source: Caselaw Access Project

author: MEYER, Justice. HANSON, Justice ANDERSON, G. BARRY, J.,

license: Public Domain

text:
    CROIXDALE, INC., Relator, v. COUNTY OF WASHINGTON, Respondent.
    No. A06-153.
    Supreme Court of Minnesota.
    Jan. 25, 2007.

      Paul B. Zisla, Peter A. Roller, Julia M. Dayton, Moss & Barnett, P.A., Minneapolis, MN, for Relator.
    Doug Johnson, Washington County Attorney, Richard Hodsdon, Asst. Washington County Attorney, Stillwater, MN, for Respondent.
   OPINION

MEYER, Justice.

Relator Croixdale, Inc. (Croixdale) challenged respondent County of Washington’s decision to remove Croixdale’s real property tax exemption beginning with taxes assessed in 2003 and payable in 2004. At ■trial, the tax court concluded that Croix-dale was not an institution of purely public charity under Minn.Stat. §-272.02 (2002) and that Croixdale was not exempt from real property taxation. On appeal, Croix-dale challenged the tax court’s application and analysis of the six-factor test for determining whether it qualified as an institution of purely public charity established in North Star Research Institute v. County of Hennepin, 306 Minn. 1, 236 N.W.2d 754 (1975), arguing that the tax court: (1) wrongly disregarded studies presented by Croixdale’s experts which established that Croixdale charged less than market rent; (2) erred when analyzing Croixdale’s financial statements to determine that Croix-dale had made a profit; and (3) improperly concluded that Croixdale did not lessen the burden on government.. We affirm the decision of the tax court because Croixdale failed to meet its burden of proof under North Star.

Croixdale is a 501(c)(3) nonprofit Minnesota corporation that was founded to assist seniors in the Bayport and St. Croix Valley area who are no longer able to live independently but not yet in need of 24-hour medical care. Croixdale began offering assisted living services in 1961 and independent living apartments in 1981.'

By the late 1990s, Croixdale’s assisted living building was nearly 40 years old, lacked the size and amenities, common to newer assisted living facilities, and was experiencing declining occupancy. Croix-dale consistently operated at a loss and was dependent upon donations from its founder, Katherine Andersen, or her foundation, the Katherine B. Andersen Fund (the Andersen Fund), to cover any operating losses. In 2000, however, the Andersen Fund stopped funding Croixdale’s operating losses.

Without the Andersen Fund support for its operating losses, Croixdale was forced to re-examine its future viability. After studying its options, Croixdale’s board of directors decided to demolish Croixdale’s existing buildings and rebuild both the assisted living and independent living units.

Rebuilding Croixdale’s assisted living and independent living facilities cost approximately $18 million. This project was financed through a capital campaign. By minimizing debt, the board hoped to offer lower rents, keeping Croixdale affordable. Croixdale raised approximately $10.5 million in pledges from private donations. The remaining funds were financed through tax-exempt bonds provided by the City of Bayport. Capital campaign donations were not specifically earmarked for rebuilding either the assisted living center or the independent living apartments.

Once rebuilt, rent for the assisted living facility was increased to a break-even price. All assisted living residents pay for their housing plus base level care. Residents may purchase points of care, which equate to services, if their needs are not met at the base level. The costs of these “points” are added to the resident’s monthly rent. Residents pay only for services received and do not pay for services someone else receives.

With three exceptions, all assisted living residents pay Croixdale’s published rates. The three exceptions are: (1) residents of Croixdale’s old building who were grandfathered into the new building at the old building’s rates; (2) residents on government assistance; and (3) residents receiving Mission Benevolence funds.

In late 1999 or early 2000, Croixdale used its own assets to establish the Mission Benevolence Fund for residents with financial need. Croixdale does not actively seek donations to the Mission Benevolence Fund. Each year the fund pays out 5% of its $1.6 million of assets, or approximately $80,000, to assist residents of both the assisted living and independent living facilities.

Only current Croixdale residents may receive Mission Benevolence funds. The Mission Benevolence Fund is not marketed to the public. Residents must apply for Mission Benevolence funds and provide Croixdale with detailed financial information. Before receiving funding, residents have to spend down their assets and exhaust available government assistance funds. As of November 30, 2004, eight of the assisted living center’s 53 residents were receiving Mission Benevolence funds for a total of $35,568.72 in aid for the year.

Until 2003, the entire Croixdale facility, assisted living and independent living services combined, was exempt from real property tax under Minn.Stat. § 272.02 as an institution of purely public charity. In 2003, based on information, provided by Croixdale, the county removed Croixdale’s property tax exemption. In response, Croixdale conceded that the independent living portion of the facility was subject to real property tax but appealed the county’s removal of the property tax exemption from the assisted living portion of its facility to the tax court.

The tax court applied the six-factor test established in North Star to determine:

(1) whether the stated purpose of the undertaking is to be helpful to others without immediate expectation of material reward;
(2) whether the entity involved is supported by donations and gifts in whole or in part;
(3) whether the recipients of the “charity” are required to pay for the assistance received in whole or in part;
(4) whether the income received from gifts and donations and charges to users produces a profit to the charitable institution;
(5) whether the beneficiaries of the “charity” are restricted or unrestricted and, if restricted, whether the class of persons to whom the charity is made available is one having a reasonable relationship to the charitable objectives;
(6) whether dividends, in form or substance, or assets upon dissolution are available to private interests.

Croixdale, Inc. v. County of Washington, Nos. CX-05-3068, C5-05-3043, C3-04-1720, 2005 WL 3542887 *1, *5 (Minn. T.C. Dec. 22, 2005) (citing N. Star Research Inst., 306 Minn, at 6, 236 N.W.2d at 757). Based on the evidence presented, the tax court concluded that Croixdale had not met its burden of establishing North Star factors three, four, and five and therefore Croixdale was not an institution of purely public charity under the statute.

This court reviews a tax court’s decision to determine whether the tax court had jurisdiction, whether or not the order is justified by evidence or in conformity with law, or whether the tax court committed an error of law. MinmStat. § 271.10 (2004). Absent a question of law, we will uphold the tax court’s decision where sufficient evidence exists for the tax court to reasonably reach the conclusion that it did. Care Inst., Inc. — Maplewood v. County of Ramsey, 576 N.W.2d 734, 738 (Minn.1998); Am. Ass’n of Cereal Chemists v. County of Dakota, 454 N.W.2d 912, 914 (Minn.1990).

The Minnesota Constitution provides that “[tjaxes shall be uniform upon the same class of subjects and shall be levied and collected for public purposes, but ⅜ ⅝ * institutions of purely public charity * * * shall be exempt from taxation except as provided in this section.” Mihn. Const, art. X, § 1. By statute, all “[[Institutions of purely public charity” are exempt from real property tax. Minn. Stat. § 272.02, subd. 7. All property is presumed taxable, however, and the taxpayer bears the burden of proving entitlement to an exemption. Am. Ass’n of Cereal Chemists, 454 N.W.2d at 914.

When determining whether an organization qualifies for a property tax exemption under the statute, this court defines charity as

a gift, to be applied consistently with existing laws, for the benefit of an indefinite number of persons “by bringing their hearts under the influence of education or religion, by relieving their bodies from disease, suffering or constraint, by assisting them to establish themselves for life, or by erecting or maintaining public buildings or works, or otherwise lessening the burdens of government.”

Junior Achievement of Greater Minneapolis, Inc. v. State, 271 Minn. 385, 390, 135 N.W.2d 881, 885 (1965) (citation omitted). A worthwhile objective alone does not justify classification as an institution of purely public charity. SHARE v. Comm’r of Revenue, 363 N.W.2d 47, 50 (Minn.1985). In North Star, this court established a six-factor test to help determine whether an organization is an institution of purely public charity for the purposes of real property tax exemption. 306 Minn, at 6, 236 N.W.2d at 757. Not every North Star factor needs to be met to determine that an organization is a purely public charity. Mayo Found v. Comm’r of Revenue, 306 Minn. 25, 36, 236 N.W.2d 767, 773 (1975). Therefore, when applying the North Star factors, we are mindful that the “purpose of the exemption is to foster and facilitate delivery of charitable services.” Skyline Pres. Found. v. County of Polk, 621 N.W.2d 727, 732 (Minn.2001). The tax court must decide each case on its own facts. Mayo Found., 306 Minn, at 36, 236 N.W.2d at 773.

The tax court applied the North Star analysis and found that Croixdale established that it met factors one, two, and six but did not meet its burden of proof in establishing factors three, four, and five.

Before reaching' the factors that the tax court applied, we first emphasize that Croixdale bears the burden of proof in establishing that it is an institution of purely public charity. At trial, Croixdale presented financial data that included both its assisted' living facility, which it claimed was a institution of purely public charity, and its independent living facility, which Croixdale acknowledged was not an institution of purely public charity. Croixdale asked the tax court to assume that its debt servicing strategy, combined operating expenses, and rental fee structure ultimately established that the independent living units subsidized the assisted living facilities. But, based upon the record presented, we cannot positively conclude that Croixdale adequately established that its resources are truly allocated in such a manner. We note that we do not believe that the failure of Croixdale to meet its burden of proof bars Croixdale from challenging its tax-exempt status in future tax years. But its failure to meet its burden of proof does prevent Croixdale from obtaining property tax exemptions in 2003, 2004, and 2005.

