease dated July 8,1960, and recorded in the office of the Register of Deeds, Sedgwick County, Kansas, in Miscellaneous Book 477, Page 344, Doc. #3333, as ratified, Lessors agreed to subordinate their interest as Lessors to any leasehold mortgage or mortgages granted, conveyed and delivered by Lessee on the leased premises, provided the indebtedness secured by the same is incurred in connection with the financing of new construction on the premises . . . .”
I have recited the above agreement because it is approved by the court in the majority opinion and also because it represents *216ratification by Mrs. Dugan of the provisions of the original lease document showing her understanding that she is obligated to subordinate to “mortgage or mortgages” of the lessee, subject only to the condition that the debt be to pay for new construction.
We have stated that new construction of a motel includes the cost of incidental and preliminary expenses prior to construction. G. Credit Co. v. Mid-West Land Development, Inc., 207 Kan. 325, 328, 485 P.2d 205 (1971). In that case we also stated:
“We start with the proposition that appellants, by the execution of the lease, voluntarily surrendered certain rights which theretofore were theirs alone. What that surrender encompassed is to be divined by determining the intent of the parties as manifested in their contract of lease.”
The lease does not define “new construction” but in her deposition, Nancy Dugan stated it was her understanding the money would be used for equipping the restaurant and club with the usual equipment needed to operate such a business.
In the instant case, the evidence stands unrefuted K & B Development Corporation spent in excess of $390,000 for building and equipping a restaurant and a bar on the Dugan lease. The first $275,000 of the construction funds were provided by a loan from The First National Bank. Ninety percent of that loan was guaranteed by the Small Business Administration. It was later sold to Kansas Development Credit Corporation (K.D.C.C.) and secured by a first mortgage to which Dugan subordinated. This will be referred to later as a parallel transaction to the one at issue.
In the course of completing the new construction, K & B Development Corporation experienced major cost overruns but owned no assets upon which it could borrow except this property. This left the problem to Bledsoe and co-owner Katz to pay the contractor. Bledsoe and Katz, individually, borrowed from the Bank and paid accounts for K & B. Bledsoe’s Resthaven corporation paid bills for K & B. In addition, Bledsoe postponed the payment of ad valorem and employer’s taxes in order to pay some of the construction costs.
Faced with the cash flow squeeze, Bledsoe sought permanent financing for K & B to repay the temporary financing which had resulted from the unexpected cost overruns. After an unsuccessful search for funds from various lending institutions, Bledsoe approached one of his attorneys, Emmet Blaes, and posed his problem. Blaes studied the proposal, examined the lease, and *217advised Bledsoe that he, with some clients, would lend K & B $100,000, providing they could obtain a first mortgage, subordinated to by the fee owner.
The SBA and the Bank readily agreed to subordinate their first mortgage to the Blaes mortgage since the MAI appraiser had reported the property was now worth $500,000 to $600,000. Both Blaes and Bledsoe assumed the Dugan subordination was routine due to the clause in the lease.
Since the Bank was subordinating to Blaes and was collecting for SBA and K.D.C.C., it was asked to escrow and collect the Blaes mortgage also. The Bank agreed and Blaes drafted a mortgage from K & B to the Bank of the leased property. A “Subordination of Lessor” was included in the same document for Nancy Dugan’s signature. K & B and Nancy Dugan executed the instrument on April 14, 1975. All signatures were acknowledged and the mortgage was recorded. The proceeds of the Blaes loan were then advanced through the Blaes law firm and were used to repay the Bank, Bledsoe, Katz and Resthaven, and to pay taxes and other deferred expenses used for temporary financing.
First, Dugan complains Bledsoe fraudulently represented to her that the mortgage was with The First National Bank of Wichita. Her deposition reveals that during her conversation with Bledsoe, she got the impression the loan was to be made by the Bank. Bledsoe testified he informed her the loan was to be handled by the Bank, meaning they would handle the mortgage agreement. At that time, he did not state the Bank would make the loan.
