This opinion will be unpublished and
may not be cited except as provided by
Minn. Stat. § 480A.08, subd. 3 (1996).


NAB Asset Venture II, L.P.,


Lenertz, Inc.,
et al.,

Filed July 28, 1998
Randall, Judge

Dakota County District Court
File No. 19-C4-96-7136

William M. Kronschnabel, Michelle D. Christensen, Kampmeyer, Kronschnabel & Bader, L.L.P., 386 North Wabasha, 1500 Capital Centre, St. Paul, MN 55102 (for respondent)

James A. Gallagher, Barry A. Gersick, Martha J. Keon, Maun & Simon, P.L.C., 2000 Midwest Plaza, 801 Nicollet Mall, Minneapolis, MN 55402 (for appellant)

Considered and decided by Kalitowski, Presiding Judge, Randall, Judge, and Schumacher, Judge.

U N P U B L I S H E D   O P I N I O N


Appellants claim the district court erred in denying their motion for amended findings and conclusions of law, and for a new trial. The motions followed a bench trial in respondent's action to recover on two promissory notes and a guarantee created by appellants. We affirm.


Respondent NAB Asset Venture II, L.P., brought suit in Dakota County District Court, seeking to collect on promissory notes made by Lenertz, Inc. (Lenertz) and its affiliate, National Systems Company, Inc. (National Systems), to Midwest Federal Savings and Loan (Midwest Federal). Lenertz and National Systems are subsidiaries of Lenertz Enterprises, Inc. (Lenertz Enterprises), the guarantor of the National Systems note. NAB purchased copies of the instruments from the Resolution Trust Company (RTC) at auction in Kansas City. The RTC was appointed as receiver for Midwest Federal, which had been seized by federal regulators as an insolvent financial institution. NAB settled its claim against National Systems and National Systems was dismissed from the action.

A bench trial was held and the district court ruled that NAB had purchased the notes and guarantee; the claimed principal balances due and owing on the instruments were correct; the substitution of Norwest Bank's prime rate as the reference rate in computing interest on the instruments was reasonable and proper; and NAB was entitled to judgment against Lenertz for any unpaid principal balances, accrued interest, and attorney fees as provided in the instruments. The district court denied appellants' motion for amended findings of fact and conclusions of law or for a new trial.


Lenertz argues that the district court improperly applied the preponderance of the evidence standard to NAB's claim to enforce a lost or destroyed instrument under Minn. Stat. § 336.3-309 (1996). Lenertz claims that the district court should have applied the clear and convincing evidentiary standard.

The rule in Minnesota is that "the evidence of the execution of an alleged lost instrument must be clear and strong 'and its contents clearly established.'" Diamond v. Dennsion, 102 Minn. 302, 306, 113 N.W. 696, 697 (1907) (applying clear and convincing standard in action to prove existence and execution of real estate mortgage note). Thus, in actions to prove the existence and execution of lost deeds to real property, "[t]he proponent of a lost deed bears the burden of establishing the deed by clear and convincing evidence." Perbix v. Hansen, 419 N.W.2d 101, 104 (Minn. App. 1988) (citing Buttruff v. Robinson, 181 Minn. 45, 46, 231 N.W. 414, 414 (1930) (holding that "to establish a lost deed the evidence must be something more than a mere preponderance. It must be clear and convincing.")). Therefore, the proper evidentiary standard to be applied in actions for lost, stolen, or destroyed instruments under Minn. Stat. § 336.3-309 is the clear and convincing standard.[1]

Here, NAB has satisfied either evidentiary standard. At no time has Lenertz denied the existence or validity of any of the instruments or the amounts owing. It was firmly established during trial that: (1) NAB purchased copies of the Lenertz note, National Systems note, and the guarantee from the RTC; (2) the RTC/NAB loan sale agreement, bill of sale, and document transmittal, along with the dates, tracking numbers, and approximate balances all refer to the notes and guarantee; (3) the original documents were never produced by the RTC despite repeated requests by NAB; and (4) the RTC endorsed the copies of the original instruments through the use of original signature allonges stapled to the copies and that this is the common practice in bulk loan transfers.

Lenertz argues that the National Systems note and the accompanying Lenertz Enterprises guarantee cannot be enforced because the stapling of the original signature allonges to those instruments does not satisfy the endorsement requirements of Minn. Stat. § 336.3-204 (1996). We disagree.

