Opinion ID: 2229151
Heading Depth: 1
Heading Rank: 2

Heading: Implied Subordination Agreement

Text: There is ample evidence to support the conclusions that Republic intended its mortgage to be prior to the lease and that both First Bank and Lorraine understood Republic's intention and purported to give it that effect. The dispositive issue is whether Marquette, in fact or in law, agreed to subordinate its lease. The trial court found that it did. Its findings are not to be set aside unless clearly erroneous. Rule 52.01, Rules of Civil Procedure. The trial court relies upon circumstantial evidence to support its finding of an implied subordination agreement. In order to support a particular verdict, circumstantial evidence need not be such that it must exclude every other theory, but the theory embraced by the verdict must outweigh any conflicting inferences. Martelle v. Thompson, 283 Minn. 279, 167 N.W.2d 376 (1969); Raymond v. Baehr, 282 Minn. 102, 163 N.W.2d 54 (1968). Where the evidence, viewed cumulatively, could sustain with equal justification either of two inconsistent inferences, the proponent of the theory has failed to meet its burden of proof. Smith v. Kahler Corp. Inc., 297 Minn. 272, 211 N.W.2d 146 (1973); E. H. Renner & Sons, Inc. v. Primus, 295 Minn. 240, 203 N.W.2d 832 (1973); Village of Plummer v. Anchor Cas. Co., 240 Minn. 355, 61 N.W.2d 225 (1953); Burke v. B. F. Nelson Mfg. Co., 219 Minn. 381, 18 N.W.2d 121 (1945). Mere speculation or conjecture will not support a verdict. Smith v. Kahler Corp. Inc., supra ; Martelle v. Thompson, supra ; Raymond v. Baehr, supra . These principles guide our consideration. The court bases its finding of an implied subordination agreement on inferences drawn from three clauses in the lease and from the conduct of the parties. One such clause gives Marquette the right to cure any defaults of Lorraine under any mortgage placed upon the property. [6] A second clause gives Marquette an option to purchase the building. Republic argues that neither of these clauses would be necessary were Marquette's lease not subject to forfeiture in the event of a mortgage foreclosure. On oral argument, however, Marquette contended that the actual purpose of the cure provision was to protect its option to purchase. The only testimony at trial with regard to the cure provision was that of the president of Lorraine, who stated that the clause was required by Mr. Scallen, an officer of Marquette. Where the evidence is documentary, we are as qualified as the trial court to draw inferences therefrom. In re Trust Known as Great Northern Iron Ore Properties, Minn., 243 N.W.2d 302, certiorari denied, sub nom., Arms v. Watson, ___ U.S. ___, 97 S.Ct. 530, 50 L.Ed.2d 612 (filed December 6, 1976). In the absence of any testimony on the issue of Marquette's intent with respect to inclusion of that clause, we will not hold that, as a matter of law, the cure provision implies subordination. [7] The inference that its purpose was to protect Marquette's option to purchase would be equally justified. Similarly, an inference of subordination drawn from the option to purchase clause would be conjectural. The third clause relied upon by the court is Lorraine's covenant that except for said aforementioned Ground Lease and any said mortgage [now or hereafter placed against the real property], it would    keep said real property    free and clear of any liens and encumbrances. This clause says nothing explicitly about priorities. An inference that the mortgage is subordinate is arguably as consistent with that phrase as is an inference that the mortgage is superior. The court also considered the conduct of the parties, apart from the lease itself, to support its finding of an implied subordination agreement. The court found: That, it was understood by Olmsted that the lease in question was necessary to the granting of a loan and, without a loan, the lease would have been of no effect and the building would not have been built. With respect to this finding of fact, it should be noted that this financing arrangement was a business transaction intended to be mutually beneficial to Marquette and Republic. Marquette acquired new facilities in a building bearing its name. Republic is an insurance company which presumably engaged in this transaction as a profit-making venture and wanted a prime tenant to assure itself that it was economically sound to build a large office building in Rochester. It would be conjecture to say the fact that Marquette knew its lease was a prerequisite to the loan implies an agreement by Marquette to subordinate its lease to the mortgage. The fact that Marquette knew its 50-year lease of a substantial portion of the building was essential to Republic would seem to be equally consistent with  or at least no less conjectural than  Marquette's receiving priority as an inducement to commit itself to a 50-year lease. The court also found: That, although Olmsted retained an executed original of the lease after it was signed on June 22, 1964, Olmsted did not file said Lease with the Register of Deeds for Olmsted County. The problem with this finding of fact is that prior recording establishes priority only where the first to record was not on notice of the unrecorded prior conveyance. Thus, Marquette did not need to record the lease in order to protect itself against First Bank, who knew of and required its lease. Republic's further observation that Marquette obviously allowed First Bank to handle details of recording thus permitting the mortgage to be recorded prior to the lease, is subject to the same objection. Viewed cumulatively, the inferences are not enhanced. Republic has failed to meet its burden of proof on this issue. [8] No subordination agreement having been proven, the prior conveyance is superior. In the event of a foreclosure sale the purchaser will take the property subject to Marquette's lease. Reversed.