Regardless of Mrs. Dugan’s impression, the source of the loan is unimportant. The specific source of the funds for bank loans is diverse and unidentified, coming from the depositors and other sources. The actions of the Bank and Blaes are not at all irregular, unlawful or unethical. It is a normal, proper method of putting together complicated financing transactions for a bank to handle the complete package. It takes the security instrument, issues certificates of indebtedness to the owners, while escrowing the transaction, collecting and distributing the proceeds pursuant to the ownership as disclosed in its escrow file. In this case it was entirely logical and proper that the Bank be the escrow agent and middleman in the transaction because it was subordinating its rights to the new mortgage and could protect itself and SBA much *218better with such an arrangement. In addition, there was multiple ownership of the first mortgage which is always awkward. I find the action taken by Bledsoe, Blaes and the Bank proper and in the best interests of all the parties, including Mrs. Dugan. There was no fraud or misrepresentation.
Plaintiff next complains that after she had signed the second subordination agreement, Bledsoe told her he would have attorney Robert Braden look at the documents. She further says Bledsoe fraudulently failed to do this, and she was damaged by his representations. Bledsoe denies he made such representations but maintains he told Mrs. Dugan the document was prepared by attorney Emmet Blaes who is in the firm with Braden and the documents were correct in form.
It is clear Mrs. Dugan didn’t rely on Bledsoe’s statement to her detriment when she executed the instrument. She had already signed the documents before she talked to Bledsoe.
In regard to allegations concerning the procurement of approval of Mr. Braden on the second subordination agreement, she testified she would have accepted Braden’s advice about subordination pursuant to the terms of the document. Braden’s supplembntal affidavit is a part of the record. In it he states if he had been called upon to counsel Mrs. Dugan, he would have advised her she had to subordinate to the preliminary expenses in question, based upon his interpretation of the lease and subordination agreements and pursuant to his interpretation of G. Credit Co. v. Mid-West Land Development, Inc., 207 Kan. at 325. This illustrates we have “much ado about nothing.” The issue is moot.
However, the facts are not all we can rely on in support of a finding there was no fraud.
“It is said to be immaterial that one is induced by false representations to do what he is bound to do. A person who has been induced to do that which the law would have otherwise required him to do cannot claim to have been defrauded.” 37 Am. Jur. 2d, Fraud and Deceit § 295, p. 392.
Here, Mrs. Dugan was required by the lease to subordinate to loans for new construction. Misrepresentation is irrelevant when one has an obligation to perform a task. She signed the subordination agreement without relying on any statements made by Bledsoe. She complied with her prior contractual obligation and she can not now complain of her bargain. The facts are uncontroverted that K & B expended in excess of $390,000 for new *219construction of the club and restaurant, which was appraised at $500,000. The appraisal evidence is material in corroborating the evidence of the amount of the cost of new construction. Mrs. Dugan has subordinated her fee interest in the total amount of $375,000 in the two agreements to obtain improvements worth $500,000. She has gained $125,000 in security by virtue of K & B’s new construction and at this date the loans have been reduced in excess of $90,000. The thrust of appellant’s argument appears to be that she was defrauded because the proceeds of the second loan went to pay the temporary financing rather than the contractor. That reasoning is faulty. The construction was completed in late 1973 and the club and restaurant opened for business. Mrs. Dugan was aware of this. She visited there five or six times, during construction and afterward. The contractor had to be paid upon completion of the work or risk the filing of a mechanic’s lien. The second subordination agreement was obtained on April 14,1975, and the loan proceeds used to repay those who had paid the contractor for K & B. I find nothing irregular, surprising or suspicious about such arrangement. However, I find it material to know the improvements were made and that they enhanced the value of the realty. This was shown by the unrefuted testimony of Bledsoe and Schultz, Bledsoe’s bookkeeper, detailed by invoices of purchases admitted in evidence.
Viewing the evidence in the light most favorable to appellant, I find no material issue of fact remaining, making summary judgment a proper remedy. The judgment of the trial court should be affirmed.
One other matter should be disposed of herein. Even if the court should find there is a scintilla of evidence creating a disputed fact issue between Dugan and Bledsoe, there is nothing in the pleadings or the facts to involve Blaes and his associates. It is generally accepted that rescission of a contract for fraud or duress cannot be asserted against the rights of a third person who acquired for value and without notice. (17A C.J.S. Contracts § 415, P. 506.) The pleadings and evidence disclose the inter-pleaded defendants loaned K & B $100,000 and had no knowledge of any infirmities in the subordination agreement of Mrs. Dugan.