LEXSEE 307 MINN.

134,AT 138

The Ministers Life and Casualty Union and Another v. Franklin Park Towers
Corporation

No. 45456

Supreme Court of Minnesota

307 Minn. 134; 239 N.W.2d 207; 1976 Minn. LEXIS 1408

January 30, 1976

PRIOR HISTORY: [***1] the developer also received a 50-year

Action in the Hennepin County lease on the land. The developer
Municipal Court brought by The failed to make rent payments, and the
Ministers Life and Casualty Union and insurance company instituted an
Preferred Risk Life Insurance Company unlawful detainer action. The trial
for unlawful detainer against Franklin court ruled in favor of the developer,
Park Towers Corporation. After holding that the transaction
adverse findings, Tom Bergin, Judge, constituted an equitable mortgage. The
plaintiffs appealed from the judgment insurance company sought review of the
entered. trial court's ruling. On appeal, the
court reversed the trial court's
DISPOSITION: decision, finding that the deed given
by the developer represented an
Reversed and remanded with absolute conveyance and the
instructions. transaction did not create an
equitable mortgage because the
CASE SUMMARY: insurance company did not intend to
allow a mortgage. The court remanded
the case to the trial court for entry
PROCEDURAL POSTURE: Plaintiff of restitution in favor of the
insurance company sought review of a insurance company.
decision of the Hennepin County
Municipal Court (Minnesota), which OUTCOME: The court reversed the trial
entered judgment in favor of defendant court's decision that had found an
developer in the insurance company's equitable mortgage, and remanded the
action for unlawful detainer of real case for entry of a judgment of
estate. restitution in favor of the insurance
company.
OVERVIEW: The developer commenced a
project for construction of an CORE TERMS: equitable mortgage,
apartment complex on certain real mortgage, deed, lessee, first
estate. The insurance company mortgage, negotiations, deed absolute,
negotiated with the developer to repurchase, lease, second mortgage,
purchase the real estate. The terms of real estate, overreaching, conveyance,
the transaction did not allow a intend, sale and leaseback,
repurchase option to the developer, experienced, equitable, expertise,
but the developer was given the right arranged, grantor, rental, absolute
to sell the land to third parties conveyance, memorials, title insurance
subject to the to the insurance policy, right of first refusal,
company's right of first refusal. In property insurance, financial
exchange for giving the deed to the position, sole shareholder, subject
real estate to the insurance company, property, lease agreement
 will not be treated as a security
LexisNexis(R) Headnotes device unless the evidence establishes
that both parties intended such a
result.
Mortgages -- deed treated as
Evidence > Inferences & Presumptions >
security device -- intent of parties.
General Overview
Real Property Law > Financing > 2. Courts exercise their equitable
Mortgages & Other Security Instruments power to construe apparent deeds as
> Definitions & Interpretation creating mortgages in order to
Real Property Law > Financing > effectuate the intent of both parties,
Mortgages & Other Security Instruments and to prevent overreaching by one of
> Equitable Mortgages the parties which would unfairly
[HN1] A deed absolute in form is exploit the other party's financial
presumed to be, and will be treated position.
as, a conveyance unless both parties Mortgages -- deed treated as
in fact intended a loan transaction security device -- intent of parties.
with the deed as security only.
Testimony as to the intention of one 3. Under the facts of this case,
party only is insufficient as proof we find as a matter of law that the
that a transaction in the form of a grantor did not intend at the time of
sale was in fact an equitable the execution of the deed that it was
mortgage; it must appear that both to be an equitable mortgage.
parties so intended. The relevant
intention is that of the parties at COUNSEL:
the time of conveyance. Intention is
Karlins, Grossman, Karlins, Siegel
to be ascertained by the written
[***2] & Brill and Sheldon D.
memorials of the transaction and the
Karlins, for appellants.
attendant facts and circumstances. The
fact that the documents and Rosen, Kaplan & Ballenthin and
negotiations were not in terms of William S. Rosen, for respondent.
debt, security, or mortgage is a
strong circumstance indicating that JUDGES:
the parties did not have a mortgage in
mind. The fact that the instrument Sheran, C.J., and Otis, Todd,
claimed to be a mortgage does not MacLaughlin, and Scott, JJ., and
contain a statement as required by considered and decided by the court en
Minn. St. § 287.03 that it is banc.
