Business Law 11th Edition by Kenneth Clarkson,Roger LeRoy Miller,Gaylord Jentz,Frank Cross

Exercise 12

Foundation Property Investments, LLC v. CTP, LLC
Court of Appeals of Kansas, 2007. 37 Kan.App.2d 890, 159 P.3d 1042.
www.kscourts.org/Cases-and-Opinions/opinions a
• Background and Facts In April 2004, CTP, LLC, bought a truck stop in South Hutchinson, Kansas. As part of the deal, CTP borrowed $96,000 from Foundation Property Investments, LLC. The loan was evidenced by a promissory note, which provided that CTP was to make monthly payments of $673.54 between June 1, 2004, and June 1, 2009. The note stated that on default in any payment, "the whole amount then unpaid shall become immediately due and payable at the option of the holder without notice." CTP paid the first four installments on or before the due dates, but beginning in October 2004, CTP paid the next ten installments late. In July 2005, citing the late payments, Foundation demanded full payment of the note by the end of the month. CTP responded that the parties' course of dealing permitted payments to be made beyond their due dates. Foundation filed a suit in a Kansas state court against CTP to collect the note's full amount. CTP asserted that Foundation had waived its right to accelerate the note by its acceptance of late payments. The court determined that Foundation was entitled to payment of the note in full, plus interest and attorneys' fees and costs, for a total of $110,975.58, and issued a summary judgment in Foundation's favor. CTP appealed to a state intermediate appellate court.
a. In the menu at the left, click on "Search by Docket Number." In the result, in the right column, click on "96000 - 96999." On the next page, scroll to "96697" and click on the number to access the opinion. The Kansas courts, Washburn University School of Law Library, and University of Kansas School of Law Library maintain this Web site.
GREEN, J. [Judge]
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The general rule is that where a [note] contains an acceleration clause relating to default of a required payment, the [holder] is entitled because of such default to enforce the acceleration clause at once according to its terms.* * * [H]owever, an acceleration clause may be waived. A waiver is the intentional relinquishment of a known right, and intention may be inferred from conduct. [Emphasis added.]
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* * * Foundation argues that the provisions of the note should be strictly construed against CTP, because it was the drafter of the note. Foundation also points to one of the note's provisions: "Upon default in payment of any interest, or any installment of principal, the whole amount then unpaid shall become immediately due and payable at the option of the holder without notice." Foundation argues that under this provision, CTP expressly waived demand of payment and notice of nonpayment.
Foundation's arguments afford no basis for saying that it did not waive the condition of prompt payment by routinely accepting late payments. There is no dispute that CTP drafted the note or that the language of the note allowed Foundation to accelerate payment at its option, without notice to CTP. The fact that the note affords Foundation the option to accelerate, however, does not mean that Foundation could not waive the acceleration clause, especially when the note does not contain an anti-waiver provision. Consequently, the question that we must determine is whether Foundation waived the option to accelerate based on its pattern of accepting late payments from CTP.
CTP argues that Foundation's acceptance of late payments over 9 months' time (October 2004-June 2005) established a course of dealing by which late payments would be accepted. Course of dealing is defined [in Kansas Statutes Annotated Section 84-1-205(1), Kansas's version of UCC 1-205(1)] as a "sequence of previous conduct between the parties to a particular transaction which is fairly to be regarded as establishing a common basis of understanding for interpreting their expressions and other conduct." [Emphasis added.]
Foundation alleges that course of dealing cannot be found in the present case because this concept * * * only relates to conduct between the parties that occurs before the agreement in question.
Contrary to Foundation's argument, * * * the course of dealing concept is applicable * * *. [A]bsent an anti-waiver provision in the note or actual notice that future late payments will not be accepted, a previous practice of accepting late payments precludes acceleration of the note.
In the present case, there is nothing in the record to indicate that Foundation ever objected to CTP's late payments before the July 2005 letter stating that Foundation was exercising its option to accelerate payment on the note. Foundation's action of accepting late payments from CTP was inconsistent with its claim or right to receive prompt payments. Accordingly, the trial court incorrectly determined that Foundation's conduct did not constitute a waiver of its right of acceleration.
Foundation, however, suggests that CTP suffered no detrimental reliance because Foundation's delay in accelerating the payment actually benefited CTP: the principal balance was less than it would have been had Foundation exercised the acceleration clause upon any of CTP's previous late payments. Nevertheless, CTP had reasonably relied on Foundation accepting late payments without exercising the acceleration clause. Moreover, CTP will clearly suffer prejudice if forced to now pay the note in full. It would be inequitable to permit Foundation to accelerate the entire note without Foundation first giving notice to CTP that Foundation would no longer accept late payments.
• Decision and Remedy The state intermediate appellate court held that Foundation's acceptance of late payments constituted a waiver of its right to exercise the note's acceleration clause. The appellate court reversed the lower court's ruling and remanded the case with instructions to enter a judgment in CTP's favor.
• The E-Commerce Dimension If Foundation had sent CTP an e-mail threatening to accelerate the note each time CTP's payment was late, would this have been sufficient to support the holder's eventual demand for full payment Why or why not
• The Global Dimension Suppose that Foundation was an entity based outside the United States. Could it have successfully claimed, in attempting to enforce the acceleration clause, that it had not given CTP notice because it had not been aware of Kansas law Discuss