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O'Leary v. Miller Schroeder Investments

Minnesota Court of Appeals
Feb 10, 2004
No. A03-1003 (Minn. Ct. App. Feb. 10, 2004)


No. A03-1003.

Filed February 10, 2004.

Appeal from the District Court, Hennepin County, File No. CT99-018230.

Paul R. Haik, Krebsbach Haik, Ltd., (for appellants)

Gary A. Van Cleve, Christopher J. Deike, Larkin, Hoffman, Daly Lindgren, Ltd., (for respondent)

Considered and decided by Klaphake, Presiding Judge, Randall, Judge, and Harten, Judge.

This opinion will be unpublished and may not be cited except as provided by Minn. Stat. § 480A.08, subd. 3 (2002).


A summary judgment determined that respondent's mortgage on appellants' property is valid. Appellants challenge the summary judgment, arguing that (1) respondent lacked standing, (2) the district court erred in its application of the law, (3) genuine issues of material fact preclude summary judgment, and (4) the district court abused its discretion in denying a motion to compel discovery and to suppress testimony or grant a continuance. Because we conclude that respondent had standing, that the law was correctly applied, that there are no genuine issues of material fact, and that there was no abuse of discretion, we affirm.


During the 1980's, Will Selbak formed a Limited Partnership (LP) for the purpose of purchasing land and constructing an assisted-living senior-citizen residence in the City of Minnetonka (the property). The general partner of LP was Leisure Living of America (Minnetonka), subsequently known as Carefree Living of America (Minnetonka) (CLA). Selbak was the sole officer, director, and shareholder of CLA.

Appellants are investors who, as a result of their investments in LP, became its limited partners. Appellant Robert O'Leary is trustee of seven of the ten appellant entities. When appellants invested, they received copies of the Confidential Private Placement Memorandum (PPM), which, among other things, stated explicitly that LP "will require a mortgage loan of approximately $2,700,000 . . . [that] will be secured by the [property]". In 1988, in a supplement to the PPM, appellants were told that LP had applied for financing but that "[t]here is no assurance that [LP] will be able to obtain the needed permanent mortgage financing on these terms, and the General Partner [Selbak] may enter into a loan agreement on terms less favorable to [LP]." The PPM also provided that, "in the event satisfactory financing cannot be arranged, all funds received from [appellants] will be returned with interest."

In 1991, Selbak executed a quitclaim deed transferring the property from LP to himself; he did not record the quitclaim deed. In 1995, he quitclaimed his own interest in the property to CLA. Also in 1995, Selbak contacted O'Leary with a plan to get the residence constructed by leveraging other properties that Selbak owned. O'Leary agreed to the plan. Selbak obtained a mortgage loan of over $11 million from Miller Schroeder, n/k/a SRC Investment Corp. (SRC), predecessor in interest to respondent MMS Investment Corp. (MMS). Of this loan, $4,136,000 was for the Minnetonka property.

O'Leary sued CLA to obtain ownership of the property on behalf of LP. The district court imposed a constructive trust on the property so it could not be sold to a purchaser who was unaware of appellants' interest in it; this court affirmed the constructive trust. O'Leary v. Carefree Living of America (Minnetonka), Inc., No. C8-97-188 (Minn. App. 5 Aug. 1997), review denied (Minn. 1 Oct. 1997) ( O'Leary I).

In December 1999, appellants brought the instant quiet title action to invalidate the mortgage. In March 2000, this court affirmed the decision that there was no title-insurance coverage on the property because Selbak did not disclose to Miller Schroeder the existence of the unrecorded quitclaim deed by which he had transferred the property to CLA. Carefree Living of America (Minnetonka), Inc., v. Chicago Title Ins. Co., No. C4-99-1651 (Minn. App. 21 Mar. 2000), review denied (Minn. 23 May 2000).

