Opinion
No. C5-01-1241.
Filed May 7, 2002.
Appeal from the District Court, Hennepin County, File No. 017882.
James M. Christenson, Daniel R. Tyson, James M. Jorissen, (for respondent Miller Schroeder)
Michael C. Mahoney, Mark W. Peery, (for appellants)
Paul R. Haik, (for respondents interveners)
This opinion will be unpublished and may not be cited except as provided by Minn. Stat. § 480A.08, subd. 3 (2000).
UNPUBLISHED OPINION
The parties involved in this dispute have been before this court on previous appeals involving the same property. In earlier opinions, we affirmed the district court's order imposing a constructive trust on the property, O'Leary v. Carefree Living of America (Minnetonka), Inc., No. C8-97-188, 1997 WL 435875, at *4 (Minn.App. Aug. 5, 1997), review denied (Minn. Oct. 1, 1997), and subsequently awarded the property to respondents Robert O'Leary, as Trustee of the Lakeland Printing Co., Inc., et al. (O'Leary), O'Leary v. Carefree Living of America (Minnetonka), Inc., No. C5-00-2072, 2001 WL 1083757, at *8, *15 (Minn.App. Sept. 18, 2001), review denied (Minn. Dec. 11, 2001). In this appeal, appellants Carefree Living of America (Minnetonka), Inc., et al. (Carefree Living), challenge the district court's appointment of the receiver for the property alleging that (1) Carefree Living was not in default on the mortgage issued by respondent Miller Schroeder Investments Corporation (MS) and that a receiver for the property should not have been appointed, (2) satisfaction of the mortgage debt by foreclosure made appointment of a receiver unnecessary, and (3) the district court's order includes relief not requested by MS and gives MS a windfall. O'Leary asserts that Carefree Living lacks standing to challenge the appointment. Because Carefree Living may be liable for deficits owed the receiver, Carefree Living has standing to bring this case. Because Carefree Living defaulted on the mortgage, Minnesota statutes and caselaw allow the appointment of a receiver pursuant to the district court's general equity powers, and excess rental payments will serve as credits against the redemption price, thereby avoiding a windfall to MS, we affirm.
FACTS
On November 1, 2000, Carefree Living, then the titled owner of the property, defaulted on its mortgage by failing to make payments of principal and interest, escrow payments for real-estate taxes, and insurance premiums. MS began foreclosure proceedings. After the first publication of the notice of foreclosure, MS moved for the appointment of a receiver to manage and operate the property. On June 13, 2001, the district court appointed Augustana Care Corporation as receiver, but it declined the appointment. MS purchased the property at the July 12, 2001 foreclosure sale. On July 13, 2001, MS moved for a replacement receiver. The district court granted the motion and appointed Jeffrey Sauer. The district court did not make a finding of waste in either order, but the following language in the order made Carefree Living potentially liable for any deficits owed the receiver:
To the extent that the proceeds collected by the Receiver from its management of the Premises are insufficient to pay the costs and expenses * * * the Receiver shall notify [appellant, respondent, and respondent-interveners] * * * in writing of the anticipated deficiency and request that the funds necessary to pay such expenses be advanced by the said Parties at their option.
This appeal follows.
DECISION
1. Carefree Living Has Standing to Challenge the Appointment of a Receiver.
In December 1999, O'Leary brought a title action against MS, asserting that MS had no interest in the property. MS moved for summary judgment, but the district court denied the motion, reasoning that whether MS had notice of a fraudulent transfer of the property was a disputed material fact. Trial is scheduled for August 2002. O'Leary asserts that Carefree Living lacks standing to bring this appeal, because Carefree Living has been adjudicated as having no interest in the subject property. O'Leary v. Carefree Living of America (Minnetonka), Inc., No. C5-00-2072, 2001 WL 1083757, at *6 (Minn.App. Sept. 18, 2001), review denied (Minn. Dec. 11, 2001). O'Leary also asserts that the present appeal is a collateral attack on this court's September 18, 2001 decision, in which we affirmed the district court's award of the property to O'Leary.
