Court Opinion

ID: 9884192
Source: CourtListenerOpinion
Date Created: 2023-10-06 02:46:25.822085+00
Date Added: 2024-06-11T07:38:04.332004
License: Public Domain

WOZNIAK, Judge
(dissenting).
I respectfully dissent.
A number of important facts are not clear from the majority opinion.
I. ADDITIONAL FACTS
A. This appeal involves a separate, lawsuit in which Miller sued to recover a deficiency judgment after it had foreclosed its mortgage by utilizing the foreclosure by advertisement statute.
Miller elected to foreclose by advertisement. It then chose to bid at the foreclosure sale substantially less than was owed under the mortgage. This created an *198artificial deficiency of nearly $200,000 owed to Miller — an amount entirely within Miller’s control. Gearman then redeemed.
Having chosen to create this large deficiency, Miller brought this separate deficiency action to recover from Gearman on his guaranty.
B. (1) Miller knew, prior to the execution of the mortgage and guaranty involved, that Gearman’s sole reason for taking title to the property in the corporate form was to allow him to transact business regarding the property during his wife’s absences. Gearman had conducted his business in this manner for this purpose for over 20 years.
(2) In making the loan, Miller relied solely on the credit of Gearman, not bothering to investigate the financial background of the imaginary “mortgagor,” Wheelock. Miller never looked to the corporation’s credit, but only to Gearman’s. Gearman always treated Wheelock’s assets as his own. This was reflected in his personal statement, which Miller received. Miller intended to, and did deal directly with Gear-man. Miller had no interest in the form of the transaction, as long as Gearman was the borrower.
(3) Miller never requested financial information from the corporation; it did, however, request and receive information regarding Gearman’s financial condition.
C. (1) Miller deliberately chose to foreclose by advertisement, rather than by action, in order to benefit from the many procedural advantages that method entails (shorter redemption period, avoidance of court proceedings, less expense, etc.). By its own choice, it made its foreclosure subject to the anti-deficiency statute.
(2) Miller unilaterally determined the amount of the artificial deficiency. Had Miller followed the customary practice of bidding in at foreclosure the amount due on the mortgage, it would have been paid in full upon Gearman’s subsequent redemption.
(3) Further, if Miller had foreclosed by action, it could have bid in below the amount due on the mortgage and protected its right to a deficiency judgment.
II.
The alter ego (or instrumentality) theory for disregarding the corporate entity is set out in White v. Jorgenson, 322 N.W.2d 607, 608 (Minn.1982) (citing Victoria Elevator Co. v. Meriden Grain Co., 283 N.W.2d 509, 512 (Minn.1979)). While the test is not an exact fit in a reverse pierce case1, it identifies the relevant issues to be discussed. In a reverse pierce request such as this one, the shareholder is asking that the corporate entity be set aside so protections that are available to noncorporate entities or individuals would be available to the shareholder to avoid an injustice.
The test consists of two prongs: first, we must examine the relationship of the shareholder to the corporation, and determine whether the corporation has been operated as a mere instrumentality of the individual. Second, we are to examine the relationship and determine whether there is “an element of injustice or fundamental unfairness” if the corporate entity is not disregarded.
(1) Relationship of shareholder to corporation.
The majority tacitly recognizes that the corporation was operated as a mere instrumentality for Gearman’s personal business dealings. Gearman has enumerated the ways in which Wheelock Corporation merely is an instrumentality for his individual real estate dealings.2 There is no clearer *199identity between an individual and a corporation than exists between Gearman and Wheelock.
(2) Injustice or fundamental unfairness.
This factor is the real basis for the majority’s denial of the protection of the statute to Gearman. Clearly, Wheelock is Gearman’s alter ego, and Gearman is the mortgagor. Upholding the corporate form would unfairly deprive Gearman of the protection intended by the legislature; a reverse pierce is required in order to accomplish the public policy enunciated by the legislature.
It is significant on the question of fairness that the deficiency Miller seeks to collect is entirely of its own making. Miller could have protected itself from the imaginary loss it claims by bidding at a price that would have precluded a redemption for less than the amount due on the mortgage. Further, Miller could have protected its right to a deficiency judgment by foreclosing by action, a method specifically designed to provide such protection. In essence, this is an action brought to recover an artificial deficiency, the existence and amount of which was completely arbitrary with Miller, and it asserts a liability which is a direct result of the form it chose for the foreclosure. This is an indirect way to circumvent the legislative intent of the anti-deficiency statute.
In the Minnesota reverse pierce cases, although the interests of the creditors also were considered, the focus was upon the unfairness to the shareholders. Roepke v. Western National Mutual Insurance Co., 302 N.W.2d 350 (Minn.1981); Cargill, 375 N.W.2d 477. Both Roepke and Cargill used a reverse pierce to correct an injustice.
Here, Gearman is in substance and in fact the mortgagor. It is unfair to Gear-man to deprive him of the protection of the statute which he would otherwise enjoy when he is one of those whom the statute was designed to protect. The injustice is in depriving Gearman of the protection of this statute — protection he would enjoy if he operated as an individual businessman — because Gearman and his corporation are indistinguishable.
In Cargill, the court mentioned that the lender knew going into the transaction that it faced the protections which are granted to an individual borrower by the homestead law. Cargill, 375 N.W.2d at 479. Of course, it is preferable that a party know a risk beforehand; Roepke demonstrates that such foreknowledge is not a prerequisite in a reverse pierce case. It also is apparent that Miller was aware of the anti-deficiency statute, as it took such pains to attempt to avoid the effects of the protection it normally affords a mortgagor.
Gearman is the sole creditor, and any unfairness is in the statute itself. Clearly, a mortgage lender cannot assert a deficiency on the ground that it believes the anti-deficiency statute is unfair.
*200In this case, if the public policy of protecting mortgagors from deficiency judgments is accepted, as it must be, then it is manifestly unfair to deprive Gearman of that protection. Any unfairness to Miller simply is inherent in the statute itself.
The majority appears to accept the argument that the unfairness present in this case is the fact that Gearman was able to redeem the property for less than was due on the mortgage. It is difficult to understand this reasoning, as this is exactly the intended effect of the interaction between the foreclosure by advertisement and anti-deficiency statutes. That argument was explicitly rejected in Cargill. To determine interaction unfair is a judgment of the statutory scheme, not a rationale for denying Gearman’s statutory protection. Nothing in the laws of Minnesota even remotely suggests that the anti-deficiency statute does not apply if the mortgagor redeems the property.
