Dairy Farm Leasing Company, a Delaware corporation, Appellant, vs. Joel D. Grunke, et al., Defendants, Americana Community Bank, Respondent.

This opinion will be unpublished and

may not be cited except as provided by

Minn. Stat. § 480 A. 08, subd. 3 (2000).

 

STATE OF MINNESOTA

IN COURT OF APPEALS

C5-01-8

 

Dairy Farm Leasing Company,

a Delaware corporation,

Appellant,

 

vs.

 

Joel D. Grunke, et al.,

Defendants,

Americana Community Bank,

Respondent.

 

Filed June 26, 2001

Affirmed

Stoneburner, Judge

 

Renville County District Court

File No. C799659

 

Daniel B. Honsey, Kraft, Walser, Hettig & Honsey, PLLP, 131 South Main Street, Box 129, Hutchinson, MN 55350 (for appellant)

 

Dustan J. Cross, Gislason & Hunter, LLP, 2700 South Broadway, Box 458, New Ulm, MN 56073-0458 (for respondent)

 

 

            Considered and decided by Klaphake, Presiding Judge, Crippen, Judge, and Stoneburner, Judge.

 

 

U N P U B L I S H E D  O P I N I O N

 

STONEBURNER, Judge

 

Appellant Dairy Farm Leasing Company (DFL) asserts that the district court erred in concluding that its mortgage was inferior to respondent Americana Community Bank's (ACB) 1994 mortgage and by granting summary judgment to ACB.  Because DFL voluntarily entered into obligations with the Grunkes after ACB's 1994 mortgage was recorded, the district court did not err in concluding that the ACB mortgage had priority, and we affirm.

FACTS

 

Defendants Joel and Loretta Grunke (the Grunkes) entered into a series of financial transactions in order to finance their dairy-farm operation.  DFL leased dairy cattle to the Grunkes in separate 60-month lease agreements in 1989, 1990, and 1991.  In 1989, to secure their obligations under the leases, the Grunkes executed a personal guarantee and a mortgage to DFL, which included the real property involved in this dispute (the real property).  In 1991, the Grunkes executed another mortgage to DFL that also included the real property.  DFL timely recorded both mortgages.  The Grunkes leased 44 dairy cows from DFL under these three leases.

            On May 19, 1994, the Grunkes pre-paid all three leases.  On June 10, 1994, the Grunkes executed a promissory note for $50,000 in favor of ACB, secured by a mortgage to ACB that included the real property.  ACB promptly recorded this mortgage.  In 1994, when the 1989 DFL dairy-cow lease expired, the Grunkes did not return the cows covered by this lease and did not purchase the cows.  DFL allowed the Grunkes to retain the cows and subsequently entered into three new lease agreements dated October 18, 1995, November 2, 1995, and March 13, 1996, pursuant to which the Grunkes leased a total of 107 dairy cows, including the cows originally leased under the 1989, 1990, and 1991 leases.

In 1997, the Grunkes defaulted on their obligations.  In August 1998, ACB foreclosed its 1994 mortgage on the real property.  ACB purchased the real property at the sheriff's foreclosure sale and recorded the Certificate of Sale.  There was no redemption by the Grunkes or DFL, and ACB is now the legal title-holder of the real property. 

In 1999, DFL brought this action to foreclose its 1989 mortgage on the real property.  Only ACB answered.  DFL and ACB brought cross-motions for summary judgment.  At the hearing on the motions, DFL conceded that the lease agreements from 1995 and 1996 were entirely optional, making its interest inferior to ACB's on all but the value of the 44 originally leased dairy cattle.  The district court found that DFL's current legal interest in the 44 cows is based on the 1995 and 1996 voluntary lease agreements, and therefore DFL's 1989/1991 mortgages provided security inferior to ACB's 1994 mortgage.  The district court denied DFL's motion and granted ACB's motion.  DFL appeals.

 

D E C I S I O N

 

On appeal from summary judgment, this court reviews the record to determine whether any genuine issues of material fact exist and whether the district court properly applied the law.  State by Cooper v. French, 460 N.W.2d 2, 4 (Minn. 1990).  Appellate courts review a grant of summary judgment de novo.  Zip Sort, Inc. v. Commissioner of Revenue, 567 N.W.2d 34, 37 (Minn. 1997).  We will affirm a grant of summary judgment if it can be sustained on any ground.  Winkler v. Magnuson, 539 N.W.2d 821, 828 (Minn. App. 1995), review denied (Minn. Feb. 13, 1996).

Mortgage Priority

The issue in this case is which secured creditor has priority.  DFL asserts priority only to the extent of DFL's continuing interest in the 44 originally leased cows.  DFL acknowledges that the Grunkes fully paid the 1989, 1990, and 1991 leases and had the right to keep the leased cows until the expiration of each lease.  DFL concedes that the Grunkes did not incur any additional obligations to DFL until DFL entered into new lease agreements with the Grunkes in 1995 and 1996, and DFL does not dispute that ACB recorded its 1994 mortgage from the Grunkes prior to the creation of the Grunkes' obligations under the 1995 and 1996 leases. 

            DFL argues that (1) both the 1989 and 1991 mortgages contained after-acquired-indebtedness clauses that secured the future obligations incurred in 1995 and 1996; and (2) the Grunkes' continued possession of the 44 leased cows after expiration of the original leases constituted an unsatisfied continuing obligation, which entitled DFL to priority to the extent of the reasonable value of those cows.

