Opinion
No. C3-98-1131.
Filed January 5, 1999.
Appeal from the District Court, Meeker County, File No. C4-97-132.
Brian M. Olsen, (for appellant).
J. Brian O' Leary, O' Leary Moritz, Chartered, (for respondent).
This opinion will be unpublished and may not be cited except as provided by Minn. Stat. § 480A.08, subd. 3 (1996).
UNPUBLISHED OPINION
Appellant argues the district court erred in ruling that his contract for deed with the bank was not a pledge of real property securing a loan and that it did not create an equitable mortgage, requiring foreclosure by judicial action. We affirm.
FACTS
In December 1987, the 365-acre farm owned in fee by appellant Larry Root was being foreclosed by the Federal Land Bank, which held a mortgage on the farmland. Dennis Ashwill, an acquaintance, advised Root that the State Bank of Springfield, respondent's predecessor, wanted to buy Root's farm. Following discussions among Ashwill, Root, and the bank, the bank paid Root $148,000 so he could redeem the farmland from the Federal Land Bank. On December 28, 1987, Root conveyed the property to the bank by quitclaim deed; the bank entered into a contract for deed with Root, selling him the farm for $158,000; and Root, in turn, sold the farm to Ashwill under a contract for deed for $158,000. Except for the contract for deed between Root and Ashwill, the documents were recorded.
Following the transaction, Ashwill took possession of the farm and made payments on the contract for deed directly to the bank. On March 17, 1989, Ashwill conveyed his interest in the property to the bank by warranty deed. He then leased the property back for the period from May 1, 1989 to December 31, 1989. Without notifying Root, Ashwill stopped making payments on the contract for deed. On May 14, 1989, the bank informed Root that his contract for deed with the bank would be cancelled unless he paid the full amount owed. On May 16, 1989, Root signed an agreement with the bank waiving his right to mediation and right of first refusal on the farm under the Farm Mediation Act. Root also agreed to allow the cancellation of the contract for deed to go through in 60 days. The notice of cancellation of the contract for deed was filed on November 2, 1989.
Also on May 16, Root entered into an earnest money contract to purchase 70 acres of the farm and paid the bank $750. Although only Root signed the contract, its existence was confirmed by the bank in a letter to Root dated December 29, 1989. Under the terms of the contract, the earnest money would be returned and the contract would be void if the bank did not have and could not obtain title to the property within 120 days of the contract's signing. In addition, Root was required to pay $10,000 on December 31, 1989 and $4,250 on March 1, 1990. Possession would then pass to Root. The parties entered into a contract for deed for the remaining payments for a total purchase price of $48,300.
On November 10, 1989, Root's son told him that the bank had sold the farm property, including the 70-acre parcel covered by the earnest money contract. On October 31, 1989, the bank had sold approximately 15.83 acres to Eddy and Carolyn Olson for $12,870. This parcel was located within the legal description contained in the earnest money contract. The deed was recorded November 9, 1989. On November 1, the bank sold another 80 acres to Bradley and Lisa Rokala and that deed was recorded on November 3. The bank sold the remaining portion of the farm on December 14, 1992, including the 70 acres subject to the earnest money contract, to Gerald and Donna Anderson.
In December 1989, Root contacted the bank, inquiring whether the 70 acres had been sold. By letter dated December 29, 1989, the bank stated that it was willing and able to perform on the earnest money contract. On December 31, Root tendered a check in the amount of $10,000 to his attorney to be held in escrow. Root testified that he did not have the money in his account but that he could have raised the funds from family members the following day if he thought the bank would perform. Root did not raise the funds and the tender was rejected.
DECISION
When reviewing a case tried by the district court without a jury, this court's review is limited to determining whether the court's findings are clearly erroneous and whether it erred in its conclusions of law. Lake Mille Lacs Inv., Inc. v. Payne , 401 N.W.2d 387, 389 (Minn.App. 1987), review denied (Minn. Apr. 29, 1987). A reviewing court is not bound nor need give deference to a district court's decision on a purely legal issue. Frost-Benco Elec. Ass'n v. Minnesota Pub. Utils. Comm'n , 358 N.W.2d 639, 642 (Minn. 1984). In addition, a reviewing court need not defer to the district court's application of the law where the material facts are not in dispute. Hubred v. Control Data Corp. , 442 N.W.2d 308, 310 (Minn. 1989).
Root argues that the original contract for deed created an equitable mortgage and that this mortgage was required to be foreclosed by judicial action. If the real nature of a transaction is that of a loan secured by property, "it may be treated as an equitable mortgage, without regard to the actual form of the instrument of conveyance." First Nat'l Bank v. Ramier , 311 N.W.2d 502, 503 (Minn. 1981); see also Seivert v. LaMarca , 383 N.W.2d 368, 370 (Minn.App. 1986) ("A pledge of real property for payment of a debt, in whatever form the transaction is clothed, is a mortgage."), review denied (Minn. Mar. 11, 1986). An equitable mortgage may be foreclosed only by action. Albright v. Henry , 285 Minn. 452, 462, 174 N.W.2d 106, 112 (1970).