We determined in a January 7, 2002 order that the appeal is not moot, noting that the outcome of this case could affect Carefree Living's liability to MS. Although O'Leary's interest in the property is superior to Carefree Living's, Carefree Living retains an interest in the receivership. The present appeal is not a collateral attack on the September 18, 2001 decision, nor is it barred by the doctrine of issue preclusion, because the September 18, 2001 decision held that, as between Carefree Living and O'Leary, O'Leary owns the property. Id. At that time, we explicitly declined to rule on the validity of MS's mortgage and did not address the rights and duties of MS and Carefree Living as mortgagee and mortgagor. Id. The mootness doctrine does not apply if judicial resolution of the question could lead to collateral consequences. In re McCaskill, 603 N.W.2d 326, 329 (Minn. 1999) ("Where an appellant produces evidence that collateral consequences actually resulted from a judgment, the appeal is not moot.") (citation omitted). Because Carefree Living may be liable for any deficits owed the receiver, it has standing to bring this appeal.
2. Carefree Living Defaulted on the Mortgage.
MS alleges that Carefree Living defaulted because it failed to make the required periodic escrow payments for taxes and insurance. Specifically, Carefree Living has failed since November 1, 2000, to pay principal, interest, and late fees and to escrow payments for real-estate taxes and insurance premiums.
The mortgage states the following regarding escrow payments:
2.2 ESCROWS. Mortgagor(s) shall deposit with the Mortgagee * * * on the first day of each and every month hereafter as a deposit to pay the costs of taxes, assessments and insurance premiums next due * * * .
As of May 15, 2001, the amount of the default was $314,332.32.
Carefree Living claims that it is not in default because a payment of $1.5 million in October 1998 satisfied the debt. But the October 1998 payment was consideration for the release of the three other properties that were originally part of this mortgage. The payment did not satisfy the debt for the property currently at issue. Further, Carefree Living's recognition that the $1.5 million was consideration for a release is evident in a sworn statement by Kathleen Zeller, an officer of Carefree Living:
Attached hereto as Exhibit B is a true and correct copy of [the] letter sent by [MS] in connection with the First Union financing which evidences [MS's] requirement that it receive over $1,500,000 against the Note as a condition of releasing the obligations of the [Other] Entities.
Carefree Living did not advise MS that the $1.5 million was to pay down the mortgage debt until 2003, and Carefree Living continued to make the monthly payments on the principal and interest along with monthly escrow payments for real-estate taxes and insurance. Carefree Living's argument that the $1.5 million was a lump-sum mortgage payment is inconsistent with its subsequent conduct and is without merit.
Carefree Living next argues that the $1.5 million was an overpayment on the mortgage debt because the mortgage prohibited partial payment. But MS implicitly waived its right to refuse partial payments in the letter agreement in which Carefree Living stated that the $1.5 million was consideration for the release. Fischer v. Pinske, 243 N.W.2d 733, 735 (Minn. 1976) (finding that the parties' conduct waived provisions of their agreement).
Finally, Carefree Living argues that it paid the taxes directly, rather than through escrow as the agreement required. According to Carefree Living, it would be formalistic for the court to require escrow payments when direct payments satisfied the tax obligations. Similarly, Carefree Living claims that it purchased insurance for the property instead of escrowing insurance payments. But Carefree Living provides no authority for its argument that direct payments in lieu of escrow payments are acceptable when the agreement calls for escrow payments. Therefore, Carefree Living is in default on the note and mortgage.
3. The District Court Did Not Abuse its Discretion in Appointing a Receiver.
A. The district court properly appointed a receiver before the foreclosure sale.
Minnesota statutes mandate the appointment of a receiver upon a failure to escrow payments for taxes and insurance:
The court shall appoint a receiver upon a showing that the mortgagor has breached a covenant contained in the mortgage relating to any of the following:
* * * *
(2) payment when due of prior or current real estate taxes or special assessments with respect to the mortgaged premises, or the periodic escrow for the payment of the taxes or special assessments;
(3) payment when due of premiums for insurance of the type required by the mortgage, or the periodic escrow for the payment of the premiums.
