This opinion will be unpublished and
may not be cited except as provided by
Minn. Stat. § 480A.08, subd. 3 (2002).
STATE OF MINNESOTA
IN COURT OF APPEALS
Filed December 21, 2004
Hennepin County District Court
File No. CT 03009036
Edward F. Fox, Christopher R. Morris; Bassford Remele, P.A., 33 South Sixth Street, Suite 3800, Minneapolis, MN 55402-3707 (for appellant)
James J. Hartnett, IV, Deborah J. Mackay; Faegre & Benson, L.L.P., 2200 Wells Fargo Center, 90 South Seventh Street, Minneapolis, MN 55402-3901 (for respondent)
Teresa E. Rice, Minnesota Bankers Association, 7601 France Avenue South, Suite 200, Edina, MN 55435 (Amicus Curiae)
Considered and decided by Wright, Presiding Judge; Peterson, Judge; and Halbrooks, Judge.
Respondent surety brought suit against appellant bank, asserting that funds that appellant set off from a contractor’s account were trust funds to which respondent was entitled. The district court held that the funds were subject to a statutory trust that prevented appellant from exercising its right of setoff. We reverse and remand.
Oakwood Builders (Oakwood), a general contractor, entered a general indemnity agreement with respondent United States Fidelity and Guaranty Company (U.S. Fidelity) in September 2001. Hennepin County selected Oakwood as general contractor for construction of a library in June 2002. In accordance with the general indemnity agreement, U.S. Fidelity issued payment bonds to secure claims from Oakwood’s subcontractors on the library project.
While the library project was pending, appellant Excel Bank Minnesota (Excel) extended lines of credit totaling $900,000 to Oakwood. Excel and Oakwood executed a security agreement that provided in relevant part:
To the extent permitted by applicable law, [Excel] reserves a right of setoff in all [Oakwood’s] accounts with [Excel] . . . . However, this does not include any IRA or Keogh accounts, or any trust accounts for which setoff would be prohibited by law.
Hennepin County remitted a progress payment of $906,558.40 to Oakwood on February 25, 2003. That same day, Excel issued a notice of default on Oakwood’s lines of credit. Oakwood deposited the payment in its general deposit account with Excel on February 27, 2003. In a meeting on March 2, 2003, Oakwood disclosed substantial financial losses to Excel. As a result of this disclosure, Excel declared that the lines of credit were in default, exercised its right of setoff, and satisfied the debt against the lines of credit by withdrawing $863,121.29 from Oakwood’s account at Excel.
On March 18, 2003, Oakwood declared that it was unable to complete the library project and filed a surety claim with U.S. Fidelity on its payment bonds. U.S. Fidelity accepted the claim and assumed liability for payments to Oakwood’s subcontractors. By the completion of the library project, U.S. Fidelity had remitted over $1.1 million for these payments.
U.S. Fidelity brought suit against Excel in May 2003. It asserted that the funds withdrawn by Excel were subject to a trust, or in the alternative, that the funds were subject to U.S. Fidelity’s superior priority of interest under the Uniform Commercial Code (UCC). Following the parties’ cross-motions for summary judgment, the district court held that the progress payment from Hennepin County was subject to a statutory trust for the benefit of Oakwood’s subcontractors. As such, the funds were “trust accounts for which setoff would be prohibited by law” under the security agreement between Excel and Oakwood. The district court entered judgment in favor of U.S. Fidelity for $728,101.74. This appeal followed.
Excel challenges the district court’s order granting U.S. Fidelity summary judgment and seeks to have summary judgment granted in its favor. Summary judgment is appropriate when there are no issues of material fact and the moving party is entitled to judgment as a matter of law. Minn. R. Civ. P. 56.03. When, as here, the material facts are undisputed, our review is limited to determining whether the district court erred in its application of the law. Prior Lake Am. v. Mader, 642 N.W.2d 729, 735 (Minn. 2002). The question before the district court was one of statutory interpretation, which we review de novo. See id.
Excel principally contends that, notwithstanding the purported effect of a statutory trust on Oakwood’s general deposit account, Excel’s setoff rights are unaltered. Excel argues that it is not subject to the statutory trust governed by Minn. Stat. § 514.02, subd. 1(a) (2002), because its setoff constituted a payment received by a third party in the ordinary course of business.
