This opinion will be unpublished and
may not be cited except as provided by
Minn. Stat. § 480A.08, subd. 3 (2004).
IN COURT OF APPEALS
Plumbing and Heating, Inc.,
J.K. Insulation, Inc.,
Jane Doe and/or John Doe,
Ronald S. Smith, et al.,
intervenors and third party plaintiffs,
J.K. Air, Inc.,
third party defendant,
Filed July 26, 2005
Anoka County District Court
File No. C7027886
Benjamin R. Skjold, Hellmuth & Johnson, PLLC, 10400 Viking Drive, Suite 500, Eden Prairie, MN 55344 (for appellant)
J.K. Insulation, Inc.,
J.K. Air, Inc.,
Molly S. McKee, Tamara O. Moreland, Larkin, Hoffman, Daly & Lindgren, Ltd., 1500 Wells Fargo Plaza, 7900 Xerxes Avenue South, Bloomington, MN 55431 (for respondents Smith, et al.)
Considered and decided by Peterson, Presiding Judge; Kalitowski, Judge; and Wright, Judge.
U N P U B L I S H E D O P I N I O N
In this security-interest dispute, appellant argues that the district court’s findings are irreconcilable and that the district court erred in declaring that respondent-buyers own an airplane hangar and the lessee’s interest in the land occupied by the hangar free and clear of appellant’s security interest in the hangar and lease. We affirm.
Metropolitan Airports Commission (MAC) owns and operates the
Keller owned an interest in respondent J.K. Insulation, Inc. (J.K. Insulation). Over several years, appellant Commercial Plumbing and Heating, Inc. (Commercial) entered into several agreements to lend J.K. Insulation money. As president of J.K. Insulation, Keller agreed to personally guaranty all funds due to Commercial from J.K. Insulation. To secure the loans, Commercial and J.K. Insulation entered into a series of security agreements. The first agreement, executed in September 2000, encumbered substantially all of J.K. Insulation’s assets.
On February 6,
2001, J.K. Insulation and Keller executed a promissory note agreeing to pay Commercial
the principal amount of $352,878. J.K.
Insulation and Keller also executed a Restated Security Agreement that was almost
identical with the agreement executed in September 2000. The only substantive change was a handwritten
addition to the list of items in which J.K. Insulation and Keller were granting
Commercial a security interest. The handwritten
addition states: “lease land lot – 33D
In August 2001, Commercial, J.K. Insulation, and Keller entered into a series of transactions that involved the hangar: Keller executed a bill of sale, a quitclaim deed, and an assignment of the lease between Keller and the MAC, all in favor of Commercial. These documents were intended to provide additional security to Commerical, which held the documents but did not record or file them with any government authority. Commercial did not take possession of the hangar, and the assignment of the lease was not submitted to the MAC for approval.
The MAC’s written policies, rules, and regulations, effective November 1, 2000, provide:
A tenant may request [MAC] consent to a conditional assignment of lease or any type of security interest to a lender which is a requirement of financing. A conditional assignment of lease transfers the lease from the tenant to the lender if the tenant fails to perform obligations for the lender. The lender must draft the conditional assignment of lease document, based on a format provided by [MAC] staff, and must submit it to the [MAC] staff.
The request for consent to a conditional assignment of lease will be considered only if: (a) the tenant does not owe any monies to the [MAC] under the terms of his/her current lease(s); (b) the lender is financing the construction of or substantial improvements to a hangar or the acquisition of an existing hangar; and (c) the tenant has complied with the terms and conditions of the current lease(s), including environmental requirements.
Metropolitan Airports Commission, Lease Policies, Rules and Regulations of the Metropolitan Airports Commission Reliever Airports, § IV, E.1 (2000). In December 2001, Keller renewed his lease with the MAC, which was not aware that Commercial claimed an interest in the hangar and the lease.
After the promissory note was executed in February 2001, Commercial loaned additional money to J.K. Insulation. Some of the money was repaid, but after repayment slowed, Commercial demanded payment of the promissory note in full. Payment was not received, and on August 27, 2002, Commercial filed this action against Keller and J.K. Insulation for amounts owed, and to foreclose its security interests. Commercial did not file a notice of lis pendens and did not attempt to evict Keller from the hangar.
July 2003, respondent Ronald Smith saw a “for sale” sign in the window of the
hangar. Smith called the telephone
number on the sign and talked to Keller. Smith and his friend, respondent
Before closing on the hangar, Smith checked with the Anoka County Assessor’s office to verify whether J.K. Insulation owned the hangar. Smith obtained a tax statement that listed J.K. Air as the fee owner of the hangar and the entity to whom taxes were to be billed. The statement also indicated that there were back taxes due on the hangar. Smith told Keller about the back taxes and that J.K. Air, not J.K. Insulation, was listed as the owner of the hangar. Keller told Smith that he would pay the back taxes and that he controlled both J.K. Air and J.K. Insulation and the seller would be changed from J.K. Insulation to J.K. Air. Keller paid the back taxes and gave Smith a receipt from the county that indicated that the taxes had been paid by Keller and J.K. Air.