Factor three examines “whether the recipients of the ‘charity’ are required to pay'for the assistance received in whole or in part.” N. Star Research Inst., 306 Minn, at 6, 236 N.W.2d at 757. To prove this, we have said that the organization must prove that residents receive services at a rate “ ‘considerably less than market value or cost.’ ” Cmty. Mem’l Home at Osakis v. County of Douglas, 573 N.W.2d 83, 87 (Minn.1997) (quoting Rio Vista Non-Profit Hous. Corp. v. County of Ramsey, 277 N.W.2d 187, 192 (Minn.1979)). We have imposed the “considerably less than market value or cost” test as a means of proving that rents were established for the stated charitable purpose rather than for purely business reasons. See Care Inst., Inc. — Roseville v. County of Ramsey, 612 N.W.2d 443, 449 (Minn.2000). Because operating at a loss may be caused by any number of factors, operating at a loss is not sufficient to establish that a facility is charging less than market value. Cmty. Mem’l Home at Osakis, 573 N.W.2d at 87. Instead, we look to see if residents are receiving services at free or reduced costs. Id.;- see also Care Inst, Inc. — Maplewood, 576 N.W.2d at 739.

Although the tést is stated in the alternative — market value or cost — in this case the tax court focused only on market value. In this situation, where testimony indicated that the variety of services and amenities provided by area assisted living centers made it difficult to compare the market value of facilities,- the appropriate inquiry should have been whether Croix-dale’s residents paid less than cost for the services, amenities, and assistance provided to them. We find the tax court’s failure to examine whether the services were provided for less than cost problematic, particularly here, where an organization has an obsolete facility and is required to build a new one in order to provide adequate services. The construction costs of a new facility, incurred at current capital costs, may be well in excess of competing facilities that were built years earlier. If the facility is to recover its capital costs over time, which it must do to stay in operation, it may not be able to charge below “market” rates when compared to organizations with older, fully depreciated facilities. Yet, its rates might be well below cost. Croixdale argues that, as a result of the capital campaign, it is able to set its rates considerably below those required to recover its capital costs. The tax court erred by failing to consider whether Croix-dale’s rates were below cost.

Croixdale’s evidence was that the $8,600,000 received in capital contributions, if allocated equally to the 109 assisted living and independent living units, produced a savings of $11,000 per unit in construction costs and a savings in excess of $650 per month per room in debt service. If this savings was fairly allocated to each assisted living room, and if this savings was passed on to the residents of those rooms (two facts we cannot determine from this record), Croixdale would have satisfied factor three by showing that donations enabled Croixdale to charge resident fees below cost.

The tax court’s failure to consider whether Croixdale’s services were below “cost” penalizes Croixdale for becoming more professional and fiscally responsible. If, to be exempt, a charity must be fiscally irresponsible, not use best management practices, and depend on operating donations to constantly bridge the shortfall in its cash needs, -then most exempt charities will not survive because they .cannot realistically depend on perpetual operating contributions. The whole purpose of the charitable exemption, to encourage and support the societal contributions of true charities, .would, be defeated by requiring that they be casually managed. More specifically, a charity that' improves its- infrastructure and establishes break-even budgets will be one that can stabilize and maximize the care that it can provide to the residents in need. These enhancements should be seen as being supportive of, not contradictory to, the charitable mission.

Despite the tax court’s failure to examine whether Croixdale’s services were considerably below cost, we conclude that sufficient evidence supports the tax court’s conclusion that factor three was not met. Testimony established that Croixdale’s rents were set to allow Croixdale to break even, that Croixdale’s points of care system was designed to ensure that residents paid for the services they received, and that the price for the points of care was based on the cost of staff for the amount of time that the services required: While this evidence suggests that Croixdale’s services were provided at a close to cost basis, these factors, combined with our inability to ascertain, from Croixdale’s financial statements what expenses and savings can be attributed to the assisted living units, suggest that Croixdale did not sufficiently meet its burden of proof in establishing that its services were offered considerably below cost.

Factor four examines “whether the income received from gifts and donations and charges to users produces a profit to the charitable institution.” N. Star Research Inst., 306 Minn, at 6, 236 N.W.2d at 757. Recognizing that all six of the North Star factors need not be met in order to establish an organization as a purely public charity, modest increases in net worth, when consistent with goals of the organization, do not destroy an organization’s charitable nature. Mayo Found., 306 Minn. at 36-37, 236 N.W.2d at 773-74; see Am. Ass’n of Cereal Chemists, 454 N.W.2d at 915 (concluding-that factor four was met because the profits were used to further the organization’s future objectives instead of for private gain); SHARE, 363 N.W.2d at 51 n. 3 (noting that a 2-year increase in net worth does not eliminate nonprofit status).

Croixdale argues that the tax court confused positive cash flow with profit when examining its financial statements and wrongly attributed donations to profit. Factor four examines whether the income received as a whole, including donations, produces a profit for the institution. N. Star Research Inst., 306 Minn, at 6, 236 N.W.2d at 757. Factor four is not intended to discourage charitable institutions from engaging in financial planning with an eye toward long-term viability. However, long-term financial planning, which could result in a modest increase in net worth, is different from producing a profit. In this case, when accounting for donations, gifts, and charges to residents, with the exception of year one, Croixdale’s financial documents showed an anticipated cash flow of $125,000 to $325,000 over five years. Based on this evidence, the tax court could reasonably conclude that Croixdale produced a profit.

Factor five examines “whether the beneficiaries of the ‘charity’ are restricted or unrestricted and, if restricted, whether the class of persons to whom the charity is made available is one having a reasonable relationship to the charitable objectives.” N. Star Research Inst., 306 Minn, at 6, 236 N.W.2d at 757. As a subpart of factor five, the charity must lessen the burden on government. Cmty. Mem’l Home at Osakis, 573 N.W.2d at 87; Worthington Dormitory, Inc. v. Comm’r of Revenue, 292 N.W.2d 276, 280 (Minn.1980). Both current and future activities of the organization help determine whether an organization lessens the burden on government. White Earth Land Recovery Project v. County of Becker, 544 N.W.2d 778, 781 (Minn.1996); see also Care Inst, Inc.— Roseville, 612 N.W.2d at 449 (examining whether the long-term philosophy of the charity involves providing services to the economically disadvantaged).

In this case, Croixdale disputes the tax court’s conclusion that it does not lessen the burden on government. Croixdale claims that by providing its residents with financial assistance through its Mission Benevolence Fund and by reducing its residents’ rent through its charitable campaign, it lessens the burden on government.

We are not persuaded by this argument. The Mission Benevolence Fund is available only to existing Croixdale residents, not new residents. And even then, Mission Benevolence funds are only available to residents after they have spent down their existing financial resources and the possibility of government assistance has been exhausted. Additionally, Croix-dale has offered no evidence indicating how reducing its overall rents by $650 lessens the burden on government. Based upon these facts, we conclude that Croix-dale did not meet its burden of showing that it lessened the burden on government and that sufficient evidence exists to support the tax court’s conclusion that Croix-dale failed to meet factor five.

In summary, we conclude that sufficient evidence supports the tax court’s conclusion that Croixdale is not qualified for real property tax exemption as an institution of purely public charity. In doing so, we again note an organization need not prove all six North Star factors to establish that it is an institution of purely public charity under Minn.Stat. § 272.02. Here, the tax court weighed these factors in relation to the particular facts and circumstances of the case, and it reasonably reached the conclusion that Croixdale did riot qualify for real property tax exemption.

■Affirmed.

HANSON, Justice

(concurring).

Although I concur in the result, I write separately to express concerns about the continued viability of our six-factor test, especially as applied by the tax court in this case.

A Croixdale’s Burden of Proof

I agree with the result reached by the majority because Croixdale failed to meet its burden of proving that, in 2003, 2004, and 2005, its assisted living services were exempt from property taxes as an “institution of purely public charity.” Croixdale did not meet its burden of proof because it did not adequately separate the financial information for its assisted living services, which it claimed were charitable, from that for its independent living services, which it agreed were not charitable.

The financial data presented by Croix-dale to the tax court was based on its combined financial statements for both operations. Croixdale’s arguments for exemption would require us to assume that its assisted living facilities and services are essentially a microcosm of the combined operation. More specifically, we would have to assume that the combined revenues and expenses of Croixdale should be allocated to the assisted living services on some pro rata basis, presumably based on the comparative number of rooms. From the record presented, we cannot be satisfied that the fee structure for the assisted living service is the same as that for the independent living services; that the share of the combined operating expenses imposed by the assisted living services was proportional to the number of rooms; that the benefits of the donated capital, calculated by Croixdale to provide a $650 rate reduction for each room, were fairly allocated between assisted living services and independent living services on the basis of the number of rooms in each; and that the annual donations or income from the investment of past donations support the assisted living services to the same degree that they support the independent living services.

I agree with the observation of the majority that the conclusion that Croixdale did not meet its burden of proof in this record would not preclude Croixdale from seeking to reinstate tax exemption for its assisted living services in some future tax year if it is able to provide the requisite financial data, allocated specifically to those services. I would go further and conclude that, if the financial results and relationships for the assisted living services were essentially the same as those for the combined operations, I would con-elude that Croixdale is entitled to tax exemption as an institution of purely public charity.

B. The North Star Six-Factor Test

I am concerned that the six-factor test does not fairly determine whether an organization is one of purely public charity. And I see a significant risk that the mechanical application of that test could deny the exemption to a charity that our Constitution intended to benefit. I understand the desirability of having a multi-factor test that can give practical meaning to the broad constitutional concept of an institution of “purely public charity.” But I question whether the North Star factors do so. In fact, I believe that at least one of those factors actually contradicts the constitutional concept.