Minn. Stat. § 576.01, subd. 2 (2000) (emphasis added). As Carefree Living failed to escrow payments for real-estate taxes and insurance premiums, the statute requires the appointment of a receiver.
A provision of the Assignment of Rents and Leases, signed by Carefree Living and MS on July 20, 1995, provides an additional basis for appointing a receiver:
6.1 REMEDIES. Upon an Event of Default [MS], without regard to waste, adequacy of the security or solvency of [Carefree Living], may * * * .
* * * *
(b) Apply for appointment of a receiver, for which receivership [Carefree Living] hereby consents to * * * .
Minnesota statutes provide for the appointment of a receiver in case of default when the assignment specifically provides for appointment of a receiver:
[I]f, by the terms of an assignment, a receiver is to be appointed upon the occurrence of some specified event, and a showing is made that the event has occurred, the court shall, without regard to waste, adequacy of the security, or solvency of the mortgagor, appoint a receiver * * * .
Minn. Stat. § 559.17, subd. 2(3)(ii)(a) (2000). Therefore, it was not an abuse of discretion for the district court to appoint Augustana Care Corporation as a receiver.
B. The district court properly appointed a replacement receiver even though the intervening foreclosure sale satisfied the mortgage debt.
Carefree Living argues that the district court abused its discretion in appointing a replacement receiver after the foreclosure sale and when Augustana Care Corporation declined the appointment. Carefree Living asserts that because MS purchased the property for over $100,000 more than the mortgage debt, the sale satisfied the debt and eliminated the need for a receiver.
This argument fails for a number of reasons. First, as explained above, Carefree Living's failure to escrow payments places this case within Minn. Stat. § 576.01, subd. 2(2), thereby making the appointment of a receiver mandatory.
Second, no provision of Minn. Stat. § 576.01 (2000) requires that a deficiency is a prerequisite to the appointment of a receiver. We decline to read this requirement into the statute. See Klein Bancorporation, Inc. v. Comm'r of Revenue, 581 N.W.2d 863, 867 (Minn.App. 1998) (noting that if the legislature had intended a certain result, it would have included relevant statutory language), review denied (Minn. Sept. 22, 1998).
Third, other provisions of the statute show that a deficiency is not necessary for the appointment of a receiver. The statute allows for appointment of receivers before foreclosure sales take place:
After the first publication of notice of sale * * * or with the commencement of an action to foreclose a mortgage * * * the foreclosing mortgagee * * * may at any time bring an action * * * for the appointment of a receiver.
Minn. Stat. § 576.01, subd. 2 (emphasis added). Deficiencies, by definition, cannot exist absent a foreclosure sale. Because the statute allows appointment of a receiver without a foreclosure sale, it also allows appointment of a receiver without a deficiency.
Fourth, Minn. Stat. § 576.01 is not the sole basis for appointing a receiver. "A trial court, under its general equity powers, may appoint receivers `in other cases in accordance with existing practice.'" Minn. Hotel Co. v. ROSA Dev. Co., 495 N.W.2d 888, 892 (Minn.App. 1993) (quotation omitted); see also Minn. Stat. § 576.01, subd. 1(4) (a receiver may be appointed "[i]n such other cases as are now provided by law, or are in accordance with the existing practice.").
