January 25, 2017

Minnesota Court of Appeals Expands Reach of Receivership Statute

On January 9, 2017, an unpublished Minnesota Court of Appeals decision (BMO Harris Bank v. City Center Development, A16-0766 (Minn. Ct. App. Jan. 9, 2017)), held that Minn. Stat. § 576.25, subdivisions 5(a) and 5(b), set forth two independent grounds on which a mortgage lender may seek the appointment of a receiver for the underlying mortgaged property. Prior to the changes made to the receivership statute in 2012 by the Minnesota legislature, the general presumption in the absence of any controlling case law was that the relevant language was dependent, and that an application for appointment of a receiver under Section 576 was an application for a limited receiver for which both requirements (now set forth separately in subdivisions (a) and (b)) had to be met. Now, with this new decision, a mortgage lender may credibly seek appointment of a receiver where only one of the requirements, (a) or (b), is met, a significant and likely unforeseen change in the interpretation of the statute.

The Case: BMO Harris Bank v. City Center Development

In BMO Harris, lender made two mortgage loans to borrower with an original principal balance of $2 million. To secure the loans, borrower granted lender a mortgage in certain real property and assigned the mortgaged property’s leases and rents to the lender. When borrower defaulted, lender commenced a foreclosure action and sought the appointment of a limited receiver. The district court granted the motion and appointed a receiver, but apparently based solely on Minn. Stat. § 576.25, subdivision 5(a). Borrower appealed, arguing in part that the district court had failed to also apply Minn. Stat. § 576.25, subdivision 5(b), and that when the subdivisions were read together, a receiver could not be appointed under Section 576.

The Court of Appeals identified its task as determining what the Minnesota Legislature intended by its 2012 adoption of Minn. Stat. § 576.25, subdivision 5. Upon review, the Court of Appeals determined that the statute was unambiguous:

A limited receiver shall be appointed at any time after the commencement of mortgage foreclosure proceedings under chapter 580 or 581 and before the end of the period for redemption, if the mortgage being foreclosed:

  1. secures an original principal amount of $100,000 or more or is a lien upon residential real estate containing more than four dwelling units; and
  2. is not a lien upon property that was entirely homesteaded, residential real estate containing four or fewer dwelling units where at least one unit is homesteaded; or agricultural property.

The Court of Appeals concluded that this subdivision compels (rather than merely allows) appointment if its requirements are met during the designated time period (after commencement of a foreclosure and prior to the expiration of the redemption period).

Borrower argued that the district court had misunderstood subdivision 5(a) by ignoring subdivision 5(b) and that the requirements of both (a) and (b) must be met before appointment was required. Subdivision 5(b) provides:

The court shall appoint a receiver upon a showing that the mortgagor has breached a covenant contained in the mortgage relating to any of the following:

  1. application of tenant security deposits as required by section 504B.178;
  2. payment when due of prior or current real estate taxes or special assessments with respect to the mortgaged property or the periodic escrow for the payment of the taxes or special assessments;
  3. payment when due of premiums for insurance of the type required by the mortgage or the periodic escrow for the payment of the premiums; or
  4. keeping the covenants required of a landlord or licensor pursuant to section 504B.161, subdivision 1.

Borrower argued that one of these mortgage covenants must have been breached before a mortgage otherwise meeting the requirements of subdivision 5(a) compelled the appointment of a receiver.

The Court of Appeals rejected this argument holding that the independent nature of paragraphs 5(a) and 5(b) is apparent “by the different nature of the conditions that each lists, and by the different nature of the receiverships each requires (“limited receiver” under subdivision 5(a) and “receiver” under 5(b)).” The Court also noted that the legislature chose “to include no coordinating conjunction or semicolon connecting subdivision paragraphs 5(a) and 5(b)” and that the “phrase ‘a limited receiver shall be appointed’ in subdivision 5(a) would be superfluous if that paragraph’s conditions were met, but were then also subject to the further requirements stated later in the subdivision.” The Court concluded that such a construction would offend its assumption that every word has meaning.

Borrower urged the Court to look at the prior codification of the relevant language, in which all of the relevant language was found in a single subdivision, and as a result of which the general presumption was that all requirements had to be met for appointment of no more than a limited receiver; namely, the commencement of a foreclosure, a qualifying mortgage and a breach of one of the specified covenants. But the Court of Appeals reasoned that the legislature had repealed that prior version and established a revised framework with more concrete subdivisions and subparts, the result of which, the Court determined, was that subdivisions (a) and (b) stand independently.

The Impact of BMO Harris

A holding that subdivisions 5(a) and 5(b) are independent, in part based on the Court’s conclusion that (a) provides for appointment of only a limited receiver while (b) provides for appointment of a “receiver,” expands at least the perceived reach of the prior statute. A mortgage lender may now argue that it need only meet the requirements of either subdivision, not both. As to subdivision (a), a lender with a qualifying mortgage need only show that a foreclosure has been commenced. Upon such a showing, the appointment of a limited receiver is required under a BMO Harris analysis.

