Landmark Community Bank, N.A. v. John D. Klingelhutz

STATE OF MINNESOTA
IN COURT OF APPEALS
A15-0980

Landmark Community Bank, N.A.,
Respondent,

vs.

John D. Klingelhutz, et al.,
Appellants.

Filed February 1, 2016
Affirmed
Kirk, Judge

Washington County District Court
File No. 82-CV-14-325

John F. Bonner III, St. Louis Park, Minnesota (for respondent)

Anthony Gabor, Richard L. Morris, Morris Law Group, P.A., Edina, Minnesota (for
appellants)

Considered and decided by Kirk, Presiding Judge; Peterson, Judge; and Chutich,

Judge.

SYLLABUS

Real property securing a guaranty mortgage is an asset under the Minnesota

Uniform Fraudulent Transfer Act when, at the time of transfer, there was no claim of

default upon the underlying principal or the guaranty mortgage and the property had value.

Minn. Stat. §§ 513.41-.51 (2014 & Supp. 2015).
 OPINION

KIRK, Judge

Appellants, husband and wife, challenge the district court’s entry of judgment in

favor of respondent-creditor, declaring their transfer of real property to wife’s limited

liability company (LLC) as void under the Minnesota Uniform Fraudulent Transfer Act

(MUFTA).1 The real property secured a guaranty mortgage of up to $1,000,000 serving as

additional collateral on a $7,750,000 construction loan that was obtained by Vista Canyon,

LLC, of which husband is the chief manager.2 Husband and wife contend that the property

is not an asset under the act because it was fully encumbered by a valid lien when they

transferred it to wife’s LLC, and the transfer was not fraudulent. The property had

considerable equity because, at the time of transfer, there was no default alleged on the

guaranty mortgage and the assessed value of the property was over $900,000. Because the

property securing the guaranty mortgage is an asset under MUFTA, and husband and wife

1
In 2015, the Minnesota Uniform Fraudulent Transfer Act was amended to the Minnesota
Uniform Voidable Transactions Act. See Minn. Stat. §§ 513.41-.51 (Supp. 2015). The
amended statute does not apply to the pending litigation because the effective date and
application of the amendments do not apply to a transfer made before August 1, 2015. See
2015 Minn. Laws, ch. 17, § 13. See also Braylock v. Jesson, 819 N.W.2d 585, 588 (Minn.
2012) (“When the Legislature merely clarifies preexisting law, the amended statute applies
to all future or pending litigation. If, on the other hand, the amendment changes preexisting
law, the amendment is not retroactive unless the Legislature states otherwise.” (citations
omitted)).
2
For ease of reading, we have chosen to adopt the phrase “guaranty mortgage” as used by
the parties at the district court and appellate level. The guaranty mortgage secured the
payment of up to $1,000,000 in favor of the mortgagee in the event that the mortgagor
defaulted on the principal loan.

2
transferred the property to wife’s LLC in order to avoid paying husband’s creditors, we

affirm.

FACTS

In 2013, respondent Landmark Community Bank, N.A., a judgment creditor, sued

appellants John D. Klingelhutz (husband) and his wife, Durene D. Klingelhutz (wife),

seeking a declaratory judgment that husband’s transfer of real property to wife’s LLC was

fraudulent and void because it violated MUFTA, Minn. Stat. §§ 513.41-.51 (2014 & Supp.

2015). Landmark asserted that its judgment lien was a valid and senior interest in the

property, and it requested costs and disbursements. In 2014, the district court held a bench

trial. No witnesses testified, but the parties stipulated to the admission of several exhibits

and submitted post-trial written briefs. The district court deemed husband and wife’s

requests for admissions to be admitted because Landmark failed to timely answer. The

district court’s findings of fact are summarized below.

