STATE OF MINNESOTA
IN COURT OF
Dale M. Stone,
Jetmar Properties, LLC, at al.,
Filed June 12, 2007
Hennepin County District Court
File No. 27-CV-04-012937
John M. Tancabel, 895 Osceola Avenue,
St. Paul, MN 55105; and
John D. Hagen, Jr., P.O. Box 15609, Minneapolis,
Alex W. Russell, Evening & Weekend Law
Hamline Avenue South, St.
Paul, MN 55105
Considered and decided by Worke, Presiding Judge; Lansing,
Judge; and Collins, Judge.
Y L L A B U S
I. Under Minnesota
law, a limited-liability company comes into existence when the articles of
organization are properly filed with the secretary of state, and the de facto-corporation
doctrine, which has been abolished in Minnesota,
does not provide a basis to establish an earlier existence.
II. A deed purporting to convey an interest
in real property to a limited-liability company not yet formally organized under
Chapter 322B of the Minnesota Statutes is void for failure of delivery.
P I N I O N
This appeal arises out of a series
of real-estate transactions that resulted in the foreclosure sale of property
that respondent Dale Stone had quitclaimed to a limited-liability company that
was not yet organized when he attempted delivery. The foreclosure sale was initiated by Selwin
Ortega, to whom the property had been mortgaged. Ortega appeals from an order establishing
Stone’s title to the property and providing damages. Ortega argues that the district court erred
by concluding that the quitclaim deed was void, rejecting Ortega’s claim that
he was a good-faith purchaser for value, and failing to determine that Stone was
equitably estopped from asserting an interest in the property and that Stone’s
claims constituted an impermissible collateral attack on a valid judgment. Because we conclude that the quitclaim deed
was void and that Stone is not legally or equitably precluded from asserting his
interest in the property, we affirm.
A C T S
Keith Hammond drafted and signed articles of
organization for Jetmar Properties, LLC, in November 2002, but he did not file
the articles with the secretary of state.
Later that same year, Hammond,
acting as president of Jetmar, offered to buy commercial property from Selwin Ortega. Hammond and Ortega signed a purchase
agreement, but the sale did not close because Hammond did not have the money. Nonetheless, based on Hammond’s
representation that he needed cash to develop the property into condominiums,
Ortega gave Hammond a three-day, unsecured
$200,000 loan, which Hammond
failed to repay.
In April 2003 Hammond
met Dale Stone, a retiree, and convinced him to invest in several of Jetmar’s
“real estate ventures.” During the
course of their relationship, Stone gave Hammond
more than $50,000 in cashiers’ checks for Jetmar’s various projects. Sometime in May 2003, Hammond asked Stone to quitclaim a duplex to
Jetmar to improve Jetmar’s balance sheet, which would allow it to secure
financing for a large condominium development. Stone was renting out the property to
supplement his social-security income. In exchange for the deed, Hammond promised Stone an interest in the
development. Hammond also told Stone that he would deed
the property back to Stone “free and clear” in sixty days and that Stone could
continue to collect rent. On May 14,
2003, Stone quitclaimed the property to Jetmar.
to accept the deed as Jetmar’s president and recorded it the same day.
On May 15, 2003, Hammond
mortgaged the duplex to Ortega in exchange for an extension on the $200,000
loan. Ortega recorded the mortgage on
May 20, 2003, after checking the title and determining that Jetmar had title to
the property by virtue of a quitclaim deed from Stone.
did not repay the loan or deed the property back to Stone. Sometime around December 2003, Ortega began
foreclosure proceedings. Ortega sent the
duplex tenants a notice of foreclosure, which they passed along to Stone. Stone confronted Hammond about the mortgage, but he was told
that there would be time to redeem and regain title to the property. Based on Hammond’s assurances, Stone did not alert
Ortega of his claimed interest. On March
2, 2004, Ortega conducted a sale under the foreclosure-by-advertisement
procedures. Because there were no higher
bidders, Ortega purchased the property in exchange for the surrender of his $200,000
claim against Jetmar. Hammond filed Jetmar’s articles of
organization on March 11, 2004, and received a certificate of
Stone brought this action in October 2004, alleging that
Hammond and Jetmar had defrauded him in violation of Minn. Stat. § 325F.69,
subd. 1 (2006). Stone sought damages and
a declaratory judgment that he was the owner of the duplex. Ortega filed an answer, but Hammond and
Jetmar failed to respond. The district
court concluded that, because Jetmar did not exist at the time of delivery, it
was therefore incapable of taking title to land, and the quitclaim deed was
void. Because the quitclaim deed was
void, both the mortgage and the foreclosure were also void. The district court also concluded that Ortega
was not a good-faith purchaser for value under Minn. Stat. § 507.34
(2006). Based on these conclusions, the
court awarded Stone damages and title to the duplex. This appeal followed.
