WesternBank, N. A., f/k/a Western National Bank, Respondent, vs. Ameriquest Mortgage Company, a Delaware corporation, et al., Appellants, Mark E. Hamilton, Respondent, Rose L. Hamilton, Respondent.

WesternBank, N. A., f/k/a Western National Bank, Respondent, vs. Ameriquest Mortgage Company, a Delaware corporation, et al., Appellants, Mark E. Hamilton, Respondent, Rose L. Hamilton, Respondent. A07-0270, Court of Appeals Unpublished Decision, December 11, 2007.

This opinion will be unpublished and

may not be cited except as provided by

Minn. Stat. § 480 A. 08, subd. 3 (2006).

 

STATE OF MINNESOTA

IN COURT OF APPEALS

A07-270

 

WesternBank, N. A.,
f/k/a Western National Bank,
Respondent,
 
vs.
 
Ameriquest Mortgage Company,
a Delaware corporation, et al.,
Appellants,
 
Mark E. Hamilton,
Respondent,
 
Rose L. Hamilton,
Respondent.

 

 

Filed December 11, 2007

Affirmed in part, reversed in part

Worke, Judge

 

Itasca County District Court

File No. 31-CV-05-3810

 

Gary B. Bodelson, 247 Third Avenue South, Minneapolis, MN 55415 (for appellants)

 

Stephanie A. Ball, Fryberger, Buchanan, Smith & Frederick, P.A., 302 West Superior Street, Suite 700, Duluth, MN 55802 (for respondent WesternBank, N.A.)

 

Mark E. & Rose L. Hamilton, 38087 Little Moose Lake Road, Deer River, MN 56636 (pro se respondents)

 

 

            Considered and decided by Klaphake, Presiding Judge; Worke, Judge; and Crippen, Judge.[*]

U N P U B L I S H E D   O P I N I O N

WORKE, Judge

            On appeal from summary  judgment in a declaratory-judgment action determining a lien dispute between appellant mortgagee and respondent personal-property lienor, appellant argues that (1) the district court erred in ruling that respondent had an equitable interest in the house separate from a lien on the land; (2) the record fails to establish who owns the house, ownership of which must be identified to establish an equitable lien; (3) any existing lien held by respondent on the house would have been subordinated to appellant's purchase-money mortgage; and (4) whatever interest or lien respondent may have had, it should not have secured attorney fees in the replevin action that preceded this lawsuit.  Respondent has filed a notice of review challenging the district court's denial of attorney fees in this action.  We affirm the district court's determination of an equitable interest, properly termed an equitable lien, covering the house, and conclude that appellant's mortgage may not, in equity, take priority as a purchase-money mortgage over that lien.   We also affirm the denial of attorney fees in this action, but reverse the district court's award of attorney fees in the replevin action. 

FACTS

            In 1997 or 1998, respondents Mark E. Hamilton and Rose L. Hamilton purchased a house on Little Moose Lake by contract for deed.  Mark Hamilton testified that the state of Minnesota owned the underlying land, which was administered by Itasca County through a land commission and was not part of the sale.  The Hamiltons paid approximately $27,000 to$30,000 for the house, along with the right to purchase the land when the state decided to sell it.  The Hamiltons paid Itasca County a yearly lease fee and, when they paid off the contract for deed in 2001 or 2002, assumed the lessee's interest under the lease.

            In 2003, the Hamiltons borrowed $21,000 from respondent WesternBank, N.A., f/k/a Western National Bank.  They signed a promissory note and a consumer-security agreement granting WesternBank a security interest in "[a]ll personal property and structures, located on the [leased] land, . . .  including . . . a home."  WesternBank filed a Uniform Commercial Code (UCC) financing statement covering the transaction with the Minnesota Secretary of State in December 2003.  That same month, the Hamiltons borrowed an additional $5,000 from WesternBank by promissory note; that debt was also secured by a consumer security agreement pledging an interest in the personal property and structures on the land.  WesternBank also filed a UCC financing statement with respect to this loan with the secretary of state and a fixture filing statement with the Itasca County Recorder. 

