United Realty Trust v. PROPERTY DEV., ETC., No. 47707.

• Decision Date: 28 July 1978
• Docket Number: No. 47707.
• Citation: 269 NW 2d 737
• Parties: UNITED REALTY TRUST, etc., Respondent, First National Bank of Rochester, Rochester, Minnesota, Respondent, v. PROPERTY DEVELOPMENT AND RESEARCH COMPANY, et al., Respondents, B. J. Loftsgaarden, Respondent, Alvin A. Holasek, et al., Respondents, Alotel Associates, Appellant, John Hall, et al., Defendants.
• Court: Minnesota Supreme Court

269 N.W.2d 737 (1978)

UNITED REALTY TRUST, etc., Respondent First National Bank of Rochester, Rochester, Minnesota, Respondent, v. PROPERTY DEVELOPMENT AND RESEARCH COMPANY, et al., Respondents B. J. Loftsgaarden, Respondent Alvin A. Holasek, et al., Respondents Alotel Associates, Appellant, John Hall, et al., Defendants.

No. 47707.

Supreme Court of Minnesota.

July 28, 1978.

Gartner, Burkhardt, Shulman & Ekstrand, Rochester, for Alotel Associates and John Hall, et al.

Briggs & Morgan and Bonnil Berezovsky, St. Paul, for United Realty Trust.

Maslon, Kaplan, Edelman, Borman, Brand & McNulty and Marcy Wallace, Minneapolis, for United Realty Trust.

West, Gowan, DeBoer & McIntosh, Rochester, for First Nat. Bank of Rochester.

B. J. Loftsgaarden, St. Paul, for Property Development and Research and pro se.

Eugene A. O'Brien and Donald A. Wheat, Minneapolis, for Alvin A. Holasek, et al.

Minnesota Bankers Association, John S. Jackson, Minneapolis, amicus curiae.

Heard before ROGOSHESKE, KELLY and WAHL, JJ., and considered and decided by the court en banc.

ROGOSHESKE, Justice.

Defendant Alotel Associates (Alotel), a Minnesota limited partnership, claiming to be the true borrower in a defaulted $2,310,000 loan transaction entered in 1973, appeals from the trial court's judgment ordering foreclosure and denying it the defense of usury by application of Minn.St. 334.01, subd. 2, as amended by L. 1974, c. 238, § 1, which exempts transactions of $100,000 or more from the usury laws. Plaintiff lender, United Realty Trust of California (URT), cross-appeals from certain of the trial court's findings of fact, urging that the judgment be affirmed on the additional ground that the loan was exempt from usury laws because made to a corporate borrower within § 334.021. We hold that the trial court properly found the transaction exempted from the usury laws under § 334.01, subd. 2, as amended by L. 1974, c. 238, § 1, and without deciding the issues raised by the cross-appeal, we affirm the judgment of foreclosure.

Through an extended period of financial negotiations beginning sometime in 1972, the promoter, B. J. Loftsgaarden, through and with a number of existing or proposed corporations and business entities formed by him, sought to obtain financing for the construction of a Ramada Inn in Rochester, Minnesota. The proposed inn was to be constructed on land acquired for that purpose by Property Development and Research Company (PDR), a Minnesota corporation which had been formed by Loftsgaarden in 1962. During negotiations, a number of temporary commitments were entered by which First National Bank of St. Paul (First National) agreed to act as interim or construction lender and URT, then Larwin Realty Mortgage Trust, agreed to purchase the loan documents as permanent financer of the project. In each of the commitments entered, the parties attempted to restructure the proposed loan transaction in order to come within a statutory exemption to Minnesota's usury laws for corporate borrowers, which would enable Loftsgaarden legally to obtain the needed venture capital at a going rate of interest exceeding the 8-percent usury ceiling in Minnesota.

On September 11, 1973, a final commitment letter was signed whereby First National agreed to loan $2,310,000 to PDR, Loftsgaarden's corporation formed in 1962. By a sale and purchase agreement of the same date, URT agreed to purchase the note and mortgage from First National after construction of the inn. On October 24, 1973, PDR executed a note to First National for $2,310,000, and to secure the note, PDR gave a mortgage covering all of the real estate and improvements to be placed upon the land where the inn was to be built. The note provided for its subsequent assignment to URT. It provided for interest of 4 percent above prime rate payable to First National and for payments of principal and interest of 9½ percent after purchase of the note by URT for a period of 12 years, at which time the entire obligation would be repaid.

All of the loan proceeds were subsequently disbursed by First National with PDR's approval and used for three purposes: (1) Advances directly to materialmen and subcontractors, (2) discharge of a corporate obligation of PDR incurred in acquisition of the land, and (3) payment of PDR's interest obligation to First National. After construction of the inn was completed, URT purchased the note and mortgage from First National on December 11, 1974. Thereafter, defaults occurred and URT commenced this action to foreclose the mortgage.

