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Anderson v. Spreiter: US District Court : REAL PROPERTY - jury could find transaction was equitable mortgage; no summary judgment for defendants

HOME STATE BANK, a Minnesota
corporation, CJB, LLC, a Minnesota limitedliability
INVESTMENTS, LLC, a Minnesota limitedliability
company, and CHAD BANKEN,
and HOME STATE BANK, a Minnesota
CJB, LLC, a Minnesota limited-liability
Case No. 0:06-CV-5028 (PJS/JJG)
Michael T. Kallas, KALLAS & ASSOCIATES, LTD., for plaintiff.
Barton C. Gernander, HELLMUTH & JOHNSON PLLC, for defendants/cross-claimants
John S. Spreiter, Mary E. Spreiter, and Home State Bank.
Jack E. Pierce, PIERCE LAW FIRM, P.A., for defendants Banken Real Estate
Investments, LLC, and Chad Banken, and for defendant/cross-defendant CJB, LLC.
1The transaction also involved Andersons then-wife, Amy Anderson. She is not
involved in this suit, however, so the Court refers only to James Anderson in this order.
This suit arises out of a series of real-estate transactions related to a property in Litchfield,
Minnesota. The property was owned by plaintiff James Andersons family for many years.
Anderson bought the property from his parents in January 1999. A few years later, Anderson
experienced financial problems. As a result, Andersons mortgage lender foreclosed on the
property, and it was sold at a sheriffs sale in June 2003.
In June 2004, just before the expiration of Andersons one-year period for redeeming the
property from the sheriffs sale, Anderson entered into a transaction with defendant Chad Banken
and his companies, defendants CJB, LLC (CJB) and Banken Real Estate Investments, LLC
(BREI) (collectively, the Banken defendants). In form, Anderson sold the house by warranty
deed to CJB and Anderson was given an option to repurchase the house. In substance, the
transaction may have been something different, as is discussed below. No matter how the
transaction is characterized, though, it gave Anderson the cash he needed to redeem the property,
and it permitted him to stay in his house at least temporarily.1
In September 2005, CJB ostensibly sold the Anderson property to defendants John and
Mary Spreiter. The Spreiters financed the sale by borrowing money from defendant Home State
Bank (John Spreiters employer) and purporting to grant Home State Bank a mortgage on the
Anderson contends that his June 2004 transaction with CJB should be treated as an
equitable mortgage under Minnesota law, and he seeks a declaratory judgment to that effect.
Although the transaction was formally structured like a sale and an option to repurchase,
Anderson contends that it was in fact a financing transaction in which CJB loaned him money
and he, in turn, granted CJB a mortgage on the property to secure the loan. Anderson also
contends that defendants violated the Home Ownership and Equity Protection Act of 1994, 15
U.S.C. 1601-15. Finally, Anderson seeks an injunction prohibiting CJB or the Spreiters from
taking possession of the property.
The Banken defendants move for summary judgment, as do the Spreiters and Home State
Bank (collectively, the Spreiter defendants). All defendants contend that, based on the
undisputed facts, the June 2004 transaction between Anderson and CJB was a sale, not an
equitable mortgage. Banken, as an individual, further contends that he was not a party to the
transaction and is therefore entitled to summary judgment. The Court grants summary judgment
to Banken individually, but otherwise denies defendants motions.
A. Standard of Review
Summary judgment is appropriate if the pleadings, the discovery and disclosure
materials on file, and any affidavits show that there is no genuine issue as to any material fact and
that the movant is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(c). A dispute over
a fact is material only if its resolution might affect the outcome of the suit under the governing
substantive law. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). A dispute over a
fact is genuine only if the evidence is such that a reasonable jury could return a verdict for
either party. Ohio Cas. Ins. Co. v. Union Pac. R.R., 469 F.3d 1158, 1162 (8th Cir. 2006). In
considering a motion for summary judgment, a court must view the evidence and the inferences
that may be reasonably drawn from the evidence in the light most favorable to the non-moving
party. Winthrop Res. Corp. v. Eaton Hydraulics, Inc., 361 F.3d 465, 468 (8th Cir. 2004).