"[A] deed absolute in form is presumed to be, and will be treated as a conveyance unless both parties in fact intended a loan transaction with the deed as security only." Ministers Life Cas. Union v. Franklin Park Towers Corp. , 307 Minn. 134, 137-38, 239 N.W.2d 207, 210 (1976). Whether a transaction is a contract for deed or an equitable mortgage is determined by the intent of the parties at the time of the transaction. Id. at 138, 239 N.W.2d at 210; Mitteness v. Dahl , 351 N.W.2d 685, 687 (Minn.App. 1984) (distinguishing between contracts for deed and equitable mortgages "classified according to the intent of the parties").
[B]efore a court will hold a deed absolute on its face to be an equitable mortgage, it must appear that both parties so intended * * * even if one party actually intended to enter into a mortgage agreement, unless the other party had the same intention, the transaction should not be construed to be an equitable mortgage.
Minnisters Life , 307 Minn. at 140, 239 N.W.2d at 211. The "[t]estimony as to the intention of one party only is insufficient as proof that a transaction in form a sale was in fact an equitable mortgage; it must appear that both parties so intended." Id. at 138, 239 N.W.2d at 210.
Here, the bank gave Root $148,000 to satisfy his mortgage with the Federal Land Bank. In return, Root quitclaimed his interest in the 365-acre farm to the bank and entered into a contract for deed with the bank to buy back the property for $158,000. Root then immediately sold the farmland to Ashwill by contract for deed for $158,000. Ashwill took possession and farmed the land in question. Root testified that after this series of transactions it was his belief that Ashwill was responsible for all payments to the bank. He stated further that he got nothing from the deal other than the prospect that the bank would provide him financing for a truck in the future. This alone suggests that Root did not consider the contract for deed to be a pledge of security for the $148,000 he received from the bank.
In addition, the agreements between Root and the bank and Root and Ashwill, on their face, are contracts for deed and do not indicate that the property was pledged as security for the $148,000. The documents do not make use of such terms as "debt," "security," or "mortgage." See id. at 138, 239 N.W.2d at 210 (holding parties' intentions can be ascertained by written memorials and failure to use of terms "debt," "security," or "mortgage" is a strong indication that the parties did not have a mortgage in mind). Similarly, there is no record evidence that the bank and Root treated the transaction as one for security. Although free to do so, the parties did not execute a promissory note or any other instrument acknowledging Root's indebtedness to the bank. See Ramier , 311 N.W.2d at 503-04 (holding equitable mortgage or lien not created when documents of record disclose no indication parties intended loan agreement to be security transaction instead of unsecured loan).
At trial, Root was the only witness presented and it appears no effort was made to secure Ashwill or any officers of the bank who were part of the series of transactions to testify regarding the intent of the parties. Because both parties must intend to enter into a mortgage before the terms of a contract for deed will be ignored, Root's testimony that the transaction was a loan obligation between him and the bank is, alone, insufficient. See Ministers Life , 307 Minn. at 138, 239 N.W.2d at 210 (holding testimony of one party to agreement insufficient to establish agreement was an equitable mortgage).
Reviewing the record on appeal, we conclude that the evidence is insufficient to hold that the parties intended the contract for deed to be security for the $148,000 Root received from the bank and that Root had an equitable mortgage in the property.
Finally, relying on B-E Constr., Inc. v. Hustad Dev. Corp. , 415 N.W.2d 330 (Minn.App. 1987), review denied (Minn. Jan. 20, 1988), Root argues that the doctrine of merger extinguished his contract for deed with Ashwill and that the only obligation remaining was his contract for deed with the bank. In B-E Constr. , this court stated that a deed is conclusively presumed to be the final agreement of the parties and that any contractual provisions that are omitted from the deed are deemed waived. Id. at 331. The court held that
[i]f there is a departure from the terms of the contract [for deed], acceptance of a deed constitutes a merger of the two instruments and the deed is thereupon presumed to be the final agreement of the parties.
Id.
Root's argument ignores the fact that on May 16, 1989, he signed an agreement with the bank, canceling the contract for deed. The notice of cancellation of the contract for deed with the bank was recorded on November 2, 1989. Contrary to Root's assertion, there is no evidence that he "conditionally" allowed the notice of cancellation to proceed. Thus, even if Ashwill's interest as contract vendee merged with the bank's as fee owner, leaving only the contract for deed between the bank and Root, by allowing the cancellation of contract for deed to go forward, Root extinguished any interest he may have had in the farmland under the contract for deed.
Root also argues that this waiver was unsupported by consideration. However, the record indicates that the bank agreed to forego a replevin hearing against Root. "Surrender of a legal right or forbearance constitutes valid consideration." Malecha v. St. Croix Valley Skydiving Club, Inc. , 392 N.W.2d 727, 731 (Minn.App. 1986) (citation omitted), review denied (Minn. Oct. 29, 1986). The district court therefore did not err when it concluded that the waiver was supported by adequate consideration.