First, I note that our decision in North Star draws the six factors individually from a sampling of cases, no single one of which used them in this particular combination. See N. Star Research Inst. v. County of Hennepin, 306 Minn. 1, 6, 236 N.W.2d 754, 756-57 (Minn.1975) (citing Assembly Homes, Inc. v. Yellow Medicine County, 273 Minn. 197, 140 N.W.2d 336 (1966) (nursing home); Junior Achievement of Greater Minneapolis, Inc. v. State, 271 Minn. 385, 135 N.W.2d 881 (1965) (youth training); Christian Bus. Men’s Comm. v. State, 228 Minn. 549, 38 N.W.2d 803 (1949) (hospitality center); County of Hennepin v. Grace, 27 Minn. 503, 8 N.W. 761 (1881) (parochial school); and County of Hennepin v. Bhd. of the Church of Gethsemane, 27 Minn. 460, 8 N.W. 595 (1881) (hospital)). As a result, I question whether they should be applied in combination to all cases. Although this concern is mitigated somewhat by our ruling that an organization need not meet every factor, that ruling provides no guidance on which factors are most important, and which are unimportant, for a particular type of organization.

Second, I find that the organization for which the factors were developed in North Star — an organization that performed applied research on the opportunities for economic development for the benefit of private enterprises' — is not the type of organization that is traditionally thought of as charitable. In North Star we identified traditional charitable undertakings as “care for the sick, the aged, and the infirm; education of young people; hospital care for the poor; facilities to promote moral and educational welfare of youth; [and] institutions for religious education.” 306 Minn, at 5-6, 236 N.W.2d at 756-57. (emphasis added) (footnotes omitted). As a result, it could be argued that the six-factor test was designed to answer a different question than that presented here— how do you determine that an activity is charitable if it is not one that has traditionally been viewed as being charitable? Obviously, Croixdale’s care for the aged by providing assisted living services is an activity that has traditionally been viewed as a charitable undertaking. And the facts surrounding Croixdale’s development and implementation of its assisted living services program demonstrate that it deserves to be classified as a traditional charity.

Croixdale identified a significant societal need to be served. Its testimony shows that the older adult population in Washington County is expected to grow from 11,-500 in 1995 to 51,000 in 2025. If the only option for older adults who are no longer able to live in their own homes is a nursing home, then the growth of the older adult population will impose serious societal and financial burdens and dramatic increases in the need for governmental assistance.

Croixdale’s solution to this looming crisis is to offer expanded assisted living services for those who can no longer live in their own homes because of physical or mental disabilities which make them incapable of keeping up with home maintenance, cooking, taking needed medications, or even eating regularly or bathing safely. But these residents may require only limited assistance, and do not need the constant care of a nursing home. Croixdale suggests that the best strategy, for the well being and quality of life of the resident, for the social benefit of the community, and for the financial benefit of the state and local governments, is to prolong the time a person can stay in assisted living. Croixdale showed that each progressive phase — from residing at home, to assisted living, to a nursing home — becomes more costly than the last. In this context, the assisted living services provide residents with the minimum of care needed to assure a safe living environment, regular meals, medications, and personal care — which are truly charitable activities. According to Croixdale’s testimony, the average age of its assisted living residents is currently 86-7, clearly a class of older adults that is deserving of charitable services.

One could conclude from North Star that the six-factor test is not needed or useful for an organization like Croixdale that is engaged in an activity that is traditionally seen as a charitable undertaking. In fact, North Star observes that “[t]he tendency of our decisions has been to sustain exemption where these traditionally ‘charitable’ objectives are being furthered, so long as no individual profits from ownership of the ‘charity’ are realized and so long as the undertaking is not a subterfuge by which the needs of a select and favored few are accommodated.” 306 Minn, at 6, 236 N.W.2d at 757.

Croixdale suggests that our analysis could end there. It argues that Croixdale is an institution of purely public charity because it performs a traditionally charitable undertaking (care of the aged), its organizational structure does not allow for its assets or profits to accrue to individuals, and the donations it receives are used for the benefit of the residents. But this analysis does not go quite far enough because of the added qualification in North Star — that the organization is not a “subterfuge by which the needs of a select and favored few are accommodated.” This added qualification is particularly important where, as here, the persons being served are charged a fee for services, because their ability to pay may make them a “select and favored few.” Further, this qualification is important where, as here, similar services are provided by for-profit businesses and the question is whether the organization is more akin to a commercial enterprise than to a charity.

In this context, the six factors identified in North Star do not necessarily or appropriately answer the question of whether the service is available to a select and favored few or whether the organization is more commercial than charitable. In fact, the three factors that the tax court relied on are perhaps the least relevant to those questions.

1. Factor Three

For the third factor — whether the recipients of the charity are required to pay for the assistance received in whole or in part, N. Star Research Inst., 306 Minn, at 6, 236 N.W.2d at 757 — we have identified several alternative measures, without discussing which must be satisfied in a given case. In North Star, we. said that the “exemption was denied to [two] homes for the aged, also a traditionally favored form of charitable activity, because the charges made to residents by the nonprofit corporations involved gave a preferred status to wealthy persons.” Id. at 9, 236 N.W.2d at 758-59 (referring to Madonna Towers v. Comm’r of Taxation, 283 Minn. 111, 167 N.W.2d 712 (1969) (independent living services), and State v. United Church Homes, Inc., 292 Minn. 323, 195 N.W.2d 411 (1972) (same)). Croixdale would satisfy this alternative measure because 90% of its residents are low income persons, 28% of whom are on government assistance, either under the elderly waiver program or the alternative care program.

In other cases, we have said that the organization must prove that residents receive services at a rate “ ‘considerably less than market value or cost.’ ” Cmty. Mem’l Home at Osakis v. County of Douglas, 573 N.W.2d 83, 87 (Minn.1997) (an assisted living facility) (quoting Rio Vista Non-Profit Hous. Corp. v. County of Ramsey, 277 N.W.2d 187, 192 (Minn.1979)). Although that test is stated in the alternative — market value or cost — in this case the tax court focused only on market value. If, as I conclude, “below cost” is an alternative test, the tax court erred by failing to consider it.

2. Factor Four

Factor four — whether the income received from gifts and donations and charges to users produces a profit to the charitable institution, N. Star Research Inst, 306 Minn, at 6, 236 N.W.2d at 757— is largely irrelevant and should not be applied in this case. To the extent that this factor includes income from gifts and donations, it is actually contradictory to factor two. Factor two suggests that the more the organization is supported by donations and gifts, the more likely the organization is charitable. Factor four seems to suggest that the more the organization is supported by donations and gifts, the less likely the organization is charitable. Id. Because a common characteristic of a traditional charity is that it is supported by donations and gifts, and only that characteristic enables the organization to charge rates below cost, factor four should be eliminated from the North Star test.

Our case law has recognized that the question of “profit” is not particularly relevant to a charity, so long as the profit cannot inure to individual benefit. Thus, in Brotherhood of the Church of Gethsemane, one of the cases relied on in North Star, we said:

That patients who are able to pay are charged for hospital services according to their ability, and that the county pays for such services rendered to those who are a legal county charge, are facts of no importance upon the question as to the character of the institution as one of purely public charity; for the fact still remains, that, notwithstanding all receipts from such sources, the hospital is established, maintained, and conducted without profit or a view to profit, and that, on the whole, it is operated at a loss, which is necessarily made up by private contributions.

27 Minn, at 462, 8 N.W. at 596. In Assembly Homes, Inc., another cased relied on in North Star, we expressed this view even more forcefully:

Nor does the fact that an organization claiming exemption as one of “purely public charity” operates at a profit derived from charges made to its patients nullify it status as an institution of “purely public charity” if under its charter its operations are intended for the benefit of the public generally, and thereunder none of such profits can be paid to stockholders or others.

273 Minn, at 203-04,140 N.W.2d at 340.

Viewed another way, factor four can only be reconciled with factor two if factor four excludes income from gifts and donations. Factor four would then only ask whether the revenue from the fees paid by residents exceeds operating costs. Thus, in Brotherhood of the Church ofGethsema-ne, we emphasized that an organization that operates “without any profit, or view to profit, but at a loss which has to be made up by benevolent contribution, is a charity.” 27 Minn, at 462, 8 N.W. at 596. Clearly, we did not mean to include contributions in determining whether the organization made a “profit.” When viewed in this way, Croixdale’s operations have not generated a “profit,” but instead have generated operating losses, in each of the 15 historical years. And Croixdale’s operations are projected to continue to generate operating losses in each of the five future years.

The tax court found that Croixdale “has consistently sustained operating losses for the past fifteen years,” but “taking into account its non-operating revenues, which include donations, investment income [from past donations], and resident activities income, [Croixdale] has had a total gain during ten of the past fourteen years.” Croixdale, Inc. v. County of Washington, Nos. CX-05-3068, C5-05-3043, C3-04-1720, 2005 WL 3542887 *1, *10 (Minn. T.C. Dec. 22, 2005). This finding is erroneous because it incorrectly includes non-operating revenue. This finding actually reinforces the proof of factor two — that is, without donations, Croixdale would have been insolvent years ago and would have closed its doors.

For the fifteen years considered by the tax court, from 1990 through 2004, Croix-dale’s “loss from operations” ranged between $216,862 to $1,419,907, and totaled over $6 million. For the five years projected in Croixdale’s proforma financial statements, presumably covering 2003 through 2007, Croixdale’s accountants continue to project operating losses for each of the five years. In analyzing those projections, the majority mistakenly confuses “cash flow” with “profit.” As the tax court noted, the proforma projects positive “cash flow” during four of these five years, but this only reflects the effect on cash flow of eliminating the significant depreciation that results from having a newly constructed facility. If depreciation is included as an expense, as is required by generally accepted accounting principles (and by prudent planning for the deterioration of the' facility), Croixdale’s proforma shows an operating loss for each of the five years. The relevant line from the proforma is not the “cash flow” line, which eliminates depreciation, but the “GAAP bottom line,” which reports net operating income under generally accepted accounting principles. That line shows net operating losses for 2003 of $1,013,101, for 2004 of $433,337, for 2005 of $188,163, for 2006 of $83,428, and for 2007 of $23,608, totaling nearly $1,750,000.

