H. & Val J. Rothschild, Inc. v. Northwestern Nat. Bank of St. Paul

• Decision Date: 28 May 1976
• Docket Number: No. 45791,45791
• Citation: 242 N.W.2d 844,19 UCC Rep. 673,309 Minn. 35
• Court: Minnesota Supreme Court
• Parties: , 85 A.L.R.3d 1043, 19 UCC Rep.Serv. 673 H. & VAL J. ROTHSCHILD, INC., Appellant, v. NORTHWESTERN NATIONAL BANK OF SAINT PAUL, Respondent.

Page 844

242 N.W.2d 844

309 Minn. 35, 85 A.L.R.3d 1043, 19

UCC Rep.Serv. 673

H. & VAL J. ROTHSCHILD, INC., Appellant, v. NORTHWESTERN NATIONAL BANK OF SAINT PAUL, Respondent.

No. 45791.

Supreme Court of Minnesota.

May 28, 1976.

Syllabus by the Court

1. The assignment of the right to receive payment of the proceeds of a construction contract involves a security interest covered by the Uniform Commercial Code and not a real estate transaction excluded thereby.

2. A junior but perfected security interest has priority over a senior but unperfected security interest under the Uniform Commercial Code. The fact that the holder of the junior interest originally had a mistaken belief that the unperfected security interest had priority does not change the effect of the first-to-file rule.

Vogel, Nemo, Stapleton & Brenner, Louis W. Brenner and E. Martin Stapleton, St. Paul, for appellant.

Doherty, Rumble & Butler and Bruce E. Hanson, St. Paul, for respondent.

Heard before PETERSON, MacLAUGHLIN and SCOTT, JJ., and considered and decided by the court en banc.

SCOTT, Justice.

This is an appeal from a judgment entered by the Ramsey County District Court in favor of respondent, Northwestern National Bank of Saint Paul, and from an order denying a new trial. A declaratory judgment action had been brought to determine the priority of conflicting security interests in the same collateral. The court found that the collateral belonged to respondent, which led to this appeal.

Appellant, H. & Val J. Rothschild, Inc. (hereinafter Rothschild), is a Minnesota corporation engaged in mortgage banking and real estate development. Murray Enterprises (hereinafter Murray) is a Minnesota corporation engaged in construction and a client of Rothschild and Northwestern National Bank of Saint Paul (hereinafter Northwestern).

Rothschild made interim construction loans to Murray, and Northwestern made working capital loans to Murray. Rothschild's loans were for the construction of five turnkey projects on land within United States Indian reservations. ¹ Because of the legal difficulty in foreclosing a mortgage on Indian land, the primary security to Rothschild for its loans was an assignment of Murray's right to receive payment of the proceeds of the construction contracts. The assignment involved herein, executed by Murray to Rothschild on November 15, 1971, stated:

'ASSIGNMENT

'KNOW ALL MEN BY THESE PRESENTS THAT MURRAY ENTERPRISES OF MINNESOTA, INC. * * * does hereby assign to H. & VAL J. ROTHSCHILD, INC. * * * the following rights as security for an interim loan to be handled by Lender in connection with the erection of certain improvements more specifically described in that certain Contract of Sale and agreement to Lease by and between MURRAY ENTERPRISES OF MINNESOTA, INC. and WHITE EARTH HOUSING AUTHORITY * * *.

'(1) All rights to receive payment from the WHITE EARTH HOUSING AUTHORITY upon delivery of certain improvements to the said party, and all proceeds due Murray Enterprises of Minnesota, Inc. shall be payable directly to Lender at its address.

'(2) A security interest in that certain lease and possessory interest in property, created by that certain agreement * * *.'

Upon discovering that Murray was experiencing financial trouble, on June 6, 1972, Northwestern obtained a security interrest which stated:

' § 2. SECURITY INTEREST. As security for the payment of all Liabilities, Borrower hereby grants to Bank a security interest in (i) all Accounts, now existing or hereafter arising, (ii) all interest of Borrower, now existing or hereafter arising, in goods, the sale or lease of which gave rise to any Accounts, (iii) all contract rights of Borrower, now existing or hereafter arising, (iv) all chattel paper, documents and instruments relating to Accounts, and (v) the proceeds, products and accessions of and to any and all of the foregoing.'

Northwestern obtained another similar security agreement from Murray on July 13, 1972.

On August 3, 1972, and August 16, 1972, Northwestern filed financing statements regarding its Murray security interests in the office of the Minnesota secretary of state. No financing statement was filed by Rothschild.

On April 17, 1974, the White Earth Indian Housing Authority tendered a cashier's check payable jointly to Rothschild and Northwestern as final payment for sale of the White Earth project, the project involved herein. The payees agreed to purchase a certificate of deposit to be held in escrow pending the outcome of this lawsuit.

We are presented with the following issues:

(1) Whether the security interests of Rothschild and Northwestern in Murray Enterprises' right to receive payment of the proceeds of the White Earth turnkey contract are contract rights within the meaning of Minn.St. 336.9--106.

(2) Whether the junior, but perfected, security interests of Northwestern have priority over the senior, but unperfected, interest of Rothschild.

1. Murray Enterprises had several interests under the turnkey construction contracts. One interest was a leasehold estate in the land. Another interest was the right to receive payment of the proceeds of the turnkey contracts when construction was completed. Rothschild argues that Murray used the former interest as collateral for its debt and that Minnesota's commercial code does not apply to the financing of real estate transactions.

Minn.St. 336.9--106 defines 'contract right' as 'any right to payment under a contract not yet earned by performance * * *. ' The Uniform Commercial Code Comment accompanying that section in the Uniform Commercial Code indicates that the contract rights to a future income can involve real estate transactions:

'* * * 'Contract right' is a right to be earned by future performance under an existing contract: for example, rights to arise when deliveries are made under an installment contract or as work is completed under a building contract.' U.C.C. Comment, 21C M.S.A. p. 269.

Rothschild's argument that its security interest was the assignment of Murray's leasehold estate is untenable in that Murray's leasehold terminated whenever construction was terminated. The assignment from White Earth Housing Authority, which leased the land involved here to Murray Enterprises, states:

'In the event Murray Enterprises of Minnesota, Inc., shall abandon the project * * *, the possessory interest created by this assignment of the lease shall cease * * *.'

Northwestern aptly points out that such a leasehold interest was of no value as a security. Rothschild's actual security was intangible collateral in the form of...