In Minn. Hotel, appellant, the mortgagor, consented in an assignment to the appointment of a receiver upon default. 495 N.W.2d at 892. When appellant defaulted, the district court appointed a receiver without a finding that the property or its rents and profits were subject to loss or material impairment. Id. at 891. Notably, Minn. Stat. § 576.01, subd. 1(1), provides for the permissive appointment of a receiver when "the property, or its rents and profits, are in danger of loss or material impairment." We affirmed the district court's appointment of a receiver despite the absence of a finding of a danger to the property, basing our decision on the district court's general equity power. Minn. Hotel, 495 N.W.2d at 892. Here, Carefree Living consented to the appointment of a receiver in the assignment. Further, given the complexity of the factual background in this case and the existence of pending litigation concerning the property, the appointment of a receiver to oversee the operation of the facility was within the district court's equitable powers.
Carefree Living contends that Prudential Ins. Co. of Am. v. Eden Square Shopping Ctr. P'ship, 524 N.W.2d 513 (Minn.App. 1994), holds that a receiver cannot be appointed if a deficiency remains after the foreclosure sale. But the issue in Prudential was whether the disbursement of excess rental income should be credited against the amount of the deficiency or the redemption price. Id. at 514. There was no dispute concerning the propriety of the appointment of a receiver.
Carefree Living also relies on Olmsted Cty. Bank Trust Co. v. Pesch, 218 Minn. 424, 427, 16 N.W.2d 470, 471 (1944), and State Bank of Young Am. v. Fabel, 530 N.W.2d 858, 861 (Minn.App. 1995), review denied (Minn. June 29, 1995), in support of its position. But those cases merely state that a foreclosure sale for the amount of the debt satisfies the debt. This rule of law is irrelevant here because Minnesota law allows for appointment of receivers even when foreclosure sales extinguish the mortgage debt. See Minn. Stat. § 576.01 (no portion of statute requires deficiency; receivers may be appointed in absence of a foreclosure sale).
Finally, Carefree Living cites Minn. Stat. § 559.17, subd. 3(a)(1) (2000), in support of its argument that the foreclosure sale satisfied the debt, thereby removing the need for a receiver. The statute states:
An assignment of rents and profits * * * shall expire:
(1) with respect to the rents and profits from all of the mortgaged property, upon recording in the office of the county recorder or filing in the office of the registrar of titles of the county where the mortgaged property is located, of a satisfaction of the mortgage * * * .
Id. While the foreclosure sale was for an amount greater than the mortgage debt, there is no indication from the record that a satisfaction of the mortgage was filed with the county recorder.
4. The District Court Correctly Ruled That MS Should Receive Excess Rental Income Despite the Satisfaction of the Deficiency.
The district court ordered that Carefree Living "shall * * * turn over to the Receiver all accounts and other moneys derived from such Rents * * * ." Carefree Living asserts that the Assignment of Rents and Leases can only be enforced to collect rents and profits to remedy a deficiency or to avoid waste and that the district court may only enforce the assignment for the purposes of ensuring payment of taxes and insurance.
We conclude that the scope of the receiver's duties is in accord with Minnesota statutes and the language of the assignment. Minn. Stat. § 559.17, subd. 2(3)(ii)(a), states that the court shall * * * appoint a receiver who shall, with respect to the excess cash remaining after application as provided in section 576.01, subdivision 2, apply it as prescribed by the assignment.
The assignment states that income, rents, and profits should cover expenses, taxes, and insurance, with surpluses going to cover the indebtedness to respondent. The assignment further provides that, if a deficiency remains after the foreclosure sale, the surplus shall go to the assignee. Although there was not a deficiency after the foreclosure sale, the assignment still provides for surpluses to go to MS if Carefree Living does not redeem the property:
[I]f the Assignee is the purchaser at the foreclosure sale, the Rental Income shall be paid to the Assignee to be applied to the extent of any deficiency remaining after the sale, the balance to be retained by the Assignee, and if the Premises be redeemed by the Assignor(s) or any other party entitled to redeem, to be applied as a credit against the redemption price, provided, if the Premises not be redeemed, any remaining excess Rental Income to belong to the Assignee, whether or not a deficiency exists * * * .
Because the property has not been redeemed, under the language of the assignment, MS is entitled to any surplus. If Carefree Living redeems the property, the excess cash will be credited toward the redemption price, thereby avoiding a windfall to MS.