In this connection, the tax court apparently misunderstood Croixdale’s testimony concerning what subsidies it provides to its residents. The tax court minimized the support provided by the Mission Benevolence Fund and missed an important point of Croixdale’s pricing structure. Croixdale explained that for its assisted living residents who are on some form of government assistance, it charges only the rent and fees that will be reimbursed by the government, which is well below' the base charges it would make to a resident who was not on government assistance. Croix-dale’s analysis showed that this shortfall in charges amounted to $193,000 per year. Croixdale explained that it expects to earn $80,000 from the investment of its Mission Benevolence Fund, which could be used to defray this shortfall, but that the additional shortfall of $113,000 will be absorbed by Croixdale through unfunded depreciation. For example, even if the appropriate depreciation expense were $550,000, Croix-dale’s charges to residents would only recover $437,000. of that amount, leaving $113,000 unfunded. This is what accounts for the “GAAP bottom line” losses for all years. Essentially, Croixdale is deferring the funding of depreciation to a future period when facility replacements are required, and Croixdale is relying on its ability to do fundraising in that future period to make up for this shortfall.

Finally, even if factor four had relevance, its application would require the court to make subjective judgments about how much profit is permissible, as being consistent with the charitable mission, and how much is not permissible because it is too great. The Constitution does not provide any objective standards by which to make that judgment and neither does North Star.

S. Factor Five

Factor five — whether the beneficiaries are restricted or unrestricted, N. Star Research Inst., 306 Minn, at 6, 236 N.W.2d at 757 — is also difficult to apply in this case. The only restriction that Croixdale imposes on the beneficiaries it serves is that they be aged persons in need of assistance, which is a restriction that has a reasonable relationship to its charitable objectives.

Although some of our cases suggest that there is a subpart of factor five that requires that a charity “lessen the burden of government,” this subpart should not require the charity to show that it somehow directly reduces government expenditures. In North Star we articulated a much broader view of what is involved in lessening the burdens of government:

It can be said with respect to activities that are traditionally “charitable” that ultimately people will benefit in an economic sense from the charitable undertaking. Persons relieved from poverty and illness and the restraints of old age demand less of, and contribute more to, the economic well-being of a community than do those who are not so relieved.

306 Minn, at 7, 236 N.W.2d at 757. Providing assistance to allow aged persons to maintain a better quality of life clearly meets these broader criteria.

But even if narrower criteria were used, Croixdale did prove that its assisted living services directly reduce government expenditures. Croixdale provided testimony that if there were no assisted living facilities, the residents would need to be placed in nursing homes where they would require full medical assistance, at greatly increased costs to the government. Croix-dale argued that keeping people in assisted living “as long as possible and out of nursing homes” directly reduces the costs of government.

Accordingly, if Croixdale’s financial information was made specific to its assisted living operations and presented the same relative results as the combined information, I would conclude that Croixdale satisfied factors three, five, and the reformulated factor four, with the result that Croixdale would be qualified as an institution of purely public charity.

ANDERSON, G. BARRY, J.,

(concurring).

I join in the concurrence of Justice Hanson.

      . For purposes of this opinion, Mission Benevolence funds refer to private funds distributed by Croixdale to individuals who have applied for and formally receive Mission Benevolence funding.

      . Minnesota Statutes § 272.02, subd. 1(7) (2002), contains two exceptions to property tax exemption for institutions of purely public charity, which are not relevant to these proceedings because we have determined that Croixdale was not an institution of purely public charity for the years in question. Minnesota Statutes § 272.02, subd. 1(7), was amended in 2005, eliminating those exceptions.

      . Because only factors three, four, and five are at issue in this case, we limit our discussion to these factors.

      . Mayo Found. v. Comm’r of Revenue, 306 Minn. 25, 36, 236 N.W.2d 767, 773 (1975).

      . Even if we were to focus on market rents, I would conclude that Croixdale rents, being at the low end of the spectrum of rents charged by comparable facilities, were by definition below the market rent, which should be set at the median of comparable rents.

      . Croixdale’s discussion of the use of the income from the Mission Benevolence Fund is somewhat confusing because there was testimony that some portion of the Mission Benevolence Fund is available for the independent living residents. Also, the amounts actually distributed by the fund on behalf of assisted living residents depend on whose applications had been granted, and actually amount to about $35,000, not $80,000. But, to the extent that lesser amounts were available from the Mission Benevolence Fund, the amounts absorbed by Croixdale by not funding depreciation would be correspondingly greater.


author: /s/Helen M. Meyer Associate Justice

text:
    In re Petition for DISCIPLINARY ACTION AGAINST Thomas Robert WARD, a Minnesota attorney, Registration No. 236561.
    No. A06-1992.
    Supreme Court of Minnesota.
    Jan. 25, 2007.
   ORDER

. The Director of the Office of Lawyers Professional Responsibility has filed a petition for disciplinary action alleging that respondent Thomas Robert Ward has committed professional misconduct warranting public discipline, namely: (1) entering into a business transaction with a client that was not fair and reasonable, failing to fully disclose all of the terms of the transaction to the client in a manner that could be reasonably understood by the client, failing to obtain from the client a consent to the transaction in a document separate from the transaction documents, failing to notify the client in writing prior to the execution of the transaction documents that independent counsel should be considered, and utilizing unfair and ambiguous terms of the transaction documents to deprive the client of her equity in the real property that was the subject of the transaction, in violation of Rules 1.8(a) and 8.4(c), Minnesota Rules of Professional Conduct (MRPC); and (2) making unwanted physical contact of a sexual nature with an applicant for employment in his law office, in violation of Rule 8.4(g), MRPC.

Respondent admits his conduct violated the Rules of Professional Conduct, waives his rights under Rule 14, Rules on Lawyers Professional Responsibility (RLPR), and has entered into a stipulation with the Director in which they jointly recommend that the appropriate discipline is suspension from the practice of law for a period of one year, effective 14 days from the date of filing of this order. By order filed on- December 11, 2006, we ordered the parties to submit to us additional information concerning a judgment entered against respondent in favor of his former client. By letter filed on December 20, 2006, the Director provided the court with a copy of a settlement agreement between respondent and his former client under which respondent agreed to begin making payments to the former client beginning in June 2006; a confession of judgment executed by respondent in favor of his former client, entry of which was conditional upon respondent’s breach of the settlement agreement; and a notice of entry and docketing of the confession of judgment. In addition, the Director indicated that respondent has made no payments toward satisfaction of the judgment. Respondent has not disputed the Director’s report of the status of the matter.

In determining the appropriate discipline to impose, we consider failure to make restitution as an aggravating factor. In re Swerine, 513 N.W.2d 463, 467 (Minn.1994) (citing ABA Standards for Imposing Lawyer Sanctions, Standard 9.22(j) (A.B.A.1991) (stating that indifference toward restitution is an aggravating factor in determining discipline)); In re Davis, 585 N.W.2d 373, 377 (Minn.1998) (noting that failure to satisfy a judgment in favor of former clients for repayment of misappropriated funds is an aggravating factor to be considered).

In light of the conduct to which respondent has admitted and respondent’s breach of the settlement agreement and failure to make restitution to his former client, which respondent has not disputed, we deem the stipulated suspension to be inadequate to protect the public. We therefore suspend respondent from the practice of law indefinitely, effective 14 days from the date of filing of this order. Respondent shall comply with Rule 26, RLPR (requiring notice of suspension to clients, opposing counsel, and tribunals). Reinstatement shall be by petition and hearing under Rule 18(a)-(d), RLPR. Respondent may petition for reinstatement no sooner than one (1) year after he fully satisfies the judgment entered against him by his former client, proof of which must accompany the petition for reinstatement. Reinstatement shall be further conditioned upon successful completion of the professional responsibility portion of the bar examination and satisfaction of the continuing legal education requirements under Rule 18(e), RLPR.

Based upon all the files, records, and proceedings herein,

IT IS HEREBY ORDERED that respondent Thomas Robert Ward is indefinitely suspended from the practice of law, suspension to be effective 14 days from the date of entry of this order, subject to the conditions set forth above. Respondent shall pay costs in the amount of $900 under Rule 24(d), RLPR.

BY THE COURT:

/s/Helen M. Meyer Associate Justice


author: WORKE, Judge.

text:
    Elizabeth PETERSON, Respondent, v. HOLIDAY RECREATIONAL INDUSTRIES, INC., et al., Appellants.
    No. A06-421.
    Court of Appeals of Minnesota.
    Jan. 2, 2007.
    Review Denied Feb. 28, 2007.

      Robert A. Gust, Gust Law Firm, Minneapolis, MN and William R. Skolnick, Minneapolis, MN, for appellants.
    David M. Lawson, Minneapolis, MN, for respondent.
    Considered and decided by KLAPHAKE, Presiding Judge; WORKE, Judge; and ROSS, Judge.
   OPINION

WORKE, Judge.

On appeal from the district court’s ruling that respondent was entitled to .all right, title, and interest in a corporation, including real property, appellants argue that (1) the district court lacked subject-matter jurisdiction to address property located in another county and lacked the authority to deny appellants’ request for a change of venue; (2) respondent’s inequitable conduct should have precluded the district court from granting respondent relief; (3) respondent lacked standing to challenge transfer of title to the property; (4) the statute of frauds should have precluded the district court from ruling that title was in respondent’s name; (5) the requirements for a constructive trust were not satisfied; (6) a constructive trust cannot be used to transfer title to real property; (7) because respondent’s evidence regarding title to the property was internally inconsistent, it cannot support the district court’s ruling; (8) respondent waived any claim to the property; and (9) the record either does not support the district court’s ruling or shows that a new trial is required. We affirm in part and reverse in part.