Keller for documentation that Keller controlled J.K. Air, and Keller gave Smith
corporate minutes that indicated that Keller was the president, treasurer, and
secretary of J.K. Air. Smith also checked
with the Minnesota Secretary of State to determine whether J.K. Air was a valid
corporation and learned that J.K. Air was a
Smith also checked
with the Secretary of State to determine whether there were any U.C.C. filings concerning
J.K. Air and the hangar and found that there were none. As further evidence of the validity of the
On October 9,
2003, buyers obtained additional loans and paid the balance of the purchase
On October 20, 2003, the MAC consented to the assignment of the lease by Keller to Smith. Keller and Smith executed the assignment on November 5, 2003, and on December 3, 2003, the MAC executed its consent to the assignment.
After Commercial’s attorney learned that the MAC was in the process of assigning the lease from Keller to a third party, Commercial took steps to take possession of the hangar and sell it and assign the lease to a third party. We need not recount the details of this effort to address the issues in this appeal, but the district court ultimately permitted buyers to intervene in Commercial’s action against Keller and J.K. Insulation and permitted Commercial to retain possession of the hangar until a decision on the merits in this action.
Following a court trial, the district court found:
Commercial had a valid security interest in the assets of Defendants including, but not limited to, the airplane and the hangar. The security interest in favor of Commercial was not perfected. Smith and Runeberg purchased the Hangar without any knowledge, constructive, actual or implied, of the security interest of Commercial, notwithstanding their due diligence.
The district court ordered judgment entered in favor of Commercial against J.K. Insulation for the amount owed, less a credit for collateral that had been sold by Commercial, and for attorney fees and costs and disbursements. The district court also declared buyers to be the owners of the hangar and the lessee’s interest in the lease, “free and clear of any interest of Commercial or its assigns,” and ordered Commercial to deliver possession of the hangar and the lease to buyers. Commercial did not move for amended findings or a new trial and appeals from the judgment entered August 16, 2004.
On appeal from a
judgment where there has been no motion for a new trial, appellate review is
limited to “whether the evidence sustains the findings of fact and whether such
findings sustain the conclusions of law and the judgment.” Gruenhagen
fact, whether based on oral or documentary evidence, shall not be set aside
unless clearly erroneous, and due regard shall be given to the opportunity of
the trial court to judge the credibility of the witnesses.”
Commercial argues that the district court’s August 2004 order should be reversed or remanded for additional proceedings because J.K. Air had no right to transfer the hangar and because the record does not support a finding that buyers purchased the hangar in good faith without notice of Commercial’s security interest.
[A] security interest is enforceable against the debtor and third parties with respect to the collateral only if: (1) value has been given; (2) the debtor has rights in the collateral or the power to transfer rights in the collateral to a secured party; and . . . (A) the debtor has authenticated a security agreement that provides a description of the collateral.
We agree that the district court’s finding that Commercial had a valid security interest in the hangar, which implies that J.K. Insulation owned the hangar, is inconsistent with the district court’s conclusion that the sale of the hangar by J.K. Air was valid. But we do not agree that this inconsistency demonstrates that J.K. Air could not validly transfer the hangar.
Commercial argues that there is no question that only Keller and J.K. Insulation were owners of the hangar at any time relevant to these proceedings. But Commercial does not challenge the district court’s finding that after constructing the hangar, Keller organized J.K. Air and transferred ownership of the hangar to J.K. Air. The only argument that Commercial makes to support its claim that J.K. Air did not own the hangar is that the lease for the property occupied by the hangar was assigned to Keller and a representative of the MAC testified that under the terms of the lease, the tenant is the owner of the hangar. But Commercial does not cite to any testimony in the record and does not cite any lease term that requires the tenant to be the owner of the hangar. Commercial has not shown that the district court’s finding that Keller transferred ownership of the hangar to J.K. Air is clearly erroneous or that ownership of the hangar did not remain with J.K. Air.
finding that Keller transferred ownership of the hangar to J.K. Air is not
clearly erroneous and Commercial has not shown that ownership of the hangar did
not remain with J.K. Air, it appears that the district court’s findings are inconsistent
because the finding that Commercial had a valid security interest in the hangar
is erroneous. But we need not determine
whether this finding is erroneous because if it is erroneous, and Commercial
did not have a valid security interest in the hangar, buyers would still take
the hangar free and clear of any interest of Commercial. See
Hanka v. Pogatchnik, 276 N.W.2d 633, 636 (
Commercial argues that even if J.K. Air owned the hangar, Commercial’s interest in the hangar is superior to any interest claimed by buyers because “[buyers] did not carry their burden of establishing that they are purchasers in good faith for value without notice, quite simply because they did not act in good faith and had more than ample notice that something was amiss.” We disagree.
