Fingerhut Corp. v. Suburban Nat. Bank, C2-90-504

Citation460 N.W.2d 63
Decision Date21 August 1990
Docket NumberNo. C2-90-504,C2-90-504
PartiesFINGERHUT CORPORATION, Respondent, v. SUBURBAN NATIONAL BANK, a United States Corporation, Appellant.
CourtCourt of Appeals of Minnesota

Syllabus by the Court

1. Registration is the operative act to convey or affect registered land; unregistered mortgage is a contract which does not affect title to registered land.

2. Duly registered notice of lis pendens is effective, pending outcome of litigation, to preserve claim of constructive trust in registered property.

3. Mortgage registered after duly registered notice of lis pendens is subsequent encumbrance and subject to outcome of pending litigation.

4. Notice of adverse claim is not appropriate where notice of lis pendens may be registered.

Patrick J. McLaughlin, Mary E. Senkus, Patrick T. Skelly, Oppenheimer Wolff & Donnelly, Minneapolis, for respondent.

Bradley N. Beisel, Scholle and Beisel, Ltd., Minneapolis, for appellant.

Considered and decided by NORTON, P.J., and GARDEBRING and KLAPHAKE, JJ.

OPINION

NORTON, Judge.

Appellant seeks review of trial court judgment that respondent, which registered its notice of lis pendens against registered property before appellant registered its mortgage, was entitled to priority.

FACTS

This appeal follows a court trial upon stipulated facts. Appellant Suburban National Bank ("Suburban") and respondent Fingerhut Corporation ("Fingerhut") both lost money to a third party, one Connelly. Connelly was a former employee of Fingerhut who engaged in a scheme to defraud Fingerhut of a large amount of money. Connelly and his wife used some of that money to purchase and improve a home in Carver County, which is the subject real estate of this suit. That real estate has been registered, or Torrens, property since 1956.

In 1986, Fingerhut discovered Connelly's scheme. On August 1, 1986, Connelly wrote Suburban regarding a second mortgage he was seeking against the house. He sought $100,000. On August 25, 1986, Suburban entered into an agreement to loan the Connellys $50,000 and receive a mortgage interest in the Carver County real estate. Suburban was unaware of the Fingerhut dispute. On August 28, Fingerhut filed suit against Connelly, claiming that Connelly held the real estate in constructive trust for the benefit of Fingerhut; it also prepared a notice of lis pendens. On August 29, the notice of lis pendens was filed with the registrar of titles in Carver County and duly registered on the certificate of title. On the same day, Mrs. Connelly signed a confirmation of the mortgage agreement and Suburban disbursed the $50,000 loan proceeds to the Connellys. Not until September 2, 1986 was Suburban's mortgage filed with the registrar of titles and duly registered on the certificate of title. Fingerhut did not know that the Connellys had given a mortgage to Suburban.

On April 1, 1987, Fingerhut informed Suburban that the Connellys were trying to sell the premises and that, based on its notice of lis pendens, Fingerhut claimed priority over any interest Suburban had. On April 10, 1987, Suburban responded that it had become aware of Fingerhut's suit against Connelly when Connelly's account records were subpoenaed from Suburban. On December 23, 1987, an order was entered in federal district court concluding, among other things, that the subject property was obtained by the Connellys specifically with money obtained fraudulently from Fingerhut while Connelly was a fiduciary of Fingerhut. The federal court found that the sum of at least $141,000 could be traced directly from funds fraudulently obtained by Connelly from Fingerhut to the purchase and improvement of the real property. The federal court concluded that a constructive trust arose at the time the Connellys became owners of the real estate. The federal court ordered that legal title be vested in Fingerhut as of "on or before August 29, 1986."

In May of 1988, Fingerhut brought this quiet title action against Suburban. Suburban opposed on the grounds that its mortgage was prior to any interest Fingerhut had in the premises. Fingerhut and Suburban entered into an escrow agreement and the property was sold to uninvolved third parties. On November 11, 1989, Fingerhut and Suburban submitted this matter for decision on the stipulated facts, the briefs and oral argument. On February 9, 1990, the trial court entered its judgment concluding that because the subject real estate was registered property and Fingerhut's notice was registered before Suburban's mortgage, Fingerhut's interest was superior. Suburban appeals.

ISSUE

Did the trial court err in holding that Fingerhut's interest was superior?

ANALYSIS

Because this case was decided upon stipulated facts, the only issue is whether the trial court erred in its application of the law. Hubred v. Control Data Corp., 442 N.W.2d 308, 310 (Minn.1989).

