FT - Miller & Schroeder v. Carefree Living of Am. (5/7/2002)

[Riser Adkisson LLP]

Miller & Schroeder Investments Corp. v. Carefree Living of America, Inc.
2002.MN.0000644 (Minn.App. 05/07/2002)

STATE OF MINNESOTA IN COURT OF APPEALS

C5-01-1241

2002.MN.0000644

May 7, 2002

MILLER & SCHROEDER INVESTMENTS CORPORATION, RESPONDENT,

v.

CAREFREE LIVING OF AMERICA (MINNETONKA), INC., A DELAWARE CORPORATION,
ET AL., APPELLANTS, ROBERT O'LEARY, AS TRUSTEE OF THE LAKELAND PRINTING
CO., INC., ET AL., INTERVENERS, RESPONDENTS.

Hennepin County District Court File No. 017882

James M. Christenson, Daniel R. Tyson, James M. Jorissen, Oppenheimer Wolff & Donnelly, Llp, 3300
Plaza VII, 45 South 7th Street, Minneapolis, MN 55402 (for respondent Miller & Schroeder) Michael
C. Mahoney, Mark W. Peery, Mahoney & Hagberg, P.A., 109 Bushaway Road, Minneapolis, MN 55391
(for appellants) Paul R. Haik, Krebsbach & Haik, Ltd., 701 4th Avenue South, Suite 500, Minneapolis,
MN 55415 (for respondents interveners)

Considered and decided by Peterson Presiding Judge, Halbrooks Judge, and Parker Judge.*fn1

The opinion of the court was delivered by: Halbrooks, Judge

Affirmed

UNPUBLISHED OPINION

The parties involved in this dispute have been before this court on previous appeals involving
the same property. In earlier opinions, we affirmed the district court's order imposing a
constructive trust on the property, O'Leary v. Carefree Living of America (Minnetonka), Inc., No.
C8-97-188, 1997 WL 435875, at *4 (Minn. App. Aug. 5, 1997), review denied (Minn. Oct. 1, 1997),
and subsequently awarded the property to respondents Robert O'Leary, as Trustee of the Lakeland
Printing Co., Inc., etáal. (O'Leary), O'Leary v. Carefree Living of America (Minnetonka), Inc.,
No. C5-00-2072, 2001 WL 1083757, at *8, *15 (Minn. App. Sept. 18, 2001), review denied (Minn.
Dec. 11, 2001). In this appeal, appellants Carefree Living of America (Minnetonka), Inc., etáal.
(Carefree Living), challenge the district court's appointment of the receiver for the property
alleging that (1) Carefree Living was not in default on the mortgage issued by respondent Miller
& Schroeder Investments Corporation (M&S) and that a receiver for the property should not have
been appointed, (2) satisfaction of the mortgage debt by foreclosure made appointment of a
receiver unnecessary, and (3) the district court's order includes relief not requested by M&S and
gives M&S a windfall. O'Leary asserts that Carefree Living lacks standing to challenge the
appointment. Because Carefree Living may be liable for deficits owed the receiver, Carefree
Living has standing to bring this case. Because Carefree Living defaulted on the mortgage,
Minnesota statutes and caselaw allow the appointment of a receiver pursuant to the district
court's general equity powers, and excess rental payments will serve as credits against the
redemption price, thereby avoiding a windfall to M&S, we affirm.

FACTS

On November 1, 2000, Carefree Living, then the titled owner of the property, defaulted on its
mortgage by failing to make payments of principal and interest, escrow payments for real-estate
taxes, and insurance premiums. M&S began foreclosure proceedings. After the first publication of
the notice of foreclosure, M&S moved for the appointment of a receiver to manage and operate the
property. On June 13, 2001, the district court appointed Augustana Care Corporation as receiver,
but it declined the appointment. M&S purchased the property at the July 12, 2001 foreclosure
sale. On July 13, 2001, M&S moved for a replacement receiver. The district court granted the
motion and appointed Jeffrey Sauer. The district court did not make a finding of waste in either
order, but the following language in the order made Carefree Living potentially liable for any
deficits owed the receiver:

To the extent that the proceeds collected by the Receiver from its management of the Premises are
insufficient to pay the costs and expenses * * * the Receiver shall notify [appellant,
respondent, and respondent-interveners] * * * in writing of the anticipated deficiency and
request that the funds necessary to pay such expenses be advanced by the said Parties at their
option.

