That said, the City has pleaded the bank had actual prior knowledge of the city's interest under the Master Development Agreement it had with Ramsey Town Center LLC.
The detailed wording of the two pleadings differ, the "Petition" for Torrens property and the "Complaint" for abstract property; but there is a compelling showing of actual notice.
Three kinds of notice are important - actual notice, constructive or record notice - where the county land records and/or title abstracts apply and give notice, and implied or inquiry notice - knowledge of facts sufficient to put one on notice of a duty to inquire further so that you are held to "know" or have notice of facts that reasonable follow-up inquiry would reveal.
For recording act or Abstract property; a purchaser who has either actual, implied, or constructive notice of inconsistent outstanding rights of others is not a bona fide purchaser entitled to protection under Minnesota's Recording Act. Anderson v. Graham Inv. Co., 263 N.W.2d 382, 384 (Minn. 1978).
Torrens registration is a bit different; where the question of "actual notice" of things not duly registered on the certificate of title was only recently resolved with the Court opinion cautiously hedging, "In rendering this decision, we decline any entreaty by M & I [a party] and amicus [Hennepin County Examiner of Titles] to define the outer contours of actual notice; rather, we limit our holding to the facts of this case. Also, because we conclude that Collier is not a good faith purchaser, we do not reach the issue of whether Collier’s purchase of Conley’s interest in the property for $5,000 constitutes 'valuable consideration' [...]"
The opinion was issued by the Minnesota Supreme Court very recently, Feb. 1, 2007, and I do not have an official citation. The Minnesota Supreme Court reversed a Court of Appeals decision; In Re Petition of Collier, 711 N.W.2d 826 (Minn.App. 2006). I thought of excerpting; but it is lengthy legalese, and for those interested the Court of Appeals opinion is online, here; and the Supreme Court opinion, here.
In dismissing the reach of "actual notice" under the facts of the case, the Court of Appeals had reversed the District [trial] Court and reached an opinion differing from the amicus view of the Hennepin County Examiner of Titles - that actual notice should apply and control.
The Supreme Court's reversal of the reversal reinstated the trial court result - that under legal and equitable principles, a bona fide purchaser in good faith, for value, without notice is the required status. If there is a race to record first with each side knowing of the other's interest, which in fact attached first might play a role, and other specific facts can control.
Where the City appears to have a slam dunk; is this document [click to enlarge, or open it in a new window]. It is one page from something the lender recorded:
I got that item Monday, July 23, via email.
There is no such thing as a "smoking gun" in boring real estate dealings; but this item, I find it convincing, because:
To protect its loan the lender recorded and registered a "UCC-1 financing statement," taking a security interest in ancillary personal property as well as the real property; specifically taking a security interest in the Ramsey Town Center LLC's position in the Master Development Agreement running between the LLC and Ramsey.
That is indisputable actual prior notice of the City's contract status. End of story.
But not quite. What did the city hold? The mortgage attached only to encumber real property - which is why a financing statement was used also - and then the mortgage only encumbered what real property the LLC owned at the time the mortgage attached.
What did the borrower own at the time of the mortgage? Real estate, subject to a future interest, in some of the land, but more importantly subject to intangible City property - powers, rights, and conditional vesting of parkland status, all under what arguably was an executory contract running with - relating to use and disposition of the land. But the contract went from executory to actual, with part performance and all - before any default by the LLC on the loan. Conditions happened, deed releases were given, there was a school, a ramp, a city hall all built as part of ongoing contract performance. Before any default.
And the lender not only knew of the contract; it took a personal property security interest in the LLC's part of the deal. Go figure what effect that might have.
I would guess that the contract was not litigated at all in bankruptcy court - a court that can void executory contracts; future terms between an airline and pilots, for example in a non-liquidation bankruptcy proceeding; but where in a liquidation the real estate and other secured property is released for disposition under state law while the unsecured creditors are left in bankruptcy court to bone pick.
I would guess the real estate was released from bankruptcy court jurisdiction without any deliberation there, over the contract. I have not looked at that file, so it's all a guess.
Then, you can forclose a lien or an interest but what about a conditional power of use and disposition? A power with duties, vested conditional future interests. Would there be any redemption right, for a non-lien contract position. Easements, as servitudes rather than liens or interests also are different. Still some uncertainty. Some rough edges.