Registered Property

Suburban argues that Fingerhut's notice of lis pendens is not effective to establish a priority against Suburban's earlier executed but later registered mortgage document. The trial court held that because registration is the operative act which creates a legal interest in registered property, the first registered interest was entitled to priority. The relevant statute states in pertinent part:

No voluntary instrument of conveyance purporting to convey or affect registered land, * * * shall take effect as a conveyance, or bind or affect the land, but shall operate only as a contract between the parties, and as authority to the registrar to make registration. The act of registration shall be the operative act to convey or affect the land.

Minn.Stat. § 508.47, subd. 1 (1988) (emphasis added). The necessity of registration to create an interest in the land is what distinguishes registered, or Torrens, property from abstract property. See Mill City Heating & Air Conditioning Co. v. Nelson 51 N.W.2d 362, 364 (Minn.1984) ("[t]he purpose of the Torrens law is to establish an indefeasible title free from any and all rights or claims not registered" (citing In re Juran, 178 Minn. 55, 58, 226 N.W. 201, 202 (1929))). See also United States v. Ryan, 124 F.Supp. 1, 10 (D.Minn.1954) (unregistered instruments do not affect Torrens titles or create any interest in land; all titles registered are free from all unregistered rights); In re Lee, 171 Minn. 182, 186, 213 N.W. 736, 737 (1927) (mortgage effective against Torrens property only from time of registration).

Suburban argues that because the mortgage agreement was executed before the notice of lis pendens was registered, the lis pendens could not affect the earlier unregistered mortgage interest. We disagree. Every instrument which would affect unregistered land,

if recorded, or filed with the county recorder, shall, in like manner, affect the title to registered land if filed and registered * * *.

Minn.Stat. § 508.48 (1988) (emphasis added). Suburban argues that a notice of lis pendens, treated "in like manner" with respect to registered or abstract property, is ineffective against an earlier executed but later recorded mortgage agreement. This assertion turns the law inside out. What must be treated "in like manner" is the instrument registered against Torrens property, not the condition of the title. Suburban's argument, that registration is not the operative act, would render meaningless much of Minn.Stat. ch. 508.

The question is not whether the notice of lis pendens is effective against registered land; that question has been answered. See, e.g., Abrahamson v. Sundman, 174 Minn. 22, 23, 218 N.W. 246, 246 (1928) (lis pendens filed against Torrens property); Minn.Stat. § 557.02 (1988) (a notice of lis pendens may be filed "[i]n all actions in which the title to, or any interest in or lien upon, real property is involved or affected").

Instead, the question is whether the mortgage taken by Suburban can be effective before registration. The answer is, with respect to registered property, unequivocally no. That is because "the act of registration shall be the operative act to convey or affect the land." Minn.Stat. § 508.47, subd. 1. Furthermore:

The owner of registered land may mortgage the same by deed or other instrument sufficient in law for that purpose * * *. Such deed, mortgage, or other instrument * * * shall be registered and take effect upon the title only from the time of registration.

Minn.Stat. § 508.54 (1988) (emphasis added). Therefore, before its registration, Suburban's mortgage was effective only as a contract between it and the Connellys; the mortgage could not affect the land. Id.; Minn.Stat. § 508.47, subd. 1.

Suburban also argues it has an equitable, if not a legal, interest which takes precedence over any interest of Fingerhut. In support of its argument, it advances Finnegan v. Gunn, 207 Minn. 480, 292 N.W. 22 (1940). Mr. Finnegan owned Torrens property and gave a mortgage to Mr. Gunn. Gunn never recorded the mortgage. After both men died, Finnegan's widow sought title registered in her name free of that encumbrance; Gunn's widow objected. The supreme court held that, between the parties, legal title was held by the mortgagor for the benefit of the mortgagee to the extent of the security. Id. at 482, 292 N.W. at 24. Recognizing that the instrument could only operate as a contract, the court held the successor widow obligated to the liabilities of her husband. Id. at 482-83, 292 N.W. at 24. The supreme court expressly held, however, that its conclusion "does not create a lien by judicial decision contrary to statute." Id. at 483, 292 N.W. at 24.

Suburban relied upon Finnegan in arguing to the trial court that an equitable interest could be granted to the holder of an unrecorded instrument against Torrens property. The trial court considered, but distinguished, Finnegan noting that it was restricted to its own unique facts which simply did not apply to Fingerhut and Suburban. We agree.

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