FACTS

In 1977, respondent Elizabeth Peterson and her then-husband, James Peterson, created Custom Coach & Van (later renamed Custom Coach RV & Marine, Inc.). In 1989, Custom Coach purchased property located in Anoka County. After the closing on the property, it was discovered that the property was contaminated. A lawsuit ensued between the Petersons and the seller of the property. The resulting judgment against Custom Coach and the personal judgment against the Petersons were affirmed on appeal. See Custom Coach RV, Inc. v. Gertzen, Nos. C8-90-2208, CX-90-2209, 1991 WL 90864 (Minn. App. June 4, 1991). Custom Coach filed bankruptcy and discharged the judgment; however, the personal judgment against the Petersons remained. In 1991, respondent and James Peterson created appellant Holiday Recreational Industries, Inc. (HRI) for the purpose of selling recreational vehicles. The sole shareholder of HRI was Obelyn Peterson, James Peterson’s mother. ■ ■ •

In 2001, respondent and James Peterson separated, and Obelyn Peterson’s health began to deteriorate. At that time, HRI’s assets and land were transferred to appellant Patricia Peterson (respondent and James Peterson’s daughter) for $1. Appellant Peterson and respondent met to discuss possibly setting up a trust to hold certain assets, including HRI’s assets and land, for the benefit of respondent and James Peterson. While an unsigned, handwritten note in appellant Peterson’s handwriting was introduced into evidence regarding the discussion at the meeting, no actual trust documents were created to show whether an agreement was reached regarding a trust.

Respondent continued to be employed by HRI until October 2002, when appellant Peterson terminated respondent’s employment for alleged misconduct. Prior to the finalization of their divorce, James Péter-son signed a Release of All Claims to the HRI assets and land contingent upon receipt of title and interest in a campground owed by respondent and James Peterson. No similar release of claims was ever signed by respondent.

In 2004, respondent filed a lawsuit in Hennepin County against appellants alleging breach of lifetime employment contract; conversion; theft, in violation of Minn.Stat. § 604.14 (2004); unjust enrichment, failure to pay commissions, in violation of Minn.Stat. § 181.14 (2004); defamation; and constructive trust or equitable return of business. Appellants filed a demand for change of venue as a matter of right to Anoka County, where HRI’s assets and land are located. The district court denied the demand and proceeded with a trial. The district court found in favor of respondent and ordered appellant Peterson to convey all right, title, and interest in HRI’s land and stock to respondent. Appellants sought post-judgment relief, including a new trial, which the district court' denied. This appeal follows.

ISSUES

I. Is appellants’ challenge to the district court’s venue decision properly before this court?

II. Does respondent’s inequitable conduct preclude , the district court from granting her relief?

III. Did, respondent lack standing to challenge the transfer of HRI’s assets and land from Obelyn Peterson to appellant Peterson?

IV. Is respondent’s claim to HRI barred by the statute of frauds?

V. Were the requirements for a constructive trust met?

VI. Can a constructive trust be used to transfer title to real property?'

VII. Does the evidence support the district court’s' ruling that HRI’s land and stock had been held for the benefit of respondent?

VIII. Did respondent waive her claim to the property?

IX. Are appellants entitled to a new trial?

ANALYSIS

I.

Appellants argue that the district court erred in denying their demand for change of venue as a matter of right, which was based on the fact that, among other reasons, the real estate was located in Anoka County. Cf Minn.Stat. 542.02 (2004) (addressing venue of actions relating to real property). The district court denied the demand finding that the case had been properly filed in Hennepin County because “Plaintiff [respondent] resides in Hennepin County and- events in this action arose in Hennepin County and underlie [respondent’s] claims in this case.” Further, the district court held that appellants “failed to show that they would be prejudiced if [v]enue was retained in Hen-nepin County.”

The district court’s decision was based on statutory interpretation, a question of law, which would be reviewed de novo if this court were to review it. Hibbing Educ. Ass’n v. Pub. Employment Relations Bd., 369 N.W.2d 527, 529 (Minn.1985). For the reasons explained below, however, we conclude that appellants’ challenge to the district court’s venue decision is not properly before this court.

“It has been the long accepted practice in this state to seek review of a venue order by petitioning this court for a writ of mandamus.” Ebenezer Soc’y v. Minn. State Bd. of Health, 301 Minn. 188, 193, 223 N.W.2d 385, 388 (1974) (emphasis added). “[I]t is proper, and often preferable, to determine the place of trial prior to the actual trial of the case rather than afterwards.” Castle v. Vill. of Baudette, 267 Minn. 140, 142, 125 N.W.2d 416, 417 (1963). Appellants did not file a petition for mandamus when the district court denied their request for change of venue; rather, they waited until the conclusion of the trial to challenge the decision in this appeal. The proper practice would have been to immediately file a petition for mandamus with this court challenging the venue ruling. While it is our impression that venue would have been more properly situated in Anoka County where the real property is located, we will not stray from the long-accepted practice of addressing venue challenges via a petition for mandamus prior to trial. Because appellants did not file a petition for mandamus following the district court’s ruling that venue in Hennepin County was appropriate, that issue is not properly before us and we decline to review it. We note, however, that “[v]enue in civil actions is not jurisdictional.” Rosnow v. Comm’r of Pub. Safety, 444 N.W.2d 591, 592 (Minn.App.1989) (citing Claseman v. Feeney, 211 Minn. 266, 268, 300 N.W. 818, 819 (1941)), review denied (Minn. Oct. 13,1989). Therefore, any error in the district court’s venue ruling did not deprive it of jurisdiction to hear the parties’ dispute.

II.

Appellants next argue that because respondent was engaged in a campaign to defraud creditors, she had unclean hands and the district court should not have invoked its equitable powers. It is within the district court’s discretion to' grant equitable relief and “[o]nly a clear abuse of that discretion will result in reversal!.]” Nadeau v. County of Ramsey, 277 N.W.2d 520, 524 (Minn.1979).

Under the doctrine of unclean hands: “he who seeks equity must do equity, and he who comes into equity must come with clean hands.” Hruska v. Chandler Assocs., Inc., 372 N.W.2d 709, 715 (Minn.1985). A party “may be denied relief where his conduct has been unconscionable by reason of a bad motive, or where the result induced by his conduct will be unconscionable either in the benefit to himself or the injury to others.” Johnson v. Freberg, 178 Minn. 594, 597-98, 228 N.W. 159, 160 (1929). “The [unclean-hands doctrine] does not apply where the relief sought by the plaintiff and the equitable right claimed by the defendant belong to or grow out of two entirely separate and distinct matters or transactions.” Lindell v. Lindell, 150 Minn. 295, 298-99, 185 N.W. 929, 930 (1921).

[The defendant’s] adverse equity must grow out of the very controversy before the court or out of such transactions as the record shows were part of its history, or where it is so connected with the cause in litigation as to be presented in the pleadings and proofs, with full opportunity afforded to the plaintiffs to explain or refute the charges.

Id. at 299,185 N.W. at 930.

In denying appellants’ motion for amended findings and/or a new trial, the district court concluded that “Johnson is differentiated from the present matter because in Johnson, both parties to the contract in question were guilty of fraud as to each other.” The district court found that “[n]o such fraud exists between the parties in the present matter, thus the [c]ourt is not persuaded by [appellants’] argument.” However, respondent testified that when she and James Peterson created HRI, the business assets and land-were placed in the name of Obelyn Peterson, and later transferred solely to appellant Peterson, for the purpose of defrauding judgment creditors. In its findings, the district court essentially acknowledged that respondent came to court with unclean hands because HRI’s assets and land were not placed in the name of respondent or James Peterson “until the personal judgment against [them] became unenforceable as a matter of law”; however, the fraud did not exist between respondent and appellant Peterson. Even if the district court was correct in noting that the transactions involved here do not precisely reflect Johnson, they are not so different under Lin-dell that the unclean-hands doctrine does not apply. Further, regardless of the degree of distinction between the transactions, respondent had, under Lindell, an opportunity to adequately litigate appellants’ allegations that her conduct constituted fraud. Because respondent’s adverse equity grew out of a transaction that was part of the history of this case— Obelyn Peterson’s transfer of her interest in HRI to appellant Peterson — the unclean-hands doctrine does apply in this case. Therefore, the district court abused its discretion in finding that the unclean-hands doctrine does not apply in this case and invoking its equitable powers.

Respondent argues that appellant Peterson also had- unclean hands because she received HRI’s assets and land for the purchase price of $1, when the corporation had approximately $460,000 in equity. However, “[inadequacy of consideration, standing.alone, is not sufficient to establish unconscionable conduct unless it is so great as to shock the conscience[.]” Johnson, 178 Minn, at 598, 228 N.W. at 160. It is not a “shock to the conscience” that a business would be transferred from grandmother to granddaughter for $1, which would be considered inadequate consideration in other circumstances.

III.

Appellants next argue that respondent lacks standing to challenge the transferring of HRI from Obelyn Peterson to appellant Peterson. We review de novo the legal issue of standing. Nash v. Wollan, 656 N.W.2d 585, 588 (Minn.App.2003) (citing Frost-Benco Elec. Ass’n v. Minn. Pub. Utils. Comm’n, 358 N.W.2d 639, 642 (Minn.1984)), review denied (Minn. Apr. 29, 2003). “An individual has standing to maintain a suit by showing an injury to some interest, economic or otherwise, which differs from injury to the interests of other citizens generally.” Vern Reynolds Constr., Inc. v. City of Champlin, 539 N.W.2d 614, 617 (Minn.App.1995) (quotation omitted), review denied (Minn. Dec. 20,1995).