This appeal follows.

DECISION

1. Carefree Living Has Standing to Challenge the Appointment of a Receiver.

In December 1999, O'Leary brought a title action against M&S, asserting that M&S had no interest
in the property. M&S moved for summary judgment, but the district court denied the motion,
reasoning that whether M&S had notice of a fraudulent transfer of the property was a disputed
material fact. Trial is scheduled for August 2002. O'Leary asserts that Carefree Living lacks
standing to bring this appeal, because Carefree Living has been adjudicated as having no interest
in the subject property. O'Leary v. Carefree Living of America (Minnetonka), Inc., No. C5-00-
2072, 2001 WL 1083757, at *6 (Minn. App. Sept. 18, 2001), review denied (Minn. Dec. 11, 2001).
O'Leary also asserts that the present appeal is a collateral attack on this court's September 18,
2001 decision, in which we affirmed the district court's award of the property to O'Leary.

We determined in a January 7, 2002 order that the appeal is not moot, noting that the outcome of
this case could affect Carefree Living's liability to M&S. Although O'Leary's interest in the
property is superior to Carefree Living's, Carefree Living retains an interest in the
receivership. The present appeal is not a collateral attack on the September 18, 2001 decision,
nor is it barred by the doctrine of issue preclusion, because the September 18, 2001 decision
held that, as between Carefree Living and O'Leary, O'Leary owns the property. Id. At that time,
we explicitly declined to rule on the validity of M&S's mortgage and did not address the rights
and duties of M&S and Carefree Living as mortgagee and mortgagor. Id. The mootness doctrine does
not apply if judicial resolution of the question could lead to collateral consequences. In re
McCaskill, 603 N.W.2d 326, 329 (Minn. 1999) ("Where an appellant produces evidence that
collateral consequences actually resulted from a judgment, the appeal is not moot.") (citation
omitted). Because Carefree Living may be liable for any deficits owed the receiver, it has
standing to bring this appeal.

2. Carefree Living Defaulted on the Mortgage.

M&S alleges that Carefree Living defaulted because it failed to make the required periodic escrow
payments for taxes and insurance. Specifically, Carefree Living has failed since November 1,
2000, to pay principal, interest, and late fees and to escrow payments for real-estate taxes and
insurance premiums.

The mortgage states the following regarding escrow payments:

2.2 ESCROWS. Mortgagor(s) shall deposit with the Mortgagee * * * on the first day of each and
every month hereafter as a deposit to pay the costs of taxes, assessments and insurance premiums
next due * * * .

As of May 15, 2001, the amount of the default was $314,332.32.

Carefree Living claims that it is not in default because a payment of $1.5 million in October
1998 satisfied the debt. But the October 1998 payment was consideration for the release of the
three other properties that were originally part of this mortgage. The payment did not satisfy
the debt for the property currently at issue. Further, Carefree Living's recognition that the
$1.5 million was consideration for a release is evident in a sworn statement by Kathleen Zeller,
an officer of Carefree Living:

Attached hereto as Exhibit B is a true and correct copy of [the] letter sent by [M&S] in
connection with the First Union financing which evidences [M&S's] requirement that it receive
over $1,500,000 against the Note as a condition of releasing the obligations of the [Other]
Entities.

Carefree Living did not advise M&S that the $1.5 million was to pay down the mortgage debt until
2003, and Carefree Living continued to make the monthly payments on the principal and interest
along with monthly escrow payments for real-estate taxes and insurance. Carefree Living's
argument that the $1.5 million was a lump-sum mortgage payment is inconsistent with its
subsequent conduct and is without merit.

Carefree Living next argues that the $1.5 million was an overpayment on the mortgage debt because
the mortgage prohibited partial payment. But M&S implicitly waived its right to refuse partial
payments in the letter agreement in which Carefree Living stated that the $1.5 million was
consideration for the release. Fischer v. Pinske, 243 N.W.2d 733, 735 (Minn. 1976) (finding that
the parties' conduct waived provisions of their agreement).

