This opinion will be unpublished and
may not be cited except as provided by
Minn. Stat. § 480A.08, subd. 3 (1998).
STATE OF MINNESOTA
IN COURT OF APPEALS
Revocable Trust of July 21, 1994, et al.,
Donovan R. Ellwanger and Susan L. Ellwanger,
d/b/a American Heritage Hunting Club, Inc.,
Filed August 29, 2000
Nathan L. Seeger, Nathan L. Seeger Law Office, 128 West Junius Avenue, Fergus Falls, MN 56537 (for appellants)
U N P U B L I S H E D O P I N I O N
Respondents Randall Hess, as Trustee of the Randall Hess Revocable Trust of July 21, 1994, and William Carl Ladwig sued appellants Donovan R. and Susan L. Ellwanger (Ellwanger), d/b/a American Heritage Hunting Club, Inc. (American Heritage), in unlawful detainer, alleging American Heritage breached its lease by failing to name Hess and Ladwig as additional insureds on American Heritage's insurance policy and failing to use insurance policy proceeds to repair one of the leased buildings. American Heritage counterclaimed, alleging among other claims that the arrangement with Hess and Ladwig was not really a lease, but an equitable mortgage, and that Hess and Ladwig had interfered with its contractual relations. After a trial, the trial court found that Hess and Ladwig were entitled to possession of the property, but that American Heritage could retain the insurance proceeds. American Heritage appealed, and Hess and Ladwig filed a notice of review. We affirm in part, reverse in part, and remand.
During 1986 and 1987, Ellwanger and American Heritage acquired 358 acres for use as a game farm and hunting club. By 1994, the American Heritage operation was financially troubled. Ellwanger sought help from Ladwig, a farm management instructor at Central Lakes College in Staples, Minnesota. The farm management program is a state government program administered through its technical colleges. Ellwanger had been enrolled in the farm management program from 1974 through 1995 in connection with a livestock operation, as well as for American Heritage's operations. Ellwanger, however, was never enrolled in any of Ladwig's classes; instead, Ellwanger was enrolled in the farm management programs through schools at which Ladwig did not teach. Ellwanger first sought Ladwig's assistance in working out a troubled loan on the livestock operation with the Farmers Home Administration, then later sought Ladwig's assistance to refinance American Heritage's debts. Ladwig used computers and software obtained from the state to analyze financial data provided by Ellwanger in an attempt to assist Ellwanger with these debts.
Unsuccessful in obtaining refinancing, Ellwanger eventually decided to sell the game-farm property to Ladwig and Hess, whom Ladwig brought in as a partner. The parties disagree about who had the idea for the arrangement. Ellwanger testified he brought it up in response to a hint by Ladwig that Ladwig might be interested in the property. Ladwig testified that the arrangement was Ellwanger's idea. Hess and Ladwig employed an attorney to draft a purchase agreement, warranty deed, lease, and other related documents. On July 19, 1996, the parties executed documents to sell the American Heritage game farm to Hess and Ladwig, then lease it back to American Heritage. To accomplish the transaction, Hess and Ladwig took out a mortgage on the property, using the proceeds to remove existing encumbrances and for closing costs. American Heritage's lease payments were designed to service Hess and Ladwig's mortgage; indeed, the mortgage payments were made through automatic withdrawals of American Heritage's lease payments from an American Heritage bank account.
On February 2, 1997, the roof of a barn located on the game farm collapsed as the result of accumulated snow, hidden decay, and insect damage. The lease between American Heritage and Hess and Ladwig required American Heritage to insure fully all buildings on the property and to name Hess and Ladwig as additional insureds. American Heritage had not done so. American Heritage collected $32,150 in insurance proceeds for the collapse of the roof, but did not repair the roof. American Heritage claims that it spent the insurance proceeds to "remove the collapsed roof, clean up, remove debris and prepare the barn for a new roof."
On June 19, 1998, Hess and Ladwig's attorney wrote American Heritage declaring it in default for failing to name Hess and Ladwig as additional insureds, failing to pay property taxes on time, and failing to use the insurance proceeds to fix the barn roof. The notice gave American Heritage 14 days to cure the alleged defaults. A few weeks later, without American Heritage's knowledge, Hess and Ladwig's attorney instructed the bank to stop taking the automatic payments out of American Heritage's account to pay Hess and Ladwig's mortgage.
Hess and Ladwig brought an unlawful detainer action against American Heritage; American Heritage counterclaimed. American Heritage tendered to Hess two rent payments that had not been made because the automatic withdrawal had been stopped, as well as the delinquent taxes. Hess accepted the checks but did not cash them, instead turning them over to Hess and Ladwig's attorney. The rent checks were later deposited with the court.