For NAB to have an enforceable claim on the National Systems note and the Lenertz Enterprises guarantee, the instruments had to be effectively endorsed and transferred to NAB. See Minn. Stat. § 336.3-203 (1996) (setting forth requirements for transfer of negotiable instruments). Under Minnesota's present Uniform Commercial Code, an endorsement is defined as "a signature * * * that alone or accompanied by other words is made on an instrument for the purpose of (i) negotiating the instrument." Minn. Stat. § 336.3-204(a)(i). This section further provides:

For the purpose of determining whether a signature is made on an instrument, a paper affixed to the instrument is a part of the instrument.

Minn. Stat. § 336.3-204(a). The comments to this section state that "[a]n indorsement on an allonge is valid even though there is sufficient space on the instrument for an indorsement." Minn. Stat. Ann. § 336.3-204 Minn. code cmt., U.C.C. cmt. 1 (West 1998). Stapling an allonge to the instrument sufficiently affixes it to the instrument so that it becomes "a part thereof." See Southwestern Resolution Corp. v. Watson, 694 S.W.2d 262, 264 (Tex. 1997) (holding "an allonge stapled to an instrument is 'firmly affixed' to the instrument"); Lamson v. Commercial Credit Corp., 531 P.2d 966, 968 (Colo. 1975) (holding stapling of allonge to instrument appropriate method of affixing endorsement to instrument because "[s]tapling is the modern equivalent of gluing or pasting"); see also Adams v. Madison Realty & Dev., Inc., 853 F.2d 163, 166 (3d Cir. 1988) (stating in dictum that "[w]e may assume, without actually deciding, that the loose indorsement sheets accompanying [the] notes would have been valid allonges had they been stapled or glued to the notes themselves."). We thus hold that the stapling of an allonge to the instrument is a proper endorsement under section 336.3-204(a).

Lenertz argues that NAB failed to prove the necessary elements of its claim to enforce lost, stolen, or destroyed instruments under Minn. Stat. § 336.3.3-309(a). This section provides:

A person not in possession of an instrument is entitled to enforce the instrument if (i) the person was in possession of the instrument and entitled to enforce it when loss of possession occurred, (ii) the loss of possession was not the result of a transfer by the person or a lawful seizure, and (iii) the person cannot reasonably obtain possession of the instrument because the instrument was destroyed, its whereabouts cannot be determined, or it is in the wrongful possession of an unknown person or person that cannot be found or is not amenable to service of process.

Minn. Stat. § 336.3-309(a).

Lenertz claims that NAB cannot enforce the instruments because NAB was never in possession of the original notes and the guarantee. It is undisputed that NAB contracted to purchase copies of the note and guarantee at auction. The district court acknowledged this fact when it stated "a proper transfer of the original notes did not occur." However, the district court ruled that the RTC could properly transfer the right to enforce a lost, stolen, or destroyed instrument, stating that

the RTC as a holder in due course properly transferred the right to enforce the notes in totality to NAB through duplicate instruments and original endorsement. The transfer of rights included the right to collect under the lost, destroyed or stolen instrument statute.

In Beal Bank, S.S.B. v. Caddo Parish-Villas South, Ltd., 218 B.R. 851, 852 (N.D. Tex. 1998), HUD assigned its interest in a mortgage note to a bank. At the time it assigned its interest, HUD could not locate the original note. Id. The federal district court held that the bank, as assignee, was entitled to enforce the note under section 3-309(a), if it was established that HUD, as assignor, could satisfy the requirements of section 3-309(a). Id. at 855. The court reasoned that under general assignment law, the assignee takes the position of the assignor, and the assignee was entitled to enforce the lost note because the assignor had "assigned all of its rights in the Note, including those of enforceability under section 3-309(a), to [the bank]." Id.

We agree with the reasoning in Beal Bank. It is undisputed that the RTC was entitled to enforce the note and guarantee and that the loss occurred while the instruments were in the RTC's possession. Minnesota assignment law is identical with the assignment law interpreted in Beal Bank. See Minn. Stat. § 336.3-203(b) (providing transferee acquires "any right of the transferor to enforce the instrument"). Thus, as an assignee of the RTC's rights, NAB is entitled to enforce the note and guarantee under section 3-309(a).

Lenertz argues that the district court erred when it failed to require NAB to provide "adequate protection" against additional claims by other parties as required by Minn. Stat. § 336.3-309(b). This section provides that

[t]he court may not enter judgment in favor of the person seeking enforcement unless it finds that the person required to pay the instrument is adequately protected against loss that might occur by reason of a claim by another person to enforce the instrument. Adequate protection may be provided by any reasonable means.