In the absence of fraud or mistake, a deed is presumed to be the final agreement of the parties. B-E Constr., Inc. v. Hustad Dev. Corp., 415 N.W.2d 330, 331 (Minn.App.1987), review denied (Minn. Jan. 20, 1988). A party challenging a deed must present clear and convincing evidence to overcome the presumption that a deed is an absolute conveyance. See Beasy v. Misko, 297 Minn. 527, 528, 211 N.W.2d 881, 882 (1973). Obelyn Peterson was the sole owner of HRI’s assets and land until she transferred her interest into the sole name of appellant Peterson. Respondent does not, and cannot, dispute that she was not an owner of HRI, and was not a party to the transferring of HRI from Obelyn Peterson to appellant Peterson. Because respondent was not an owner of HRI- and cannot show an injury to some interest, economic or otherwise, she lacks standing to challenge the transaction between Obelyn Peterson and appellant Peterson. Further, the analysis of whether a fraud existed is unnecessary because even if a finding could be made that the transfer of HRI was fraudulent, the only person with standing to make that claim is Obelyn Peterson.

IV.

Appellants next argue that respondent’s claimed right to HRI’s property is barred by the statute of frauds. Under the statute of frauds, a conveyance of real property or an agreement to convey real property is invalid unless it is reduced to writing. Minn.Stat. 513.04 (2004). Minn.Stat. § 513.03 (2004) requires trusts to be in writing, and Minn.Stat. 513.04 requires that every estate or interest in land be created “by deed or conveyance in writing, subscribed by the parties creating” or conveying the interest. With the exception of a handwritten note, there is no evidence of any type of conveyance from appellant Peterson to respondent. All ownership documents to HRI’s assets and land list appellant Peterson as the sole owner. While the unsigned, handwritten note in appellant Peterson’s handwriting does not purport to be a contract or a conveyance, even if there was an agreement to create a family trust, it embraced an interest in real estate and, therefore, was subject to the statute of frauds.

V.

Appellants argue that the district court erred in granting respondent a constructive trust because a constructive trust is not a remedy for a defective trust or an unenforceable oral trust. Whether a constructive trust should be imposed is a question of fact for the district court that this court reviews for clear error. Freundschuh v. Freundschuh, 559 N.W.2d 706, 711 (Minn.App.1997), review denied (Minn. Apr. 24,1997).

“A constructive trust is a remedial device by which the holder of legal title is held to be a trustee for the benefit of another who in good conscience is entitled to the beneficial interest.” Wilcox v. Nelson, 227 Minn. 545, 550, 35 N.W.2d 741, 744 (1949). “The elements of a cause of action to enforce a constructive trust are the existence of a fiduciary relation and the abuse by defendant of confidence and trust bestowed under it to plaintiffs harm.” Id. A constructive trust “arises by operation of law without any reference to any actual or supposed intention of creating a trust and frequently directly contrary to such intention.” Sieger v. Sieger, 162 Minn. 322, 324, 202 N.W. 742, 743 (1925). “In finding a constructive trust, the court is not bound by a formula, but is free to effect justice to avoid unjust enrichment according to the equities.” Freundschuh, 559 N.W.2d at 711. The district court must be “persuaded by clear and convincing evidence that the imposition of a constructive trust is justified to prevent unjust enrichment.” In re Estate of Eriksen, 337 N.W.2d 671, 674 (Minn.1983). A constructive trust may be imposed when there is “clear and convincing evidence that it would be morally wrong for the property holder to retain” the property. Spiess v. Schumm, 448 N.W.2d 106, 108 (Minn.App.1989) (quotation omitted). The district court concluded that “[appellant] Peterson is not entitled to the benefit of equity in [t]he HRI [l]and. Retention of [t]he HRI [l]and or the HRI stock by [appellant] Peterson would be unjustf.]”

The evidence shows that appellant Peterson was the sole legal owner of HRI’s assets and land. With the exception of respondent’s testimony, there is no evidence that appellant Peterson had a fiduciary relationship with respondent, and, therefore, she did not abuse any such relationship. The necessary elements of a constructive trust were not proven in this case. Additionally, there is nothing in the record to clearly and convincingly suggest that it would be “morally wrong for [appellant Peterson] to retain” the HRI assets and land. The district court’s finding that a constructive trust existed is clearly erroneous.

VI.

Appellants also argue that a constructive trust cannot be used to compel a conveyance of title. We agree.

The establishment of a constructive trust does not set aside the title to the property but instead proceeds on the theory that, even though legal title rests in the grantee of the deed, equity will declare that such title is held in trust for someone else to whom it rightfully belongs.

In re Estate of Vittorio, 546 N.W.2d 751, 755 (Minn.App.1996) (quotation omitted). “[P]arol evidence is admissible to • show establishment of a constructive trust.” Id. “A constructive trust also is exempt from the statute of frauds because it arises by operation of law.” Id. Here, there was a dispute as to whether HRI’s assets and land were to be held in trust for the benefit of respondent and James Peterson. There is no direct evidence to support this claim- Even if such evidence did exist, the district court did not have the authority to set aside the title to HRI’s assets and land and transfer them to respondent. Title would remain in the name of appellant Peterson to be held in trust for “someone else to whom it rightfully belongs” — in this case, respondent. .

VII.

Next, appellants argue that the district court’s conveyance of title conflicts with respondent’s testimony that HRI’s assets and land were to be held in trust for her heirs. The district court ordered that HRI’s assets and land be immediately transferred to respondent because a constructive trust existed. As stated earlier, if a constructive trust existed, title would remain in the name of appellant Peterson to be held in trust for “someone to whom it rightfully belongs.” As per respondent’s testimony, HRI’s assets and land would be held in trust for respondent’s benefit during her lifetime, and then to her heirs. The district court erred in transferring the title to respondent rather than ordering that it be held in trust, and it disregarded respondent’s testimony regarding her alleged intent that the property was to be held in trust for her heirs.

VIII.

Appellants also argue that respondent orally waived any claim that she may have had to HRI’s assets and land. This argument is based on respondent’s testimony that James Peterson would not have signed a release of claims to HRI’s assets and land if he did not have any in the first place. Therefore, because James Peterson had an interest in HRI, so did respondent and she did not sign a release of her claims. Appellants argue that based on the agreement respondent and James Peterson reached during their divorce regarding ownership of the campground, respondent and James Peterson agreed to sign away any claims that they may have had in HRI. Respondent was supposed to sign a release and never did so; however, her oral agreement to release the claims was ignored by the court. There is no evidence, besides appellant Peterson’s testimony, to support the fact that respondent was supposed to sign a release to any claims she may have had to HRI’s assets and land. Further, the fact that James Peterson signed a release to any claims he may have had to HRI’s assets and land is not proof that he actually had any valid claims.

IX.

Finally, appellant Peterson argues that she is entitled to a new trial. This argument is based on the fact that she had to proceed to trial unrepresented. After appellant Peterson’s attorney of record withdrew, the district court informed her that trial would not be postponed for lack of counsel. Appellant Peterson proceeded pro se. Appellant Peterson’s lack of counsel at trial is not a sufficient ground to grant her a new trial.

DECISION

Because appellants did not file a petition for mandamus following the district court’s ruling on the demand for change of venue, we decline to address the district court’s venue ruling. The district court abused its discretion in finding that the unclean-hands doctrine did not apply in this case and should not have invoked its equitable powers. Further, the inadequacy of consideration for the transfer of HRI’s assets and land to appellant Peterson from her grandmother for $1 was not a “shock to the conscience.” Respondent also did not have standing to challenge the transaction between Obelyn Peterson and appellant Peterson because she failed to present clear and convincing evidence that she had an ownership interest in HRI’s assets and land. While respondent claims that HRI’s assets and land were to be held in trust for her benefit, there is no evidence of a conveyance between respondent and appellant Peterson, and any conveyance would have been subject to the writing requirement under the statute of frauds. The district court clearly erred in finding that a constructive trust existed, and in finding that because of the constructive trust, title to HRI’s assets and land should be transferred to respondent. Finally, there is no evidence to support appellant Peterson’s claim that respondent orally waived her claims to HRI’s assets and land, and appellant Peterson’s lack of counsel at the time of trial is not a sufficient ground to grant her a new trial. The district court’s order that appellant Peterson convey all right, title, and interest in HRI’s assets and land to respondent is reversed.

Affirmed in part and reversed in part.

      . To the extent that certain appellate opinions could be read to permit review of a district court's venue decision on appeal from a final judgment or in another non-mandamus manner, we note that the parties cite, and research reveals, no case in which the propriety of challenging a district court's venue decision in a non-mandamus manner was addressed, meaning such cases are distinguishable. See Skelly Oil Co. v. Comm’r of Taxation, 269 Minn. 351, 371, 131 N.W.2d 632, 645 (1964) (stating that opinion language must be read in light of issue presented); Chapman v. Dorsey, 230 Minn. 279, 288, 41 N.W.2d 438, 443 (1950) (deciding appeal based on the assumption that appellate jurisdiction existed, without actually addressing whether it did, is not precedential regarding existence of appellate jurisdiction). Moreover, consistent with the idea that venue objections can be waived if not promptly raised, the parties cite, and research reveals, no case in which venue-related relief was granted on appeal from a final judgment after a trial had occurred. See Kowalke v. Lutheran Welfare Soc'y of Minneapolis (In re Guardianship of Kowalke), 232 Minn. 292, 306-07, 46 N.W.2d 275, 284 (1950) (stating "[ajppellants cannot be allowed to save their objection to the venue awaiting the probate court's decision on their own petition, and then, after suffering an adverse decision, raise their objection to the venue for the first time on appeal to the district court.”)


author: HUDSON, Judge.

text:
    STATE of Minnesota, Respondent, v. Tavon Tarrel TIMBERLAKE, Appellant.
    No. A06-72.
    Court of Appeals of Minnesota.
    Jan. 16, 2007.

      Lori. Swanson,' Attorney General, St. Paul, MN and Susan Gaertner, Ramsey County Attorney, Mark Nathan Lystig, Assistant County Attorney, St. Paul, MN, for respondent.
    John M. Stuart, State Public Defender, Susan Andrews, Assistant State Public Defender, Minneapolis, MN, for appellant.
    Considered and decided by MINGE, Presiding Judge; HUDSON, Judge; and HUSPENI, Judge.

