265 Kan. 431
(961 P.2d 32)
No. 78,313
ARTHUR J. GEORGE and JANET GEORGE, Appellees/Cross-appellants, v. CAPITAL SOUTH MORTGAGE INVESTMENTS, INC., et al., Appellants/Cross-appellees.
SYLLABUS BY THE COURT
1. A motion to amend a petition to include a claim for punitive damages timely filed prior to the pretrial conference may be considered by the trial court at a later date.
2. When a statute is plain and unambiguous, the appellate courts will not speculate as to the legislative intent behind it and will not read such a statute so as to add something not readily found in the statute. When construing a statute, a court should give words in common usage their natural and ordinary meaning.
3. Under Kansas law, a joint venture is defined as an association of two or more persons or corporations to carry out a single business enterprise for profit; it may be found in the mutual acts and conduct of the parties. Among acts or conduct which is indicative of a joint venture, but no single one of which is controlling in the determination, are: (1) the joint ownership and control of property; (2) the sharing of expenses, profits and losses, and having and exercising some voice in determining the division of the net earnings; (3) a community of control over and active participation in the management and direction of the business enterprise; (4) the intention of the parties, express or implied; and (5) the fixing of salaries by joint agreement.
4. The existence of a joint venture may be inferred from the facts and circumstances presented at the trial which demonstrate that the parties, in fact, undertook a joint enterprise. The requisite intent of parties required to create a joint venture may be express or implied.
5. Error cannot be predicated on the refusal to give an instruction when its substance is adequately covered in other instructions.
6. While we do not endorse or recommend the giving of an instruction on the badges or indicia of fraud, the determination of whether one should be given should be left to the sound discretion of the trial court based upon the facts and circumstances of the particular case. Ordinarily a trial court will not need to give such an instruction, but if the court is of the opinion, based upon the evidence and circumstances of the case, that such an instruction is necessary for the guidance of the jury in arriving at a proper verdict, the trial court should not be precluded from giving an instruction on the badges or indicia of fraud.
7. Usury statutes are penal in nature and are to be strictly construed in favor of the lender.
8. K.S.A. 16-207 does not authorize an offensive usury action; it only authorizes the defensive use of a usury claim. Neither this court nor the legislature has ever held that attorney fees are recoverable for a successful usury claim brought under the common law.
9. In an action requesting punitive damages, the record is examined and it is held the defendants are entitled to a new trial on the issue of punitive damages.
Appeal from Wyandotte district court; LAWRENCE G. ZUKEL, judge. Opinion filed June 19, 1998. Affirmed in part and reversed in part.
Jeffrey M. Friedman, of Friedman & Weddington, Attorneys, L.L.P., of Austin, Texas, argued the cause, and Thomas M. Martin, of Lewis, Rice & Fingersh, L.C., of Kansas City, Missouri, was with him on the briefs for appellant/cross-appellee Capital South Mortgage Investments, Inc.
Spencer J. Brown, of Deacy & Deacy, of Kansas City, Missouri, argued the cause, and Brett C. Coonrod, of the same firm, was with him on the briefs for appellant/cross-appellee Castanuela.
John H. Fields, of Kansas City, argued the cause, and Edwin Fields, of the same firm, was with him on the brief for appellees/cross-appellants.
The opinion of the court was delivered by
ABBOTT, J.: The plaintiffs, Arthur J. and Janet George, sought to obtain financing for the purchase of a house from a quasi relative-friend. However, due to the alleged misrepresentation of those parties who secured the financing, the plaintiffs unintentionally borrowed more money than they intended to borrow and at a higher interest rate. Thus, the plaintiffs brought suit in Wyandotte County District Court against several parties involved in securing the loan, including Creative Capital Investment Bankers (Creative), Capital South Mortgage Investments, Inc. (Capital), and Elio Castanuela. Creative did not appear at trial, and the plaintiffs received a default judgment against it. At trial, the plaintiffs alleged that Capital and Castanuela, the appellants herein, engaged in a joint venture with Creative to defraud the plaintiffs and commit usury against them. The jury agreed with the plaintiffs and entered a verdict against the appellants for fraud and usury. The plaintiffs were awarded actual damages for usury, punitive damages against Capital in the amount of $50,000, punitive damages against Castanuela in the amount of $50,000, an equitable reformation of the note from a $60,000 loan to a $32,000 loan, and attorney fees. The appellants appealed the jury's verdict and the damage award to the Court of Appeals. The plaintiffs cross-appealed, alleging that the actual damages or usury penalties awarded against the appellants were inadequate. The case was transferred to this court pursuant to K.S.A. 20-3018(c).