Finally, Carefree Living argues that it paid the taxes directly, rather than through escrow as
the agreement required. According to Carefree Living, it would be formalistic for the court to
require escrow payments when direct payments satisfied the tax obligations. Similarly, Carefree
Living claims that it purchased insurance for the property instead of escrowing insurance
payments. But Carefree Living provides no authority for its argument that direct payments in lieu
of escrow payments are acceptable when the agreement calls for escrow payments. Therefore,
Carefree Living is in default on the note and mortgage.

3. The District Court Did Not Abuse its Discretion in Appointing a Receiver.

A. The district court properly appointed a receiver before the foreclosure sale.

Minnesota statutes mandate the appointment of a receiver upon a failure to escrow payments for
taxes and insurance:

The court shall appoint a receiver upon a showing that the mortgagor has breached a covenant
contained in the mortgage relating to any of the following:

(2) payment when due of prior or current real estate taxes or special assessments with respect to
the mortgaged premises, or the periodic escrow for the payment of the taxes or special
assessments;

(3) payment when due of premiums for insurance of the type required by the mortgage, or the
periodic escrow for the payment of the premiums. Minn. Stat. § 576.01, subd. 2 (2000) (emphasis
added).

As Carefree Living failed to escrow payments for real-estate taxes and insurance premiums, the
statute requires the appointment of a receiver.

A provision of the Assignment of Rents and Leases, signed by Carefree Living and M&S on July 20,
1995, provides an additional basis for appointing a receiver:

6.1 REMEDIES. Upon an Event of Default [M&S], without regard to waste, adequacy of the security
or solvency of [Carefree Living], may *á*á* .

(b) Apply for appointment of a receiver, for which receivership [Carefree Living] hereby consents
to * * * .

Minnesota statutes provide for the appointment of a receiver in case of default when the
assignment specifically provides for appointment of a receiver:

[I]f, by the terms of an assignment, a receiver is to be appointed upon the occurrence of some
specified event, and a showing is made that the event has occurred, the court shall, without
regard to waste, adequacy of the security, or solvency of the mortgagor, appoint a receiver * *
* . Minn. Stat. § 559.17, subd. 2(3)(ii)(a) (2000).

Therefore, it was not an abuse of discretion for the district court to appoint Augustana Care
Corporation as a receiver.

B. The district court properly appointed a replacement receiver even though the intervening
foreclosure sale satisfied the mortgage debt.

Carefree Living argues that the district court abused its discretion in appointing a replacement
receiver after the foreclosure sale and when Augustana Care Corporation declined the appointment.
Carefree Living asserts that because M&S purchased the property for over $100,000 more than the
mortgage debt, the sale satisfied the debt and eliminated the need for a receiver.

This argument fails for a number of reasons. First, as explained above, Carefree Living's failure
to escrow payments places this case within Minn. Stat. §á576.01, subd. 2(2), thereby making the
appointment of a receiver mandatory.

Second, no provision of Minn. Stat. § 576.01 (2000) requires that a deficiency is a prerequisite
to the appointment of a receiver. We decline to read this requirement into the statute. See Klein
Bancorporation, Inc. v. Comm'r of Revenue, 581 N.W.2d 863, 867 (Minn. App. 1998) (noting that if
the legislature had intended a certain result, it would have included relevant statutory
language), review denied (Minn. Sept. 22, 1998).

Third, other provisions of the statute show that a deficiency is not necessary for the
appointment of a receiver. The statute allows for appointment of receivers before foreclosure
sales take place:

After the first publication of notice of sale * * * or with the commencement of an action to
foreclose a mortgage * * * the foreclosing mortgagee * * * may at any time bring an action *á*á*
for the appointment of a receiver. Minn. Stat. § 576.01, subd. 2 (emphasis added).

Deficiencies, by definition, cannot exist absent a foreclosure sale. Because the statute allows
appointment of a receiver without a foreclosure sale, it also allows appointment of a receiver
without a deficiency.

Fourth, Minn. Stat. § 576.01 is not the sole basis for appointing a receiver. "A trial court,
under its general equity powers, may appoint receivers 'in other cases in accordance with
existing practice.'" Minn. Hotel Co. v. ROSA Dev. Co., 495 N.W.2d 888, 892 (Minn. App. 1993)
(quotation omitted); see also Minn. Stat. § 576.01, subd. 1(4) (a receiver may be appointed "[i]n
such other cases as are now provided by law, or are in accordance with the existing practice.").