intended for security is important,
particularly where the documents were OPINION BY:
prepared by lawyers. The fact that the TODD
grantor is experienced in business and
real estate transactions, and is OPINION:
represented by a lawyer, is material.
Although no personal obligation on the [*135] [**208] The Ministers
part of the mortgagor is necessary to Life and Casualty Union and Preferred
a valid mortgage, the absence of such Risk Life Insurance Company
an obligation is a material (Ministers) appeal from the judgment
circumstance in determining whether a of not guilty in an unlawful detainer
deed was intended as a mortgage or as proceeding against Franklin Park
an absolute conveyance. Towers Corporation (Franklin).
Ministers' claim is based on its
HEADNOTES: interest in land established pursuant
to documents apparently creating a
Mortgages -- deed treated as sale and leaseback arrangement, but
security device -- intent of parties. which the lower court construed to
1. A deed, absolute on its face, give rise to an equitable mortgage. We
reverse and remand.
 Franklin is a holding corporation Scallen through his agent, Eberhardt.
engaged in the construction and Ministers specifically rejected
operation of apartment rental units. Scallen's request for a repurchase
Its president and sole shareholder, option, but the lessee was given the
Stephen A. Scallen (Scallen), is an right to sell the land to third
experienced lawyer, holds a faculty parties, subject to the lessor's right
position at the University of of first refusal. In addition, title
Minnesota Law School, and has to the apartment building itself was
conducted courses and seminars to remain in the lessee until the
[**209] in real estate law. He is an termination of the lease, and the
experienced and sophisticated real lessee was responsible for payment of
estate developer and investor, who at the first mortgage, taxes,
the time of trial had interests in assessments, insurance, utilities, and
over [***3] a dozen real estate maintenance and repair expenses.
development projects with mortgage In December 1970, Ministers paid $
balances in excess of 20 million 450,000 to Franklin and received a
dollars. warranty deed n1 to the property,
The site in question was acquired subject to the existing first
by Scallen and, with a partner whose mortgage. Franklin received a 50-year
interest he now owns, he arranged the lease of the land, including terms
construction of a 182-unit apartment relating to its continued ownership of
complex on the property. To finance the building until the expiration of
the construction, Scallen obtained a $ the lease, at which time all of the
1,900,000 first mortgage loan. In buildings and improvements on the land
addition, he also arranged a second were to become the property of
mortgage which bore interest at 18 or Ministers. Both the title insurance
19 percent. Upon completion of the policy and the property insurance
building, unpaid bills of [*137] [***5] policy which were
approximately $ 100,000 were issued to cover the subject premises
outstanding. insured Ministers' interest as fee
owner and Franklin's as lessee.
[*136] In order to pay off the
second mortgage loan and the
outstanding construction bills, n1 Typed on the deed in
Scallen enlisted the aid of the different typeface from the main
Eberhardt Company. Eberhardt's body were the words "State Deed
efforts to assist him in refinancing Tax Due Hereon -- $ 2.20",
the project through an increase in the indicating a consideration of $
existing first mortgage, or through 1,000 or less. See, Minn. St.
new second mortgage money upon more 287.21. No evidence was
advantageous terms, were unsuccessful. introduced as to which party
Eberhardt then prepared and circulated added this recitation, and since
to potential investors a subordinated the payment of the deed tax is
land sale and leaseback proposal the seller's responsibility
involving a sale of the land for $ pursuant to Minn. St. 287.24, we
450,000 with a leaseback for 50 years attach no importance to this
at an 11-percent net rental. The statement.
proposal made no mention of an option
to repurchase.
Late in 1973, Franklin sought to
These terms interested Ministers, sell the subject premises to
and the two [***4] plaintiffs agreed University Community Properties,
to jointly purchase the property. commonly referred to as Cedar-
Negotiations were held between Riverside. In conducting these
Ministers and Franklin, represented by negotiations, Scallen held himself out
Scallen, and the parties consummated as a lessee of the property. In fact,
the transaction in general accord with Cedar-Riverside refused to purchase
the terms originally proposed by Franklin's interest unless an option
for repurchase could be added to the are particularly relevant to an