The plaintiffs purchased a home in Kansas City, Kansas, from Opal Morgan, Arthur George's step-grandmother. The home had an appraised value of approximately $60,000. However, Morgan planned to sell the house to the plaintiffs for $40,000. The only condition was that she needed all of the money up front.
The plaintiffs were not able to obtain conventional financing, so they approached Creative in an effort to obtain a loan. Creative indicated that it would be able to assist the plaintiffs in obtaining financing. At that time, Morgan signed a written, notarized agreement dated August 26, 1993, which stated: "I, Opal N. Morgan, agree to sell my house as it is for $40,000." This agreement was prepared and signed due to the plaintiffs' meeting with a representative from Creative who told the plaintiffs that he would need a document stating that Morgan was selling her house for $40,000. The plaintiffs then executed a note between themselves and Morgan for $40,000, which was secured by Morgan's house. The note did not include an interest rate or other terms because the parties did not know who would loan the money and were unsure of the terms of the note. Instead, the note stated that all $40,000 was due and payable upon the plaintiffs' financing being completed by September 30, 1993.
Later, this note was altered by the plaintiffs, who changed the principal amount owing to Morgan from $40,000 to $60,000, and initialed these changes. The plaintiffs testified that this change was made because Creative told them that a lender would only lend them a certain percentage of the cost of the house. Thus, the plaintiffs understood that to get a $40,000 loan, it had to appear that they would be paying $60,000 for the house. Since the house was valued at $60,000, Creative suggested changing the principal amount of the note to $60,000. The plaintiffs agreed to such change, but testified that they had made it clear that they did not want to actually borrow more than $40,000. According to the plaintiffs, Creative assured them that the change would be a change on paper only. In the end, Creative requested the alteration of the note and the plaintiffs initialed this alteration. In the margin of the amended note is a handwritten message stating, "Attention: Margie; From: Stacy Bennett." Bennett is a representative of Creative, and Margie is employed by Capital.
Subsequently, the plaintiffs added a one-page typed amendment to the original note, which included a $60,000 principal, as well as an interest rate and terms. In the amendment, the plaintiffs agreed to pay Morgan $60,000 and to pay this amount in a monthly installment of $440.26 per month over a 10-year period. At the end of the 10-year period, the remaining balance would become due. The annual interest rate on the unpaid principal balance was 8%. Finally, the plaintiffs executed an entirely new note showing a principal balance of $60,000 and an interest rate of 8%. Under this note, the plaintiffs were to pay $440 per month until both the principal and interest were paid off in full. All of these notes showed that the plaintiffs owed the principal directly to Morgan without the involvement of any third-party financing.
After this note was entered into, Capital sent a fax to Guarantee Title, the title company, asking Guarantee Title to prepare a title insurance policy for Capital, showing that it would issue a loan for $60,000. The policy was issued on October 25, 1993, listing Capital as the proposed insured, and the amount of the insurance as $60,000.
Also, after the plaintiffs entered into the note with Morgan, Morgan signed a promissory note endorsement. The endorsement was payable to Capital, and was to be a permanent rider on the promissory note executed by the plaintiffs for $60,000. This endorsement amounted to an assignment of the final $60,000 note, between Morgan and the plaintiffs, to defendant Capital from Morgan. Prior to making this assignment, Morgan provided Capital with a mortgage estoppel certificate, advising Capital that she (Morgan) had the authority to transfer the mortgage. With this authority, Morgan also assigned the mortgage of her house to Capital, at the same time that she assigned the note from the plaintiffs. Capital, in turn, assigned this note and mortgage to Castanuela.
The plaintiffs had no knowledge that Creative had also obtained Morgan's signature on a document entitled "Standard Option To Purchase Agreement," without explaining to Morgan anything about the document. The document refers to a note in the amount of $60,000, with a remaining unpaid balance of $60,000. Also in the document, Creative offers to purchase the note for the sum of $35,000. However, Morgan never received $35,000 from Bennett. Instead, on or about October 4, 1993, Creative informed the plaintiffs that they needed to give Morgan a down payment check for $5,000. Thus, on October 4, 1993, Mr. George wrote Morgan a check for $5,000 and faxed a copy of the check to Creative.