Section 514.02 provides in relevant part:
Proceeds of payments received by a person contributing to an improvement to real estate . . . shall be held in trust by that person for the benefit of those persons who furnished the labor, skill, material, or machinery contributing to the improvement. Proceeds of the payment are not subject to garnishment, execution, levy, or attachment. Nothing contained in this subdivision shall require money to be placed in a separate account and not commingled with other money of the person receiving payment or create a fiduciary liability or tort liability on the part of any person receiving payment . . . .
Minn. Stat. § 514.02, subd. 1(a). The purpose of this provision is to protect landowners from unscrupulous contractors, reducing the risk that landowners will face a mechanics’ lien when subcontractors are unpaid. Hearing on H.F. No. 2563 Before the House Comm. on Civil Law (Feb. 2, 2000). But discrete limits are placed on the scope of the statutory trust, in that “[t]he penalties and remedies provided in this section do not apply to a third party who receives a payment in the ordinary course of business.” Minn. Stat. § 514.02, subd. 1(c) (2002).
We recently considered the effect of this limitation in Siemens Bldg. Techs., Inc. v. Peak Mech., Inc., 684 N.W.2d 914 (Minn. App. 2004). Siemens involved a subcontractor, Peak Mechanical, Inc., who was not paid by the general contractor for work on a construction project. Peak had subcontracted part if its assignment to Siemens. After the general contractor defaulted, Peak and other subcontractors joined in an action to foreclose its mechanics’ lien against the project. Id. at 916. Siemens was not a party to the mechanics’ lien action. Id. At the time, Peak’s accounts receivables were subject to a previously granted security interest held by a bank. Id. Because Peak defaulted on its loan payments to the bank, Peak entered an agreement with the bank that surrendered title to Peak’s accounts receivables. Id. When Peak and the other subcontractors reached a settlement with the general contractor in the mechanics’ lien case, Peak received a settlement of $215,088 payable jointly to Peak and the bank. Id. Siemens then sued both Peak and the bank, asserting that the funds were subject to a statutory trust under Minn. Stat. § 514.02. Id. Characterizing the payment to the bank as a payment received by a third party in the ordinary course of business, we held that Siemens had no cause of action against the bank. Id. at 918.
Compared to the instant case, Siemens is distinguishable in only one respect. Siemens involved collection of a debt through operation of a perfected security interest, whereas the instant case involved collection of a debt through a contractual right of setoff. Notwithstanding this distinction, we are persuaded that actions by Excel, as a lending institution, to collect its debts resulted in the receipt of payments in the ordinary course of business.
We assume, for purposes of this analysis that, under Minn. Stat. § 514.02, subd. 1(a), Oakwood transferred to Excel funds initially subject to the statutory trust. But under Minn. Stat. § 514.02, subd. 1(c), U.S. Fidelity has no cause of action against Excel, a third party that exercised its right of setoff in the ordinary course of business. We, therefore, conclude as a matter of law that U.S. Fidelity has no remedy against Excel and that Excel is entitled to summary judgment. Accordingly, we reverse and remand for entry of judgment.
Reversed and remanded.
 At the time that Excel exercised its right of setoff, Oakwood had $1,041,577.95 in its account. Based on its holding that $906,558.40 of this amount was subject to a statutory trust, the district court found that Excel could properly setoff the remainder in the account, $135,019.55, against Oakwood’s debt of $863,121.29. Concluding that statutory trust funds in the amount of $728,101.24 were improperly applied to Oakwood’s debt, the district court ordered judgment accordingly.
We observe that there is no outstanding priority of interests issue under the UCC. Although Excel had a perfected security interest, it proceeded by setoff, which is not subject to the UCC. See Minn. Stat. § 336.9-340(b) (2002) (“[T]he application of this article to a security interest in a deposit account does not affect a right of recoupment or setoff of the secured party as to a deposit account maintained with the secured party.”).
Because we hold that U.S. Fidelity has no remedy against Excel under Minn. Stat. § 514.02, we need not address whether U.S. Fidelity is entitled to attorney fees under this statute.