Court Opinion

ID: 9561958
Source: CourtListenerOpinion
Date Created: 2023-08-21 18:19:39.184942+00
Date Added: 2024-06-11T09:17:08.718147
License: Public Domain

Herd, J.,
dissenting: I disagree with the majority holding that Kanopolis State bank was acting in good faith when it deemed itself insecure on Ronald F. Lloyd’s note and exercised its right of setoff against his checking and reserve accounts.
The evidence in this case consists of the testimony of Dale E. Hoosier, bank vice-president, the Lloyd note and the bank ledger.
Mr. Hoosier acknowledged that the bank officials knew an Oklahoma judgment in the amount of $58,352.40 had been properly filed of record in Ellsworth County against Mr. Lloyd. He testified the judgment did not make the bank deem itself insecure. He further testified that Mr. Lloyd’s note with his bank was secured by a first mortgage on Ellsworth County real estate and did not mature until more than four months after the August 3 setoff. Hoosier also testified Lloyd was not delinquent in any note payments when the setoff was made. The bank ledger sheet shows that thirteen days after the setoff of $39,178.20 from Lloyd’s account was applied on his note, the bank loaned Lloyd an additional $50,000. Mr. Hoosier testified the reason he deemed the bank insecure with regard to Lloyd was because he knew a garnishment summons was going to be served on the bank to aid in satisfying the foreign judgment against Lloyd.
The bank argues the garnishment of Lloyd’s bank accounts would have destroyed his liquidity and thus justifies its deeming itself insecure. This argument ignores the nature of a secured note. Neither the garnishment nor the foreign judgment affect the bank’s security. As testified to, the bank was satisfied with the security for the Lloyd debt. The garnishment was seeking *250payment from Lloyd’s unmortgaged assets. The bank’s lending Lloyd an additional $50,000 thirteen days after the setoff is clear evidence it did not, in good faith, deem itself insecure.
A creditor has the power to accelerate debt payments when he deems himself insecure only if he in good faith believes the prospect of payment of the debt is impaired. K.S.A. 84-1-208. “Good faith” is defined at K.S.A. 84-1-201(19) as “honesty in fact in the conduct or transaction concerned.”
While it is true, as the majority points out, that the test of good faith is a subjective one which must be considered from the viewpoint of the creditor, that does not mean a creditor can accelerate a note to maturity at its whim; As stated by the Utah Supreme Court in Clayton v. Crossroads Equipment Co., 655 P.2d 1125, 1128 (Utah 1982), “The obvious purpose of requiring that a secured party act in good faith is to impose the basic obligation of fair dealing, and to protect the purchaser from the mere whim or caprice of the secured party.” If the good faith requirement of K.S.A. 84-1-208 is to have any meaning or purpose, we cannot allow the bank to use its acceleration and setoff authority to defeat a creditor’s rights under the garnishment statute as Kanopolis State bank did here. This was the determination reached by the Indiana Court of Appeals in Universal C.I.T. Credit Corp. v. Shepler, 164 Ind. App. 516, 520-21, 329 N.E.2d 620 (1975). There, the Indiana court held that if the good faith provisions of Indiana Code Annotated § 26-1-1-208 and 26-1-1-201(19) (Burns 1974) (the Indiana counterparts to K.S.A. 84-1-208 and 84-l-201[19]) were to have any real effect, they must be modified to include a more objective standard, i.e., what would a “reasonable man” do under the same set of facts and circumstances. See also Williamson v. Wanlass, 545 P.2d 1145, 1149 (Utah 1976), where the Supreme Court of Utah recognized that acceleration is a harsh remedy which should be allowed only if there is some reasonable justification for doing so, such as a good faith belief that the prospect of payment is impaired as expressly provided in the U.C.C.
I would hold, as have courts of other jurisdictions, that in considering whether a creditor acted in good faith in deeming itself insecure, a secured party must show compelling facts of insecurity because the secured creditor is in a less precarious position than is an unsecured creditor. McKay v. Farmers & *251Stockmens Bank of Clayton, 92 N.M. 181, 183, 585 P.2d 325 (1978); Van Horn v. Van De Wol, Inc., 6 Wash. App. 959, 497 P.2d 252 (1972), 61 A.L.R.3d 241.
Here, the debtor’s note with the bank was secured by a first mortgage on real estate. There is no evidence the collateral was impaired in any way. Nor is there any evidence the debtor was delinquent in payments on the note or that the prospect of payment was impaired. There is no evidence, compelling or otherwise, to support the bank’s contention its setoff was in good faith. To be in good faith, the bank’s action must have been in response to a bona fide belief, based on evidence, that its prospect of payment from Lloyd was impaired.
Finally, we find the reasoning of the Utah Supreme Court in Williamson v. Wanlass, 545 P.2d 1145, instructive. In Williamson, the debtors’ promissory note was secured by a second mortgage on farm property which the debtors had purchased for $111,000. The court found that the holders of the promissory note failed to show a good faith belief that prospect of payment was impaired, justifying acceleration of the note under Utah Code Ann. 70A-1-208 (1980). The court made this finding notwithstanding the fact that the defendants were frequently late in making monthly installment payments on the note. The key factor was the fact that the plaintiffs had a second mortgage on extensive property and there was little doubt the note would be paid, principal and interest.
As in Williamson, here there is no evidence indicating an inability of the debtor to pay off the note, especially in light of the bank’s first mortgage on Lloyd’s Ellsworth County real estate. The debtor here was not delinquent in any payments, in contrast to the debtor in Williamson.
Under the construction given K.S.A. 84-1-208 by the majority opinion, any debtor who .signs a standard note is vulnerable to acceleration of his note and setoff of his bank account upon the unsubstantiated statement of a bank that it deems itself insecure. In Iola State Bank v. Bolan, 235 Kan. 175, Syl. ¶ 8, 679 P.2d 720 (1984), we construed the good faith rule:
“Where a bank knows sums deposited in the account of one of its depositors belong to a third party, it does not act in good faith when it applies such funds of the third party against the depositor’s debts to the bank. Under such circumstances the third party has an action directly against the bank for conversion of the third party’s funds from the debtor’s accounts.”
*252In Iola State Bank, the bank knew of outstanding checks from its delinquent borrower to various farmers for the purchase of grain but nevertheless set off the borrower’s account, dishonoring his outstanding checks. We held the bank’s action was not in good faith. Here, the bank knew of the judgment against its borrower and that a garnishment summons was en route to seize the bank account for application on the judgment. With this information, Kanopolis State bank accelerated Lloyd’s note and set off his bank account before the impending garnishment attached, even though the Lloyd note was not delinquent. This case is analogous to Iola State Bank, but stronger, because here the borrower’s note was not delinquent. Thus, according to our own precedent, the Kanopolis State Bank lacked good faith in its setoff of Lloyd’s account.
I would reverse.
Holmes, J., joins the foregoing dissenting opinion.