After a court trial, the court ruled that the transaction was a true sale and leaseback, not an equitable mortgage, and that American Heritage had breached the lease, entitling Hess and Ladwig to possession of the premises. The court also ruled that American Heritage could keep the $32,150 in insurance proceeds and refused to award Hess and Ladwig attorney fees.
American Heritage's main argument is that the transaction was not a true sale and leaseback, but instead was an equitable mortgage. The burden of proving the existence of an equitable mortgage is on the plaintiff. Westberg v. Wilson, 185 Minn. 307, 309, 241 N.W 315, 316 (1932). "[A] deed absolute in form is presumed to be, and will be treated as, a conveyance unless both parties in fact intended a loan transaction with the deed as security only." Ministers Life & Cas. Union v. Franklin Park Towers Corp., 307 Minn. 134, 137-38, 239 N.W.2d 207, 210 (1976). "The relevant intention is that of the parties at the time of conveyance." Id. at 138, 239 N.W.2d at 210 (citation omitted). But "[t]estimony as to the intention of one party only is insufficient as proof that a transaction in form a sale was in fact an equitable mortgage." Id. Intent is determined by reference to the written documents and to all facts and circumstances surrounding the transaction. Gagne v. Hoban, 280 Minn. 475, 479, 159 N.W.2d 896, 899 (1968). The question of whether the parties to a conveyance really intended it to be absolute or security for indebtedness is for the trier of fact. Id. at 480-81, 159 N.W.2d at 900. We defer to the district court's opportunity to judge a witness's credibility. Town of Wahnena v. Dorholt, 465 N.W.2d 435, 437 (Minn. App. 1991). We will not reverse the district court's factual finding unless it is clearly erroneous. Minn. R. Civ. P. 52.01.
There is sufficient record evidence to support the trial court's finding that the parties intended the transaction to be a true sale and leaseback. Both Hess and Ladwig testified that that was their intent. Their accountant and attorney also testified that they understood the deal was to be a true sale and leaseback. In fact, the accountant, who also worked for American Heritage, testified that Ellwanger asked him about the tax implications of selling his property for less than full market value. Ellwanger also told the accountant that he wanted the lease payments to be fully tax deductible, which the accountant told him was only possible if the transaction were a true sale and leaseback.
In fact, one of the documents used as part of the transaction explicitly states that the parties intended the transaction to be a sale and leaseback. An addendum to the purchase agreement provides in part:
The parties to this lease acknowledge that the lease is part of the sale and a lease back. The parties hereto all agree that this sale and lease back does not constitute and should not be interpreted by any court as constituting an equitable mortgage but rather a sale and lease back consistent with the documents being executed. Lessee agrees that it will be estopped from claiming that this transaction is anything more than a sale and lease back coupled with an option to repurchase the land as provided for in this lease.
American Heritage contends that this document is legally ineffective because Hess and Ladwig never signed it, but American Heritage's representatives did sign. Whether it is legally binding or not, it is strong evidence of American Heritage's contemporaneous intent that the transaction be a true sale and leaseback, not an equitable mortgage.
On this record, American Heritage cannot meet its burden of proving that the trial court's finding on intent was clearly erroneous. The trial court did not err in holding that the transaction was not an equitable mortgage.
In light of our conclusion that the transaction was not an equitable mortgage, we need not reach American Heritage's arguments that the transaction violated the farmer-lender mediation and usury laws, because those laws apply only to loans.
American Heritage next argues that even if it did not retain title under an equitable mortgage, it is entitled to equitable title to the property under a purchase-money (resulting) trust theory. The applicable statute provides that "[i]f a transfer of property is made to one person and the purchase price is paid by another, a resulting trust is presumed to arise in favor of the person by whom the purchase price is paid." Minn. Stat. § 501B.07 (1998). But the statute is inapplicable by its terms. The property was transferred to Hess and Ladwig, and Hess and Ladwig paid the purchase price. The trial court thus did not err in holding that American Heritage was not entitled to a resulting trust.
American Heritage also claims it is entitled to impose a constructive trust on the title to the game farm.
A court may impose a constructive trust when there is clear and convincing evidence that such imposition is justified to prevent unjust enrichment. * * * A constructive trust may arise in favor of a person equitably entitled to property when legal title to the property is obtained through fraud, oppression, duress, undue influence, force, crime, or similar means, or by taking improper advantage of a confidential or fiduciary relationship.
