• June 8, 2012

Minnesota Litigator has recently noted how difficult it is for many creditors to collect debts owed to them during the recent economic downturn.  This is particularly challenging for most people and businesses who are not normally in the business of lending money.  Non-lender creditors, as a group are less sophisticated lenders by definition.  They do not know all they can do to protect their interests and they do not have time-tested systems and forms firmly in place.

It is different for banks.  Or it should be.

Banks have many institutionalized systems in place to mitigate default risk and minimize collection costs because they are in the business, of course, of lending and, all too often, they are in the business of collections in the event of default.

But even banks can get cross-wise and fouled up during the tricky task of debt collection.

Take, for example, Frandsen Bank.  The bank lent $460,000 to the Burggraffs in connection with their amusement park business, (apparently Billy Bones Raceway, f/k/a Vacationland Family Fun Park f/k/a Kart Kountry), near Brainerd, Minnesota.  Unfortunately for Frandsen, however, the Minnesota Court of Appeals recently held that the corporate entities to which the bank lent the money and which, in turn, pledged certain property as collateral for the loan in the event of default, did not actually have sufficient rights in the collateral so that the entities could properly pledge them to the bank.

To simplify this by analogy — I cannot promise I will give you my neighbor’s car if I fail to pay back money that I owe you.  The Burggraffs could not promise to Frandsen collateral already pledged to another (Jordray, Inc.) and not the property of the borrowing entities.

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