On November 22, 1993, Capital sent the assignments, together with the final $60,000 note and a letter of closing instructions, to Terry Garner, a closing agent with Guarantee Title. This letter stated that Guarantee Title would receive a wire transfer in the amount of $60,000 from Collins Marketing for the funding of the transaction, that Morgan was to receive $32,000 out of the $60,000 fund from Collins Marketing, and that the remainder of the funds were to be paid to Capital (after deducting Guarantee Title's escrow and recording fee). The letter also indicated that the assignment of the $60,000 note from Capital to Castanuela had already been executed. In this letter, Capital asked that the documents transferring the note and mortgage from Capital to Castanuela not be shown to the plaintiffs. The closing agent, Garner, followed the instructions as they were set out in the letter. At the time the deed and the note were finally executed and filed with the Wyandotte County Records, the assignments were also filed by the closing agent.
Garner does not recall Castanuela's name coming up prior to the receipt of this letter on November 22, and she did not have any contact with him. Prior to the letter, Garner had always been under the impression that Morgan was to receive $40,000. Garner was never given any explanation as to why the remainder of the $60,000 funds were paid to Capital.
Garner, who had 5 years of experience as an escrow closer for Guarantee Title, testified that she involved her boss with this transaction because she was not comfortable with some parts of the transaction and she wanted his opinion. She testified:
"A. I've never known a lender to receive these kind of funds after a closing. I have no idea. This is a completely different deal than I'm used to seeing."
Prior to closing, the plaintiffs had already paid Morgan $5,000 as a down payment, as instructed by Capital. Therefore, at the closing, the plaintiffs expected Morgan to get $35,000, for a total of $40,000. However, Creative informed the plaintiffs that Morgan would only receive $32,000 at the closing. Consequently, the plaintiffs gave Morgan another note for an additional $3,000. This note was signed at the December 14, 1993 closing.
Janet George testified concerning the December 14, 1993 closing as follows:
"Q. [By Mr. Fields] Did you realize when you were signing the papers there on the 14th of December that you were obligating yourself to pay back $60,000 over a 30-year period?
"A. No, I did not.
"Q. What did you think you were obligating yourself to pay back?
"A. Forty Thousand.
"Q. And why did you have that belief?
"A. Because Stacy with Creative Capital Investment informed us that that's all we had to pay."
The plaintiffs thought the $60,000 they had heard about was the appraised value of the home. They never thought they were agreeing to pay back $60,000. According to their testimony, the plaintiffs told Creative that it was okay to use the figure $60,000 on the loan papers, as long as they did not have to pay any extra money over $40,000. The plaintiffs did not receive any papers at the December 14, 1993 closing. They were not informed that Capital received $27,832 (most of which went to Castanuela) out of the $60,000 funds from Collins Marketing, or that the $60,000 note had been assigned to Castanuela.
At the time closing occurred, the maximum allowable interest rate was 8.79%, as established through the trial court's judicial notice of the Kansas usury laws. At trial, an employee of Brotherhood Bank & Trust, Pamela Sweeney, calculated that assuming a loan of $32,000, at an interest rate of 8.79%, payable in monthly installments over 30 years, the monthly payment requirement would be $252.33. The total interest over the life of such a loan would be $56,564.93. She also calculated that a loan of $60,000, at an 8% interest rate, payable in installments over 30 years, would require a monthly payment of $440.26, and total interest of $94,531.26.
Arthur George testified that at no time prior to closing did he have any dealings or speak with anyone at Capital; all of his dealings were with Creative. However, just prior to the December closing date, Janet George did have a few brief telephone conversations with someone at Capital inquiring about the closing date. Janet George knew about Capital because she had asked Creative what company was financing them, and Creative had told her that Capital was financing them. Creative also told Janet George that Capital was a lender out of Texas.
A former employee of Creative, Patricia Bolin, testified that she began working at Creative in October 1993. Bolin was aware of telephone contacts between Stacy Bennett, a representative of Creative, and Capital. According to Bolin, Bennett both made, as well as received, phone calls from Capital. Bolin testified that these calls specifically related to the plaintiffs because Creative did not yet have a lender for them.