S S U E S
I. Did the district court correctly
conclude that Dale Stone’s quitclaim deed to Jetmar Properties, LLC, was void?
II. Is Stone barred by the corporation-by-estoppel
doctrine from challenging Selwin Ortega’s title to the property?
III. Did the district court correctly conclude
that Selwin Ortega is not a good-faith purchaser for value under Minn. Stat. §
IV. Is Stone’s challenge to Ortega’s title to
the property an impermissible collateral attack on a valid judgment?
N A L Y S I S
Selwin Ortega argues that the district court erred by
concluding that Dale Stone’s quitclaim deed to Jetmar Properties, LLC, was void.
Ortega claims that Jetmar was a de facto
corporation when the deed was delivered, and, alternatively, that Jetmar was
not per se barred from accepting delivery of the deed despite its nonexistence
at the time of transfer. Because Ortega’s
de facto-corporation claim raises an issue of statutory construction, it is
subject to de novo review. Weston v. McWilliams & Assocs., Inc.,
716 N.W.2d 634, 638 (Minn. 2006). Ortega’s claim that a deed can be delivered
to an entity that did not exist at the time of transfer is also subject to de
novo review. See Nelson v. Productive Alternatives, Inc., 715 N.W.2d 452, 454 (Minn. 2006) (interpreting question of common law under de
Ortega first argues that, although Jetmar had not filed
its articles of organization when Stone delivered the quitclaim deed, Jetmar
could accept the deed under the de facto-corporation doctrine. Ortega claims that any suggestion that the de
facto-corporation doctrine has been abolished in Minnesota is unfounded because
it appeared only in the Reporter’s Notes to Chapter 302A of the Minnesota
Statutes, Minnesota cases continue to refer to the doctrine even after the
enactment of chapter 302A, and it is unclear whether any prohibition against de
facto corporations found in chapter 302A necessarily extends to
limited-liability companies (LLC), which are governed by chapter 322B. The law and the facts do not support these
Historically, a de facto corporation could exist in Minnesota when there was
“(1) some law under which a corporation with powers assumed might lawfully have
been created; (2) a colorable and bona
fide attempt to perfect an organization under such a law; and (3) user of
the rights claimed to have been conferred by the law.” Evens
v. Anderson, 132 Minn.
59, 61, 155 N.W. 1040, 1041 (1916).
Ortega’s claim that the de facto-corporation doctrine applies in this
case fails as a matter of fact because, as he acknowledges, there had been no colorable attempt to organize Jetmar
under the LLC statute when Stone signed the deed. Mabel First Lutheran
Church v. Cadwallader, 172 Minn. 471, 476, 215 N.W. 845, 847 (1927) (stating that if
there has been no attempt to create corporation de jure there can be no
corporation de facto). The LLC statute
provides that an LLC is organized by filing articles of organization with the
secretary of state. Minn.
Stat. § 322B.105 (2006). Hammond made no attempt
to file Jetmar’s articles of organization with the secretary of state. As a result, even if the de facto-corporation
doctrine had not been abolished, it would not apply. We conclude, however, that the doctrine has
been abolished in the context of business-corporation law and, by extension, in
the context of LLC law.
The 1981 notes accompanying the business-corporations statute
that sets the effective date of a corporation’s articles of incorporation specifically
provide that “the doctrine of de facto corporations is inapplicable in this
state after the enactment of this act.” Minn. Stat. Ann. §
302A.153, reporter’s notes (West 2006).
The rationale for the abolition of de facto corporations is that the
process for incorporating is so simple that no one could ever make a “colorable
attempt” to incorporate and fail. Id. This
court recognized the abolition of de facto corporations in Warthan v. Midwest Consol. Ins.
Agencies, Inc., 450 N.W.2d 145, 147-48 (Minn. App. 1990), when, after
quoting the reporter’s notes, we observed that the “use of advisory committee
reports is recognized in this state as a tool for ascertaining legislative
at 148 n.2.
cases that continue to refer to the availability of the de facto-corporation
doctrine after the enactment of the business-corporation statute are
distinguishable. In Almac, Inc. v. JRH Dev.,
Inc., for example, we acknowledged that the “law gives equal recognition to
de facto corporations.” 391 N.W.2d 919,
924 (Minn. App. 1986), review denied (Minn.