            In early 2004, the state and county offered to sell the underlying land to the Hamiltons.  To finance the purchase and pay off additional debts, the Hamiltons obtained a mortgage from respondent Ameriquest Mortgage Company for $149,175.   They directed Ameriquest to pay off the WesternBank loans with part of the mortgage proceeds.  But due to a series of clerical errors by either Ameriquest or the title company handling the transaction, WesternBank received only $6,000, which was payment for the accumulated balance on the $5,000 loan. 

            The Hamiltons defaulted on the WesternBank loans and the Ameriquest mortgage.  WesternBank filed a replevin action to enforce its security interest, and the district court granted an order for pre-judgment replevin of "all personal property and structures" located on the property.  Ameriquest disputed WesternBank's assertion of a first-priority security interest in the house and also began foreclosure proceedings.  A sheriff's sale took place in September 2005, purporting to sell "Lot 2, Block 2, Little Moose Lake."

            WesternBank filed this action, naming as defendants Ameriquest, the Hamiltons, and AMC Mortgage, Ameriquest's attorney-in-fact for the foreclosure sale, to determine priority between WesternBank's security interests and Ameriquest's mortgage.  The parties agreed that no material fact issues existed on the priority of the liens, and that the lien-priority issue could be resolved by the court.   Following cross-motions for summary judgment, the district court issued partial summary judgment, declaring that (1) WesternBank had an equitable mortgage against the house, but not the underlying land; (2) Ameriquest had a mortgage against both the house and the land, which took priority as a purchase-money mortgage only as to the land, but not the house, under Wells Fargo Home Mortgage, Inc. v. Newton, 646 N.W.2d 888 (Minn. App. 2002), review denied (Minn. Sept. 25, 2002);  (3) WesternBank's equitable mortgage on the house was senior to Ameriquest's mortgage; (4) WesternBank was entitled to attorney fees from the Hamiltons in the earlier replevin action, based on the security agreements between WesternBank and the Hamiltons; and (5) WesternBank was not entitled to attorney fees from Ameriquest in this action.   At a subsequent court trial, the district court resolved the amount due from the Hamiltons on WesternBank's promissory notes.   This appeal follows. 

D E C I S I O N

            Summary Judgment

 

            On appeal from summary judgment, we determine whether there are any genuine issues of material fact and whether a party is entitled to judgment as a matter of law.  In re Collier, 726 N.W.2d 799, 803 (Minn. 2007).  We view the evidence in the light most favorable to the party against whom judgment was granted, but if the nonmoving party fails to raise a material factual issue on an element necessary to establish the case, summary judgment is appropriate.  Gradjelick v. Hance, 646 N.W.2d 225, 231 (Minn. 2002).    Legal issues determined at summary judgment are reviewed de novo.  Reads Landing Campers Ass'n v. Twp. of Pepin, 546 N.W.2d 10, 13 (Minn. 1996).    We note that while the ruling from which this appeal was taken was prompted by cross-motions for summary judgment, the parties explicitly agreed that the district court could resolve their priority dispute on the record as presented.    Thus, this case does not fit the typical summary-judgment posture presented to this court.

            Ameriquest argues that the district court abused its discretion by imposing, sua sponte, what it referred to as an "equitable mortgage" on the house because (1) the district court correctly determined that the house was real property, not personal property; (2) "[i]t is not possible to convey fee ownership of a house separately from the underlying land when the house is an integrated part of the real estate"; and (3) the record does not establish that the Hamiltons owned the house before they purchased the underlying land.  "Granting equitable relief is within the sound discretion of the [district] court," and this court will not reverse the district court's determination absent "a clear abuse of that discretion."   Nadeau v. County of Ramsey, 277 N.W.2d 520, 524 (Minn. 1979).    