B. Equitable-Mortgage Doctrine
The function of the equitable-mortgage doctrine is to allow the substance of certain realestate
transactions to trump their form. This doctrine recognizes the functional equivalence of
two types of transactions: First, a prospective purchaser of real estate might borrow money from
a lender and grant that lender a security interest a mortgage in the property being
purchased. The purchaser would then pay off the loan over time and eventually own the
property. Second, a prospective purchaser of real estate might ask a third party to buy the
property outright but to grant the prospective purchaser the right to occupy the property and
purchase it over time, whether through a contract for deed or some other arrangement (such as a
lease with an option to buy). The two transactions are very similar: In both cases, a third party
advances the money needed to buy the property, and the prospective purchaser makes payments
over time to the third party, with the eventual result (if all the payments are made) that the
prospective purchaser owns the property.
Under the equitable-mortgage doctrine, when the real nature of a transaction between the
parties is that of a loan, advanced upon the security of realty granted to the party making the loan,
whatever the form of the instrument of conveyance taken as the security, it is treated in equity as
a mortgage. Albright v. Henry, 174 N.W.2d 106, 111 (Minn. 1970). The Minnesota Supreme
Court summed up the basic philosophy underlying the doctrine in Ministers Life & Casualty
Union v. Franklin Park Towers Corp.:
[A] court will exercise its equitable powers to effectuate the intent
of both parties to a transaction and to prevent any overreaching by
one party which would unfairly exploit the other partys financial
position or relative lack of expertise in real estate dealings.
239 N.W.2d 207, 210 (Minn. 1976).
The key issue in equitable-mortgage cases is the intention of the parties: Did they engage
in a transaction that, although structured as a sale to the party advancing the funds for purchasing
the property, was in fact a loan from that party in exchange for a security interest in the property?
Under Westberg v. Wilson, the parties intention
is to be ascertained by the written memorials of the transaction and
the attendant facts and circumstances. This includes the previous
negotiation of the parties. We are not limited to the papers for the
purpose of ascertaining the true intention of the parties. We
consider their relative situation, and generally all pertinent facts
having a tendency to fix and determine the real nature of their
design and understanding.
241 N.W. 315, 316 (Minn. 1932) (emphasis added; citations omitted). A party asserting that an
apparent sale was in fact an equitable mortgage Anderson, in this case bears the burden of
proving this by clear and convincing evidence. St. Paul Mercury & Indem. Co. v. Lyell, 11
N.W.2d 491, 494-95 (Minn. 1943); see also Beasy v. Misko, 211 N.W.2d 881, 882 (Minn. 1973)
(describing proof of an equitable mortgage as clear, strong, and convincing); Nelson v.
Helmbrecht, 193 N.W. 688, 689 (Minn. 1923).
As the passage from Westberg quoted above makes clear, equitable-mortgage cases are
necessarily fact-specific. Accordingly, despite the heightened burden of proof in such cases,
Minnesota courts have said that the existence of an equitable mortgage is a question for the trier
of fact. See Gagne v. Hoban, 159 N.W.2d 896, 900 (Minn. 1968) (In the final analysis, the
question of whether the parties to a conveyance really intended it to be absolute or security for
indebtedness is for the triers of fact.); Nitkey v. Ward, 271 N.W. 873, 876-77 (Minn. 1937).
And in City of Shakopee v. Kopp & Associates, the Minnesota Supreme Court reversed a grant of
summary judgment because a dispute of fact was created by the parties dueling affidavits about
whether a transaction was intended as an outright transfer of property or as the mere grant of a
security interest in the property. 159 N.W.2d 901, 903 (Minn. 1968).
Given the fact-specific nature of equitable-mortgage cases, it is difficult to generalize
about them. In Brown v. Grant Holding, LLC, however, this Court identified the following six
factors that, under Minnesota law, must be considered in any case: (1) evidence about the parties
intent, as reflected in transaction-related documents, testimony, and affidavits; (2) the disparity
between a propertys sale price and its value; (3) the nature of the solicitation that gave rise to the
transaction; (4) whether the property was placed on sale in the open market; (5) whether the
parties negotiated a sale price; and (6) whether the party asserting the existence of an equitable
mortgage continued to live in the property after ostensibly selling it. 394 F. Supp. 2d 1090,
1097-99 (D. Minn. 2005); see also Jones v. REES-MAX, LLC, 514 F. Supp. 2d 1139, 1146 (D.
Minn. 2007) (applying Brown factors).
