This opinion will be unpublished and

may not be cited except as provided by

Minn. Stat. sec. 480A.08, subd. 3 (1996).




First State Bank of Floodwood,



Estate of David Lee Braden, Sr., et al.,


Filed December 30, 1997


Harten, Judge

St. Louis County District Court

File No. CX-97-600087

Kenneth D. Butler, Gunnar B. Johnson, Clure, Eaton, Butler, Michelson, Ferguson & Munger, P.A., 222 West Superior Street, Suite 200, Duluth, MN 55802 (for appellant)

Richard D. Kolu, 1710 Mall Drive, Duluth, MN 55811 (for respondents)

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



Appellant First State Bank of Floodwood appeals the grant of summary judgment to the Estate of David Lee Braden, Sr. We affirm.


During 1994 and 1995, David Lee Braden, Sr. obtained four loans from First State Bank of Floodwood (First State). In each of the loan contracts, Braden agreed that if he was in default on repayment, the bank could set off his loan obligation against any right he had to receive money from the bank. Braden then died without repaying the loans. By January 1997, the four loans were in default.

In March 1996, a probate petition was filed. First State Bank filed a notice of claim in the district court probate division (probate court) and demanded notice of the probate proceedings. Several other creditors also filed claims against the estate. The claims eventually totaled over $100,000. The estate assets were approximately $55,000. In July 1996, the probate court ordered that the proceeds from the sale of secured assets were to be held in an estate bank account. The estate account was established at a bank other than appellant.

In January 1997, the estate sold real property. The buyer financed the purchase by a First State mortgage. At the closing, First State issued a bank money order for payment to the estate. Along with this settlement check, First State handed the estate representatives a letter claiming its right to set off the total amount due on the defaulted loans against the sale proceeds. The estate representatives deposited the check in the estate account.

First State then filed a declaratory judgment action in the district court civil division (district court) to determine if it was entitled to the setoff. In February 1997, the probate court stayed the probate proceedings pending disposition of the declaratory judgment action in district court.

In the declaratory action, both parties filed motions for summary judgment. The district court granted summary judgment in favor of the estate and denied First State's motion. The district court determined that the probate court had exclusive jurisdiction over the real estate sale proceeds and that First State did not have a right of setoff as a matter of law. First State appeals that decision.


In reviewing a grant of summary judgment, we determine: (1) whether genuine issues of material fact exist and (2) whether the district court erred in applying the law. State by Cooper v. French, 460 N.W.2d 2, 4 (Minn. 1990). The evidence is viewed in the light most favorable to the party against whom summary judgment was granted. Fabio v. Bellomo, 504 N.W.2d 758, 761 (Minn. 1993).

The district court decided, among other things, that First State could not avoid probate court jurisdiction by bringing its declaratory action in district court because First State had already submitted to the jurisdiction of the probate court. We agree. This matter involves distribution of estate assets. "To the full extent permitted by the constitution, the [probate] court has jurisdiction over all subject matter relating to estates of decedents * * *." Minn. Stat. § 524.1-302(a) (1996). The district court cannot direct the distribution of funds belonging to the estate of a decedent, because the probate court has exclusive jurisdiction to determine the persons entitled to it. Crolley v. O'Hare Int'l Bank, 346 N.W.2d 156, 159 (Minn. 1984). Thus, jurisdiction to decide the ultimate distribution of all probate funds properly rests with the probate court.

Notwithstanding its declaration that the probate court has exclusive jurisdiction over the distribution of the realty sale proceeds, the district court granted summary judgment declaring that First State had no right to set off the loan indebtedness against the sale proceeds. We note a possible jurisdictional inconsistency in these declarations. But neither party raised the issue on appeal, so we turn to the setoff issue as presented.[1]

Minnesota courts recognize both a contractual right of setoff and an equitable right of setoff. Nietzel v. Farmers and Merchants State Bank of Breckenridge, 307 Minn. 147, 152-53, 238 N.W.2d 437, 440 (1976). "A bank's right to set off a debt owed it by a depositor against the depositor's account is a balancing of accounts between debtor and creditor." Id. at 149, 238 N.W.2d at 438. A right of setoff continues to exist against a debtor's estate. Browning v. Eiken, 189 Minn. 375, 379, 249 N.W. 573, 574 (1933).

A bank setoff requires: (1) mutuality of debt, (2) that the funds used are property of the debtor, (3) that the funds be a general deposit, and (4) that the

indebtedness is due at the time of the setoff. Firstar Eagan Bank, N.A. v. Marquette Bank Minneapolis, N.A., 466 N.W.2d 8, 12 (Minn. App. 1991), review denied (Minn. Apr. 29, 1991). Mutuality of debt means that the debts are "between the same parties and in the same right."[2] Nietzel at 152, 238 N.W.2d at 440. The right does not exist where the account from which the setoff would be exercised does not belong to the debtor. Firstar, 466 N.W.2d at 12.

First State has not satisfied these setoff requirements. It concedes that the funds were not in a deposit account. In addition, the real estate purchaser, not the bank, is obligated to pay the estate. The mortgage funds were part of the purchaser's payment to the estate. First State has no indebtedness to the estate and the requirement of mutuality of obligation is not met.

First State argues that the four Firstar requirements are not involved because they apply only to the equitable right to setoff. The bank argues that it is claiming a contractual right to setoff, which arises from the contract alone and is a more expansive right. The law does not support the bank's position. Even when courts have applied a contractual right of setoff, they have required a deposit account and mutuality of obligation. See Nietzel, 307 Minn. at 152-53, 238 N.W.2d at 440 (holding that a bank had a contractual right to set off a debt against a depositor's account); Browning, 189 Minn. at 379, 249 N.W. at 575 (holding that a contract that includes a right to set off funds justifies the bank in applying the debtor's deposit account to his debt). Without those elements, the debtor/creditor relationship, which is central to the right of setoff, is absent. Here the purported setoff is based solely on the fortuitous circumstance that the real estate financing originated in First State as mortgagee for a third party who owed real estate purchase money to the bank's debtor.


Dated: ______________________________________

James C. Harten

[1] The probate court was competent to decide the declaratory issue concerning setoffs. See Minn. Stat. § 555.01 (1996) ("Courts of record within their respective jurisdictions shall have power to declare rights * * *.").

[2] The relationship between a bank and its depositor is that of debtor and creditor. If the depositor (creditor) becomes otherwise indebted to the bank, the role and corresponding right of each party are reversed as to the latter indebtedness, but the same general right prevails between the parties.