As to subdivision (b), regardless of the amount of the loan secured by the mortgage, or the nature of the property it encumbers, a mortgage lender may now argue that it need only show a breach of a mortgage covenant relating to any of the four specified matters (application of tenant security deposits, payment of real estate taxes, payment of insurance premiums, or the covenants required of a landlord or licensor). As an independent subdivision, the mortgage at issue in a subdivision (b) application need not secure an original principal amount of $100,000 or more, or be a lien on residential real estate containing more than four dwelling units, and can now be a lien on property that is entirely homesteaded or is agricultural property. In short, under a BMO Harris analysis, subdivision (b) can be used with any mortgage loan as (b) contains none of the restrictions set forth in (a).

An issue left unaddressed is the nature of the receiver appointed under subdivision (b). The Court of Appeals expressly distinguished the limited receiver compelled by subdivision (a) with the “receiver” contemplated under subdivision (b). As receivers are either limited or general (Minn. Stat. § 576.21), a defensible conclusion is that the Court of Appeals had in mind that a general receiver is compelled by meeting the requirements of subdivision (b). A general receiver is appointed in a general receivership, which constitutes a receivership over all or substantially all of the nonexempt property of a respondent for the purpose of liquidation and distribution to creditors and other parties in interest. Minn. Stat. § 576.21(g) and (h). In other words, arguably consistent with the approach set forth in BMO Harris, a general receiver with powers to liquidate nonexempt property may be available to a mortgage lender simply by meeting the requirements of the (b) subdivision. But any mortgage lender making such an argument will run into the language of Minn. Stat. § 576.24 which provides that any receivership based on the foreclosure of a mortgage lien shall be a limited receivership. But then again, if subdivision (b) is truly independent of (a), then the receivership under (b) might be characterized as based on a breach of the specified mortgage covenants, rather than on the foreclosure of a mortgage lien.

Going Forward: More Receiverships and Expanded Powers?

In the usual commercial setting, Minn. Stat. § 576.25, subdivision 5, existed as an alternate grounds to appointment of a limited receiver under Minn. Stat. § 559.17, subdivision 2, the statutory provision permitting enforcement of an assignment of leases and rents through the appointment of a receiver. Under Section 559, subdivision 2, the underlying mortgage must (1) be executed, modified or amended subsequent to August 1, 1977, (2) secure an original principal amount of $100,000 or more or be a lien upon residential real estate containing more than four dwelling units, and 3) not be a lien on property which was (i) entirely homesteaded or agricultural property, or (ii) residential real estate containing four or fewer dwelling units where at least one of the units is homesteaded. Then if by the terms of the assignment, a receiver is to be appointed upon the occurrence of some specified event, and a showing is made that the event has occurred, the court is to, without regard to waste, adequacy of the security or solvency of the mortgagor, appoint the receiver. The receiver appointed in a Section 559 application is a limited receiver.

But now, as interpreted in BMO Harris, subdivision (b) has no requirements at all for the underlying mortgage and at least leaves open the possibility of arguing for the appointment of a general receiver. All that is required is a breach of any of the four covenants. Without the requirements included in subdivision (a), a limited receiver (and arguably even a general receiver) can be appointed under subdivision (b) for any loan where, for example, the owner has not timely paid its property taxes. It’s hard to imagine that the Court of Appeals, or the Minnesota Legislature when enacting the changes to the receivership statute, in particular setting forth the language of (b) in its own subdivision, contemplated the possibility that a general receiver could take possession of an owner’s nonexempt property on behalf of the mortgage lender for the purpose of liquidation and distribution (thereby avoiding the foreclosure process) based solely on a single breached covenant, but that appears to be a defensible conclusion of the BMO Harris analysis.

As to subdivision (a), the change is less radical, but (a) does establish a standard that, at least after commencement of a foreclosure, may be simpler to meet than the requirements of Section 559.17, subdivision 2. A qualifying mortgage under Section 559.17, subdivision 2 (one that meets the 559.17, subd. 2, requirements) will always also be a qualifying mortgage under subdivision 5(a), but subdivision 5(a) only requires that a foreclosure have been commenced, while Section 559.17, subdivision 2(a) requires a showing of the specified event (almost always a default). For unknown reasons, the Court of Appeals leaves unaddressed the potential application of Section 559.17 to the BMO Harris mortgage.

As we look forward, it should be noted that the BMO Harris decision is an unpublished decision of the Minnesota Court of Appeals — so it is improper to rely on BMO Harris as binding precedent. But unpublished decisions can be used for their persuasive value. And here, as the first decision to address the apparent independence of subdivisions (a) and (b), BMO Harris has the potential to be used early and often.

There of course also remains the possibility of review by the Minnesota Supreme Court. But there’s no assurance that a petition for review will be filed or, if filed, granted.

The Faegre Baker Daniels website uses cookies to make your browsing experience as useful as possible. In order to have the full site experience, keep cookies enabled on your web browser. By browsing our site with cookies enabled, you are agreeing to their use. Review Faegre Baker Daniels' cookies information for more details.