Husband and wife owned real property in Bayport (Bayport property) as joint

tenants with rights of survivorship. In 2005, they recorded their warranty deed of the

Bayport property with the Washington County Recorder. In January 2008, Vista Canyon

obtained a $7,750,000 construction loan from The RiverBank to purchase and improve real

property in Hudson, Wisconsin. Husband and wife simultaneously executed a guaranty

mortgage of up to $1,000,000 to RiverBank on the Bayport property, which could be

foreclosed upon in the event of default on the Vista Canyon loan. The guaranty mortgage

was promptly recorded. The guaranty mortgage contained an anti-alienation clause:

3
 The [m]ortgagor shall not sell, convey, transfer,
encumber or mortgage the [p]remises or any part thereof or any
interest therein, or be divested of [m]ortgagor’s title or any
interest therein in any manner or way, whether voluntary or
involuntary, without the written consent of the [m]ortgagee.
Consent by the mortgagee as to one transaction or occurrence
shall not be deemed to be a waiver of the right as to any
subsequent transaction or occurrence.

(Emphasis added.)

In 2009, husband, wife, and Riverbank executed a guaranty-mortgage-modification

agreement. Relevant to this appeal, the modification agreement added language

specifically referencing that the Vista Canyon loan was secured by the guaranty mortgage

on the Bayport property. The anti-alienation clause remained unchanged, stating that “[a]ll

original terms of the [m]ortgage shall remain in full force and effect except as amended

hereby.” The guaranty-mortgage-modification agreement was promptly recorded.

Meanwhile, in 2009, Landmark sued husband for an unpaid debt. On October 25,

2011, husband and wife transferred the Bayport property by quitclaim deed to Duff

Investments MN, LLC for consideration of less than $500. Wife is the registered agent of

Duff Investments, which is a single-member LLC wholly owned and directed by her. In

April 2012, husband and wife recorded the conveyance in Washington County. It assessed

the property-tax value of the Bayport property at $924,000 in 2011 and $919,600 in 2012.

In 2013, Landmark obtained a judgment against husband totaling $403,524.42.

In 2012, Central Bank received RiverBank’s assets and obligations, including the

guaranty mortgage under the Federal Deposit Insurance Corporation regulations. There is

no evidence in the record that Central Bank, the new mortgagee, gave husband and wife

4
written permission to transfer the property, as required under the anti-alienation clause of

the guaranty mortgage.

Despite the fact that the Bayport property was encumbered by the guaranty

mortgage in an amount up to $1,000,000, the district court found that the Bayport property

had considerable value at the time husband and wife transferred it because there was no

default, claim, or action pursuant to the guaranty mortgage. Also, wife was not indebted

to husband at the time of the transfer.

The district court concluded that husband and wife’s transfer of the Bayport

property was fraudulent because it was intended to hinder, delay, and defraud creditors,

including Landmark. It did not credit husband and wife’s argument that Landmark had

admitted that the property was not an asset under MUFTA because the guaranty mortgage’s

potential debt exceeded the property’s tax-assessed value in 2011. The district court

recognized that, while the guaranty mortgage could have some effect upon the property’s

value, the extent of the encumbrance on the property was unknown until a demand was

made upon the guaranty mortgage. It concluded that the property was an asset under

MUFTA because there was no claim against or default under the guaranty mortgage at the

time of transfer, and the property had considerable value.

The district court found that Landmark was entitled to declaratory judgment that the

transfer was void under MUFTA and that its judgment lien on the Bayport property was

senior to the interest of wife’s LLC. It also ordered husband and wife to pay Landmark’s

costs and disbursements.

Husband and wife appeal.

5
 ISSUES

1. Did the district court err when it found that the Bayport property was an asset

under MUFTA?

2. Did the district court err when it held that husband and wife fraudulently

transferred the Bayport property to wife’s LLC?

ANALYSIS

I. The district court did not err when it found that the Bayport property was an
asset under MUFTA.

“When reviewing a declaratory judgment action, we apply the clearly erroneous

standard to factual findings and review the district court’s determinations of law de novo.”

Onvoy, Inc. v. ALLETE, Inc., 736 N.W.2d 611, 615 (Minn. 2007) (citations omitted); see

also Skyline Village Park Ass’n v. Skyline Village L.P., 786 N.W.2d 304, 306-07 (Minn.