lease agreement. Accordingly, at evaluation of the present fact
Scallen's suggestion, Cedar- situation are:
Riverside's president negotiated an
amendment to the lease with Ministers (1) Testimony as to the intention
of one party only is insufficient as
which established an option [***6] to
proof that a transaction in form a
repurchase and also provided for
sale was in fact an equitable
increased rentals on the land after 10
mortgage; it must appear that both
years. Thereafter, Franklin's sale to
parties so intended.
Cedar-Riverside was closed, but Cedar-
Riverside subsequently defaulted in (2) The relevant intention is that
its payments to Franklin, so the of the parties at the time of
latter resumed its collection of all conveyance. St. Paul Mercury Ind. Co.
rentals from the property. v. Lyell, 216 Minn. 7, 11 N.W. 2d 491
(1943).
It is not disputed that since April
1974 Franklin has not paid any rent, (3) Intention is to be ascertained
interest due on overdue rent, or by the written memorials of the
mortgage payments due under the first transaction and the attendant facts
mortgage, all of which it is required and circumstances. The fact that the
to pay under the terms of the lease. documents and negotiations were not in
Because of Franklin's failure to make terms of "debt", "security", or
payments on the first mortgage, that "mortgage" [***8] is a strong
[**210] mortgage was being foreclosed circumstance indicating that the
at the time of trial in the present parties did not have a mortgage in
action. As a result of these mind. Westberg v. Wilson, 185 Minn.
delinquencies, Ministers properly 307, 309, 241 N.W. 315, 316 (1932).
notified Franklin of its breach of the
lease agreement and upon Franklin's (4) The parties have an absolute
continued failure to meet its right to bargain either for a sale or
obligations, unsuccessfully sought to a loan. Either form of transaction,
gain possession of the property by if intended in good faith, will be
instituting this unlawful detainer upheld. Westberg v. Wilson, supra.
action in the Hennepin County (5) The fact that the instrument
Municipal Court. claimed to be a mortgage does not
Ministers challenges the lower contain a statement as required by
court's holding that the saleleaseback Minn. St. 287.03 that it is intended
financing arrangement constituted an for security is important,
equitable mortgage and raises other particularly where the documents were
issues regarding the jurisdiction of prepared by lawyers. Ekberg v. Thein,
the municipal court in unlawful 291 Minn. 315, 191 N.W. 2d 414 (1971).
detainer [***7] proceedings. (6) The fact that the grantor is
experienced in business and real
1. This court has on numerous
estate transactions, and is
occasions considered claims that a
represented by a lawyer, is material.
deed absolute on its face was in fact
Ekberg v. Thein, supra. These factors
given as security, and, therefore,
are relevant because it is the
constitutes an equitable mortgage.
fraudulent possibilities inherent in a
See, 12 Dunnell, Dig. (3 ed.) § 6154,
transaction where a deed absolute on
et seq. The controlling legal
its face was intended as security
principle governing our resolution of
which gives rise to the rule that such
all of these cases is that [HN1] a
an instrument can be construed as an
deed absolute [*138] in form is
equitable mortgage. Hewitt v. Baker,
presumed to be, and will be treated
222 Minn. 292, 302, 24 N.W. 2d 47, 52
as, a conveyance unless both parties
(1946).
in fact intended a loan transaction
with the deed as security only. Some (7) Although no personal obligation
of the corollaries to this rule which on the part of the mortgagor [*139]
is necessary to a valid [***9] Here, none of the documents or
mortgage, the absence of such an negotiations surrounding the
obligation is a material circumstance conveyance contained any indication
in determining whether a deed was that the transaction was intended to
intended as a mortgage or as an create an equitable mortgage; "debt",
absolute conveyance. Lundeen v. "security", "mortgage", or other like
Nyborg, 161 Minn. 391, 201 N.W. 623 terms which would have evinced such an
(1925). intent were not mentioned in [*140]
the documents establishing the sale
2. Running through all of these and leaseback.
cases is the basic philosophy that a
court will exercise its equitable We must bear in mind that
powers to effectuate the intent of Eberhardt, acting as Scallen's agent,
both parties to a transaction and to proposed the form of the agreement
prevent any overreaching by one party [***11] prior to any involvement by
which would unfairly exploit the other Ministers. This proposal followed an
party's financial position or relative unsuccessful exhaustion of both first
