National Corp. for Housing Partnership v. Liberty State Bank

• Decision Date: 07 January 1988
• Docket Number: 87-5096,Nos. 87-5095,s. 87-5095
• Citation: 836 F.2d 433
• Parties: NATIONAL CORPORATION FOR HOUSING PARTNERSHIP, federal equity receiver of the Cedar Square West Housing Project on appointment by The Honorable Robert G. Renner, U.S. District Court Judge, in Civil Files 3-84-1097 and 3-85-421, Appellee, v. LIBERTY STATE BANK, Stage I Land Company, F Building Land Company and Keith Heller, Appellants.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 433

836 F.2d 433

NATIONAL CORPORATION FOR HOUSING PARTNERSHIP, federal equity receiver of the Cedar Square West Housing Project on appointment by The Honorable Robert G. Renner, U.S. District Court Judge, in Civil Files 3-84-1097 and 3-85-421, Appellee, v. LIBERTY STATE BANK, Stage I Land Company, F Building Land Company and Keith Heller, Appellants.

Nos. 87-5095, 87-5096.

United States Court of Appeals Eighth Circuit.

Submitted Sept. 2, 1987.

Decided Jan. 7, 1988.

Eric J. Magnuson, Minneapolis, Minn., for appellee.

Before McMILLIAN, Circuit Judge, HENLEY, Senior Circuit Judge, and JOHN R. GIBSON, Circuit Judge.

JOHN R. GIBSON, Circuit Judge.

National Corporation for Housing Partnership brought this suit as receiver for the Cedar Square West Housing Project to recover security deposits belonging to the housing project tenants. The security deposits had been commingled with the project's operating funds by the Cedar Square West owners, Stage I and F Building Land Company, and general partner of their general partner, Keith Heller (these three parties will be referred to collectively as the "Cedar Square West appellants"). A portion of these funds was used to purchase certificates of deposit, which Stage I had pledged to Liberty State Bank to secure a loan and which Liberty had applied to pay off the loan. The district court ¹ entered summary judgment against Liberty State Bank on the grounds that Stage I did not own the deposits and therefore could not grant Liberty a security interest in them. The court granted summary judgment against the Cedar Square West appellants on the issue of liability for Cedar Square West's security deposit funding. The court entered its final judgment after a trial on the amount of the Cedar Square West appellants' damage liability. We affirm.

Stage I, a Minnesota limited partnership, and F Building, a partnership, owned a housing project for which they had obtained government-insured financing under the National Housing Act. Cedar Riverside Associates, Inc. and Cedar Riverside Properties, a Minnesota limited partnership are the general partners in both Stage I and F Building. Keith Heller, in turn, is president of Cedar Riverside Associates, Inc. and general partner of Cedar-Riverside Properties. In order to get the financing, Stage I and F Building had entered into regulatory agreements with the Secretary of Housing and Urban Development governing their operation of the financed properties. The regulatory agreements contained provisions governing the owners' treatment of tenants' security deposits, ² under which the owners agreed to keep the security deposits in a separate trust account, the amount of which equalled or exceeded the owners' outstanding obligations for return of security deposits to tenants.

The project was located in Minnesota, which regulates residential rental security deposits by statute. Minn.Stat. Sec. 504.20(2) (1986). ³

The Cedar Square West appellants collected security deposits from their tenants and established bank accounts representing the security deposits. The actual security deposits were not segregated from the owners' other funds, and the moneys in the security deposit accounts could not be traced directly from the tenants to the security deposit account.

On August 3, 1981 Heller wrote to Liberty Board Chairman David Fesler, indicating that there were funds for security deposits in interest-bearing accounts, which the Board of Directors of the Cedar-Riverside Associates, Inc. might decide to deposit with Liberty. In October, 1981 the security deposit accounts were moved to Liberty and invested in CD's. Fesler admitted that he had always known the funds represented "security deposit funding", but disputes only whether he knew they represented tenants ' security deposits. Fesler was a limited partner in Cedar-Riverside Properties, and, of course, was aware that the Cedar-Riverside group was engaged in the business of renting apartments.

In August, 1982 Stage I borrowed the amount of the CD's from Liberty and pledged the CD's as security for the debt. The CD's were reinvested several times and finally consolidated into one certificate.