       Retired judge of the Minnesota Court of Appeals, serving by appointment pursuant to Minn. Const, art. VI, § 10.

   OPINION

HUDSON, Judge.

Appellant Tavon Timberlake challenges the district court’s order denying his motion to suppress evidence of a gun found during an investigative Terry stop of the car in which he was the passenger. Appellant argues that the district court erred in concluding that the officers who initiated the stop articulated a particularized and objective basis for suspecting appellant of criminal activity. Because we conclude that the facts available to the police officers at the inception of the stop were insufficient to form a reasonable suspicion that appellant was engaged in criminal activity, we reverse.

FACTS

On May 30, 2004, at approximately midnight, two St. Paul police officers answered a call from dispatch informing them that an identifiable private citizen had witnessed a black male at a convenience store on the corner of Maryland and Arkwright drop or set down what appeared to be a handgun as he got out of the passenger side of a white Pontiac Grand Prix. The informant stated that the black male quickly picked up the gun and got back into the car, which was being driven by a black female. The informant did not provide a license plate number; nor did the informant indicate that the black male had committed a crime or that the black female appeared to be in danger.

The officers testified that they were seven blocks from the convenience store when the call came in and were able to arrive at the scene in about fifteen to twenty seconds. As the officers approached the scene, dispatch informed them that the private citizen witnessed the car leave the convenience store heading east on Maryland. Traveling north on Arkwright, the officers noticed a white Pontiac Grand Prix heading east on Maryland approaching Arkwright. The officers testified that from their position they could see that a black female was driving the car and that a black male was the passenger.

The officers followed the car until backup arrived, and then they initiated a traffic stop of the car. Before initiating the stop the officers did not run the license plate, testifying that “[a]t that point, that was not a priority.” Nor did the officers testify that they observed anything unusual or suspicious about the car, the manner in which it was driven, or the actions of the occupants that would independently warrant initiating a Terry stop.

After pulling the car over and ordering both occupants to exit the car, the officers discovered a handgun lying in plain view on the passenger-side floor. Appellant was arrested and charged with being a felon in possession of a firearm in violation of Minn.Stat. § 624.713, subd. 1(b) (Supp. 2003). At the Rasmussen hearing, appellant moved to suppress the gun, arguing that the gun was the product of an unreasonable search and seizure. The district court denied the motion. In its findings of fact and order, the district court relied on the officers’ testimony that after they initiated the stop they witnessed appellant making furtive movement's, which heightened their suspicions that appellant had a gun. After a jury trial, appellant was found guilty as charged. The district court sentenced appellant to sixty months in prison. This appeal follows.

ISSUE •

Did the district court err by concluding that at the inception of the stop the police officers had a particularized and objective basis for suspecting appellant of criminal activity?

ANALYSIS

Appellant challenges the district court’s order denying his motion to suppress evidence that he possessed a gun, arguing that the traffic stop was an unlawful seizure. We review the legality of an investigatory Terry stop de novo. State v. Schrupp, 625 N.W.2d 844, 846 (Minn.App.2001), review denied (Minn. July 24, 2001).

A person has a constitutional right to not be subjected to an unreasonable search and seizure. U.S. Const, amend. IV; Minn. Const, art. I, § 10. Any evidence gathered pursuant to . an unreasonable seizure must be suppressed. State v. Harris, 590 N.W.2d 90, 99 (Minn.1999). A seizure occurs when an officer, by means of physical force or show of authority, has in some way restrained the liberty of a person. Id. at 98. The relevant inquiry is whether based on the totality of the circumstances a reasonable person would believe that he or she is neither free to disregard the police nor free to terminate the encounter. Id.; In re Welfare of E.D.J., 502 N.W.2d 779, 783 (Minn.1993).

In determining if a stop is an unreasonable seizure, courts examine “whether the officer’s action was justified at its inception, and whether it was reasonably related in scope to the circumstances.” Terry v. Ohio, 392 U.S. 1, 19-20, 88 S.Ct. 1868, 1879, 20 L.Ed.2d 889 (1968). The stop cannot be the product of mere whim, caprice, or idle curiosity. State v. Munson, 594 N.W.2d 128, 136 (Minn.1999); see also Terry, 392 U.S. at 22, 88 S.Ct. at 1880 (“[I]ntrusion[ ] upon constitutionally guaranteed rights based on nothing more substantial than inarticulate hunches, [is] a result this Court has consistently refused to sanction.”). In justifying the intrusion upon a personas privacy, the police must be able to “point to specific and articulable facts which, taken together with rational inferences from those facts, reasonably warrant that intrusion.” Terry, 392 U.S. at 21, 88 S.Ct. at 1880. The Supreme Court has stated that this standard is satisfied if based upon the “totality of the circumstances” the officers initiating the stop have a “particularized and objective basis for suspecting the particular person stopped of criminal activity.” United States v. Cortez, 449 U.S. 411, 417-18, 101 S.Ct. 690, 695, 66 L.Ed.2d 621 (1981). This test has two elements that must be present before the stop is permissible. Id. at 418, 101 S.Ct. at 695. First, the officer’s suspicion must be based on an assessment of all of the circumstances. Id. This permits the officer to draw inferences and deductions that might elude an untrained individual. Id.; Harris, 590 N.W.2d at 99. Second, the officer’s assessment of all of the circumstances must lead the officer to suspect “that the particular individual being stopped is engaged in wrongdoing.” Id.

Activity consistent with innocent behavior may justify a suspicion of criminal activity. State v. Johnson, 444 N.W.2d 824, 826 (Minn.1989). But the officer must-be able to articulate “objective facts that, by their nature, quality, repetition, or pattern become so unusual and suspicious that they support at least one inference of the possibility of criminal activity.” Sehrupp, 625 N.W.2d at 847-48.

The officer’s reasonable suspicion does not have to be based upon the officer’s personal observations. In re Welfare of G.M., 560 N.W.2d 687, 691 (Minn.1997). An officer may rely on an informant’s tip if the tip has sufficient indicia of reliability. Id. In assessing the reliability of a tip, courts examine the informant and the basis of the informant’s knowledge. Id. A private citizen who is identifiable or identified is presumed to be reliable. Rose v. Comm’r of Pub. Safety, 637 N.W..2d 326, 328 (Minn.App.2001), review denied (Minn. Mar. 19, 2002). In judging the basis of the informant’s knowledge, courts examine (1) the quantity and quality of detail in the informant’s report, and (2) the officer’s independent verification of the details in the informant’s report. Alabama v. White, 496 U.S. 325, 330-32, 110 S.Ct. 2412, 2416, 110 L.Ed.2d 301 (1990). .

It is “without question [that] the stopping of a vehicle and the detention of its occupants constitutes a seizure.” E.D.J., 502 N.W.2d at 782 (quotation omitted). A passenger in a vehicle stopped by the police has standing to contest the legality of the stop. State v. Ritchie, 379 N.W.2d 550, 552-53 (Minn.App.1985), review denied (Minn. Feb. 14, 1986). Thus, appellant has a “protectible Fourth Amendment interest in not being stopped unless the police officers were able to justify the stop based on the standards set forth in Terry and ... Cortez.” Id.

Appellant contends that the district court erred by concluding that the officers articulated a particularized and objective basis for suspecting appellant of criminal activity. The district court’s decision was based primarily on the fact that appellant was in possession of a gun while riding in a car late at night. We are thus called upon again to balance the state’s interest in public safety against an individual’s Fourth Amendment guarantee. That always delicate task is especially difficult here, as no Minnesota case has decided the precise issue of whether mere possession of a gun amounts to reasonable suspicion that criminal activity is afoot. Further, both parties presented compelling arguments in support of their respective positions. That said, we conclude that the Terry stop violated appellant’s constitutional rights.

At the inception of the stop, all that the officers knew was thát an informant Had witnessed a black male in possible possession of a handgun near a convenience store, and that the black male had left the convenience store heading east on Maryland in a white Pontiac Grand Prix driven by a black female. The officers were able to verify that a white Pontiac Grand Prix, being driven by a black female with a black male passenger, was heading east on Maryland approaching Arkwright.

Because the informant was an identifiable private citizen, and the officers were able to. verify details of the informant’s report before initiating the stop, it was reasonable for the officers to suspect that someone in the white Pontiac Grand Prix was in possession of a gun. But in Minnesota, possession of a firearm in a motor vehicle is lawful if the possessor has a permit. Minn.Stat. § 624.714, subd. la (Supp.2003). Nevertheless, respondent contends that because possession of a gun in a public place is unlawful without a permit, the officers had reasonable suspicion to believe that appellant was committing a crime — i.e., that he did not have a permit. But it is equally plausible that appellant did have a permit. Accordingly, we conclude that mere suspicion that a person possesses a gun is insufficient to warrant a Terry stop, absent additional particular and objective facts which create a reasonable suspicion that the possessor does not have a permit or is otherwise about to commit a crime.

Our holding is supported by our decisions in State v. Balenger, 667 N.W.2d 133 (Minn.App.2003), review denied (Minn. Oct. 21, 2003), and State v. Ritchie. In Balenger, an identifiable informant walked up to a police officer and told them that a woman wearing a hat and an L.A. Lakers jersey had just pointed a gun at the informant’s friend. 667 N.W.2d at 136. The informant identified Balenger as the perpetrator. Id. The-police stopped her and discovered a gun. Id. The district court granted Balenger’s motion to suppress the gun and dismissed the case. Id. This court reversed the district court holding that the detaining officers performed a lawful Terry stop because “the circumstances warranted [the officer’s] belief that his safety and the safety of others was threatened.” Id. at 138.

