Commercial Plumbing and Heating, Inc., Appellant, vs. J.K. Insulation, Inc., Respondent, Gerald Keller, Respondent, Jane  Doe and/or John Doe, Defendants, and Ronald S. Smith, et al., intervenors and third party plaintiffs, Respondents, vs. J.K. Air, Inc., third party defendant, Respondent.

Commercial Plumbing and Heating, Inc., Appellant, vs. J.K. Insulation, Inc., Respondent, Gerald Keller, Respondent, Jane  Doe and/or John Doe, Defendants, and Ronald S. Smith, et al., intervenors and third party plaintiffs, Respondents, vs. J.K. Air, Inc., third party defendant, Respondent. A04-1762, Court of Appeals Unpublished, July 26, 2005.

This opinion will be unpublished and

may not be cited except as provided by

Minn. Stat. § 480 A. 08, subd. 3 (2004).

 

STATE OF MINNESOTA

IN COURT OF APPEALS

A04-1762

 

Commercial Plumbing and Heating, Inc.,
Appellant,
 
vs.
 
J.K. Insulation, Inc.,
Respondent,
 
Gerald Keller,
Respondent,
 
Jane  Doe and/or John Doe,
Defendants,
 
and
 
Ronald S. Smith, et al.,
intervenors and third party plaintiffs,
Respondents,

 

vs.

 

J.K. Air, Inc.,

third party defendant,

Respondent.

 

Filed July 26, 2005

Affirmed

Peterson, Judge

 

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., PO Box 49924, Blaine, MN  55449 (pro se respondent)

 

Gerald Keller, PO Box 49924, Blaine, MN  55449 (pro se respondent)

 

J.K. Air, Inc., PO Box 49924, Blaine, MN  55449 (pro se respondent)

 

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

PETERSON, Judge

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.

FACTS

            The Metropolitan Airports Commission (MAC) owns and operates the Anoka County Blaine Airport (airport).  The MAC leases parcels of airport property and permits the construction of airplane hangars on the leased property.  After constructing a hangar known as 33D Nebraska Taxiway Hangar No. 2477 at the airport, respondent Gerald Keller organized respondent J.K. Air, Inc. (J.K. Air) and transferred ownership of the hangar to J.K. Air.  In November 1991, J.K. Air entered into a ten-year lease agreement with the MAC for the land occupied by the hangar.  In March 1999, J.K. Air transferred its interest in the lease to Keller.  The MAC consented to the transfer.

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 Nebraska Taxi-way Hanger No. 2477."  

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. 

            In 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 Diane Runeberg, looked at the hangar with Keller, and on August 6, 2003, Smith and Runeberg (buyers) borrowed $50,000, which they gave to Keller as a down payment.  On August 13, 2003, buyers entered into a purchase agreement with Keller and J.K. Insulation to purchase the hangar and the lease interest for $275,000.

            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.  

Smith asked 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 Minnesota corporation, but it was not in good standing.  Smith asked Keller to take steps to put J.K. Air back in good standing before the closing, and Keller put J.K. Air back in good standing.

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 sale, Keller gave buyers a copy of the minutes of a joint meeting of J.K. Air shareholders and the board of directors at which the sale of the hangar by J.K. Air to buyers was approved.

On October 9, 2003, buyers obtained additional loans and paid the balance of the purchase price to Keller.  Before paying Keller, Runeberg specifically asked Keller whether there were any liens or judgments against the hangar, and Keller told her that there were none.  Keller executed a bill of sale for the hangar, which states that J.K. Air "warrants and guarantees that said hanger [sic] is free from any and all encumbrances of any kind or nature . . . ."  The body of the bill of sale and the notary description identify J.K. Air as the seller of the hangar, but the signature line identifies J.K. Insulation as the seller.  Smith, who drafted the bill of sale, testified at trial that the signature line was a typographical error.  On October 10, 2003, buyers filed the bill of sale with the Anoka County Assessor's office and took possession of the hangar.  On December 9, 2003, they filed a corrected bill of sale that identified J.K. Air as the seller in the signature line.

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.

D E C I S I O N

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 v. Larson, 310 Minn. 454, 458, 246 N.W.2d 565, 569 (1976).  But a motion for a new trial is not a prerequisite for appellate review of a substantive question of law that was considered and addressed by the district court.  Alpha Real Estate Co. of Rochester v. Delta Dental Plan of Minn., 664 N.W.2d 303, 311 (Minn. 2003).