            The district court determined that because the Hamilton house was real property, rather than a fixture, WesternBank's UCC filings did not govern WesternBank's security interest in the house.  WesternBank argues, as an alternative ground for sustaining summary judgment, that its UCC filings created an Article 9 security interest in the house, which took priority over Ameriquest's mortgage.  We reject that argument.   Minn. Stat. § 336.9-334(a) (2006) provides that an Article 9 security interest "may be created in goods that are fixtures or may continue in goods that become fixtures" but that "[a] security interest does not exist under this article in ordinary building materials incorporated into an improvement on land."  

A fixture is "generally an item of personal property which, through affixation or adaption to real property, or by the intent of the owner, has become part of the real property, but which may be removed and again become personal property."  8 Richard R. Powell and Michael Allen Wolf, Powell on Real Property, § 57.05[1], at 57-27 (Michael Allan Wolf Ed., 2000) (quotation omitted).  Mark Hamilton testified that the house was "stick-built right on the foundation," which was made of concrete blocks, and that he improved it by adding insulation, redoing plumbing, adding a septic system, and moving and incorporating an existing shed.   The parties do not disagree that, consistent with this testimony, the building materials were incorporated into the house, and the house constituted an improvement on the land.    

But WesternBank argues, citing Esbjornsson v. Buffalo Ins. Co., that the house should be considered a fixture because "Minnesota law allows buildings to be characterized as fixtures where title has been severed from the land."  252 Minn. 269, 89 N.W.2d 893 (1958).  In Esbjornsson, when a grantor of property reserved the right to remove a building on the property before the property was conveyed, the grantor retained an insurable interest in the building under a previously issued fire policy.   Id. at 274, 89 N.W.2d at 897.   But Esbjornsson is both legally and factually distinguishable.  First, whether, for purposes of an insurance contract, an insurable interest exists or is retained in property is a legal question distinct from whether a home that is a purported fixture has become part of the underlying real estate.  Second, this record contains no evidence that the Hamiltons actually retained a right to remove the house from the land.  Thus, WesternBank has not shown that the district court erroneously concluded that because the construction materials became part of an improvement on the land, any interest in those materials was not securable under Article 9, and the priority of claims to the house is determined by the law governing real-property claims.  See Minn. Stat. Ann. § 336.9-334 U.C.C. cmt. 3, para. 3 (West Supp. 2002); see also Minn. Stat. § 336.9-109(d)(11) (2006) (stating that Article 9 is inapplicable to the creation or transfer of lien on real property). 

            The district court also determined that, even though WesternBank's UCC filings did not govern its security interest in the house, the house was subject to an "equitable mortgage" to the extent of WesternBank's interest.   Although it is unusual for the district court to grant fact-based equitable relief at the summary-judgment stage of a proceeding, the parties expressly granted the district court authority to resolve their priority dispute.

          An equitable mortgage is generally created when the parties intend a deed of conveyance to be security for the payment of a debt.   First Nat'l Bank v. Ramier, 311 N.W.2d 502, 503 (1981).  Because the Hamiltons did not give WesternBank a deed, they cannot be deemed to have given WesternBank an equitable mortgage.  But "[a]n equitable lien exists when there is a contract, express or implied, sufficiently indicating an intention to make some particular property a security for a debt or other obligation[.]"  Marquette Nat'l Bank of Minneapolis v. Mullin, 205 Minn. 562, 571, 287 N.W. 233, 238 (1939) (quotation omitted); see also Fredin v. Farmers State Bank of Mountain Lake, 384 N.W.2d 532, 535 (Minn. App. 1986) ("An equitable lien arises in an equity proceeding when a person is allowed to reach the property of another and hold it as security for a claim on the ground that otherwise the latter would be unjustly enriched.").    

Ameriquest argues, first, that an equitable interest could not be imposed on the house alone because ownership of the house could not be conveyed separately from ownership of the underlying land.   But the Hamiltons' interest in the land when they borrowed funds from WesternBank was consistent with that of a lessee under a "ground lease," which has been defined as "a long-term . . . lease of land only."   Black's Law Dictionary 899 (7th ed. 1999).   Minnesota law has long established that when improved property is subject to a ground lease, a person may own buildings on that property separate from ownership of the underlying real estate.  See, e.g., In re Widening Third St. in St. Paul, 176 Minn. 389, 390, 223 N.W. 458, 458 (1929).  WesternBank presented an expert affidavit stating that it is common practice in greater Minnesota for persons to own houses located on leased lakeshore property, and Ameriquest presented no evidence in rebuttal. 