App. 2010). “In a declaratory judgment action tried without a jury, the court as the trier of

facts must be sustained in its findings unless they are palpably and manifestly contrary to

the evidence.” Samuelson v. Farm Bureau Mut. Ins. Co., 446 N.W.2d 428, 430 (Minn.

App. 1989), review denied (Minn. Nov. 22, 1989).

“[MUFTA] prohibits a debtor from transferring property with the intent to hinder,

delay, or defraud any creditors.” Reilly v. Antonello, 852 N.W.2d 694, 698 (Minn. App.

2014) (quotation omitted). MUFTA’s purpose is “to prevent debtors from placing property

that is otherwise available for the payment of their debts out of the reach of their creditors.”

Id. at 699 (quotation omitted). “The act is a remedial statute and is meant to be construed

broadly.” Id. (quotation omitted).

6
 The controlling issue in this appeal is whether the Bayport property is an “asset” as

defined by MUFTA. See Minn. Stat. § 513.41(2)(i). An “asset” is defined as property of

a debtor, but does not include “property to the extent it is encumbered by a valid lien.” Id.

A valid lien is defined as a “charge against or an interest in property to secure payment of

a debt or performance of an obligation” that is effective against the holder of a subsequent

lien. Id. (8), (13).

Husband and wife argue that the district court erred in finding that the Bayport

property was an asset because it was fully encumbered by a valid lien at the time of transfer.

In support of their position, they point to admissions made by Landmark including: the

property has at all times been subject to a guaranty mortgage in the amount of $1,000,000;

after the transfer, the property remained and is still subject to the guaranty mortgage; the

property’s current value as well as its value from January 1, 2011 through October 25,

2011, was less than $1,000,000; the outstanding indebtedness secured by the guaranty

mortgage is in excess of $1,000,000; and the existing liens and encumbrances on the

property are superior to Landmark’s judgment lien. They also cite rulings from other state

appellate courts holding transfers of property that are fully encumbered by a valid lien are

not fraudulent under the applicable state’s version of the Uniform Fraudulent Transfer Act.

Any matter admitted pursuant to Minn. R. Civ. P. 36.02, “is conclusively established

unless the court on motion permits withdrawal or amendment of the admission.”

Admissions include matters of fact, mixed questions of law and fact, and matters of opinion

and conclusion. Minn. R. Civ. P. 36.01 1975 comm. cmt. “A Rule 36 admission is

comparable to an admission in pleadings . . . .” Sec. State Bank of Aitkin v. Morlock, 355

7
N.W.2d 441, 445 (Minn. App. 1984). In essence, husband and wife assert that Landmark’s

admissions conclusively establish that there was no equity in the Bayport property at the

time they transferred it to wife’s LLC.

But, as the district court implicitly concluded, Landmark’s admissions do not

resolve the controlling issue in this case. As a matter of law, the date of transfer under

MUFTA occurred in April 2012, not October 25, 2011. A transfer is made “when the

transfer is so far perfected that a good[-]faith purchaser of the asset from the debtor against

which applicable law permits the transfer to be perfected cannot acquire an interest in the

asset that is superior to the interest of the transferee.” Minn. Stat. § 513.46(1)(i). Here,

husband and wife transferred the Bayport property when they recorded the interest of

wife’s LLC in the property in April 2012, which made her LLC’s interest superior to all

future good-faith purchasers, such as Landmark. Landmark never admitted that the fair-

market value of the Bayport property was less than $1,000,000 in April 2012. Moreover,

Landmark’s admission that “outstanding indebtedness” secured by the guaranty mortgage

exceeds $1,000,000 is not only vague, but also does not conclusively establish that the

property was fully mortgaged in April 2012.

A “guaranty” is “a collateral contract to answer for the payment of a debt or the

performance of a duty in case of the default of another who is primarily liable to pay or

perform the same.” Geneva JPM 2003-PM1, LLC v. Geneva FSCX I, LLC, 843 N.W.2d

263, 266 (Minn. App. 2014) (quotation omitted). A guaranty is a conditional obligation

that does not become absolute until a default on the underlying obligation. Schmidt v.