In July 2001, Miller Schroeder purchased the property at a foreclosure sale. Three months later, this court affirmed the award of the property to appellants, subject to the Miller Schroeder mortgage. O'Leary v. Carefree Living of America (Minnetonka), Inc., No. C5-00-2072, 2001 WL 1083757, at *5 (Minn. App. 18 Sept. 2001) (determined the ownership of the property as between CLA and appellants but did "not address the status of any encumbrances on the property, including the Miller Schroeder mortgage"), review denied (Minn. 11 Dec. 2001) ( O'Leary II).

By the end of 2001, Miller Schroeder had assigned both its rights as a loan servicer and its interest in the property to MMS and later changed its own name to SRC Investments Corporation (SRC). SRC filed for bankruptcy in January 2002.

Appellants moved to dismiss their quiet title action on the ground that MMS lacked standing; MMS moved for summary judgment on the ground that the mortgage was valid. The district court granted MMS's motion for summary judgment and denied appellants' motion to dismiss. Appellants then moved for findings and conclusions; this motion was also denied.

On appeal, appellants argue that MMS lacks standing, that the district court erred in applying the law when it granted summary judgment, that genuine issues of material fact precluded summary judgment, and that the district court abused its discretion in evidentiary and procedural matters.

By notice of review, MMS raises the issue of judicial estoppel. The district court did not address this issue, which was rendered moot by the summary judgment granted to MMS. Because we affirm that summary judgment, we also decline to address it because it is moot.


1. Standing

Whether a party has standing to sue is a question of law, which appellate courts review de novo. Joel v. Wellman, 551 N.W.2d 729, 730 (Minn. App. 1996), review denied (Minn. 29 Oct. 1996). Appellants argue that MMS lacks standing because the mortgagee was not MMS but Miller Schroeder.

As a threshold matter, the law on standing pertains only to those bringing a claim, not to those opposing a claim. See Minn. R. Civ. P. 17.01 ("Every action shall be prosecuted in the name of the real party in interest.").

It is undisputed that (1) Miller Schroeder assigned all its loan-servicer rights to MMS in August 2001 through a sub-servicing agreement, (2) Miller Schroeder changed its name to SRC in October 2001, (3) SRC assigned the Sheriff's Certificate and quitclaimed all its interest in the property to MMS in December 2001, (4) SRC filed for bankruptcy in January 2002, (5) the property was not listed as an asset in the bankruptcy estate, and (6) the bankruptcy trustee said nothing about the property.

Appellants argue that the bankruptcy trustee's silence operates to void the sub-servicing agreement, the assignment of the Sheriff's Certificate, and the quitclaim, leaving MMS with no interest in the property. They base this argument on 11 U.S.C. § 365(d)(1), providing that "if the [bankruptcy] trustee does not assume or reject an executory contract or unexpired lease of residential real property . . . within 60 days after the order for relief . . . then such contract or lease is deemed rejected." But when SRC filed for bankruptcy in January 2002, it had neither an executory contract nor an unexpired lease on the property. Appellants' challenge to the standing of MMS is without merit.

2. Summary Judgment: Errors of Law

In reviewing a summary judgment, this court asks whether the district court erred in its application of the law. State by Cooper v. French, 460 N.W.2d 2, 4 (Minn. 1990). Appellants contend that the district court made five errors in applying the law.

a. Minn. Stat. § 501B.05

Appellants argue that the district court erred in concluding that "Miller Schroeder is entitled to the protection of Minnesota trust law generally, and Minnesota Statute § 501B.05 (2002) specifically." That statute provides:

An express trust not declared in the disposition to the trustee or a constructive or resulting trust does not defeat the title of a purchaser from the trustee for value and without notice of the trust, or the rights of a creditor who extended credit to the trustee in reliance upon the trustee's apparent ownership of the trust property.

Appellants' argument that section 501B.05 does not apply to constructive trusts is defeated by the explicit reference to constructive trusts.

The district court determined that the constructive trust that we affirmed in O'Leary I, whereby CLA was not allowed to sell the property to a purchaser unaware of appellants' interest, did not defeat the rights of Miller Schroeder, which, in reliance on CLA's apparent ownership of the property, granted a mortgage on it.