In Minnesota, optionalfuture advances made pursuant to a future-advances provision in a mortgage are inferior to intervening encumbrances (here, ACB's 1994 mortgage) arising prior to the issuance of the optional future advances.  See Model Home Bldg., Inc. v. Turnquist, 258 Minn. 53, 56, 102 N.W.2d 717, 719 (1960) (ruling that if advances are optional, intervening mechanic's liens have priority); Axel Newman Heating & Plumbing Co. v. Sauers, 234 Minn. 140, 145, 47 N.W.2d 769, 772 (1951) ("[W]here the advances are optional, the subsequent encumbrance will take priority over all advances made after the mortgagee [here, DFL] receives actual notice of the subsequent encumbrance."); Finlayson v. Crooks, 47 Minn. 74, 79, 49 N.W. 398, 400 (1891) (indicating mechanic's lien has priority over mortgage payments if subsequent payments are optional).  Although these cases discuss the intervening encumbrance of a subsequent mechanic's lien, the general doctrine applies equally to an intervening mortgage:

The general rule that the parties to a mortgage * * * may by a written agreement extend the security of it to cover an additional indebtedness cannot properly be applied to the holder of an interest in the property acquired between the time of the execution of the mortgage and the time of the extension thereof to the additional obligation.

 

* * * * .

 

In general, advances made after notice of subsequent interests do not have priority over such interests.  This rule has been applied to subsequent liens and encumbrances         * * * .  The rule is especially applicable where the advancements are optional with the mortgagee.

55 Am. Jur. 2d Mortgages §§ 330-31, at 74-75 (1996) (emphasis added).  DFL asserts that the terms of its 1989 and 1991 mortgages contain after-acquired-indebtedness clauses that contemplate the 1995 and 1996 lease agreements:

Provided, nevertheless, that if the mortgagor(s) [the Grunkes] shall perform according to its terms, including the payment of $467.25 each month as rent for 60 months, and any and all other obligations, covenants and conditions contained in that certain Dairy Cow Lease Agreement dated 12-29-89 plus any additional or other obligations or leases, and whose terms, conditions and amounts are incorporated herein, executed by the mortgagor(s) in favor of mortgagee [DFL], then this mortgage shall be null and void; otherwise it shall remain in full force and effect, it being understood that this mortgage is being given as security for performance of such Dairy Cow Lease Agreement and any other obligations.

 

(Emphasis added.)[1]  The mortgage language does not obligate DFL to enter into further lease agreements with the Grunkes.  Because DFL voluntarily re-leased the original 44 cows to the Grunkes after ACB's mortgage was recorded, DFL lost its priority position with regard to security in the real property for these cows.

DFL argues that the Grunkes' failure to return the 44 cows to DFL constitutes a continuing obligation that was "later consolidated and renewed" by the 1995 and 1996 lease agreements between DFL and the Grunkes, thereby entitling DFL to priority of its mortgage to the extent of the value of the unreturned cattle.  DFL, however, permitted the Grunkes to retain the cows after the expiration of the lease and then entered into new agreements with the Grunkes for these cows.  In effect, DFL treated the cows as if they had been returned and then re-leased to the Grunkes. 

Any obligations under the 1989, 1990, and 1991 60-month leases terminated in December 1994, June 1995, and January 1996, respectively.  The Grunkes were not in default until 1997 a year after the last of the three leases expired.  At that time, the Grunkes had possession of the cows pursuant to the voluntarily granted 1995 and 1996 leases.  The district court did not err by finding that the Grunkes' obligations under the earlier leases were satisfied before the Grunkes defaulted.  The 1995 and 1996 DFL lease agreements constitute new lease agreements with the Grunkes that DFL entered into with knowledge of ACB's 1994 mortgage.  DFL's current interest in the 44 cows stems only from the 1995 and 1996 leases, and the mortgage on the real property securing this interest is inferior to ACB's 1994 mortgage.

DFL also argues that ACB's notice of DFL's 1989 and 1991 mortgages constitutes actual notice of the subsequent advances made by DFL in 1995 and 1996.  DFL is mistaken.  Minnesota has a long tradition of recognizing that "a recorded interest is constructive notice only of the facts appearing on the face of the record."  Anderson v. Graham Inv. Co., 263 N.W.2d 382, 385 (Minn. 1978); accord May v. Ackerman, 235 Minn. 273, 280, 51 N.W.2d 87, 92 (1951); Niles v. Cooper, 98 Minn. 39, 42, 107 N.W. 744, 745 (1906); Bailey v. Galpin, 40 Minn. 319, 322, 41 N.W. 1054, 1055 (1889); see Claflin v. Commercial State Bank, 487 N.W.2d 242, 248 (Minn. App. 1992) (recognizing that implied notice differs from constructive notice arising from record of instruments because record is notice only of what appears upon its face), review denied (Minn. Aug 4, 1992).  At the time ACB entered into its 1994 mortgage with the Grunkes, ACB only had "notice" of the fact that the Grunkes had paid off their 1989 and 1991 leases with DFL in May 1994.  There is no merit to DFL's claim that ACB had notice in 1994 of then-not-existing lease arrangements between the Grunkes and DFL in 1995 and 1996.

Finally, DFL argues that summary judgment is improper because the parties dispute the purchase price of the cows.  Because DFL's mortgage does not have priority, the issue of the value of the cows is irrelevant.  The district court did not err by granting summary judgment in favor of ACB.

            Affirmed.

 

[1] The terms of DFL's 1991 Mortgage are identical but for the monthly-payment amount.