Fredin v. Farmers State Bank, 384 N.W.2d 532, 535 (Minn. App. 1986) (citations omitted). American Heritage relies on several sections of the ethics statute governing members of the executive branch to support its argument that Ladwig exercised improper influence or took improper advantage of a fiduciary relationship. See Minn. Stat. § 43A.38, subds. 3-6 (1998).
The trial court, however, rejected that argument, finding:
No undue influence was exercised and there was no violation of any fiduciary duty or abuse of power by Ladwig. The testimony was that Mr. Ellwanger had involved himself in several different real estate transactions prior to this transaction and involved himself with negotiations of settlement of indebtedness with [the Farmers Home Administration], had incorporated [American Heritage], and taken several courses in farm business management.
The evidence also showed that it was Ellwanger who sought out Ladwig; that Ladwig helped Ellwanger free of charge, even though Ellwanger was never enrolled in any of Ladwig's classes, or even at Ladwig's school; that American Heritage was unable to get bank financing because of bad credit; and that the farm management program at another school was unwilling to work with Ellwanger. Perhaps most importantly, the trial court also could have chosen to believe Ladwig's unequivocal testimony that the transaction was Ellwanger's idea. Under these circumstances, even if Ladwig had violated the ethics statute, the trial court could well have found that American Heritage failed to provide "clear and convincing evidence that [the] imposition [of a constructive trust was] justified to prevent unjust enrichment." Fredin, 384 N.W.2d at 535. Given the high standard of proof that American Heritage must meet, the trial court did not err in refusing to impose a constructive trust.
Hess and Ladwig sued for unlawful detainer, contending that American Heritage had breached the lease by failing to pay the property taxes on time and failing to name Hess and Ladwig as additional insureds on the insurance policy. There is no dispute that American Heritage failed to name Hess and Ladwig as additional insureds. Instead, American Heritage argues, for several reasons, that this breach does not justify terminating the lease. See Cloverdale Foods, Inc. v. Pioneer Snacks, 580 N.W.2d 46, 49 (Minn. App. 1998) (breach must be material to warrant unlawful detainer action).
First, American Heritage contends that the lease specifies which breaches are material, and the failure to name Hess and Ladwig as additional insureds is not included. Paragraph 16 of the lease provides:
Any failure to make any lease payment or any failure to make any insurance premium payment or to escrow funds for taxes or to escrow funds for insurance premiums that might be required under this lease shall constitute a substantial breach of this lease and shall entitle the Lessors to all remedies they would have upon a substantial breach of this lease.
Paragraph 5, by contrast, allows Hess and Ladwig to cancel the lease if "any term, condition or covenant of this lease * * * shall be violated or neglected." American Heritage contends that the two provisions conflict, and so the specific provisions of Paragraph 16 control over the general provisions of Paragraph 5. The trial court held that the two provisions did not conflict, ruling that Paragraph 16 was not intended to be an exclusive list of all the substantial (or material) breaches that could justify cancellation of the lease.
American Heritage's reading of the lease assumes that the two provisions conflict; the trial court's reading harmonizes them, treating Paragraph 16 as non-exhaustive examples of the type of conduct prohibited by Paragraph 5. "We read contract terms in the context of the entire contract and * * * interpret a contract in such a way as to give meaning to all of its provisions." Brookfield Trade Center, Inc. v. County of Ramsey, 584 N.W.2d 390, 394 (Minn. 1998); see also State v. Rhude and Fryberger, 266 Minn. 16, 20, 123 N.W.2d 196, 199 (1963) ("The lease must be read as an entirety."). In light of these canons of contractual interpretation, the trial court did not err by ruling that the two provisions did not conflict and that the substantial breaches listed in Paragraph 16 were not the only breaches for which the lease could be terminated.
American Heritage argues that the failure to name Hess and Ladwig as additional insureds could not be a material breach because they would have had no right to the insurance proceeds anyway. American Heritage argues that the lessor's only risk of loss of use in the event of casualty is the loss of rent. See United Fire & Cas. Co. v. Bruggeman, 505 N.W.2d 87, 89 (Minn. App. 1993), review denied (Minn. Oct. 19, 1993). But loss of rent is the landlord's only risk of loss of use in the event of casualty; it is not the landlord's only risk of loss. The landlord obviously has an insurable interest in its buildings remaining standing after the tenant leaves. This argument is meritless.