Id. The committee comments to this section state that "adequate protection is a flexible concept" and that the court is given discretion in determining how that protection is to be assured. Minn. Stat. Ann. § 336.3-309 Minn. code cmt., U.C.C. cmt. (West 1998). The comments further provide that the type of adequate protection that is reasonable under the circumstances "may depend on the degree of certainty about the facts in the case." Id.

Here, the district court found that under the circumstances, it was "highly unlikely" that any other entity would pursue a claim on the same instruments. The court noted that (1) the notes did not contain blank endorsements; (2) the only entities that could bring claims are the now-defunct Midwest Federal or the RTC; (3) the four years that have elapsed since the RTC sold the instruments provides an additional layer of protection to Lenertz; and (4) the Lenertz entities are no longer in business and do not have any assets to pay any future judgment. Although there was an action in federal court regarding the Lenertz note, this action came about due to a clerical error and has since been dismissed. We find that, under the circumstances, the district court properly concluded it was unlikely Lenertz Enterprises would be subject to another suit by another entity on these instruments. Adequate protection was afforded Lenertz.

Lenertz claims the district court erred when it computed interest on the instruments based on Norwest Bank's prime rate. In the present case, the notes and guarantee purchased by NAB called for the payment of interest based on "Midwest [Federal's] publicly announced 'Prime Rate of Interest." However, Midwest Federal failed in 1989. The district court applied the Norwest prime rate to calculate the interest, reasoning that "it would not be correct or equitable to allow [Lenertz] to escape agreed upon interest calculations merely because a savings and loan failed."

Other jurisdictions addressing this issue have allowed the substitution of a reasonable rate of interest where the loan instrument calls for interest to be based on the prime rate of a failed bank. See Ginsberg 1985 Real Estate Partnership v. Cadle Co., 39 F.3d 528, 533 (5th Cir. 1994) (holding substitution of analogous prime rate is appropriate in light of "benchmark" bank's failure); FDIC v. Massingill, 24 F.3d 768, 781 (5th Cir. 1994) (holding it is reasonable alternative to substitute assuming bank's prime rate for that of defunct lender's prime rate); FDIC v. M.F.P. Realty Assocs., 870 F. Supp. 451, 456 (D. Conn. 1994) (holding FDIC may substitute appropriate interest rate to apply to loan based on prime rate of failed bank); FDIC v. Cage, 810 F. Supp. 745, 747 (S.D. Miss. 1993) (noting "bank cannot be expected to provide in its notes for interest rates to be applied in the event the bank fails"); FDIC v. Condo Group Apts., 812 F. Supp. 694, 699 (N.D. Tex. 1992) (noting courts have approved using another bank's prime rate when note became asset of FDIC through purchase and assumption agreement); cf. FDIC v. Patel, 46 F.3d 482, 485 (5th Cir. 1995) (holding district court may not accept substituted rate of interest for rate of failed bank unless new rate is proven reasonable).

Here, Lenertz agreed to pay ongoing interest using Midwest's publicly announced prime rate. Lenertz therefore contemplated that it would pay interest on the notes. If we were to adopt Lenertz's argument, it would seem to eviscerate the intent of the parties and allow Lenertz to escape paying interest simply because Midwest Federal collapsed. We conclude the district court properly substituted a reasonable rate of interest in lieu of Midwest Federal's publicly announced prime rate.

Lenertz argues that NAB's proof as to the principal and interest amounts due on the notes and the guarantee was based on inadmissible documents improperly admitted into evidence. Lenertz claims that the district court erroneously admitted printouts from Midland Loans Services, L.P. (Midland), the loan servicing agent for the RTC handling the Lenertz entities' obligations due Midwest, showing the various loan histories, including payments received, because the current records custodian for Midland failed to establish a proper foundation for the admission of the printouts. In addition, Lenertz claims the court erred when it allowed NAB's interest calculations into evidence.

The decision whether to admit evidence is within the broad discretion of the district court, and its decision will not be disturbed unless it constitutes an abuse of discretion. Uselman v. Uselman, 464 N.W.2d 130, 138 (Minn. 1990). Further, "[a] decision on sufficiency of foundation [for evidence] is within the discretion of the trial court." Sorensen v. Maski, 361 N.W.2d 498, 500 (Minn. App. 1985 (citation omitted).

