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Landmark Community Bank, N.A. v. Klingelhutz

Court of Appeals of Minnesota

April 15, 2019

Landmark Community Bank, N.A., et al., Appellants,
v.
John D. Klingelhutz, et al., Respondents.

          Carver County District Court File No. 10-CV-16-704

          Christopher Elliott, Elliott Law P.A., Edina, Minnesota; and Jason Steck, Law Office of Jason Steck, Edina, Minnesota (for appellants)

          Anthony Gabor, The Morris Law Group, P.A., Edina, Minnesota; and Phillip R. Krass, Malkerson Gunn Martin LLP, Minneapolis, Minnesota; and Bryce D. Huemoeller, Huemoeller, Gontarek & Cheskis, PLC, Prior Lake, Minnesota (for respondents)

          Considered and decided by Larkin, Presiding Judge; Cleary, Chief Judge; and Halbrooks, Judge.

         SYLLABUS

         When determining whether a property is used primarily for agricultural purposes such that the property's owner qualifies for the agricultural homestead exemption under Minn. Stat. § 510.02, subd. 1 (2010), a district court must consider all of the record evidence regarding how the property is used. Evidence that the property receives valuation and tax deferment under Minn. Stat. § 273.111 (2018), the Minnesota Agricultural Property Tax Law, is relevant, but it is not determinative.

          OPINION

          LARKIN, JUDGE

         Appellant creditors challenge the district court's dismissal of their fraudulent-transfer claims against respondents, which were brought under the Minnesota Uniform Fraudulent Transfer Act (MUFTA) based on respondent husband's transfer of his interest in certain real property to his wife, who is also a respondent in this appeal. The district court dismissed appellants' MUFTA claims based on its determination that husband's interest in the property was not an asset as defined in MUFTA. Appellants argue that the district court abused its discretion by amending its posttrial findings to determine that at the time of the transfer, the market value of the property was $1, 935, 000 and by applying a $750, 000 agricultural homestead exemption. By notice of related appeal, respondents argue that the district court erred by determining that a $3, 000, 000 guaranty mortgage is not a valid lien encumbering the property under MUFTA. Because the district court did not err in determining the market value of the property and because any errors related to the agricultural homestead exception and guaranty mortgage are harmless, we affirm.

         FACTS

         From 2001 until February 29, 2012, respondents John D. Klingelhutz and Durene D. Klingelhutz, husband and wife, continuously owned and occupied real property in Carver County as joint tenants. The property is composed of three contiguous parcels totaling 49.28 acres and is classified by Carver County for tax purposes as homestead agricultural. Respondents reside in a home on the largest parcel. On February 29, 2012, Mr. Klingelhutz conveyed, by quit claim deed, his joint-tenancy interest in the Carver County property to Mrs. Klingelhutz.

         In July 2016, appellants Landmark Community Bank N.A. (Landmark) and Security Bank & Trust Company (Security) sued respondents, asserting that Mr. Klingelhutz's February 29, 2012 transfer of his joint-tenancy interest in the Carver County property to Mrs. Klingelhutz was void under MUFTA and that the property was therefore available to satisfy appellants' outstanding judgments against Mr. Klingelhutz.

         Appellants' fraudulent-conveyance claims were tried to the court. At trial, respondents' appraiser, a certified appraiser with 15 years of real-estate appraisal experience, testified that the fair market value of the property at the time of the transfer was $1, 935, 000. The district court received, pursuant to the parties' stipulation, copies of Carver County property cards for the property indicating that the 2015 assessed values of the parcels composing the property were $2, 470, 000, $108, 700, and $241, 800 and that the 2016 assessed values of the parcels were $2, 470, 000, $112, 400, and $250, 000.

         Appellants did not submit a market-value appraisal. Instead, appellants asked the district court, in posttrial submissions, to take judicial notice of the 2012 and 2013 tax-assessed values of the parcels composing the property. Appellants did not submit any documentation establishing the 2012 and 2013 tax-assessed values. Instead, appellants set forth those values in their proposed findings of fact and suggested that judicial notice be taken. In its initial findings of fact following trial, the district court accepted appellants' assertions that the 2012 tax-assessed values of the parcels were $2, 537, 000, $108, 000 and $241, 200 and that the 2013 assessed values of the parcels were $2, 104, 800, $83, 400, and $185, 500. However, that acceptance was "subject to [respondents'] right to present any contradictory evidence of such in connection with a motion for reconsideration or amended findings."

         The district court's initial findings also set forth the following facts. In June 2001, respondents granted mortgages of $158, 000 and $475, 000 to Community Bank Chaska. Those mortgages encumbered two of the property's three parcels. As of February 29, 2012, respondents had only paid interest on the mortgages.