Eventually, the plaintiffs discovered that they had taken out a $60,000 loan and owed $60,000, rather than $40,000, as they had believed. On July 7, 1994, the plaintiffs filed a petition against Creative, Capital, and Castanuela. The plaintiffs alleged that all three had engaged in a joint enterprise to commit fraud and usury on the plaintiffs.
Creative never filed an answer, and default judgment was taken by the plaintiffs against Creative. The jury rendered a verdict against Capital and Castanuela, finding that Creative, Capital, and Castanuela had engaged in a joint venture and together had committed fraud and usury on the plaintiffs.
After the jury returned this verdict in favor of the plaintiffs, the trial court held a separate post-trial hearing on damages. The trial court required Capital to credit the plaintiffs with the excess interest that the plaintiffs had paid prior to the action in calculating their future payment of the loan. The trial court also awarded the plaintiffs $14,140.51 in attorney fees, which was almost the entirety of the plaintiffs' attorney fees. Finally, the trial court awarded the plaintiffs $250,000 in punitive damages against Creative, $50,000 in punitive damages against Capital, and $50,000 in punitive damages against Castanuela.
Capital filed a motion for judgment notwithstanding the verdict or in the alternative a motion for new trial, which the trial court denied. Capital and Castanuela timely appealed from the trial court's judgment.
I. PUNITIVE DAMAGES
The plaintiffs filed a verified petition on July 7, 1994. Concurrent with the filing of the suit, the plaintiffs filed a motion to allow an amended pleading to include punitive damages. The verified petition and the motion were served on the defendants. However, no affidavits alleging any substantial facts to support punitive damages were attached to the motion, nor were any such supportive facts mentioned or included in the motion.
A status conference was conducted. At this conference, it was agreed to and ordered by the court that all discovery would close May 1, 1995, "at which time the parties will submit an Agreed Pretrial Order." At this status conference, the plaintiffs did not request a hearing on their motion to file an amended petition and request punitive damages. Counsel for Capital prepared the pretrial order. None of the parties had their pretrial questionnaires on file by May 1, 1995. The plaintiffs' pretrial questionnaire was prepared May 16, 1995, and filed May 18, 1995. Paragraph 4 of the plaintiffs' pretrial questionnaire mentioned a request to amend their petition and ask for punitive damages against Creative, Capital, and Castanuela. In paragraph 13, the plaintiffs mentioned that a motion to amend the petition and include punitive damages was pending. Counsel for Capital put the pending motion in the pretrial order, and all counsel approved the order. At the hearing on the parties' pretrial motions immediately before trial, the trial court mentioned the provision in the pretrial order concerning the plaintiffs' request for punitive damages and the motion which had been filed but never heard. The court stated:
"Technically what we've had here is the parties agreed to the pretrial order. That language is contained in the pretrial order, so, the plaintiff is protected in that regard from the timeliness argument as to whether or not punitive damages are allowed. That's something way ahead of all of us at this particular point. I'd like to get going . . . I don't think [I'm] in error when I indicate that this is a little premature at this point."
Capital had filed a written motion in limine, asking that punitive damages not be mentioned. Castanuela made a similar oral motion at the hearing for pretrial motions. In response to these motions, the trial court stated: "Nobody's going to mention anything about or use that word punitive in any way at this juncture." The plaintiffs' counsel then informed the court and counsel that it had not been its intention to do so at that time. The defendants then objected to the plaintiffs' motion to amend the petition and request punitive damages, claiming that no hearing on the motion had been held, no affidavits supporting the motion had been filed by the plaintiffs, no opportunity for opposing affidavits had been provided to the defendants, and no notice had been provided that a hearing on the motion was going to take place on the morning of trial. The trial court rejected the defendants' objections and granted the plaintiffs' motion to amend their petition and request punitive damages. An amended petition was filed on May 25, 1995, the last day of trial. In so holding, the trial court stated:
"The argument about the requirement of the affidavits is--I agree with Mr. Fields that the original petition was verified, alleges serious intentional behavior on the part of the defendants which would apprise any reasonable person that this is not a negligence action per se, and that there would be a request for additional punitive damages."