Appellants argue that Minn. Stat. § 501B.05 does not apply here because appellants acquired the property, not through a constructive trust, but through partnership law. See O'Leary II. Appellants claim that the constructive trust was only "an intermediate step in the litigation pending a trial on the merits of [a]ppellants' claim to recover the property" and rely on Minn. Stat. § 507.34 (2002) (unrecorded conveyances are void against a subsequent good-faith purchaser) to argue that the mortgage is void. But Miller Schroeder acquired the mortgage in 1995; the mortgage was recorded, and appellants indisputably had notice of it when they brought their action to recover the property. Appellants cannot argue that the mortgage is void as against them.

Appellants also argue that both Miller Schroeder and MMS had a duty to try to void appellants' right to the property pursuant to Minn. Stat. § 323.09 (providing that, if property whose record does not disclose the right of the partnership to it is conveyed by one partner, the partnership may recover the property "unless the purchaser . . . is a holder for value, without knowledge") repealed by 1997 Minn. Laws ch. 174, art. 12, § 68; 1998 Minn. Laws ch. 262, § 12 (effective 1 January 2002). But appellants' right to recover the property was determined as against CLA; this court explicitly "[did] not address the status of any encumbrances on the property, including the Miller Schroeder mortgage." O'Leary II, at *5.

When they originally invested, appellants were aware that the property would be mortgaged; when they sued to recover the property, appellants likewise were aware that it had been mortgaged. The fact that their action to recover was brought under partnership law does not void the mortgage.

b. Evidentiary Standard

Appellants claim that the relevant statute is Minn. Stat. § 507.34 (2002) (protecting bona fide purchasers from prior unrecorded conveyances). Within the meaning of that statute, a bona fide purchaser is "one who gives consideration in good faith without actual, implied, or constructive notice of inconsistent outstanding rights of others." Anderson v. Graham Inv. Co., 263 N.W.2d 382, 384 (Minn. 1978). Appellants argue that the district court erred when it required them to show that Miller Schroeder had discovered the fraud, because they should have been required to show only that Miller and Schroeder had "notice of inconsistent outstanding rights of others," i.e., of appellants.

But although the district court did not use the precise language "notice of inconsistent outstanding rights of others," it referred frequently to appellants' rights: see, e.g., "The City resolution [offered by appellants in evidence], as a matter of law, cannot constitute constructive notice of Selbak's fraud or of any entity's property rights" (emphasis added).

Appellants also argue that the district court "erroneously omitted findings material to correctly applying the proper standard." But the district court devoted more than eight pages of its memorandum to analysis of why the evidence appellants provided failed to show either actual or constructive knowledge of Selbak's fraud or of appellants' alleged rights. There was no erroneous standard.

c. Estoppel

The district court concluded that appellants are estopped from denying the mortgage. From the time appellants made their investment, they knew that the property would be mortgaged and that Selbak, as sole owner of the general partner, had the authority to mortgage it. O'Leary, as trustee for seven of the ten appellants, testified that "[i]t was the business of Mr. Selbak to get a mortgage and build a building, and I relied upon him to get a mortgage and build a building."

We note that the district court used "estopped" not in a particular sense, e.g., equitable estoppel or collateral estopped, but in its more general sense. See Black's Law Dictionary 570 (7th ed. 1999), defining estoppel as " 1. a bar that prevents one from asserting a claim or right that contradicts what one has said or done before or what has been legally established as true. 2. A bar that prevents the relitigation of issues."

Although Selbak acted fraudulently in acquiring the property for himself instead of for the partnership, he did not act fraudulently in mortgaging it: appellants knew he had authority to mortgage the property and expected him to mortgage it. They are arguably estopped from arguing that the mortgage is invalid. See Wells Fargo Home Mortgage, Inc., v. Chojnacki, 668 N.W.2d 1, 5 (Minn. App. 2003) (party that was claimed to have "ratified the mortgage and . . . therefore [to be] estopped from contesting its validity" held not to have ratified the mortgage and therefore not to be estopped from contesting it). See also Esty v. Cummings, 80 Minn. 516, 518, 83 N.W. 420, 421 (1900) (defendant property owner who had conveyed property to an individual "to clothe [the individual] with title to the property for the purpose of mortgaging it to procure money with which to redeem [it] from prior foreclosures" held estopped from denying the rights of plaintiff, who had "loaned the money to [the individual], taking the mortgage in question in good faith, and in the belief that [the individual] owned the property"). As the district court concluded, appellants are estopped from denying the MMS mortgage.