A further, crucial factor is the sophistication of the party seeking the protection of the
equitable-mortgage doctrine. As noted above, Ministers Life described the doctrines purpose as
both to effectuate the parties intent and to prevent any overreaching by which a moresophisticated
party might unfairly exploit the other partys financial position or relative lack of
expertise in real estate dealings. 239 N.W.2d at 210. Significantly, in many cases in which
Minnesota courts have refused to apply the equitable-mortgage doctrine, the party seeking the
protection of the doctrine was represented by a lawyer or was an otherwise sophisticated party.
See First Natl Bank of St. Paul v. Ramier, 311 N.W.2d 502, 504 (Minn. 1981) (affirming trial
courts rejection of banks claim of an equitable mortgage where the renewal note drafted by the
bank conclusively states that it is an unsecured loan); Ministers Life, 239 N.W.2d at 211 (noting
that the president of the company asserting the equitable-mortgage doctrine was a lawyer with
unusual expertise in complex real estate financing); Nitkey, 271 N.W. at 878 (affirming trial
courts rejection of a real-estate speculators equitable-mortgage claim and noting that [h]e
knew the difference between a sale and a loan, a mortgage and an absolute conveyance, a deed
and a leasehold); Bliss v. Swendra, No. C1-89-1444, 1990 WL 43054, at *2 (Minn. Ct. App.
Apr. 17,1990) (affirming trial courts rejection of a partys equitable-mortgage claim where that
partys attorney drew up the relevant documents).
C. The June 2004 Transaction
After Andersons property was sold at a sheriffs sale in June 2003, Anderson attempted
to find financing so that he could redeem the property. Various banks turned him down.
Anderson Aff. 11 [Docket No. 28]. He then contacted a mortgage broker, Faith Rocha, who
put him in contact with Banken. Id. 12-13. Notably, Rocha was a mortgage broker, not a realestate
agent, and Anderson never listed his property for sale on the open market. Further, at least
as compared to Banken who is in the real-estate business Anderson is neither sophisticated
nor particularly experienced in real-estate matters.
On June 18, 2004, Anderson and the Banken defendants entered into a series of related
transactions with respect to the property. CJB borrowed 5,000 from Home State Bank to
finance CJBs ostensible purchase of the property from Anderson. Anderson Dep. Ex. 10
Andersons deposition transcript and 2 the associated exhibits are attached as Exhibit A to
the Gernander affidavit [Docket No. 23].
(HUD-1 line 504).2 Of that amount, roughly 3,000 was provided to Anderson, and he used
that money to redeem the property from the sheriffs sale. Id.; Anderson Dep. Ex. 6. Another
roughly ,000 of the 5,000 was paid into an account at Home State Bank for the benefit of
the Banken defendants. Anderson Dep. Ex. 10 (HUD-1 line 1307); Anderson Aff. 19. The
balance of the 5,000, plus an additional ,000 that Anderson himself brought to closing,
went toward financing costs, administrative fees, an escrow account for septic-system repairs,
and paying off various taxes and liens on the property. Anderson Dep. Ex. 10. In exchange for
the Banken defendants payments, Anderson executed a warranty deed transferring the property
to CJB. Anderson Dep. Ex. 9. Anderson and Banken also signed a purchase agreement with
respect to the transfer, but the space for the buyers name on the agreements first page was left
blank. Anderson Dep. Ex. 7.
Anderson the purported seller of the property did not take any cash away from this
transaction. Anderson Aff. 18; Anderson Dep. Ex. 10. Indeed, as noted, Anderson paid ,000
in cash at closing. Further, the dollar amount of the transaction was driven not by the propertys
assessed value, but rather by the amount needed to redeem the property from the sheriffs sale
and to pay off encumbrances on the property, plus various transaction costs (including, as noted,
a fee of roughly ,000 paid to the Banken defendants). Although there is a dispute of fact over
the propertys market value, it is undisputed that in 2003, for tax purposes, the property was
valued between 1,500 and 2,700. Anderson Aff. Ex. C. Thus, the Banken defendants not
only received a fee of ,000, but (if Andersons evidence is believed), they also managed to
purchase the property for roughly ,000 to 0,000 less than its value a tidy profit on a
5,000 transaction.
Further, the transaction was structured so that Anderson would remain in the property
despite the ostensible sale. Anderson and BREI entered into a document titled First Right of
Refusal the day of the ostensible sale. Anderson Dep. Ex. 8. Under that document (which
recognized the unique circumstances of this transaction), BREI granted Anderson an option,
valid for fifteen months, to purchase the property for a total of 0,000 (,000 to be paid
within a week, and the balance to be paid when the option was exercised). The document also
obligated Anderson to pay all property taxes and insurance. The record does not show why it
was BREI that granted Anderson an option to purchase the property even though it was CJB to
whom Anderson transferred the property by warranty deed.