However, the lender taking a security interest in one side of a contract necessarily implies actual, prior knowledge of the existence of the contract - and that means inquiry notice is triggered, (and there should be imputed notice of the date of agreement and the terms and conditions). There is an expectation of inquiry, for any ordinarily sophisticated institutional lender originating a multi-million dollar loan. You know there's a deal, you take a security interest in part of it, other banks are participating and relying on your due diligence; so you look like a town fool if saying or thinking to say you did not know all a prudent institutional lender would know, under those facts.
So - that still leaves bank and city to talk; to bargain and see if they can do a work-out of the situation now faced - a lender on the hook for millions on a distressed parcel of land not worth millions. With a city wanting to keep a plan and dream in place. A city wanting to stand pat. But not for too long.
Some new bargain will come about; and if there actually is a July 27 sale I would be astounded.
If there's a buyer in the wings - that's a third party to be in negotiations, and the city should seek identification and having the potential purchasing party at the table. The buyer would become the key player, but the lender may remain, possibly financing the buyer as a new developer having a go where Nedegaard failed.
But getting the potential buyer involved up front is how you avoid the whining later about, didn't know, didn't expect; etc. Get the potential buyer to the table sooner rather than later and define the deal.
Based on the In Re Petition of Collier case, as current, recent, strong law favoring the city on actual knowledge being the key factor - and based on the security interest the bank took in the LLC's contract stake, the City is in a sound position and all should be well on the litigation front. If it is litigated.
But litigating would be an admission of an inability to reach a negoitiated settlement and it is too early for that. People have to talk and bargain.
Bottom line: Any doubts I had earlier about how the actual notice contention might be sidestepped, are lessened now by having gotten that document from the County Recorder's office. It's about as strong a paper trail of actual notice as there can be, plus with the lender's intent to attain a security benefit from it, waiver, estoppel and ratification arguably also apply in the City's favor.
Practically, there is a standoff - the bank's probably written it off as bad debt but wants to recoup as much as feasible; while the city wants someone to step forward to alter the unfinished fallow status quo.
Who can outwait the other? The City.
The lender wants it off the books and to move on. Snapping up a nice property is different. This is a lame orphan dog, and the bank wants out - or to get a new fish to come in with capital, in which case it might carry a loan on the chance to either be paid or to snap up the risk capital if the new venturer also fails.
The City can stand pat longer than the bank can. Only a weak will, or an attractive deal should cause city movement. If sound appearing fresh cash comes in and says, "Change this," and "Change that," and this and that are not deal-killing factors, it could be back on track.
However, would you jump such a deal, for denser shared-wall housing than some already on site and not selling? I wouldn't.
One final point - from copies of the recorder's office receipts, it appears all documents were brought in by "Metro Legal Services Inc., 330 2nd Ave S, Mpls, MN 55401." All the receipts are to that entity. Who sent and instructed them, on recording sequence, is uncertain to me, but I expect City lawyers know or will find out in discovery. If there were joint escrow instructions - record bank papers first and the city signed off on that - then actual notice arguments slip in importance. Others know about answering that concern. I do not.
***********POSTSCRIPT**************
Tuesday, July 24. Additional info, for anyone wanting to follow up.
To confuse things more: See, In re the Petition of Willmus, 568 N.W.2d 722 (Minn. App. 1997)(quoting In re Juran, 178 Minn. 55, 60, 226 N.W. 201, 202 (1929)), review denied (Minn. Oct. 21, 1997); online here, where actual notice was held lacking. See, also, In re Petition of Ocwen Fin. Servs., Inc., 649 N.W.2d 854 (Minn. App. 2002), review denied (Minn. Nov. 19, 2002), online here. Those cases arguably seem to favor the bank, but the Supreme Court holding in Collier appears to lessen their continuing authority. Decide for yourself.
Ocwen stood for first in time is first in right in Torrens registration and in any resultant litigation, when each mortgage holder there had actual knowledge of the other's interest. The City and lender, in our instance likely are comparable.
The Court of Appeals in Collier cited and explained Ocwen in support of its conclusions; while the Collier Supreme Court, in reversing, declined to mention the opinion. It is arguably likely the final Collier result lessens the reach of Ocwen in our case. Again, decide for yourself.