Ameriquest also maintains that WesternBank presented no admissible evidence to show that the Hamiltons owned the house, and without that evidence, there could be no showing that a lien was attached to the house.   Ameriquest claims that WesternBank failed to present written evidence of the Hamiltons' ownership, which is required under the statute of frauds.   But "[t]he public policy underlying the Statute of Frauds is the concern that fraud or perjury will not be rewarded by denying enforcement of alleged contracts that never, in fact, existed."  David Co. v. Jim W. Miller Constr., Inc., 444 N.W.2d 836, 842 (Minn. 1989).   In this situation, upholding the district court's order of equitable relief does not conflict with the public policy underlying the statute of frauds or result in the enforcement of an oral agreement to convey land.   See id. at 843 (holding that an arbitration award ordering a transfer of real property on an equitable basis did not violate public policy of the statute of frauds).   Therefore, we conclude that the statute of frauds does not preclude the district court from granting equitable relief.

Mark Hamilton testified in his deposition that he purchased the house in 1997 or 1998 and that, when the house was paid off in about 2001, he assumed the lessee's interest on the lease of the underlying land.  Ameriquest provided no evidence to rebut Hamilton's testimony.  Thus, the district court was entitled to make reasonable inferences from the undisputed evidence supporting the Hamiltons' assertion of an ownership interest in the house.  See, e.g., Foerster v. Holland, 498 N.W.2d 459, 460 (Minn. 1993) (deferring to district court's discretion when record amply supported inferences drawn by district court).  Thus, the district court did not err by determining that WesternBank had an equitable interest in the house. 

            Next, Ameriquest argues that, even if the district court did not abuse its discretion by imposing an equitable mortgage or lien, Ameriquest's mortgage takes priority over that lien as a purchase-money mortgage.   A purchase-money mortgage will take precedence over any other claim or liens arising through the mortgagor.  Stewart v. Smith, 36 Minn. 82, 83, 30 N.W. 430, 431 (1886).  Purchase-money mortgagees are not charged with notice of prior recorded interests through the mortgagor or charged with searching records for conveyances by the grantee as a stranger to the title of the property.  Schoch v. Birdsall,48 Minn. 441, 443-44, 51 N.W.2d 382, 382-83 (1892). 

            The district court determined that only the portion of Ameriquest's mortgage securing the debt on the underlying land, not the portion securing a lien on the house, operated as a purchase-money mortgage.  The district court relied on Wells Fargo Home Mortgage, Inc. v. Newton, 646 N.W.2d 888 (Minn. App. 2002), review denied (Minn. Sept. 25, 2002).  As Ameriquest points out, following Newton, the Minnesota Legislature amended the requirements for purchase-money mortgages in Minn. Stat. § 507.03 (2004), by adding additional language.  See 2004 Minn. Laws ch. 234, § 2, at 722-23.  The amended statute provides, with certain exceptions, that "[i]f any portion of the money secured by the mortgage is used for the payment of the purchase price of the real property or any portion of it, the entire mortgage debt shall be deemed purchase money within the meaning of this section[.]"  Minn. Stat. § 507.03 (2006).  Thus, because a portion of the funds secured by Ameriquest's mortgage was used to purchase the real property underlying the house, under the plain language of the statute, the entire mortgage amount would be considered a purchase-money mortgage.  See Minn. Stat. § 645.16 (2006) (stating the plain language rule).

But a strict application of the purchase-money priority rule does not end our inquiry.  A court may fashion equitable remedies based on the exigencies and facts of each case to accomplish a just result.  Clark v. Clark, 288 N.W.2d 1, 11 (Minn. 1979).   In fashioning equitable relief, form gives way to substance.  See Prince v. Sonnesyn, 222 Minn. 528, 538, 25 N.W.2d 468, 474 (1946).  These principles apply to the determination of priority interests in real property.  See, e.g., Chergosky v. Crosstown Bell, Inc., 463 N.W.2d 522, 526 (Minn. 1990) (holding that a party who assumed a vendor's obligations under  an unrecorded contract for deed could not, after acquiring an interest in the property from a bona fide purchaser who recorded first, assert bona-fide-purchaser status to assert priority over that unrecorded interest). 