With respect to the mortgage, Selbak deviated from his authorized activity only in having himself and CLA listed as mortgagor and property owner, instead of listing appellants. But, as the district court observed, if Selbak had not defrauded appellants, this deviation would have made no difference to them.

d. Unjust Enrichment

"Unjust enrichment applies when there is no contract governing the rights of the parties." Norwest Bank Minnesota, N.A. v. Ode, 615 N.W.2d 91, 96 (Minn. App. 2000), review denied (Minn. 17 Oct. 2000). It is undisputed that there was no contract between appellants and Miller Schroeder, and appellants do not deny that they will be unjustly enriched if they take the property without the mortgage. The district court concluded that unjust enrichment was an additional basis for awarding summary judgment.

Appellants argue that various other documents and contracts might enable Miller Schroeder to recover. But no contract governs the rights of the parties to this dispute, i.e., appellants and Miller Schroeder. The fact that other contracts might exist with or between other parties is irrelevant.

e. Constructive Notice

Appellants argue that various documents provided constructive notice of their interest in the property to Miller Schroeder or imposed on Miller Schroeder a duty to inquire. Relying on Anderson, 263 N.W.2d at 385, (constructive notice includes "such additional facts as [a document in the record] directs attention to"), appellants claim that the contract for deed by which Selbak acquired the property was constructive notice because it directs purchasers seeking more information to a file that included a Planned Unit Development Agreement (PUD) made between the City of Minnetonka and "Will Selbak, Leisure Living" in 1993. The PUD included a clause prohibiting assignment or transfer. But other language of the PUD itself defeats appellants' argument: the PUD says it is "intended only to cover matters related to compliance with the City's Planned Unit Development Ordinance and not to address other issues of property subdivision, public improvements, assessments or other matters that may be part of the process of development of the subject property, unless specifically set forth."

Appellants assert that, in light of the PUD, "a prudent and logical course of inquiry" for Miller Schroeder would have been to search "Leisure Living" in the records. But appellants offer no support for their implication that the law mandates pursuing every "prudent and logical course of inquiry."

Appellants also argue that Miller Schroeder had constructive notice from the phrase "the placing of a mortgage on the property" that appeared in a 18 July 1995 letter written by an attorney representing Tonka Properties, from whom Selbak acquired the property, to Selbak's attorney. But appellants offer no basis for refuting the district court's findings that "there is scant evidence to support a conclusion that the Miller Schroeder personnel involved in this mortgage" were aware of the letter, and "little authority to support the conclusion that had they even been aware of [it], that such awareness gave rise to a legal duty to inquire further."

Appellants show no error of law in the award of summary judgment.

3. Summary Judgment: Genuine Issues of Material Fact

In reviewing a summary judgment, this court asks whether there are any genuine issues of material fact. Cooper, 460 N.W.2d at 4. Appellants contend that genuine issues of material fact preclude summary judgment.

The first issue appellants mention is whether Miller Schroeder knew of the 18 July 1995 letter from the attorney for Tonka Properties. When the vice-president of Miller Schroeder was asked if he had seen the letter, he answered, "I could have. I don't recall seeing it." The district court classified this answer as a "mere scintilla" of evidence that Miller Schroeder had notice of appellants' interest in the property. Particularly in light of the protection provided by section 501B.05 to creditors who lend in reliance on a constructive trustee's ownership of trust property and the protection provided by section 507.34 to a good-faith purchaser of property affected by an unrecorded conveyance, this "mere scintilla" of evidence does not defeat summary judgment. See DLH, Inc. v. Russ, 566 N.W.2d 60, 71 (Minn. 1997) ("the mere existence of a scintilla of evidence in support of the [non-moving party/]plaintiff's position will be insufficient [to defeat summary judgment]; there must be evidence on which the jury could reasonably find for the [non-moving party/]plaintiff") (quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 252, 106 S.Ct. 2505, 2512 (1986)).

