Wilmington Trust, Nat'l Ass'n v. 700 Hennepin Holdings, LLC

Citation971 N.W.2d 750
Decision Date07 March 2022
Docket NumberA21-0963
Parties WILMINGTON TRUST, NATIONAL ASSOCIATION, Respondent, v. 700 HENNEPIN HOLDINGS, LLC, Respondent, Gregg Williams, as receiver for 700 Hennepin Holdings, LLC, Respondent, Anytime Restoration, Inc., Defendant, Seven Acquisition, LLC, Appellant.
CourtCourt of Appeals of Minnesota

Mark W. Vyvyan, Kyle W. Ubl, Fredrikson & Byron, P.A., Minneapolis, Minnesota (for respondent Wilmington Trust, National Association)

Thomas F. DeVincke, Malkerson Gunn Martin LLP, Minneapolis, Minnesota (for respondent 700 Hennepin Holdings, LLC)

Michael W. Kaphing, Taft Stettinius & Hollister LLP, Minneapolis, Minnesota (for respondent Gregg Williams )

Mark R. Bradford, Andrew L. Marshall, Bassford Remele, P.A., Minneapolis, Minnesota (for appellant)

Considered and decided by Segal, Chief Judge; Ross, Judge; and Larkin, Judge.

SEGAL, Chief Judge

Appellant Seven Acquisition, LLC (Seven) is a tenant in a building subject to a mortgage held by respondent Wilmington Trust, National Association. Wilmington Trust brought a foreclosure action against its mortgagor, respondent 700 Hennepin Holdings, LLC (700 Hennepin), the owner of the building. Pursuant to a stipulation between Wilmington Trust and 700 Hennepin, the district court appointed a limited receiver, respondent Gregg Williams (the receiver), with the power to collect rent from Seven, among other powers.

Seven challenges a district court order granting the receiver's motion to direct the payment of rent by Seven. Seven asserts that the district court erred by determining that (1) the receiver was not bound by a mandatory arbitration provision in the lease between Seven and 700 Hennepin, and (2) Seven could not assert a defense of recoupment to the rent-payment motion. Because we conclude that the receiver is bound by the arbitration provision in the lease to the same extent as 700 Hennepin would have been but for the receivership, we reverse and remand.

FACTS

In January 2017, Seven entered into a lease to operate a restaurant in the building located at 700 Hennepin Avenue (the building) in downtown Minneapolis. 700 Hennepin purchased the building and assumed the lease with Seven in November 2017.

When 700 Hennepin purchased the building, it had an inspection performed by a structural engineer. The engineer noted that there were obvious signs of "water leaking at the roof level" and recommended that 700 Hennepin further investigate and repair the leak. 700 Hennepin did not act on the recommendation. Beginning in January 2018, the water leaks became increasingly frequent and intense, with water leaking into various areas of the restaurant.

Despite Seven's request that 700 Hennepin make repairs to prevent the leaks, 700 Hennepin failed to do so. In 2019, a pipe burst and caused extensive water damage to the restaurant, requiring Seven to close for several days for repairs. Seven asked 700 Hennepin to provide the name of its insurer so that Seven could submit a claim for the water damage. 700 Hennepin did not provide the information. Seven then submitted the claim through its own insurer, causing a substantial increase in Seven's annual insurance premiums.

Seven withheld rent payments because it believed that 700 Hennepin was responsible for the cost of the repairs and Seven's revenue losses. 700 Hennepin then filed an eviction action in housing court, alleging that Seven owed over $100,000 in rent. Seven initiated a separate action in district court seeking an order to compel arbitration of the dispute and enjoin the eviction action. The district court granted the relief sought by Seven, based on its determination that the lease unambiguously required the parties to arbitrate the dispute.

The parties submitted the matter to arbitration, and the arbitrator determined that 700 Hennepin was responsible under the lease for maintenance and repairs to the building's roof, that it had failed to satisfy those obligations, and that Seven was entitled to an award of damages in excess of $900,000 for business losses and the increase in Seven's insurance premiums. The arbitrator also awarded 700 Hennepin approximately $140,000 in unpaid rent and determined that the eviction action should be dismissed. The district court confirmed the award and directed that judgment be entered in favor of Seven in the net amount of $826,070.84.