American Heritage also argues that the breach is not material because it had no obligation under the lease to purchase the insurance covering the roof collapse, and so Hess and Ladwig are not entitled to the proceeds. To support this argument, American Heritage points to the lease provision that requires it to "maintain a comprehensive policy of insurance which will include fire and wind insurance on all buildings and personal property." Because the policy specifically requires wind and fire insurance, but not the collapse coverage that covered the barn roof, American Heritage argues, it was not required to purchase the coverage, and Hess and Ladwig should thus get no benefit from it.
We need not decide whether American Heritage is correct. As the trial court noted, the insurance policy "generally excluded collapse coverage from snow," but collapse coverage was provided * * * for collapse caused by 'hidden decay, hidden insect or vermin damage'." The trial court found that American Heritage's insurance claim "was submitted under collapse, debris clean up and pollution removal," and that "there was no allocation of the settlement to the specific coverage(s)." These findings are not clearly erroneous. Because American Heritage cannot show that it received the insurance proceeds solely as the result of the snow collapse coverage, it cannot show that its failure to use the proceeds to fix the roof was an immaterial breach.
The lease required American Heritage to name Hess and Ladwig as additional insured to protect their interest in their buildings, but American Heritage failed to do so. The materiality of the breach is shown by the fact that without this protection, Hess and Ladwig had no control over how the insurance proceeds were spent, and the barn roof has still not been replaced. The trial court did not err in ruling that American Heritage's failure to name Hess and Ladwig as additional insureds was a material breach of the lease.
American Heritage also claims that even if there was a material breach of the lease, Hess and Ladwig waived it by accepting rent payments after the breach. But waiver of breach by acceptance of rent only occurs when it is made knowingly and with the intent to waive the default. Priordale Mall Investors v. Farrington, 411 N.W.2d 582, 585 (Minn. App. 1987). Hess did take the checks when they were left at his office, but he did not cash them; instead, he turned them over to his counsel, who eventually deposited them with the court. Doing so clearly demonstrated that Hess and Ladwig did not wish to waive the breaches by accepting rent from American Heritage. The trial court did not err in rejecting this argument.
American Heritage claims that the trial court erred in rejecting its claim for intentional interference with contractual relations. It argues that Hess and Ladwig interfered with its relationship with First State Bank by telling the bank that American Heritage was in breach and instructing the bank to stop taking automatic payments on Hess and Ladwig's mortgage on the game farm out of American Heritage's account. But the bank's representative testified that Hess and Ladwig did not interfere with the bank's consideration of American Heritage's application for credit; instead, the application was denied because of American Heritage's and the Ellwangers' poor credit file. American Heritage calls this explanation a "false pretense," but the trial court was entitled to judge the credibility of the witness and whether to believe the testimony. With this evidence, American Heritage cannot demonstrate that Hess and Ladwig interfered with any contract it had, and therefore cannot make out a prima facie case of intentional interference with contractual relations. The trial court did not err by rejecting this claim.
The trial court held that American Heritage was entitled to keep the $32,150 in insurance proceeds it received for the collapse of the barn roof. But it did not adequately explain how it calculated the amount of money to which American Heritage was entitled. Although Ellwanger testified that the value of his services in removing the barn roof debris and performing related work was equal to the amount he received from the insurance company, the court noted that Ellwanger would have had to work 1000 hours—more than 100 work days—at $32 per hour in order to have earned the amount of the entire settlement for his efforts. Nonetheless, the court concluded that "in the absence of other evidence as to the costs of having third persons do the cleanup and disposal of debris, equitable principles allow Mr. Ellwanger to retain the insurance funds."
But as Hess and Ladwig point out, in order to award damages there must be reasonable certainty in the method used to measure the loss. See Bonhiver v. Graff, 311 Minn. 111, 132, 248 N.W.2d 291, 304 (1976). Here, the trial court only relied on Ellwanger's conclusory testimony, the absence of other evidence, and unexplained "equitable principles." We therefore reverse and remand for more precise calculation of the value of the services provided by Ellwanger and his agents.
Finally, the trial court refused to award attorney fees to Hess and Ladwig, holding in part that "[i]n this case there is not a contract as to the award of attorney's fees." The lease provides, however, that "[i]n the event Lessors hereunder incur any costs, including but not limited to reasonable attorney's fees, in enforcing the provisions of this lease Lessee shall be obligated to reimburse Lessors for all such costs incurred." Hess and Ladwig have prevailed in their lawsuit to enforce the provisions of the lease and are thus contractually entitled to their costs in doing so, including reasonable attorney fees. On remand, therefore, the district court should allow Hess and Ladwig to prove up their reasonable attorney fees.
Affirmed in part, reversed in part, and remanded.