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Dusenbery v. Hawks

Court of Appeals of Minnesota

April 10, 2017

Kathryn E. Dusenbery, M.D., Respondent,
v.
William K. Hawks, et al., Appellants, Malkerson Gunn Martin, LLP, Defendant.

         Hennepin County District Court File No. 27-CV-15-17087 Hooten, Judge

          S. Steven Prince, Grell Feist Prince PLC, Minneapolis, Minnesota (for respondent)

          Ronald H. Groth, Minneapolis, Minnesota (for appellants)

          Considered and decided by Hooten, Presiding Judge; Reilly, Judge; and Smith, Tracy M., Judge.

         SYLLABUS

         A bailee-in-possession's lien, governed by Minnesota Statutes section 514.18, subdivision 1 (2016), has priority over any security interest, regardless of whether a secured party had notice of the bailee's lien interest when its security interest was created.

          OPINION

          HOOTEN, Judge

         In this multiparty litigation, the district court granted summary judgment in favor of respondent lender, determining that with respect to loan collateral, lender's security interest has priority over appellant bailee-in-possession's lien interest. The district court also granted summary judgment for lender with respect to lender's breach of contract claim against appellant borrower and developer. Appellants challenge the district court's grant of lender's motion for summary judgment. We reverse the district court's priority determination, and remand for further proceedings consistent with this opinion. However, we affirm the district court's grant of summary judgment with respect to lender's breach of contract claim against borrower.

         FACTS

         This priority dispute arises out of a loan used to finance a proposed hydroelectric plant (the project). Appellants William H. Hawks and Crown Hydro, LLC, (collectively, Crown Hydro), developer of the project, own two generators (the collateral) at issue in this litigation. Respondent Kathryn E. Dusenbery, M.D., is a creditor of the project.

         In December 2006, Crown Hydro and appellant Randal C. Olson entered into a storage agreement in which Crown Hydro agreed to pay Olson $2, 000 a month to store the collateral and to maintain it by rotating the generator shafts each month. Olson stored the collateral in a garage at his residence in Jordan, Minnesota. In June 2007, Olson sold the Jordan residence to appellants Jason and Sheila M. Pelowski, but retained a leasehold interest in the garage. For the purposes of this appeal, the parties concede that the collateral has been stored continuously at the Jordan residence in Olson's care since December 2006, and that Olson is currently in possession of the collateral. Olson claims that Crown Hydro owes him at least $137, 000 under the storage agreement.

         In May 2013, Dusenbery loaned Crown Hydro $250, 000 secured by an interest in the collateral (the loan contract). In the security agreement that accompanied the loan contract, Crown Hydro represented to Dusenbery that the collateral was "free and clear of all security interests, liens and encumbrances, " except prior lien interests explicitly stated within the agreement.[1] The security agreement stated that the collateral was located at the Jordan residence. But the security agreement did not indicate that Olson, who was not a party to the loan contract, possessed the collateral. The parties do not dispute on appeal that Dusenbery lacked actual notice of Olson's possession of the collateral.

         In June 2013, Dusenbery filed a Uniform Commercial Code (UCC) financing statement with the Minnesota Secretary of State. As a result, Dusenbery had a first priority position with respect to any UCC financing statements regarding the collateral. In June 2014, Crown Hydro defaulted on the loan contract. Dusenbery claims that Crown Hydro owes her at least $393, 000 on the loan contract.

         Prior to Dusenbery acquiring her security interest, Olson had not filed any documentation with regard to his bailee's lien interest or a UCC financing statement with the secretary of state claiming a security interest in the collateral. In October 2015, Dusenbery sued, alleging breach of the loan contract, claiming the right to possess the collateral, and seeking a declaration that her security interest in the collateral has first priority.

         Olson answered with the affirmative defense that his lien had priority over Dusenbery's security interest. Crown Hydro claimed in its answer that it was not in breach, but did not deny that although it had received the $250, 000 from Dusenbery, it had failed to make any payments under the loan contract. Crown Hydro alleged that Dusenbery conspired with Crown Hydro's former attorney to fraudulently induce Crown Hydro to enter into the loan contract in breach of the attorney's fiduciary duty to Crown Hydro. Based on these facts, Crown Hydro alleged that Dusenbery was not "a good faith holder of any debt obligation attributable to Crown Hydro."

         Dusenbery moved for judgment on the pleadings under Minn. R. Civ. P. 12.03.[2]The district court granted Dusenbery's motion for judgment on the pleadings with respect to the breach of contract claim against Crown Hydro. The district court reasoned that Crown Hydro admitted that it had failed to make payments on the contract, and that any defenses pleaded by Crown Hydro were either claims in tort that should have been asserted as counterclaims or affirmative defenses of fraud not pleaded with sufficient particularity. The district court denied Dusenbery's ...


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