         In January 2008, Vista Canyon LLC, owned by Mr. Klingelhutz, entered into a loan agreement with The RiverBank for $7, 750, 000 to fund the development and construction of a senior-housing facility. Mr. Klingelhutz personally guaranteed the loan. Later, the RiverBank loan agreement was amended to add Mrs. Klingelhutz as an additional personal guarantor. Respondents executed a guaranty mortgage in the amount of $3, 000, 000 in favor of The RiverBank. One of the Carver County property's parcels served as security for the guaranty mortgage.

         In November 2008, Klingelhutz Development Company, owned by Mr. Klingelhutz, granted Community Bank Corporation a mortgage in the amount of $245, 000 on one of the property's parcels.

         In 2009, the district court awarded judgment of $451, 213.51 for Associated Bank against Mr. Klingelhutz. The judgment was docketed in Ramsey and Carver Counties. As of February 29, 2012, Mr. Klingelhutz had not satisfied any portion of the judgment.

         In 2010, Landmark sued Mr. Klingelhutz to recover a debt he owed pursuant to a loan agreement. In September 2013, the district court awarded judgment of $403, 524.42 for Landmark against Mr. Klingelhutz. The judgment was docketed in Ramsey and Carver Counties.

         In 2016, Security sued Mr. Klingelhutz, Klingelhutz Investment Company, and Klingelhutz Development Company to recover a debt owed under a 2006 promissory note and personal guaranty. In January 2017, the district court awarded judgment of $812, 314 for Security against Mr. Klingelhutz. The judgment was docketed in Carver County.

         The district court found that when Mr. Klingelhutz transferred his interest in the Carver County property to Mrs. Klingelhutz in 2012, the reasonable value of the property was $2, 427, 800, that Mr. Klingelhutz was entitled to a homestead exemption of $300, 000 against any judgment on the property, and that the property was encumbered by three mortgages totaling $878, 000, as well as the 2009 $451, 213.51 judgment for Associated Bank. The district court found that "the amount of debt secured by [respondents'] guaranty mortgages" as of the date of transfer was zero, "[b]ecause the underlying principal mortgages had not been deemed in default." The district court also found that because respondents had a $798, 586.49 nonexempt interest in the property and the transfer of Mr. Klingelhutz's joint-tenancy interest in the property to Mrs. Klingelhutz was "done in an attempt to place the Property beyond the reach of [appellants] and [Mr. Klingelhutz's] other creditors," the transfer was fraudulent.[1]

         In December 2017, respondents moved for amended findings, or, in the alternative, a new trial. Consistent with the district court's reservation of respondents' right to present evidence contradicting appellants' posttrial assertions regarding tax-assessed values, respondents submitted an affidavit from their appraiser further explaining his appraisal and the comparables on which he relied.

         Respondents argued that the reasonable value of the property at the time of transfer was $1, 935, 000, that the district court should have applied an agricultural homestead exemption of $750, 000, and that the property was encumbered by four mortgages totaling $3, 878, 000, including the $3, 000, 000 guaranty mortgage in favor of The RiverBank. Respondents also argued that the district court erred in computing the nonexempt interest in the property by subtracting the amount of the mortgages and the $451, 213.51 judgment from the total value of the property, and not just from Mr. Klingelhutz's interest in the property. Respondents concluded that, based on their proposed amended findings, Mr. Klingelhutz's interest in the property was not an asset as defined by MUFTA and the transfer of his joint-tenancy interest therefore did not violate MUFTA.

         The district court granted respondents' motion for amended findings in part. The district court amended its finding regarding the property's market value at the time of the 2012 transfer, finding "the value of the Property to be not less than $1, 935, 000 as determined by [respondents'] appraisal." The district court also amended its finding regarding the homestead exemption. The district court found that the property "has been enrolled in the Green Acres tax deferment program since 2000" and reasoned that based on the Green Acres enrollment, [2] and because respondents had "testified they farmed the Property for a number of years and now rent the tillable acreage on it to a local farmer," Mr. Klingelhutz was entitled to a $750, 000 agricultural homestead exemption.

         The district court did not amend its findings or determination regarding the $3, 000, 000 guaranty mortgage. However, the district court found that it was not appropriate to include the $245, 000 mortgage in favor of Community Bank Corporation in the computation of Mr. Klingelhutz's equity in the Carver County property because that mortgage was signed by Mr. Klingelhutz as CEO of Klingelhutz Development Company, and not by Mrs. Klingelhutz, and because Klingelhutz Development Company did not have an ownership interest in the property.

         Based on the amended findings, the district court concluded that "[a]t the time of transfer, [Mr. Klingelhutz's] interest in the Property was -$550, 000, and the Property was therefore not an asset under MUFTA."[3] The district court therefore dismissed appellants' MUFTA claims.

         Landmark and Security appeal, challenging the district court's amended property valuation, application of the agricultural homestead exemption, and dismissal of their MUFTA claims. Respondents have filed a notice of related appeal, challenging the district court's determination that the $3, 000, 000 guaranty mortgage is not a valid lien encumbering the property under MUFTA.

         ISSUES

         I. Did the district court err by amending its findings regarding the market value of the Carver County ...


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