Shortly before the confirmation of the award, Wilmington Trust, the mortgagee of 700 Hennepin, commenced a foreclosure action in district court against 700 Hennepin. Wilmington Trust did not initially name Seven as a party in the foreclosure action. The district court, based on a stipulation between Wilmington Trust and 700 Hennepin, signed an order appointing the receiver and granting him, among other powers, "[t]he power to oversee all collection of rents and cash flow." The receiver then sent a letter to Seven seeking payment of $44,199.95, which the receiver claimed as the amount of rent due since the date the receiver was appointed. Seven disputed the rent claim and asserted that a landlord default had occurred because the roof still leaked and Seven was continuing to incur losses as a result.

In response, Wilmington Trust amended the foreclosure action to name Seven as a party. The amended complaint alleged that Seven was in default under the lease because it failed to make rent payments and that "upon completion of the foreclosure of [the commercial mortgage], Seven's tenancy will be foreclosed and Seven shall have no further rights to possession of the Property." The receiver then filed a "Motion for Order Directing Payment of Rent."

Seven opposed the motion on two grounds. First, Seven argued that the receiver's claims were subject to the terms of the lease and that the lease required that the dispute be submitted to arbitration for resolution, not to the court. Second, Seven argued that it was entitled to assert the common-law defense of recoupment to the receiver's claim for rent.

The district court rejected both arguments and granted the receiver's motion to direct the payment of rent. The district court reasoned that the receiver could not be required to submit the rent dispute to arbitration because the receiver was not a party to the lease and had not agreed to the arbitration provision. The district court explained that compelling arbitration "would necessarily abrogate the Receiver's ability to exercise his court-appointed authority" to collect rents and protect Wilmington Trust's "property interests as a mortgag[ee]." Following the same line of reasoning, the district court concluded that Seven could not assert recoupment as a defense to the receiver's claim for rent because the arbitration-award judgment was against 700 Hennepin, Seven's landlord, not the receiver.

Seven appeals the district court's order directing the payment of rent.

ISSUE

Did the district court err in determining that the receiver was not subject to the arbitration clauses in the lease?

ANALYSIS

Seven asserts as its primary issue in this appeal that the district court erred when it failed to require the receiver to submit its claim for rent to arbitration as required by the lease between Seven and 700 Hennepin. Seven contends that this court need not address its second issue—that the district court erred by determining that Seven was not entitled to assert a defense of recoupment—if we rule in Seven's favor that the dispute is arbitrable. The issues in this appeal are subject to de novo review by this court. See Glacier Park Iron Ore Props., LLC v. U.S. Steel Corp. , 961 N.W.2d 766, 771 (Minn. 2021) (stating that determining whether a party has agreed to arbitrate a dispute presents a question of contract interpretation subject to de novo review); Aaron Carlson Corp. v. Cohen , 933 N.W.2d 63, 69 (Minn. 2019) (stating that issues of statutory interpretation are reviewed de novo).

Seven maintains that the receiver is required to submit the dispute to arbitration because the receiver's rights against Seven arise from the lease between Seven and 700 Hennepin, and the receiver has no greater rights than those accorded 700 Hennepin under the lease. Seven contends that, if 700 Hennepin would have been required to submit the demand for the payment of rent to arbitration, then the receiver is likewise bound. Seven argues that the district court erred in its interpretation of the receivership statute, Minn. Stat. §§ 576.21 -.53, and that the statute does not give the court the authority to override the arbitration provision in the lease.

The lease here contains two arbitration provisions, one governing the remedies available to the landlord in the event of a tenant default, and the second governing the remedies available to the tenant in the event of a landlord default. The provision governing the landlord's remedies (the arbitration provision) provides, in relevant part, that if the landlord claims that the tenant is in default and the tenant disputes the default in good faith, then "Landlord shall not exercise any of its remedies provided herein but shall, as its sole remedy, submit such dispute to binding arbitration." The corresponding section for the tenant similarly provides that, in the event the tenant claims the landlord is in default and the landlord disputes the alleged default in good faith, then "Tenant shall not offset or deduct any amounts from any installments of Rent but shall, as its sole remedy submit such dispute to binding arbitration." A later section of the lease establishes the applicable procedures for any resulting arbitration.

Seven argues that the receiver's claim for unpaid rent asserts a "tenant default" under the lease,1 which Seven has in good faith disputed. Seven contends that the lease thus requires the receiver, "as its sole remedy," to "submit such dispute to binding arbitration to be conducted under the arbitration provisions as set forth in this Lease." Seven emphasizes that the district court interpreted these same provisions in Seven's action...

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