lack of expertise in real estate and second mortgage money
dealings. Applying this basic availabilities. The proposal
principle to the instant case, we presented a commitment by Franklin to
first observe the unique situation of the absolute transfer of title to the
the party here seeking to invoke this land in question with no repurchase
court's equitable intervention. options. Franklin's rights with
Franklin was represented throughout respect to the subject property were
its dealings with Ministers by further circumscribed by the provision
Scallen, whose sophistication and in the lease which gave Ministers a
expertise in the field of real estate right of first refusal on any sale by
[**211] financing are so great that Franklin to third parties, a right
our basic concern for protecting a totally inconsistent with a mere
party against overreaching, which in mortgage interest in the property.
past cases has prompted this court to Furthermore, there was no evidence of
construe a deed absolute on its face debt, such as a promissory note, and
as an equitable mortgage, simply is there was no method provided for
not a factor here. In fact, the repayment of the principal other than
evidence in this case can lead to the the possible sale to a third party.
conclusion that if there was any
In light of the test of intention
overreaching, it was [***10] on the
prescribed in Westberg v. Wilson,
part of the grantor, rather than the
supra, in which this court placed
recipient, of the deed.
great weight on the written memorials
3. Since Scallen is Franklin's of the transaction and the fact that
president and sole shareholder, the documents and negotiations were
Scallen's actions and intentions may not in terms of "debt", "security", or
be ascribed to Franklin. The fact "mortgage", all of the above-described
that Scallen is a lawyer with unusual aspects of the present transaction
expertise in complex real estate must be considered very strong
financing is a factor that should evidence indicating that the parties
therefore be given weight in did not have an equitable mortgage in
evaluating Franklin's claim that the mind.
original transaction was intended as
In accordance [***12] with the
an equitable mortgage. Ekberg v.
Thein, supra. No such claim was made rule that before a court will hold a
deed absolute on its face to be an
until cancellation proceedings were
commenced by Ministers. Yet, as we equitable mortgage, it must appear
that both parties so intended, we have
held in St. Paul Mercury Ind. Co. v.
Lyell, supra, the relevant intent of specifically held that even if one
party actually intended to enter into
the parties for determining the nature
of the transaction is that which they a mortgage agreement, unless the other
party had the same intention, the
manifested at the time of conveyance.
transaction should not be construed to Ministers' [**212] title as owner of
be an equitable mortgage. Nitkey v. the property, Scallen did not object,
Ward, 199 Minn. 334, 343, 271 N.W. nor did he advise the insurer of his
873, 878 (1937). Therefore, a view that Ministers was an equitable
determination in the present case that mortgagee rather than the owner of the
either of the parties did not intend premises. Even more significant is
to create an equitable mortgage would the fact that Scallen himself arranged
be sufficient basis for a reversal of for the property insurance on the
the trial court's ruling that the subject premises, and the resulting
transaction should be so policy named Ministers as lessor and
characterized. Franklin as lessee. Finally, even
after Franklin first notified
Evaluating all the facts and
Ministers of its claim that the
circumstances on the record herein
transaction was an equitable mortgage,
according to the legal standards for
throughout Franklin's subsequent
ascertaining whether the [*141] negotiations with Cedar-Riverside for
parties intended an equitable mortgage the sale of its interest in the
which are set forth supra, we hold property, Franklin referred to itself
that as a matter of law Scallen did as lessee rather than owner.
not intend at the time of the
execution of the sale-leaseback Therefore, since one of the parties
transaction that the warranty deed did not intend the transaction to be a
given by Franklin represent anything security device, the doctrine of
other than an absolute conveyance. equitable mortgage has no application.
Until the 1973 default, every document Having so determined, we need not
exchanged between the parties consider other issues raised by
described Ministers as the owner of appellants and respondent.
[***13] the subject property, and
Reversed and remanded with
Franklin as a mere lessee. When a
instructions to enter judgment of
title insurance policy issued insuring
restitution for plaintiffs.