In Minn. Hotel, appellant, the mortgagor, consented in an assignment to the appointment of a
receiver upon default. 495 N.W.2d at 892. When appellant defaulted, the district court appointed
a receiver without a finding that the property or its rents and profits were subject to loss or
material impairment. Id. at 891. Notably, Minn. Stat. §á576.01, subd. 1(1), provides for the
permissive appointment of a receiver when "the property, or its rents and profits, are in danger
of loss or material impairment." We affirmed the district court's appointment of a receiver
despite the absence of a finding of a danger to the property, basing our decision on the district
court's general equity power. Minn. Hotel, 495 N.W.2d at 892.

Here, Carefree Living consented to the appointment of a receiver in the assignment. Further,
given the complexity of the factual background in this case and the existence of pending
litigation concerning the property, the appointment of a receiver to oversee the operation of the
facility was within the district court's equitable powers.

Carefree Living contends that Prudential Ins. Co. of Am. v. Eden Square Shopping Ctr. P'ship, 524
N.W.2d 513 (Minn. App. 1994), holds that a receiver cannot be appointed if a deficiency remains
after the foreclosure sale. But the issue in Prudential was whether the disbursement of excess
rental income should be credited against the amount of the deficiency or the redemption price.
Id. at 514. There was no dispute concerning the propriety of the appointment of a receiver.

Carefree Living also relies on Olmsted Cty. Bank & Trust Co. v. Pesch, 218 Minn. 424, 427, 16
N.W.2d 470, 471 (1944), and State Bank of Young Am. v. Fabel, 530 N.W.2d 858, 861 (Minn. App.
1995), review denied (Minn. June 29, 1995), in support of its position. But those cases merely
state that a foreclosure sale for the amount of the debt satisfies the debt. This rule of law is
irrelevant here because Minnesota law allows for appointment of receivers even when foreclosure
sales extinguish the mortgage debt. See Minn. Stat. § 576.01 (no portion of statute requires
deficiency; receivers may be appointed in absence of a foreclosure sale).

Finally, Carefree Living cites Minn. Stat. § 559.17, subd. 3(a)(1) (2000), in support of its
argument that the foreclosure sale satisfied the debt, thereby removing the need for a receiver.
The statute states:

An assignment of rents and profits * * * shall expire:

(1) with respect to the rents and profits from all of the mortgaged property, upon recording in
the office of the county recorder or filing in the office of the registrar of titles of the
county where the mortgaged property is located, of a satisfaction of the mortgage * * * . Id.

While the foreclosure sale was for an amount greater than the mortgage debt, there is no
indication from the record that a satisfaction of the mortgage was filed with the county recorder.

4. The District Court Correctly Ruled That M&S Should Receive Excess Rental Income Despite the
Satisfaction of the Deficiency.

The district court ordered that Carefree Living "shall * * * turn over to the Receiver all
accounts and other moneys derived from such Rents * * * ." Carefree Living asserts that the
Assignment of Rents and Leases can only be enforced to collect rents and profits to remedy a
deficiency or to avoid waste and that the district court may only enforce the assignment for the
purposes of ensuring payment of taxes and insurance.

We conclude that the scope of the receiver's duties is in accord with Minnesota statutes and the
language of the assignment. Minn. Stat. § 559.17, subd. 2(3)(ii)(a), states that the court shall
* * * appoint a receiver who shall, with respect to the excess cash remaining after application
as provided in section 576.01, subdivision 2, apply it as prescribed by the assignment.

The assignment states that income, rents, and profits should cover expenses, taxes, and
insurance, with surpluses going to cover the indebtedness to respondent. The assignment further
provides that, if a deficiency remains after the foreclosure sale, the surplus shall go to the
assignee. Although there was not a deficiency after the foreclosure sale, the assignment still
provides for surpluses to go to M&S if Carefree Living does not redeem the property:

[I]f the Assignee is the purchaser at the foreclosure sale, the Rental Income shall be paid to
the Assignee to be applied to the extent of any deficiency remaining after the sale, the balance
to be retained by the Assignee, and if the Premises be redeemed by the Assignor(s) or any other
party entitled to redeem, to be applied as a credit against the redemption price, provided, if
the Premises not be redeemed, any remaining excess Rental Income to belong to the Assignee,
whether or not a deficiency exists * * * .