McKenzie, 215 Minn. 1, 7, 9 N.W.2d 1, 4 (1943). Minnesota appellate courts have not

8
addressed how to determine the value of an asset securing a guaranty mortgage under Minn.

Stat. § 513.41, subd. (2)(i). A guaranty mortgage compensates the lender in the event of a

default on the principal mortgage. Once the principal mortgage debt is satisfied, the

guaranty ceases to exist. See State Bank of Young Am. v. Fabel, 530 N.W.2d 858, 862

(Minn. App. 1995), review denied (Minn. June 29, 1995).

The record shows that at the time of the transfer, there was no claim of default upon

the principal mortgage or guaranty mortgage. Hence, we agree with the district court that

the amount of debt secured by the guaranty mortgage was zero. Moreover, the property

had considerable value, as the county assessed its value at $924,000 in 2011 and $919,600

in 2012. We conclude that the Bayport property is an asset under MUFTA. Minn. Stat.

§ 513.41(2)(i).

We note that there are also strong public-policy grounds for district courts to closely

examine the amount of equity of the asset securing a guaranty mortgage in these types of

cases. To hide monies from creditors, debtors could easily secure assets with considerable

value with sham guaranty mortgages and then falsely claim that the asset was encumbered

up to or exceeding its value.

II. The district court did not err when it held that the husband and wife
fraudulently transferred the Bayport property to wife’s LLC.

Under MUFTA, debtors are prohibited from transferring an asset “with actual intent

to hinder, delay, or defraud any creditor of the debtor.” Minn. Stat. § 513.44(a)(1).

“[F]raudulent intent must be determined in light of the facts and circumstances of each

case.” Finn v. Alliance Bank, 860 N.W.2d 638, 647-48 (Minn. 2015). A district court may

9
consider factors commonly referred to as “badges of fraud” in determining whether a

debtor transferred an asset with an actual intent to defraud a creditor. Id. at 647. The list

of badges includes: (1) whether the transfer was to an insider; (2) the debtor’s possession

or control of the property after the transfer; (3) the concealment of the transfer; (4) whether

the debtor was threatened with a lawsuit at the time of the transfer; and (5) whether the

value of consideration received by the debtor was equivalent to the value of the asset

transferred. Minn. Stat. § 513.44(b).

Husband and wife argue that the district court erred in finding that they fraudulently

transferred the property because wife’s LLC does not meet the statutory definition of

“insider” and the property had no value at the time of transfer.

The district court did not clearly err in finding that husband and wife fraudulently

transferred the property. The parties’ relationship “is a significant consideration” when

determining intent to defraud. New Horizon Enters., Inc. v. Contemporary Closet Design,

Inc., 570 N.W.2d 12, 16 (Minn. App. 1997). Here, husband and wife conveyed the property

to wife’s LLC. The statutory definition of “insider” includes spouses. Minn. Stat.

§ 513.41(7)(i)(A), (9). The definition also contemplates business organizations such as

corporations and partnerships as potential insiders. Id. (7)(ii), (7)(iii). Also, the definition

of “insider” is not limiting. See Citizens State Bank Norwood Young Am. v. Brown, 849

N.W.2d 2d 55, 62-63 (Minn. 2014) (concluding that the term “insider” is nonexclusive in

Minn. Stat. § 513.41(7)(i)(A) and that former spouse was an insider). Taking these facts

together, the single-member LLC owned and directed by wife constitutes an “insider.”

10
 The transfer also violated the anti-alienation clause of the guaranty mortgage, which

prohibited a transfer of the property to a third party without Central Bank’s consent. There

is no evidence in the record that Central Bank ever authorized the transfer. Landmark was

actively seeking a $403,524.42 judgment against husband at the time husband and wife

transferred the property. Further, wife’s LLC did not pay adequate consideration to wife

and husband for the conveyance of the property to the LLC.

DECISION

The Bayport property is an asset under MUFTA because, at the time of transfer,

there was no claim of default on the principal or guaranty mortgage and the property had

value. Husband and wife transferred the property with the intent to defraud respondent-

creditor.

Affirmed.

11