perfect a security interest in most types of collateral, a financing statement
must be filed with the appropriate state or county office.” World
Wide Tracers, Inc. v. Metro. Protection, Inc., 384 N.W.2d 442, 444 (
The district court found:
February 20, 2004, UCC search with the Secretary of State revealed no financing
statement referring to Commercial’s claimed security interest in the Hangar
under the names of J.K. Air, J.K. Insulation, or Keller. A December 16, 2003 UCC search with
Commercial does not challenge this finding, and it does not dispute that its security interest was not perfected. Commercial instead argues that its interest has priority because buyers did not give value for and take delivery of the hangar without knowledge of Commercial’s interest.
Commercial contends that because buyers endorsed the checks that they gave Keller so that the checks would be paid to J.K. Insulation, there was no value transferred to the owners of the hangar and the lease. But Commercial acknowledges that it found no legal authority that supports this claim. There is evidence that buyers paid $275,000 for the hangar and the lease. The district court’s finding that buyers gave value is not clearly erroneous.
Commercial also argues that buyers did not meet their burden of demonstrating that they did not have notice of Commercial’s interest in the hangar.
[A] person has “notice” of a fact if the person: (1) has actual knowledge of it; or (2) has received a notice or notification of it; or (3) from all the facts and circumstances known to that person at the time in question, has reason to know that it exists.
testified that at no time before the closing were they informed about
Commercial’s interest, and Keller testified that he did not tell buyers about
Commercial’s interest. Both the purchase
agreement and the bill of sale guaranteed that no such interest existed. Also, Smith testified that he checked with the
Anoka County Assessor’s office to verify whether J.K. Insulation owned the
hangar, and upon learning that J.K. Air, not J.K. Insulation, was listed as the
owner, he told Keller about the discrepancy, and Keller said that he controlled
both J.K. Air and J.K. Insulation and the seller would be changed from J.K.
Insulation to J.K. Air. Keller also gave
Smith a receipt from the county that indicated that the back taxes on the
hangar had been paid by Keller and J.K. Air and produced corporate minutes that
indicated that Keller was the president, treasurer, and secretary of J.K.
Air. Keller also took steps to put J.K.
Air back in good standing after Smith learned that J.K. Air was a
Citing Miller v. Hennen, 438 N.W.2d 366, 369-70 (Minn. 1989), Commercial argues that the district court should have analyzed the sale of the hangar and lease as a sale of real property and that buyers did not demonstrate that they were bona fide purchasers because the record “unequivocally demonstrates that . . . [buyers] were in possession of sufficient facts to put them on notice of inquiry as to adverse interests in the hangar.” In making this argument, however, Commercial misstates the rule described in Miller.
The Miller court stated,
One is not a bona fide purchaser and entitled to the protection of the recording act, though he paid a valuable consideration and did not have actual notice of a prior unrecorded conveyance from the same grantor, if he had knowledge of facts which ought to have put him on an inquiry that would have led to a knowledge of such conveyance.
Commercial contends that if Smith had checked with the Secretary of State concerning J.K. Insulation rather than J.K. Air, he would have found that there was an outstanding security interest against J.K. Insulation. Our review of the record reveals a U.C.C. financing statement filed by Lino Lakes State Bank that identifies J.K. Insulation as the debtor and claims an interest in all of J.K. Insulation’s inventory, equipment, rights to payments, and general intangibles. Commercial also contends that if Smith had searched the records of the county assessor’s office for anything more than back taxes, he would have found at least one of the tax liens disclosed by trial exhibit 204. Exhibit 204 contains a tax lien filed with the Anoka County Recorder on December 10, 2002, by the Minnesota Department of Economic Security against J.K. Insulation.
But even if buyers had known about the U.C.C. financing statement and the tax lien, Commercial has not explained how this knowledge would prompt an inquiry that would lead to knowledge of Commercial’s security interest in the hangar. We see no reason why Lino Lakes State Bank or the Department of Economic Security would have any knowledge about Commercial’s security interest.
Commercial also asserts that had Smith searched the office of the Anoka County District Court Administrator or spoken to “someone” at the MAC, he would have found the instant litigation, which would have put him on notice of the possibility of adverse interests in the property. But Commercial does not explain what reason Smith had for searching court records or speaking with someone at the MAC. The rule in Miller is that buyers would not be bona fide purchasers if they had knowledge of facts that ought to have put them on an inquiry that would have led to a knowledge of Commercial’s interest. Although searching court records or talking with someone at the MAC might have revealed Commercial’s security interest, Commercial has not identified any facts that buyers knew that ought to have caused them to search court records or speak with someone at the MAC.