All of the facts discussed above suggest, in light of the relevant factors under Minnesotas
equitable mortgage-doctrine, that Andersons equitable-mortgage claim cannot be decided on
summary judgment. To support their summary-judgment motions, the defendants focus on the
transaction documents themselves, on Bankens affidavit about his intentions, and on Andersons
deposition testimony. Banken Defs. Mem. Supp. Mot. S.J. at 3-5, 7 [Docket No. 17]; Spreiter
Defs. Mem. Supp. Mot. S.J. at 5-7, 18-20 [Docket No. 22]. But none of these three pieces of
evidence justify granting defendants motions.
First, as to the transaction documents: While it is true that the documents on their face
reflect a sale from Anderson to CJB, that fact alone cannot defeat Andersons equitable-mortgage
claim. Again, the entire purpose of the equitable-mortgage doctrine is to pierce the form of a
transaction and give effect to its substance. In virtually every equitable-mortgage case, the
documents will reflect a sale rather than a mortgage; equity-strippers are rarely so stupid as to
insert into their documents a statement to the effect, This is really a mortgage, but were not
calling it a mortgage so that we can evade federal and state laws protecting mortgagors.
Obviously, to give controlling weight to the form of a transaction would be to render the
equitable-mortgage doctrine toothless.
Second, as to the Banken affidavit: Bankens assertion that he intended the transaction
in this matter to be a sale and not a loan, Banken Aff. 2 [Docket No. 18], is certainly evidence
about the parties intentions. But a reasonable jury could disbelieve this assertion in light of the
other evidence about the transaction recounted above.
Finally, as to Andersons deposition testimony: Andersons testimony does not establish,
beyond dispute, that he intended an absolute sale of his property to CJB. It is true that, when
pressed by the lawyer for the Banken defendants, Anderson acknowledged that he had executed a
purchase agreement in which he agreed to sell his property to CJB. Anderson Dep. Ex. 132-37.
But the parties have never disputed that Anderson signed a document that in form evidenced a
sale of his property to CJB; what is disputed is whether the substance of the transaction matched
its form. And on that point, the following exchange between Anderson and the lawyer for the
Spreiter defendants is significant:
Q: Do you recall whether you ever signed a loan agreement with
A: The loan agreement would be that right of first refusal, I
thought that was the loan agreement.
Q: You believe you did sign a loan agreement?
A: If that would constitute a loan agreement, yes.
Q: You are not sure if that does constitute a loan agreement or
A: No. Im not sure if its the proper verbiage, but if thats
considered a loan agreement, then thats what the right of first
refusal is or first right of refusal.
Anderson Dep. at 85:5-19 (emphasis added). Further, in his affidavit, Anderson asserts that he
did not intend to vacate the property, and that he entered into the June 18, 2004 transaction with
Banken as a way to stay in the property. Anderson Aff. 14-15. In light of all of the evidence,
a dispute of fact exists over whether the transaction was an outright sale or was, in fact, a loan
from the Banken defendants to Anderson in return for a security interest in the property.
D. Defendant Chad Banken
The key transactions in this case were between Anderson and CJB (the ostensible sale on
June 14, 2008) and Anderson and BREI (the first right of refusal). Although Banken is a
principal in both entities and signed documents on their behalf, there is little indication that
Banken acted in his personal capacity in entering into any transactions with Anderson. Banken
therefore moves for summary judgment in his favor. Anderson apparently does not oppose this
motion, as he did not address it in his brief opposing the defendants summary-judgment
motions. The Court therefore grants summary judgment to Banken individually.
Based on the foregoing and on all of the files, records, and proceedings herein, IT IS
1. The motion of defendants CJB, LLC, Banken Real Estate Investments, LLC, and
Chad Banken for summary judgment [Docket No. 15] is GRANTED IN PART as
a. The motion is GRANTED with respect to defendant Chad Banken.
b. Plaintiffs claims against defendant Chad Banken are DISMISSED WITH
c. The motion is DENIED in all other respects.
2. The motion of defendants John S. Spreiter, Mary E. Spreiter, and Home State
Bank for summary judgment [Docket No. 20] is DENIED.
Dated: September 16, 2008 s/Patrick J. Schiltz
Patrick J. Schiltz
United States District Judge


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