Upon conclusion of the trial, the court issued its instructions to the jury. The defendants objected to an instruction being given on the issue of punitive damages, claiming that the plaintiffs had not properly followed the statutory requirements regarding the amendment of their petition to request punitive damages. The defendants' objections were overruled, and the trial court gave an instruction on punitive damages to the jury.
The jury entered a verdict in favor of the plaintiffs, finding all three defendants had engaged in fraud and usury through a joint venture. The plaintiffs filed a memorandum prior to trial in support of their application for punitive damages on May 6, 1996. Capital responded, objecting again to the award of punitive damages on the grounds that the plaintiffs had not satisfied the statutory requirements for amending a petition and requesting punitive damages. Castanuela also objected to the award of punitive damages on the same grounds. The trial court issued a memorandum decision, rejecting the defendants objections and awarding punitive damages to the plaintiffs in the amount of $250,000 against Creative, $50,000 against Capital, and $50,000 against Castanuela. Capital and Castanuela challenge this award of punitive damages on appeal. The defendants claim that the plaintiffs did not properly comply with the statutory requirements in amending their petition to request punitive damages, specifically K.S.A. 60-3703. This statute provides:
"No tort claim or reference to a tort claim for punitive damages shall be included in a petition or other pleading unless the court enters an order allowing an amended pleading that includes a claim for punitive damages to be filed. The court may allow the filing of an amended pleading claiming punitive damages on a motion by the party seeking the amended pleading and on the basis of the supporting and opposing affidavits presented that the plaintiff has established that there is a probability that the plaintiff will prevail on the claim pursuant to K.S.A. 60-209, and amendments thereto. The court shall not grant a motion allowing the filing of an amended pleading that includes a claim for punitive damages if the motion for such an order is not filed on or before the date of the final pretrial conference held in the matter."
Here, the defendants were served with the motion to amend at the same time they were served with the petition. It is true that the motion was not accompanied by an affidavit, but the plaintiffs claim that their verified petition, asserting facts which supported the claim for punitive damages, served as a legal equivalent of an affidavit. This verified petition was also served on the defendants. Both the motion to amend and the verified petition were served on the defendants well before the pretrial order was filed. The pretrial order included the plaintiffs' request for punitive damages. The defendants knew of their request for punitive damages, knew the motion had yet to be ruled on, and knew it must be heard at the hearing prior to trial. The defendants had the opportunity to file affidavits in opposition to the motion if they chose to do so.
In support of their argument that the verified petition, which included facts supporting a claim for punitive damages, was the legal equivalent of an affidavit supporting a claim for punitive damages, the plaintiffs cite to Conaway v. Smith, 853 F.2d 789 (10th Cir. 1988). In Conaway, the plaintiff brought a First Amendment action, and the trial court granted summary judgment to the defendants. The plaintiff appealed. In challenging the grant of a motion for summary judgment in federal court, the party opposing the motion must allege specific facts which indicate genuine issues requiring a trial for resolution. In attempting to allege such facts in his appeal, the plaintiff did not file an affidavit. Instead, he simply relied on the specific facts he had asserted in his verified complaint. The court found that this was proper. In so holding the court stated:
"Although a nonmoving party may not rely merely on the unsupported or conclusory allegations contained in his pleadings, a verified complaint may be treated as an affidavit for purposes of summary judgment if it satisfies the standards for affidavits set out in Rule 56(e). [Citations omitted.] Rule 56(e) requires that the affidavit be based on personal knowledge, contain facts which would be admissible at trial, and show that the affiant is competent to testify on the matters stated therein. Conaway's verified complaint as to the factual allegations in support of his free speech claim meets these requirements.
"Conaway did not rely solely on the 'mere' pleadings to oppose the motion for summary judgment regarding his free speech claim. In addition to the factual allegations stated in his verified complaint, Conaway submitted certain documentary evidence to substantiate his claim. Conaway also identified other documents, photos and evidence to corroborate his rendition of the events which evidence was inexplicably missing from the files of the Building Inspection Division and was therefore unavailable to him. Under these circumstances, we will treat the verified complaint as an affidavit for the purpose of the motion for summary judgment. We note that there may be cases where the sole reliance on a verified complaint would be insufficient to meet a nonmoving party's burden under Celotex Corp v. Catrett, 477 U.S. 317, 106 S. Ct. 2548, 91 L. Ed. 2d 265 (1986) and Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 106 S. Ct. 2505, 91 L. Ed. 2d 202 (1986), especially when the allegations contained in the pleading are merely conclusory. In this case, however, a full affidavit would serve no better purpose than the sworn, detailed, factual allegations contained in the verified complaint that were based on Conaway's personal knowledge. We see no reason, under these particular circumstances, to demand that Conaway must re-label his verified complaint as an affidavit and submit essentially the same facts to the court." 853 F.2d at 792-93.