Carefree Living cites various cases for the principle that extinguishment of the mortgage debt renders the assignment of rents ineffective. Carefree Living relies on Cross Cos. v. Citizens Mort. Inv. Trust, 305 Minn. 111, 113, 232 N.W.2d 114, 116 (1975), for the proposition that a mortgagee's purchase at a foreclosure sale for the amount of the debt denies the mortgagee the right to possess the property during the redemption period pursuant to an assignment agreement. Cross Cos. was decided in 1975, when Minn. Stat. § 559.17 was silent regarding whether a mortgagee could collect rents subsequent to a foreclosure sale that fully paid the mortgage debt. The legislature amended Minn. Stat. § 559.17 in 1977. The current statute states that enforcement of an assignment of rents * * * shall not be deemed prohibited * * * because a foreclosure sale under the mortgage has extinguished all or part of the mortgage debt.
Minn. Stat. § 559.17, subd. 1 (2000). The current statute explicitly permits enforcement of an assignment-of-rents clause even though a foreclosure sale fully satisfied the mortgage debt.
Carefree Living relies on G.G.C. v. First Nat'l Bank of St. Paul, 287 N.W.2d 378, 382 (Minn. 1979), for the same proposition. This reliance is misplaced for a number of reasons. G.G.C. actually enforced an assignment-of-rents clause post-foreclosure. Id. at 380-82. The court enforced the clause because a deficiency remained after the foreclosure sale and because the clause did not terminate at full payment of the mortgage debt. Id. at 382. Even though a deficiency does not exist in this case, the governing statute still provides for appointment of a receiver. Furthermore, the G.G.C. court did not apply the statute at issue, Minn. Stat. § 559.17, subd. 1. As the court wrote, [i]n 1977, the Minnesota Legislature again amended § 559.17, specifically authorizing assignment-of-rents clause which may apply after the foreclosure sale. The new statute * * * has no application here * * * . Provision is also made to ease the appointment of receivers.
G.G.C., 287 N.W.2d at 382 n. 3. G.G.C., therefore, provides no support for Carefree Living's position.
In re Brewery Ltd. P'ship v. Consol. Title Abstract Co., 113 B.R. 992 (Bankr.D.Minn. 1990), is also inapposite. The language Carefree Living cites from Brewery is as follows:
At first glance, the highlighted language in both the City's assignment and the statute purports to give the City a claim to rents even after its entire debt has been satisfied by foreclosure of its mortgage. I doubt this is the outcome the Legislature intended. * * * [T]he assignee under a valid assignment of rents may continue to collect rents after a foreclosure which fully satisfies its underlying debt only to the extent necessary to pay the expenses associated with maintaining the property, such as taxes and insurance, during the redemption period. Any other interpretation would entitle the assignee to a windfall neither contemplated nor intended by the Legislature.
Id. at 1001. The court did not hold that foreclosure sales that satisfy mortgage debts render assignment-of-rents clauses inoperative. Rather, the court held that an assignment of rents will continue in effect after foreclosure, even if the foreclosure has fully extinguished the underlying mortgage debt, but only to the extent necessary to pay the ongoing expenses associated with maintaining the property, such as taxes, insurance, and repair costs, during the redemption period.
Id. at 1002. Assignment-of-rents clauses continue in effect after foreclosure sales that extinguish all of the debt.
Brewery is not binding precedent on this court, however, and we decline to ignore relevant language in the statute and the assignment. Minn. Stat. § 559.17, subd. 2, requires that the language of the assignment govern the duties of the receiver. "Every law shall be construed, if possible, to give effect to all its provisions." Minn. Stat. § 645.16 (2000). Accordingly, the language of the assignment controls. The assignment states that, absent a redemption, excess rental income will go to the receiver even if a deficiency does not exist. Therefore, the district court was within its discretion to order that MS receive any surplus rental income.