Appellants also instance several allegedly unsubstantiated findings. But evidence supports these findings. For example, the findings that "[appellants] acknowledged that worse [mortgage] terms were possible and acceptable" and that the "supplement [to the PPM] reiterated that the General Partner (Selbak) could enter into a mortgage on terms less favorable than contemplated in the PPM" are supported by the language of the supplement, saying that "the General Partner may enter into a loan agreement on terms less favorable to the Partnership." The finding that "Plaintiff O'Leary testified [at deposition] that he had written off the investment and concluded that it would not be built" is supported by O'Leary's testimony:

Q. But you wrote [the investment] off in 1994. And I asked you why, and you said one of the reasons was the facility wasn't built. What else did you consider in writing it off, if anything?

A. It didn't look like it was going to be built to me in 1990. . . .

We note that appellants did not provide any citation to the voluminous record in this case for support of many of the facts that they claim contradict the district court's findings. Minn. R. Civ. App. P. 128.03 (brief must indicate particular part of the record to which reference is made).

Opposition to summary judgment "must do more than rest on mere averments." Id. Appellants provide nothing more than mere averments in opposing this summary judgment on factual grounds.

4. Procedural Issues

Appellants challenge the district court's refusal to compel discovery, to suppress testimony, and to continue the summary judgment hearing. All are reviewed under an abuse-of-discretion standard. See Shetka v. Kueppers, Kueppers, Von Feldt Salmen, 454 N.W.2d 916, 921 (Minn. 1990) (district court has wide discretion to issue discovery orders and will not be reversed absent an abuse of that discretion); Benson v. N. Gopher Enters., 455 N.W.2d 444, 445-46 (Minn. 1990) (even when this court would reach a different conclusion as to the sufficiency of the foundation for an expert witness's testimony, the decision of the district court will not be reversed absent clear abuse of discretion); Dunshee v. Douglas, 255 N.W.2d 42, 45 (Minn. 1977) (granting of a continuance is within district court's discretion and will not be reversed absent a clear abuse of discretion).

a. Refusal to Compel Discovery

Appellants do not specify what the testimony that they were denied would have contributed to their case. MMS claims that all the material appellants sought pertained to the period following Miller Schroeder's granting of the mortgage and is therefore irrelevant to Miller Schroeder's alleged knowledge of conditions prior to and at the time of the mortgage. Appellants do not explain what relevance these would have had. There was no abuse of discretion in denying appellants' motions to compel discovery.

b. Refusal to Suppress Testimony or Continue

Appellants sought to suppress an expert affidavit offered by MMS or, in the alternative, to continue the summary judgment hearing, alleging that the expert's identity had been disclosed in an untimely manner that denied appellants sufficient time to respond to his affidavit. MMS provided an affidavit saying that: (1) on 10 or 11 October 2002, the expert was retained; (2) on 31 October, it was decided that he would be a testifying expert; (3) on 31 October, MMS notified appellants of his testimony and its anticipated subject matter by means of supplementing a prior interrogatory answer; (4) on 14 November, the expert provided an affidavit of his opinion and its basis; and (5) on 15 November, this was delivered to counsel for appellants. The hearing was held on 13 December 2002. Appellants do not dispute any of these dates. The district court did not abuse its discretion in denying appellants' motion.

We conclude that MMS had standing, that neither an error of law nor a genuine issue of material fact precludes this summary judgment, and that the district court did not abuse its discretion in regard to procedural matters.


Summaries of

O'Leary v. Miller Schroeder Investments

Minnesota Court of Appeals
Feb 10, 2004
No. A03-1003 (Minn. Ct. App. Feb. 10, 2004)
Case details for

O'Leary v. Miller Schroeder Investments

Case Details

Full title:Robert O'Leary, et al., Appellants, v. Miller Schroeder Investments…

Court:Minnesota Court of Appeals

Date published: Feb 10, 2004


No. A03-1003 (Minn. Ct. App. Feb. 10, 2004)