The business records exception to the rule against hearsay is contained in Minn. R. Evid. 803(6). This rule provides:

A memorandum, report, record, or data compilation, in any form, of acts, events, conditions, opinions, or diagnoses, made at or near the time by, or from information transmitted by, a person with knowledge, if kept in the course of a regularly conducted business activity, and if it was the regular practice of that business activity to make the memorandum, report, record, or data compilation, all as shown by the testimony of the custodian or other qualified witness, unless the source of information or the method or circumstances of preparation indicate lack of trustworthiness.

Minn. R. Evid. 803(6). For a document to qualify under this exception, (1) the evidence must be kept in the regular course of business activity; (2) it must be the regular practice of that business to make the memorandum, report, record, or data compilation; and (3) the foundation for the evidence must be shown by the custodian or other qualified witness. National Tea Co. v. Tyler Refrigeration Co., 339 N.W.2d 59, 61 (Minn. 1983). The custodian need not have personal knowledge of the actual creation of the document nor have been employed by the business when the record was made. Id. A custodian also does not necessarily need to be an employee of the business if the custodian understands the business's system. Id. Lastly, the foundation for admissibility may be based on judicial notice of the business's nature and records' nature; this is particularly true of bank and similar statements. Id.

Here, the foundation for the Midland Borrower History Reports was provided in a deposition by the current custodian of those records, Jerald Denk. Denk testified that (1) he has been involved with all aspects of loan servicing while at Midland, including review of loan documents and posting of loan payments; (2) the Borrower History Reports truly and accurately reflect the Lenertz Entities loan transactions with Midland; (3) it is the regular practice of Midland to create reports like the Borrower History Reports; (4) these reports show the transactions on the loans as they occurred; and (5) the reports showing the outstanding principal balances and payments for the Lenertz and National Systems note were prepared and kept in the course of Midland's regularly conducted business activities.

Contrary to Lenertz's assertions, the Borrower History Reports were not prepared for this litigation. Testimony established that the records were kept in the regular course of Midland's business, and that Denk simply caused them to be printed. NAB was not required to show that Denk was employed by Midland when it began servicing the Lenertz Entities loans held by the RTC, or that Denk actually prepared the documents. The fact that Denk was unfamiliar with certain aspects of the loan history goes not to the foundation of the reports, but rather the weight to be given his testimony regarding those reports. The district court did not abuse its discretion when it concluded that a proper foundation had been established and admitted the reports into evidence.

Next, Lenertz argues that the district court erred when admitting NAB's interest calculations into evidence because they constitute inadmissible hearsay and no foundation was laid for their admission. These interest calculations are admissible as business records or as summaries under Minn. R. Evid. 1006 (providing voluminous writings that cannot be conveniently examined by court may be introduced by summary or calculation). Although the accountants who prepared the calculations did not testify at trial, the principal of NAB, Michael Hrbenar, testified concerning the calculations. He was able to testify regarding the loan amounts, the interest rates applied, and how the calculations were determined. In addition, the calculations were based on figures already admitted into evidence and were merely a summary of those figures. A proper foundation was laid for admission of the interest calculations prepared by NAB, and the district court did not abuse its discretion.

Lenertz argues the district court erred in denying its motion for amended findings of fact and conclusions of law or for a new trial. The decision to grant a motion for amended findings and conclusions or for a new trial is within the discretion of the district court, and its decision will not be reversed absent an abuse of discretion. See Bains v. Piper, Jaffray & Hopwood, Inc., 497 N.W.2d 263, 271 (Minn. App. 1993) (applying abuse of discretion standard when reviewing district courts' denial of appellants' motion for a new trial or for amended findings and conclusions), review denied (Minn. Apr. 20, 1993). On appeal from the denial of a motion for a new trial, the verdict will be sustained unless, when viewed in the light most favorable to the verdict, it is manifestly and palpably contrary to the evidence. ZumBerge v. Northern States Power Co., 481 N.W.2d 103, 110 (Minn. App. 1992), review denied (Minn. Apr. 29, 1992). Viewing the evidence in the light most favorable to the verdict, we hold that the district court did not abuse its discretion in denying Lenertz's motion for a new trial.


[1] The district court's and NAB's reliance on Aesoph v. Golden, 367 N.W.2d 639 (Minn. App. 1985), is misplaced. In that case, the court did not address the proper evidentiary standard to be applied.