The majority merely states, without any discussion or reasoning, that Gearman should pay the remaining indebtedness which he agreed to pay. This conclusion disregards a strong public policy, enacted into law, which decrees that a mortgagee trades his right to a deficiency judgment in return for the shorter redemption period and other procedural and practical advantages of foreclosure by advertisement.
The majority also has emphasized that the prior statute’s purpose was to protect only mortgagors, not guarantors. This view exalts form over substance. In the circumstances present here, the meaning of the statute is not expanded by protecting someone who is not a mortgagor; we merely recognize the substance of the transaction rather than the form or title the parties give it, and acknowledge that Gearman is a mortgagor.
Reliance is also placed on Victory Highway Village v. Weaver, 480 F.Supp. 71 (D.Minn.1979), aff'd, 634 F.2d 1099 (8th Cir. 1980). In Victory Highway, the court relied upon the definitional distinction that the guarantor and the mortgagor were separate entities. There was no claim that the mortgagor and guarantor were identical; the court did not even address the issue. Also, the mortgagor in Victory clearly was a viable business entity; in this case, Gear-man forcefully shows that the corporation was formed merely as a conduit for his personal business transaction. In the present case, it is undisputed that the mortgagor and guarantor are not separate entities. Miller knew they were dealing with an individual who operated as a corporation. Miller requested Gearman’s personal financial statement, not that of the company. Miller never relied on the corporate form for repayment of the debt. Victory thus is inapplicable to the factual situation before us.
3. Equity and public policy considerations.
The public policy considerations are compelling. The legislature expressed its abhorrence of deficiency judgments by adding the anti-deficiency language in Minn. Stat. § 580.23:
Where the redemption period is as provided in this subdivision the mortgagee, or his successors, assigns, or personal representative, or any other purchaser so purchasing at the sheriffs sale shall by purchasing the property at the sheriffs sale thereby waive his right to a deficiency judgment against the mortgagor.
(Emphasis added.)
In 1986 the legislature again expressed itself, in the strongest possible terms, by prohibiting deficiency judgments altogether in foreclosures like this one. The result of the legislation is expressed in Minn.Stat. § 582.30, subd. 2 (1986):
General prohibition for property with a six-month redemption period. A deficiency judgment is not allowed if a mortgage is foreclosed by advertisement under chapter 580, and has a redemption period of six months under section 580.23, subdivision 1.
The new statute makes no distinction between mortgagors and guarantors. The force of this expression of public policy is not diminished by the fact that the enactment took place shortly after the fore*201closure by Miller. The Cargill court found the enactment of homestead moratorium laws to be important expressions of policy, even though the laws were adopted two years after Cargill executed its judgment on Hedge’s farm. Cargill, 375 N.W.2d at 479.
The California Rule.
In California, when the guarantor of the debt is the primary obligor of the corporation, the guarantor is treated as a mortgagor. In a similar case, the court found that individuals who purchased land and organized a corporation which took title to the land were within the protection of a statute which precluded deficiency judgments against purchasers. This was true despite the fact that the individuals executed a note and deed of trust, and were to hold the vendor harmless. The court found these individuals to be purchasers, in substance, and they were entitled to the pro-’ tection of the statute. Valinda Builders, Inc. v. Bissner, 230 Cal.App.2d 106, 40 Cal.Rptr. 735 (1964).
In Bissner, the “guarantor” also was the primary obligor:
[0]ne who contracts to buy land does not alter his identity and relation as purchaser by a purported guaranty of performance of his own obligation to pay the purchase price.
Id., 230 Cal.App.2d at 111, 40 Cal.Rptr. at 738. Gearman, as the sole shareholder of the corporation, is the primary obligor of the debt.3 Gearman also is the guarantor of his own obligation on the mortgage:
In applying, under differing factual situations, the various statutes which make up the legislative scheme prohibiting deficiency judgments, California courts have recognized a distinction between true, independent contracts of guarantee and guarantees which were in reality executed by the primary obligor.
Mariners Savings & Loan Assoc. v. Neil, 22 Cal.App.3d 232, 234-35, 99 Cal.Rptr. 238, 240 (1971). The purported guaranty added nothing to the primary liability which arose when Gearman, as sole director and shareholder of Wheelock, executed the note in the corporation’s name. This is not a true, independent contract of guaranty. Gearman is entitled to protection under the anti-deficiency statute. The same public policy concerns supporting the anti-deficiency statute apply to Gearman’s situation.
As this court recently noted in a related context, the “better law” in foreclosure proceedings does not favor allowing a deficiency for the full amount of the deficiency that results from the mortgagor purchasing the mortgaged property. Gate City Federal Savings and Loan Assoc. v. O’Connor, 410 N.W.2d 448, 451 (Minn.Ct.App.1987). This equitable observation applies to the situation Gearman finds himself in; the deficiency was artificially set by the mortgagor.
III. CONCLUSION
Following the majority opinion’s analysis would result in a situation where a mortgagee who has expressed absolutely no interest in holding the corporate mortgagor responsible for the mortgage would be allowed to foreclose and proceed directly against guarantor who is, in fact, the known alter ego of the corporation. Where the mortgagor is unconcerned with the ability of the mortgagor to make payments on the mortgage and is instead looking primarily to the alter ego guarantor of the corporate mortgagee for payment of the debt, it is unjust to deny that guarantor the type of protection afforded mortgagors under the anti-deficiency statute.
In the transaction giving rise to this lawsuit, Gearman clearly was the borrower. For purposes of the statute, he is the pri■mary obligor and the person the statute was designed to protect. If the policy underlying the anti-deficiency statute is to be given effect, the corporate separateness of Wheelock must be disregarded.
*202The Minnesota Supreme Court has cautioned that a determination of whether or not there are sufficient grounds for piercing the corporate veil should not normally be made by summary judgment because of the complexity of the relationship between the corporation and its shareholder. Ahlm v. Rooney, 274 Minn. 259, 265, 143 N.W.2d 65, 69 n. 1 (1966).
The guidelines of Roepke and Cargill show that a reverse pierce is mandated here. Gearman is entitled to summary judgment that Miller’s action against him is barred. At the very least, bearing in mind the cautionary language of Ahlm, the issue should be sent back for trial so a full hearing can be had on the Wheelock/Gear-man relationship.
I would reverse the trial court’s entry of summary judgment on the issue of whether appellant is entitled to the protection of the anti-deficiency statute, and remand for consideration under the analysis above. Because of the disposition of this issue, I would also reverse the award of attorney fees.
I concur in the judgment dismissing the misrepresentation claim.