Oct. 17, 1986). But Almac involved events that occurred in November 1980, before the
new business-corporations statute went into effect. Id.; see 1981 Minn. Laws ch. 270, § 144, at
1232 (setting effective date of statute as July 1, 1981). Similarly, in Ross v. Briggs & Morgan, we stated that a “de facto corporation
may have existed.” 520 N.W.2d 432, 436
(Minn. App. 1994), rev’d, 540 N.W.2d
1995). But the statement was peripheral
to the central holding and did not derive from an interpretation of section
302A.153. Id.at 436-37. Thus these cases do not support Ortega’s claim
that the de facto-corporation doctrine remains viable in the context of
We also reject Ortega’s claim that even if the de
facto-corporation doctrine was abolished for purposes of business corporations
it has not been abolished for LLC purposes. The 1992 notes to the LLC statute explain that
“[t]o the extent a chapter 322B provision resembles a chapter 302A provision in
substance, the case law and Reporter’s Notes of chapter 302A should be used to
interpret and apply the chapter 322B provision.” Minn.
Stat. Ann. § 322B.01, reporter’s notes (West 2006). The LLC statute setting the effective date of
articles of organization lists section 302A.153 as its source. Minn.
Stat. Ann. § 322B.175, reporter’s notes (West 2006). Because section 302A.153 serves as the basis
for section 322B.175, and the law relevant to corporations guides our
interpretation and application of the law relevant to LLCs, the prohibition against
de facto corporations must extend to LLCs.
Like the business-corporations statute, the LLC statute provides
organizers with an indisputably simple route to formal organization. Thus it is doubtful that one could actually
make an unsuccessful “colorable attempt” to organize a de jure LLC. See Minn.
Stat. § 322B.175 (making organization of LLC effective upon filing articles of
organization with secretary of state and payment of fee). Accordingly, the district court did not err by
concluding that Jetmar was not a de facto corporation when Stone executed the
Ortega next argues that Jetmar’s nonexistence at the time
Stone executed the deed is not determinative of whether Jetmar could take title
to the property. To transfer title, a
deed must be delivered. Slawik v. Loseth, 207 Minn. 137, 139, 290 N.W. 228, 229
(1940). Ortega argues that when a deed
is delivered to an “incipient” LLC, the transfer of title may take effect upon
the LLC’s formal organization. We
law deeds cannot be delivered to nonexistent entities, whether the entities are
natural or legal. A deed cannot be
delivered to a deceased grantee, for example.
In re Estate of Savich, 671
N.W.2d 746, 750 (Minn. App. 2003). Similarly, the supreme court has held that
because an organization was not a corporation de jure or de facto, it could not
take title to real estate. Cadwallader, 172 Minn. at 476, 215 N.W. at 847. We can find no basis in Minnesota law for delaying transfer of title
to some indeterminate future date when the grantee might come into
existence. In fact, “many, but not all,
courts have denied validity to deeds conveying property to corporations which
are not incorporated at the time of conveyance.” 14 Richard R. Powell, Powell on Real Property § 81A.04[a][iii] (Michael Allan Wolf
ed., 2006); see also Savich, 671
N.W.2d at 750 (citing § 81A.04[a][iii] of Powell on Real Property).
According to these courts, “[t]he effective date of a deed is usually
stated to be the date of delivery, and if at that date the corporation is
‘non-existent,’ the ordinary rule governs and the deed is treated as a nullity.” 9 Thompson
on Real Property § 82.08(a)(2) (David A. Thomas ed., 1994) (footnote
Ortega relies primarily on Cmty. Credit Union Servs., Inc. v. Fed. Express Servs. Corp., 534
A.2d 331 (D.C. 1987), for his claim that delivery of a deed to an incipient LLC
may take effect upon the LLC’s formal organization. In Cmty.
Credit Union, the District of
Columbia Court of Appeals observed that “a deed
conveying property to an incipient ‘corporation’ that has not yet been
incorporated passes title to the corporation as of the time of
incorporation.” 534 A.2d at 334. The decision on which Cmty. Credit Union relies for support, Zulver Realty Co. v. Snyder, 62 A.2d 276 (Md. 1948), holds that a
deed to a grantee that is nonexistent when the deed is created can still pass
if the grantee has come into existence at the time of delivery. 62 A.2d at 280. Neither case supports Ortega’s theory.
The date of delivery is ordinarily presumed to be the
date on the deed. Because Jetmar did not
come into existence until almost a year after Stone delivered the deed to Hammond, Zulver does not apply. Cmty.