The supreme court recently held that a purchaser of Torrens property, who had actual knowledge of a prior, unregistered mortgage, was not a good-faith purchaser and therefore took the property subject to that mortgage.  In re Collier, 726 N.W.2d at 808.   The supreme court relied on prior caselaw and equitable principles to conclude that a person who has actual knowledge of previous unregistered interests is not a good-faith purchaser of Torrens property.  Id.   Although Ameriquest argues it lacked notice of WesternBank's lien, the record shows unequivocally that the Hamiltons notified Ameriquest of WesternBank's security interest, and that Ameriquest or its agents made errors to Ameriquest's benefit by failing to pay off the full amount of WesternBank's loans to the Hamiltons.  We conclude that Ameriquest's actual knowledge of WesternBank's prior lien, even though that interest was erroneously recorded as a fixture filing rather than a real-property lien, precludes Ameriquest from asserting purchase-money priority for its mortgage.  Therefore, the district court did not err by determining that WesternBank's lien took priority and by granting summary judgment in favor of WesternBank. 

            Attorney Fees

            Ameriquest, acting on behalf of the Hamiltons, challenges the district court's grant of $9,361.50 in attorney fees to WesternBank in the replevin action.  Apparently, in the interest of efficiency, the district court addressed that issue in this action.  Generally, attorney fees are not awarded without a contractual or statutory basis.  Material Movers, Inc. v. Hill, 316 N.W.2d 13, 18 (Minn. 1982).  

The district court determined that, although the replevin action did not govern the house because the house was real property, "WesternBank is entitled to attorney fees for [that] action because, had WesternBank properly characterized the . . . [h]ouse as real property, WesternBank would have been entitled to attorney's fees for a foreclosure action."   WesternBank maintains that the district court properly awarded attorney fees because the promissory notes and consumer security agreements securing the Hamiltons' loans with WesternBank authorized the recovery of attorney fees.   But the district court did not award attorney fees on the basis of the Hamiltons' agreements with WesternBank, but by analogy to the right to recover fees in a foreclosure action.  See Minn. Stat. § 582.02 (2006) (authorizing the recovery of attorney fees in a foreclosure action if the mortgage provides for attorney fees).   The contractual basis for the recovery of attorney fees from the Hamiltons related to an action taken to enforce its consumer security interests, not to a foreclosure action.   Therefore, we conclude that the district court lacked a contractual or statutory basis for the award of attorney fees from the Hamiltons to WesternBank, and we reverse that portion of the district court's order.

            However, we affirm the district court's order declining to grant attorney fees in the declaratory-judgment action.   WesternBank argues that its consumer security agreements with the Hamiltons authorize WesternBank to collect attorney fees incurred to protect its security interest.  But those agreements state only that the Hamiltons agree to pay attorney fees "incurred in connection with the enforcement of this agreement"  and authorize WesternBank to take action "on [the Hamiltons'] behalf" to protect the Hamiltons' interest in the property.  The district court stated in its order:

Expenses related to WesternBank's declaratory judgment action against Ameriquest are not ‘incurred in connection with the enforcement' of WesternBank's security agreements with the Hamiltons.  Furthermore, although WesternBank's declaratory judgment against Ameriquest is an action taken to protect WesternBank's interests, the action is clearly not taken ‘on behalf of' the Hamiltons because the Hamiltons are named defendants.

 

We agree with this reasoning and conclude that the district court did not err by declining to grant WesternBank attorney fees in the declaratory judgment action.

            Affirmed in part, reversed in part.

[*] Retired judge of the Minnesota Court of Appeals, serving by appointment pursuant to Minn. Const. art. VI, § 10.