Alotel's interest in the property and claims in this litigation arise out of a set of financial and legal relationships created by Loftsgaarden involving PDR, Alotel, and a number of other entities and individuals as part of his scheme for raising additional capital and for constructing and operating the inn. Alotel was formed by Loftsgaarden and functions in part to manage and operate the Ramada Inn.¹ While promoting the inn project, Loftsgaarden prepared and circulated a prospectus by which interests in Alotel were publicly offered to individual investors, raising an additional $1 million in investment capital.

On October 24, 1973, the date of the note and mortgage from PDR to First National, PDR and Alotel entered a lease agreement whereby Alotel leased the subject real estate from PDR for a term of 29 years for use in construction and operation of the motel. Also on October 24, 1973, Alotel gave a secured installment note to PDR in the amount of $2,310,000 at 8-percent interest to be repaid in full within 13 years by October 1986. To secure this note, Alotel gave a mortgage on its leasehold interest in the property plus an assignment of rents to PDR. Rental payments under the lease were calculated to cover the difference between the 8-percent interest on the Alotel note to PDR and the 9½-percent rate on PDR's note to URT during the term of the installment note from Alotel to PDR, which was essentially the term of the First National-URT loan. The term of Alotel's lease, however, extended 16 years beyond the final repayment date of PDR's loan from First National and URT. Alotel thus functioned as an entity for raising additional investment capital, for operating and managing the inn, and for providing the funds to repay the long term loan presumably out of earnings from the inn.²

So long as Loftsgaarden remained a general partner in Alotel, Alotel continued to make monthly payments to PDR in accordance with its note and lease, and all principal and interest payments on the loan to URT were made by the borrower, PDR, from its corporate checking account. After Loftsgaarden withdrew from Alotel in September 1975, Alotel made no further lease payments to PDR, but Loftsgaarden's successor as general partner of Alotel made loan payments directly to URT until default occurred. PDR and Alotel continued to recognize each other's existence as separate entities. When Alotel discontinued paying rent to PDR, PDR brought an unlawful detainer action seeking to regain possession of the real estate under the lease. That action was settled.³

URT brought this action to foreclose the mortgage in July 1976. In this action Alotel and individual defendants John Hall and Wayne Boisen, successors to Loftsgaarden as general partner of Alotel, claimed to be the true borrowers and interposed the defense of usury. They alleged that the loan was made in fact to Alotel; that PDR was a mere conduit for the loan funds in an attempt to evade the usury laws; that the 9½-percent rate of interest, exceeding Minnesota's 8-percent limit for loans to individuals, was usurious; and that the entire transaction was therefore void under §§ 334.01, subd. 2, and 334.03 and URT should have no interest in the mortgaged property. After several days of trial, the trial court, sitting without a jury, found that PDR was in fact a mere corporate cloak for a loan to individuals and that all the elements of usury, including the critically disputed element of intention to evade the usury laws, had been proved. The court held, however, that an amendment to Minnesota's usury statute exempting from usury limits all loans of over $100,000, passed after the loan was first made by First National but before assignment of the note and mortgage to URT, applied to make this transaction nonusurious. Judgment was entered directing the foreclosure of the mortgage and sale of the property in satisfaction of the indebtedness due URT.

Alotel appeals from the judgment, seeking reversal and an order setting aside the foreclosure sale which was held subsequent to judgment and through which URT has become fee owner of the real estate.⁴ URT cross-appeals from the trial court's findings that the loan was usurious and not made in form and in fact to a corporation.⁵

The loan transaction between PDR, First National, and URT was entered in Minnesota and, by express agreement of the parties, is governed by Minnesota law. Under § 334.03, the note and mortgage were void if the loan was usurious, and URT would have no interest in the mortgaged property and no right to either interest accrued or principal. Phalen Park State Bank v. Reeves, Minn., 251 N.W.2d 135 (1977). Under § 334.01, the legal rate of interest on any loan not exempted from the usury laws may not exceed 8 percent. The trial court found that all of the elements of usury were present in the transaction before us involving a loan of $2,310,000 at 9½-percent interest,⁶ and the note and mortgage would be void unless the loan comes within one of the statutory exemptions to the usury laws stated in c. 334. The relevant exemptions upon this record are contained in § 334.01, subd. 2, as amended by L. 1974, exempting all loans of over $100,000, and § 334.021, making the defense of usury unavailable to a corporate borrower.

We hold that the trial court properly applied § 334.01, subd. 2, to find the defense of usury unavailable to avoid the...