. Typically, an individual requests a pierce because the corporate structure has been used in an unjust manner or operated as a constructive fraud. The individual desires to pierce in order to hold the officers or shareholders personally liable. West Concord Conservation Club, 306 N.W.2d at 898.

. He is, and always has been, the sole shareholder, officer and director.
No stock was ever issued.
There is no minute book and no corporate records.
The only minutes which exist are ones required by the other party to a particular transaction (such as the Written Action by Sole Director *199required by Miller in connection with its loan to Wheelock).
There were never any meetings of shareholders or directors.
The corporation has no bank account.
Its only assets are those that Gearman has chosen to hold in Wheelock’s name.
If Gearman decides he would like Wheelock to hold cash or an asset, he puts it in Wheelock’s name; and if he wants that cash or asset, he transfers it out of Wheelock’s name.
Wheelock maintains no separate financial books or records.
Wheelock is a subchapter S corporation for tax purposes, so all its profits are taxed to, and all of its losses deducted by, Gearman individually. Wheelock files subchapter S tax returns as required by law.
All cash generated by properties in Wheelock’s name goes into Gearman’s personal account and is used by him as he sees fit.
Wheelock has never declared a dividend. Gear-man takes all cash out of the corporation and deposits it in his personal account, but no formal transfer of any kind is needed, since it never goes into a corporate account.
Wheelock has no employees and pays no salaries.
Wheelock has no place of business except the office that Gearman maintains for himself.
Gearman does not use the corporation as a defense to personal liability because he is always required to personally guarantee its debts. He is always personally liable, anyway.

. There is little doubt that Miller could pierce the corporate veil to hold Gearman personally liable on the mortgage under an alter ego theory were it not for the anti-deficiency statute. Footnote one recites the numerous factors that would call for this result.