Credit Union extends Zulver by
delaying the question of delivery to the time of incorporation, but is also
inapplicable because Stone did not have the requisite intent to convey the
property when Jetmar was organized after the
We see no reason to deviate from the “ordinary rule” that
a deed to an entity nonexistent at the time of conveyance is void. Limiting the question of delivery to the time
of conveyance is not only consistent with Minnesota law, it is also a logical result
given the ease of formal incorporation and organization. Allowing a form of future interest to vest in
unorganized entities would be inconsistent with our public policy of encouraging
Ortega next argues that the doctrine of
corporation-by-estoppel prevents Stone from taking title to the property. The district court did not expressly address
Ortega’s equitable claims, but it implicitly denied them by granting Stone’s
request for a declaratory judgment establishing title in him. See
Fraser v. Fraser, 702 N.W.2d 283, 292 (Minn.
App. 2005) (finding implicit rejection of equitable claim in other judicial
action), review denied (Minn. Oct. 18,
2005). The issue of estoppel is
generally a question of fact. N. Petrochemical Co. v. U.S. Fire Ins. Co.,
277 N.W.2d 408, 410 (Minn.
1979). We review fact questions for
clear error. Minn. R. Civ. P. 52.01.
Ortega argues that under the corporation-by-estoppel doctrine
Stone cannot take title to the property because Stone obtained an advantage by
entering into a contract with Jetmar acting as an LLC, and Stone cannot now
question the organization of the LLC. See State v. Rivers, 206 Minn. 85, 95, 287 N.W. 790, 794-95 (1939) (finding that
mortgagor is estopped from denying validity of mortgagee’s incorporation after
obtaining advantage by contracting with mortgagee acting as corporation); accord N. Bldg. & Loan Ass’n v. Witherow,
205 Minn. 413, 416-17, 286 N.W. 397, 398-99
(1939); 8 William Meade Fletcher et al., Fletcher’s
Cyclopedia of the Law of Private Corporations § 3958 (perm. ed., rev. vol.
2001) (stating that person who conveys deed to entity as corporation cannot
avoid conveyance by denying corporate existence of grantee). Although section 302A.153 abolished the de
facto-corporation doctrine, the reporter’s notes to the same statute indicate
that the corporation-by-estoppel doctrine “has nothing to do with the efficacy
of an attempted incorporation, and may apply even where no documents have been
filed with the secretary of state.” Minn.
Stat. Ann. § 302A.153, reporter’s notes.
Thus, the corporation-by-estoppel doctrine survives in Minnesota despite the inapplicability of the
de facto-corporation doctrine. Arbo Corp. v. Aidan Mktg./Distrib., Inc.,
639 F. Supp. 1512, 1514 (D. Minn. 1986).
Even if we assume, without deciding, that the
corporation-by-estoppel doctrine applies to LLCs, Ortega’s claim fails. Stone treated Jetmar as a “corporation” when
he executed the deed. But the estoppel
doctrine does not apply when the acts forming the basis for an estoppel claim
are induced by fraud. Fletcher et al., supra, § 3909. When a corporation is used to accomplish
fraud, courts may disregard the corporate entity and permit plaintiffs to
“pierce the corporate veil.” Victoria Elevator Co. v. Meriden Grain Co,
283 N.W.2d 509, 512 (Minn. 1979). Similarly, a court may refuse to apply the
doctrine of corporation-by-estoppel when the corporation is used to accomplish
fraud. The district court found that
Stone executed the quitclaim deed while “relying on the false representations,
promises, and assurances of Hammond.” Because Stone was fraudulently induced to
sign the deed and treat Jetmar as a “corporation,” the district court could
reject Ortega’s corporation-by-estoppel argument.
Ortega also disputes the district court’s determination
that he was not a good-faith purchaser for value under Minn. Stat. § 507.34
(2006). Whether one is a good-faith
purchaser is a factual determination that will be sustained unless the
reviewing court has a firm and definite impression that a mistake has been
made. Miller v. Hennen, 438 N.W.2d 366, 369 (Minn.
In a parallel argument, Ortega contends that equitable
estoppel prevents Stone from taking title.
A party is equitably estopped “from taking unconscionable advantage of
his own wrong by asserting his strict legal rights.” N.
Petrochemical, 277 N.W.2d at 410. To
prevail on his equitable-estoppel claim, Ortega “must prove that [Stone] made
representations or inducements, upon which [Ortega] reasonably relied, and that
[Ortega] will be harmed if the claim of estoppel is not allowed.” Id. Silence can serve as a representation or
inducement. Macomber v. Kinney, 114 Minn. 146,
156-57, 128 N.W. 1001, 1004 (1910).
The good-faith-purchaser statute operates to establish
priority over earlier unrecorded conveyances.