"Findings of 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."  Minn. R. Civ. P. 52.01.  In applying Minn. R. Civ. P. 52.01, "we view the record in the light most favorable to the judgment of the district court."  Rogers v. Moore, 603 N.W.2d 650, 656 (Minn. 1999).  This court will not reverse the district court's judgment merely because we view the evidence differently.  Id.; see Vangsness v. Vangsness, 607 N.W.2d 468, 474 (Minn. App. 2000) (stating "[t]hat the record might support findings other than those made by the [district] court does not show that the . . . findings are defective").  Rather, the district court's factual findings must be "manifestly contrary to the weight of the evidence or not reasonably supported by the evidence as a whole" to warrant reversal.  Id. (quotation omitted).  "Findings of fact are clearly erroneous only if the reviewing court is left with the definite and firm conviction that a mistake has been made."  Fletcher v. St. Paul Pioneer Press, 589 N.W.2d 96, 101 (Minn. 1999) (quotation omitted).  "If there is reasonable evidence to support the district court's findings, we will not disturb them."  Rogers, 603 N.W.2d at 656.

            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. 

Citing Minn. Stat. § 336.9-203 (2004), Commercial argues that the district court's finding that Commercial had a valid security interest in the hangar is irreconcilable with the district court's conclusion that the sale of the hangar by J.K. Air was valid.  Under that section, "[a] security interest attaches to collateral when it becomes enforceable against the debtor with respect to the collateral." Minn. Stat. § 336.9-203(a) (2004).

[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.

 

Minn. Stat. § 336.9-203(b) (2004).  Commercial contends that because a security interest is enforceable against the debtor only if the debtor has rights in the collateral, the district court's finding that Commercial had a valid security interest in the hangar means that J.K. Insulation, which granted Commercial the security interest in the hangar, was the owner of the hangar.  Commercial further contends that if J.K. Insulation owned the hangar, J.K. Air could not validly transfer the hangar to buyers.   

            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. 

Because the 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 (Minn. 1979) (when decisive finding of fact is supported by sufficient evidence and is adequate to sustain conclusions of law, it is immaterial whether other findings are not so sustained); Minn. R. Civ. P. 61.01 (court at every stage of proceeding must disregard any error or defect that does not affect substantial rights of the parties).  The decisive finding of fact is that Keller transferred ownership of the hangar to J.K. Air.

            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.

            "[T]o 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 (Minn. 1986); Minn. Stat. §§ 336.9-301 - .9-306; .9-310(a) (2002).  "The filing of the financing statement serves as notice to the world that a secured party of record may have a secured interest in the collateral described and invites further inquiry to disclose the complete state of affairs."  Corporate Financers, Inc. v. Voyageur Trading Co., 519 N.W.2d 238, 242 (Minn. App. 1994) (citing Van Deist Supply Co. v. Adrian State Bank, 305 N.W.2d 342, 347 (Minn. 1981)).  If a secured party fails to perfect an interest in goods, a buyer of the goods "takes free of [the] security interest . . . if the buyer gives value and receives delivery of the collateral without knowledge of the security interest . . . and before it is perfected."  Minn. Stat. § 336.9-317 (b) (2004). 

            The district court found:

A 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 Anoka County revealed no UCC financing statements under the names of J.K. Air, J.K. Insulation, or Keller. 

 

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.

 

Minn. Stat. § 336.1-202(a)(25) (2004).  "‘Knowledge' means actual knowledge.  ‘Knows' has a corresponding meaning."  Id. at § 336.1-202(b) (2004). 

Buyers both 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 Minnesota corporation, but it was not in good standing.  Finally, Smith 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.

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.

 

Id. at 370 (quoting Henschke v. Christian et al., 228 Minn. 142, 146-47, 36 N.W.2d 547, 550 (1949)).  Applied to the facts of this case, the rule stated in Miller would mean that even though Commercial failed to record any document identifying its security interest in the hangar and lease and buyers did not have actual notice of Commercial's interest, buyers would not be bona fide purchasers entitled to take the property free of Commercial's unrecorded interest if buyers had knowledge of facts that ought to have put them on an inquiry that would have led to knowledge of Commercial's security interest in the hangar and lease.  It is not sufficient, as Commercial contends, that buyers have knowledge of sufficient facts to put them on notice of inquiry as to any adverse interests in the hangar; the facts must prompt an inquiry that would lead to knowledge of Commercial's interest in the property.

 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.

Affirmed.