Because the property has not been redeemed, under the language of the assignment, M&S is entitled
to any surplus. If Carefree Living redeems the property, the excess cash will be credited toward
the redemption price, thereby avoiding a windfall to M&S.

Carefree Living cites various cases for the principle that extinguishment of the mortgage debt
renders the assignment of rents ineffective. Carefree Living relies on Cross Cos. v. Citizens
Mort. Inv. Trust, 305 Minn. 111, 113, 232 N.W.2d 114, 116 (1975), for the proposition that a
mortgagee's purchase at a foreclosure sale for the amount of the debt denies the mortgagee the
right to possess the property during the redemption period pursuant to an assignment agreement.
Cross Cos. was decided in 1975, when Minn. Stat. § 559.17 was silent regarding whether a
mortgagee could collect rents subsequent to a foreclosure sale that fully paid the mortgage debt.
The legislature amended Minn. Stat. § 559.17 in 1977. The current statute states that enforcement
of an assignment of rents * * * shall not be deemed prohibited * * * because a foreclosure sale
under the mortgage has extinguished all or part of the mortgage debt. Minn. Stat. § 559.17, subd.
1 (2000).

The current statute explicitly permits enforcement of an assignment-of-rents clause even though a
foreclosure sale fully satisfied the mortgage debt.

Carefree Living relies on G.G.C. v. First Nat'l Bank of St. Paul, 287 N.W.2d 378, 382 (Minn.
1979), for the same proposition. This reliance is misplaced for a number of reasons. G.G.C.
actually enforced an assignment-of-rents clause post-foreclosure. Id. at 380-82. The court
enforced the clause because a deficiency remained after the foreclosure sale and because the
clause did not terminate at full payment of the mortgage debt. Id. at 382. Even though a
deficiency does not exist in this case, the governing statute still provides for appointment of a
receiver. Furthermore, the G.G.C. court did not apply the statute at issue, Minn. Stat. § 559.17,
subd. 1. As the court wrote,

[i]n 1977, the Minnesota Legislature again amended § 559.17, specifically authorizing assignment-
of-rents clause which may apply after the foreclosure sale. The new statute * * * has no
application here * * * . Provision is also made to ease the appointment of receivers. G.G.C., 287
N.W.2d at 382 n.3. G.G.C., therefore, provides no support for Carefree Living's position.

In re Brewery Ltd. P'ship v. Consol. Title & Abstract Co., 113 B.R. 992 (Bankr. D. Minn. 1990),
is also inapposite. The language Carefree Living cites from Brewery is as follows:

At first glance, the highlighted language in both the City's assignment and the statute purports
to give the City a claim to rents even after its entire debt has been satisfied by foreclosure of
its mortgage. I doubt this is the outcome the Legislature intended. * * * [T]he assignee under a
valid assignment of rents may continue to collect rents after a foreclosure which fully satisfies
its underlying debt only to the extent necessary to pay the expenses associated with maintaining
the property, such as taxes and insurance, during the redemption period. Any other interpretation
would entitle the assignee to a windfall neither contemplated nor intended by the Legislature.
Id. at 1001.

The court did not hold that foreclosure sales that satisfy mortgage debts render assignment-of-
rents clauses inoperative. Rather, the court held that an assignment of rents will continue in
effect after foreclosure, even if the foreclosure has fully extinguished the underlying mortgage
debt, but only to the extent necessary to pay the ongoing expenses associated with maintaining
the property, such as taxes, insurance, and repair costs, during the redemption period. Id. at
1002.

Assignment-of-rents clauses continue in effect after foreclosure sales that extinguish all of the
debt.

Brewery is not binding precedent on this court, however, and we decline to ignore relevant
language in the statute and the assignment. Minn. Stat. § 559.17, subd. 2, requires that the
language of the assignment govern the duties of the receiver. "Every law shall be construed, if
possible, to give effect to all its provisions." Minn. Stat. §á645.16 (2000). Accordingly, the
language of the assignment controls. The assignment states that, absent a redemption, excess
rental income will go to the receiver even if a deficiency does not exist. Therefore, the
district court was within its discretion to order that M&S receive any surplus rental income.

Affirmed.


Opinion Footnotes

*fn1 Retired judge of the Minnesota Court of Appeals, serving by appointment
pursuant to Minn. Const. art. VI, § 10.