Minn. Stat. § 507.34. In this case, however, there is no earlier
unrecorded conveyance to which the statute could apply to establish
priority. Instead, Stone retained title
to the property because his quitclaim deed to Jetmar was void. Consequently, Ortega has not established that
the good-faith-purchaser statute applies.
§ 81A.04[a][ii]. In addition,
even if the good-faith purchaser statute applies, the record weighs against
Ortega’s claim in light of his failure to make even minimal reasonable
inquiries into the transaction with Jetmar.
Public policy generally favors allowing a degree of
reliance on the title shown in public records.
See Nussbaumer v. Fetrow, 556
N.W.2d 595, 599 (Minn. App. 1996), review
denied (Minn. Feb. 26, 1997) (stating policy of allowing judgment creditors
to rely on record). But the reliance
allowed is not absolute. A “party
attempting to invoke the doctrine [of equitable estoppel] cannot be negligent
and cannot have knowledge of the defect in the title.” W.
Concord Conservation Club, Inc. v. Chilson, 306 N.W.2d 893, 896 (Minn. 1981). A
prospective purchaser is obligated to discover anyone in possession of the land
at issue and to “inquire into the nature and extent of the occupant’s
interest.” Id. As a result of this obligation, the purchaser
is held to have knowledge of all the “rights of the [possessor] and also of all
facts connected therewith which reasonable inquiry would have developed.” Claflin
v. Commercial State Bank, 487 N.W.2d 242, 248 (Minn. App. 1992), review denied (Minn. Aug. 4, 1992). “In order to have status as a bona fide
purchaser the mortgagee’s inquiry must be directed to the person in possession; inquiry of the mortgagor,
who may have reason to conceal the truth, is not sufficient.” Id.
Under the unusual circumstances of this transaction,
Ortega failed to make adequate inquiries about the property. Previously, Ortega had given Hammond
an unsecured loan that Hammond
failed to repay. In addition, Hammond had been unable to
complete the purchase of Ortega’s property due to lack of funds. This course of dealing should have alerted
Ortega to the possibility of suspicious transactions like the one Hammond proposed. Jetmar had obtained the property through a
quitclaim deed from Stone the day before Hammond offered the
property as collateral.
Despite these “red flags,” the record contains no
evidence that Ortega ever made the minimal inquiries that would have informed
him about the fraudulent nature of the transaction. Ortega never contacted Stone’s renters to
inquire about the nature of their rights, which would have inevitably led him
to Stone and to the discovery of Stone’s claimed rights. More significantly, Ortega never ascertained
had the authority to act on Jetmar’s behalf.
When dealing with an agent, the purchaser “is put on inquiry and must
discover whether the agent has the authority to complete the proposed
act.” Chilson, 306 N.W.2d at 896.
Implicit in that obligation is the duty to establish whether the
principal has the capacity to place authority in an agent. If Ortega had made these inquiries, he would have
learned that Jetmar had never been formed and could not have had an interest in
the property. Given his conduct,
Ortega’s claim of being a good-faith purchaser is tenuous at best, and the
district court did not clearly err by finding that Ortega was not a good-faith
purchaser for value.
Similarly, Stone is not equitably estopped from claiming
title to the property. Ortega argues
that Stone induced him to act to his detriment in two ways.
First, Ortega argues that Stone’s purported conveyance to Jetmar, which
was recorded, was a representation on which he detrimentally relied. Second, Ortega contends that Stone’s silence
when Ortega foreclosed and surrendered his claim against Hammond in exchange for title to the property
was a representation on which he detrimentally relied. But because Ortega failed to make even
minimal inquiries about the transaction, Ortega’s reliance was itself not
reasonable. Therefore, for the same
reasons that Ortega is not a good-faith purchaser for value, Stone is not equitably
estopped from claiming title.
Ortega’s final argument is that Stone’s challenge to the
title he gained through the foreclosure sale is an impermissible collateral
attack on a valid judgment. Ortega did
not sufficiently raise this argument below, however, and he cannot raise it for
the first time on appeal. Thiele v. Stich, 425 N.W.2d 580, 582 (Minn. 1988).
Furthermore, in their briefs, the parties agree that the foreclosure was
conducted through foreclosure-by-advertisement procedures. Thus, there is apparently no judgment to
attack. See Guidarelli v. Lazaretti, 305 Minn. 551, 554, 233 N.W.2d 890, 892 (1975)
(noting that no hearing is held before foreclosure by advertisement). In any case, Ortega failed to produce any
judgment or similar documentation to support his claim of collateral
estoppel. Therefore, the argument is
D E C I S I O N
The district court did not err by concluding that the
quitclaim deed was void and that neither law nor equity prevented Stone from
asserting his interest in the property.