Two cases relate to the Abstract part of the Town Center property under foreclosure; where "actual knowledge" is analyzed; Comstock & Davis, Inc. v. G.D.S. & Assocs., 481 N.W.2d 82 (Minn. App. 1992),and Levine v. Bradley Real Estate Trust, 457 N.W.2d 237 (Minn. App. 1990), review denied (Minn. Aug. 7, 1990). Neither is online. They relate to non-registered property and hold that “actual notice” requires “actual knowledge,” a proposition that is clearly applicable to registered property as stated in Willmus. 568 N.W.2d at 726. Courts have relied on Comstock for the requirement of “actual notice” when discussing Torrens property and the Juran case. See Alchemedes, 546 N.W.2d at 42 (citing Comstock, 481 N.W.2d at 85, for the proposition that “actual notice requires knowledge of [an] enforceable agreement”). Comstock in turn relied on Levine for the proposition that “actual notice . . . requires conveying knowledge of a signed, enforceable agreement.” 481 N.W.2d at 85. So, given that Torrens - Abstract linkage, in defining "actual notice" there is an arguable parallel when actual notice exists, regardless of whether it is Torrens or Abstract property at issue. Confusing? Decide for yourself.
Interestingly, the Supreme Court in Collier, opined:
We also note that we have applied principles of equity when a result under the Torrens Act violates notions of justice and good faith. See Finnegan v. Gunn, 207 Minn. 480, 292 N.W. 22 (1940). In Finnegan, we concluded that “[n]othing in the Torrens system indicates that the ancient concepts of equity are not applicable” under certain circumstances. 207 Minn. at 482, 292 N.W. at 23. See also Mill City Heating & Air Conditioning Co. v. Nelson, 351 N.W.2d 362, 365 (Minn. 1984) (requiring a subcontractor to provide prelien notice of a mechanic’s lien to purchasers of Torrens property who had not yet filed their ownership interest with the registrar of titles, because failure to do so produced an “unfair and unreasonable” result). But, because equitable concepts are not necessary to our holding in this case, we mention this precedent only as an additional point of reference for our ultimate decision.
and
We conclude that under section 508.25, a purchaser of Torrens property who has actual knowledge of a prior, unregistered interest in the property is not a good faith purchaser. Here, Collier gained actual knowledge of M & I’s interest in the property through the Ramsey County Sheriff’s office’s publication of the notice of foreclosure sale and through his subsequent negotiations with M & I to purchase the property. We also conclude that Collier’s knowledge constitutes actual notice, and since Juran was decided in 1929, the law in Minnesota has prevented a prospective purchaser with actual notice of a superior interest in Torrens property from becoming a good faith purchaser. In the years after Juran,the legislature has not chosen to alter the relevant language in section 508.25 or define good faith. Moreover, Minnesota courts have relied on our precedent, and real estate practitioners have accepted and applied the foregoing principles without apparent difficulties. We have stated that “[w]e are extremely reluctant to overrule our precedent under principles of stare decisis” and require a “compelling reason” to do so. [citation omitted] The facts in this case offer no compelling reason to overrule our precedent. Accordingly, we conclude that M & I’s interest in the subject property is superior to Collier’s interest.
To me, and you can decide for yourself, the equity-still-applies language is interesting, since waiver, estoppel, ratification, and laches can be argued - the bank's extended forebearance in moving against Nedegaard vs. having moved sooner; all the while the City was relying on its Agreement terms and conditions.
And with Collier being recent and decisive on saying Juran stood as they described it, consistently over time re Torrens property, and with a parallel view of actual notice and actual knowledge existing for Abstract property, I view the City's litigation position as solid.
Again, however, negotiation will take place and probably be decisive - not litigation. Not unless the bank is intransigent and no "white knight" steps forward to stand where Nedegaard stood, to try to have a go at the balance of Town Center.
In that instance, there may be a standstill; with no substantial changes to the land as it now exists. Will the bank ultimately cease postponing its sheriff's sale, and bid its mortgage amount and take title? I could only guess. The bank's probably not reached a decision that way yet, and would await negotiation.
I wish everyone well in negotiating the future of Town Center, bank and City, rather than seeing them ultimately breaking off talks and litigating for a resolution.
Sitting still, for now, while things unwind as they will, is all we outside the loop can do, as Ramsey citizens.
I expect this will be my last post regarding the situation, unless some news arises that the log jam's been somehow broken. Leave it to the lawyers; their fees; their argument and activities. Bless them. They have to make sense of the mess, as does council. As does the bank. Bless them all. And - if there is a white knight - that could result in another failed and incomplete effort.
At least, now, the expectations of city officials is tempered by recent history and market trends. It is a far lot better than having had the cheerleader squad, Town Center Task Force, give us "marketing" assurances that have proven dead wrong and unduly exuberant.
I hope each of those folks have learned a lesson. Less hype. More reality.