The Cedar Square West project was placed in receivership upon the application of the United States. After the receiver was appointed, Liberty applied most of the CD proceeds to Stage I's defaulted loan and turned over to the receiver only $5,587.82, the amount left over.

The receiver brought this suit to recover the tenants' deposits. The district court granted the receiver's summary judgment motion against Liberty, reasoning that under the Minnesota statute, a landlord receives residential security deposits as a bailment. Having no interest in the fund other than that of a bailee, Stage I did not have sufficient rights in the CD's to grant a security interest in them. Accordingly, Liberty's claimed security interest was invalid. The court entered summary judgment against Liberty for the amount of the CD proceeds Liberty retained to pay off the loan.

The court granted partial summary judgment against the Cedar Square West appellants on the issue of liability for the amount of the project's security deposit liability. After a trial on the issue of damages, the court entered judgment against the three for $340,107.18 plus prejudgment interest.

On appeal, Liberty argues that the security deposits were not a bailment, but a debt, and that at any rate, the proceeds of CD's were not the tenants' money, since they could not be traced from the tenants to the security deposit account.

The nature of the security deposits is governed by Minnesota law. This court accords substantial deference to the district court's interpretation of state law, particularly "when considering a state statute not yet construed by the state court." G.A. Imports, Inc. v. Subaru Mid-America, Inc., 799 F.2d 1200, 1205 (8th Cir.1986).

There is no Minnesota case determining whether the provisions of Minn.Stat. Sec. 504.20(2) create a debt or a bailment. The district court concluded that the statutory language providing that the security deposits "shall be held by the landlord for the tenant " (emphasis added by the district court) created a bailment, that is, the " 'legal relation arising upon delivery of goods without transference of ownership under an express or implied agreement that the goods be returned' or accounted for." Slip Op. at 9 (quoting Wallinga v. Johnson, 269 Minn. 436, 131 N.W.2d 216, 218 (1964)). The district court found further support for its conclusion in the regulatory agreements which required the segregation of the security deposit funds in a separate trust account and which forbade the transfer or encumbrance of the funds without prior written approval. This reinforced the district court's conclusion that Stage I had no interest in the CD and that Liberty consequently obtained no security interest.

Liberty cites a number of cases from other jurisdictions holding that a security deposit creates a debtor-creditor relation at common law, with the landlord taking title to the moneys ⁴; but no matter how the relation might be characterized at common law, the Minnesota statute supercedes any contrary common law.

Liberty also argues that unless the landlord is obligated to return to the tenant the identical check or moneys the tenant deposited, the relation cannot be one of bailment. While such appears to have been the ancient rule regarding bailment of money, see, e.g., Wright v. Payne, 62 Ala. 340, 344 (1878), the rule requiring return of the identical item has been liberalized in the case of bailment of fungible goods. See generally R. Brown, The Law of Personal Property Sec. 10.6 (3d ed. W. Raushenbush rev. 1975). Cf. Production Credit Association v. Fitzpatrick, 385 N.W.2d 410 (Minn.Ct.App.1986) (person storing another's grain in his bin is bailee). At least one jurisdiction has also liberalized the rule in the case of money, analogizing to the case of fungible goods. Knapp v. Knapp, 118 Mo.App. 685, 96 S.W. 295, 297 (1906). In the absence of Minnesota authority on point and in light of our deference to the district court on undecided questions of state law, we cannot say the district court erred in determining that Stage I held the security deposits without transfer of ownership under express or implied agreement that they be returned or accounted for, and that such was a bailment under Minnesota law. We believe that, while all of the attributes of bailment may not be strictly applicable to such deposits, the district court did not err in its conclusion with respect to the essence of the relationship.

Next Liberty argues that the CD cannot be treated as bailed property because it was not purchased exclusively with the actual tenants' deposits, but with money from a general operating fund. Liberty cites In re Trafalgar Associates, 53 B.R. 693 (Bankr.S.D.N.Y.1985), for the proposition that in order to charge a fund as security deposits, the deposits must be traced from the tenant's hand to the fund. The Trafalgar case is inapplicable, since it was decided under New York's statutory provisions making security deposits trusts and therefore subject to trust tracing rules. Minn.Stat. Sec. 504.20(2) specifically provides that the security deposits will not be received by the landlord in a fiduciary capacity and the parties agree...