See also Fusaro v. First Family Mtg. Corp., 257 Kan. 794, 803, 897 P.2d 123 (1995). ("A significant similarity between K.S.A. 60-3703 and the trial court's approach to summary judgment or directed verdict is that under K.S.A. 60-3703 the trial court must view the evidence as disclosed from the affidavits in a light most favorable to the party moving for amendment.")
The case of Burrowwood Assocs., Inc. v. Safelite Glass Corp., 18 Kan. App. 2d 396, 853 P.2d 1175 (1993), more directly addresses when a motion to amend must be ruled upon. In Burrowwood, the plaintiff filed a motion to amend its petition and request punitive damages prior to the pretrial conference. The motion was not ruled upon prior to the pretrial conference, but the motion was noted in the pretrial order. Thereafter, a district judge denied the motion, and the case was assigned to a different district judge for trial. After the evidence was presented at trial, the plaintiff renewed its motion to amend and the trial judge granted the motion, allowing the issue of punitive damages to be submitted to the jury. The jury awarded punitive damages to the plaintiff, and the defendant appealed. The Court of Appeals affirmed the trial court's grant of the plaintiff's renewed motion to amend the petition and request punitive damages. 18 Kan. App. 2d at 398. In so ruling, the Court of Appeals stated:
"K.S.A. 1992 Supp. 60-3703 and the ruling in Glynos v. Jagoda, 249 Kan. 473, 487, 819 P.2d 1202 (1991), require that the motion to amend to plead punitive damages be filed on or prior to the date of the pretrial conference. If this is not done, a plaintiff will not be allowed to make a claim for such damages. Neither the statute nor Glynos require, however, that a ruling on the motion must be made at the pretrial conference. Neither the statute nor Glynos state that, once an order denying the motion to amend has been entered, it cannot thereafter be modified to allow such a claim.
. . . .
"It is axiomatic that a trial judge may reverse himself or herself during the course of an action if he or she believes an incorrect ruling has been made. Had Judge Buchanan, who heard the motion in the first place, presided over the trial, he could have, without question, reversed himself once he was satisfied of the probability that Burrowwood would prevail. Safelite would have us deny to Judge Anderson, the assigned trial judge, the same authority Judge Buchanan would have had. This we will not do.
"We hold that a motion to amend to allow a claim for punitive damages, when timely filed prior to the pretrial conference, may be considered and reconsidered as may be appropriate by the trial court at any and all times the issue is properly before the court, as was the case here." 18 Kan. App. 2d at 397-98.
Finally, the plaintiffs assert that the defendants did have notice of the hearing on the motion and an opportunity to file affidavits opposing the motion. As the plaintiffs point out, the motion and the verified petition (which equalled an affidavit) were both filed and served on the defendants well before the motion was heard. The fact that the motion was pending was noted in the pretrial order, which the defendants signed and were bound by. See Burrowwood, 18 Kan. App. 2d at 397-98 (indicating that a trial court may consider the defendant's evidence presented at trial in determining if motion to amend a petition to request punitive damages should be granted); Fusaro, 257 Kan. at 802 (indicating that a trial court may consider a defendant's evidence presented at trial, in addition to the defendant's affidavits opposing a motion to amend, in determining if motion should be granted). The defendants chose not to present any witnesses at trial. Thus, at the conclusion of the trial, when the court reconsidered the punitive damage issue, it reaffirmed its prior decision by providing the jury with a punitive damage instruction.
In Fusaro, 257 Kan. at 804, this court stated that "under K.S.A. 60-3703, the decision whether to permit plaintiff to amend is discretionary in that the statute provides that the court may allow the filing of an amended petition claiming punitive damages. Thus, our standard of review is one of abuse of discretion." However, the issue in that case was whether the plaintiff's affidavit, attached to its motion to amend, actuall