In Ritchie, police responded to a call that an individual was pointing a gun at somebody. 379 N.W.2d at 551. The district court determined that the stop was unlawful and suppressed all evidence seized because the vehicle that the officers stopped was initially sighted in an area inconsistent with the informant’s information. Id. at 551-52. This court reversed the district court, holding that the stop was reasonable because the officers (1) arrived in three or four minutes at the scene where a reported crime was in progress; (2) dispatch supplied the officers with a description of the suspects and the vehicle they were traveling in; and (3) a vehicle matching the description was “intercepted and stopped within the close vicinity” of the scene of the crime. Id. at 553.

Balenger and Ritchie are significant because in both cases the officers were able to point to particular and objective facts that, together with reasonable inferences from those facts, created a reasonable suspicion that a particular individual suspected of possessing a gun was also engaged in some type of criminal activity, namely pointing a gun at the respective victims. Furthermore, our decisions in Balenger and Ritchie are consistent with the Supreme Court’s decisions in Terry and Cortez. In Terry the Supreme Court stated the detaining officer was justified in conducting an investigative stop because the officer was able to point to conduct that was arguably innocent on its face, but which in the aggregate led the officer to reasonably suspect that the plaintiff was about to commit a daytime robbery. 392 U.S. at 22-23, 88 S.Ct. at 1880-81. Likewise in Cortez the Supreme Court sustained the reasonableness of a traffic stop because the officers were able to point to a compilation of facts that may have eluded an untrained person which warranted a reasonable suspicion that the car they stopped was transporting illegal immigrants. 449 U.S. at 419-22, 101 S.Ct. at 695-97.

In contrast, here, the informant did not accuse appellant of pointing the gun at anyone or indicate that appellant was engaged in any other criminal activity. Nor did the informant provide any facts that would reasonably support a belief that the driver was in danger. Based on the information available at the inception of the stop, the officers were not warranted in believing that their safety or the safety of anyone else was in danger, or that appellant had or was planning to commit a crime.

In addition, there is nothing in the record that would independently support a reasonable suspicion that appellant did not have a permit to carry the gun. We note first that the informant did not know whether appellant had a permit for the gun, and neither party claims otherwise. Second, the officers did not have any knowledge as to the identities of the driver or the passenger or their status with regard to possession of a firearm. Third, the officers did not “run” the license plate of the vehicle before initiating the stop in order to ascertain who the registered owner of the car was and whether that person was licensed to carry a firearm. Fourth, the officers articulated nothing about the manner in which appellant was handling the gun or the surrounding circumstances which in their experience led them to believe that appellant might not have a permit. In sum, the officers did not articulate any facts which would permit a conclusion that their suspicion that appellant was unlawfully possessing a firearm was based on anything other than an “inchoate and un-particularized suspicion or hunch.” Terry, 392 U.S. at 27, 88 S.Ct. at 1883.

Finally, we note that it appears the district court based its decision, in part, on the officers’ testimony that after pulling the car over they witnessed appellant making furtive movements. But it is well established that the officers’ reasonable suspicion must be based on facts that existed at the inception of the stop. Id. at 19-20, 88 S.Ct. at 1879. Thus the district court’s reliance on this testimony is misplaced.

Although the standard for an investigative stop is less than what is needed for an arrest, “[a] brief stop is considered a seizure and an individual who is stopped is entitled to Fourth Amendment protection.” Ritchie, 379 N.W.2d at 553. On this record, the officers did not articulate a particularized and objective basis for suspecting appellant of criminal activity, and thus the Terry stop of the car subjected appellant to an unreasonable search and seizure in violation of both the United States and Minnesota Constitutions.

The dangers and challenges facing law enforcement officers are well-known and need not be detailed here. And, for that reason, our opinion should not be read to suggest that the officers were not acting in good faith while carrying out their duty of protecting the public’s safety, health and welfare. But “good faith on the part of the arresting officer is not enough.” Terry, 392 U.S. at 22, 88 S.Ct. at 1880 (quotation omitted). Terry requires a particularized and objective basis for suspecting appellant of criminal activity, and that simply was not present here.

DECISION

Because the officers lacked a particularized and objective basis for suspecting that appellant did not have a permit to carry a gun or that appellant was engaged in some other type of criminal activity, the district court erred by denying appellant’s motion to suppress evidence obtained during the Terry stop of the car appellant was riding in.

Reversed.

      . Unpublished opinions of this court are not precedential. Dynamic Air, Inc. v. Bloch, 502 N,W.2d 796, 800 (Minn.App.1993); Minn. Stat. § 480A.08, subd. 3(c) (2004). They can, however, be of persuasive value. Dynamic Air, 502 N.W.2d at 800. Accordingly, we note that in State v. McCurtis, this court held that the detaining officers were justified in performing a Terry stop of appellant based on an informant’s tip that appellant possessed a gun because the officers knew who appellant was and that he had been arrested for gun-related charges in the past. 2005 WL 1804303 (Minn.App. Aug.2, 2005). The officers here possessed no such independent information about appellant.


text:
    Irina Alexandrovna JOHNSON, and on behalf of Angelique Nina JOHNSON, petitioner, Appellant, v. Bryan Craig JOHNSON, Respondent.
    No. A06-977.
    Court of Appeals of Minnesota.
    Jan. 30, 2007.

      Brenda S. Denton, Legal Aid Service of Northeastern Minnesota, Duluth, MN, for appellant.
    Bill L. Thompson, Duluth, MN, for respondent.
    Considered and decided by MINGE, Presiding Judge; SHUMAKER, Judge; and HUDSON, Judge.
   OPINION

HUDSON, Judge.

In November 2004, the district court granted appellant Irina Alexandrovna Johnson an emergency ex parte order for protection (“OFP”) against respondent Bryan Craig Johnson. In August 2005, the district court dismissed the OFP after an evidentiary hearing. During an unrelated September 2005 marriage-dissolution hearing, respondent requested attorney fees for costs incurred defending against the previously dismissed OFP. The district court subsequently ordered - appellant to pay respondent’s attorney fees incurred defending against the OFP. Appellant argues that the fee award constitutes an abuse of discretion because respondent did not adhere to the statutory “safe-harbor” requirements of Minn.Stat. § 549.211 (2004) and Minn. R: Civ. P. 11. Because the mandatory “safe-harbor” provisions of Minn.Stat. § 549.211 (2004) and Minn. R. Civ. P. 11 were not met, we reverse.

FACTS

Appellant and respondent were married in 1999. Appellant left the relationship in November 2004, when she departed their home with a police escort. In November 2004, she petitioned for and was granted an emergency ex parte order for protection against respondent. In December 2004, the district court issued an OFP after respondent failed to appear for the hearing. Appellant alleged a history of domestic violence, physical assault, and emotional abuse, including respondent’s threats to kill her and himself if she left him or sought child support. Appellant contends that she feared for her own safety. Immediately after receiving notice of the OFP, respondent took steps to vacate the default judgment. Both parties agreed to an evidentiary hearing, at which the district court found the testimony of respondent “overwhelmingly credible” and the testimony of appellant “incredible and not to be believed.” The district court dismissed the ex parte OFP with prejudice, stating that appellant “failed to prove by a preponderance of the evidence” that domestic abuse had occurred.

At a pretrial hearing in a separate proceeding to dissolve the parties’ marriage, respondent made an oral request for attorney fees incurred in the OFP proceeding. The issue was scheduled for hearing and respondent subsequently filed a letter with the court seeking attorney fees incurred in the OFP proceeding. A copy of the letter was sent to opposing counsel. The letter was accepted by the district court as a notice of motion and motion for fees incurred defending against the ex parte OFP. The October 2005 hearing concerned only the issue of attorney fees. Counsel for appellant admitted at the hearing to receiving a letter from respondent requesting attorney fees but “did not view it as a motion.”

In December 2005, the district court awarded attorney fees to respondent under Minn.Stat. § 549.211 (2004) and Minn. R. Civ. P. 11, allowing respondent to recover the entirety of the funds expended to defend against appellant’s “unsubstantiated and unfounded allegations.” Appellant’s informal petition for reconsideration was denied. The district court found that the letter sent by respondent in September 2005 was adequate notice as it was supplied to both the district court and opposing counsel. This appeal follows.

ISSUE

Did the district court err as a matter of law in awarding respondent attorney fees without applying the “safe-harbor” provisions of MinmStat. § 549.211 (2004) and Minn. R. Civ. P. 11?

ANALYSIS

Appellant argues that the district court abused its discretion when it awarded respondent attorney fees without requiring respondent to follow the applicable statutory and procedural guidelines. An award of attorney fees is reviewed for an abuse of discretion. Becker v. Alloy Hardfacing & Eng’g Co., 401 N.W.2d 655, 661 (Minn.1987). Here, however, the issue is whether the district court misinterpreted Minn.Stat. § 549.211 (2004) and Minn. R. Civ. P. 11 when it failed to apply the “safe-harbor” provision of the statute and rule. Appellate courts review a district court’s interpretation of statutes and rules de novo. Weston v. McWilliams & Assocs., 716 N.W.2d 684, 638 (Minn.2006) (statutes); Rubey v. Vannett, 714 N.W.2d 417, 421 (Minn.2006) (rules).

The mandatory opportunity to respond to a motion for attorney fees made under Minn.Stat. § 549.211 or rule 11 is provided for in the “safe-harbor” provisions of those authorities. Minn. R. Civ. P. 11.03(a)(1) “independently requires that a party seeking sanctions serve its motion on the non-moving party, wait for 21 days, and, if the challenged material has not been withdrawn or corrected by then, file the motion for sanctions in the district court.” Gibson v. Coldwell Banker Burnet, 659 N.W.2d 782, 789 (Minn.App.2003). This “safe-harbor” provision is intended to give the offending party time to “withdraw the improper papers or otherwise rectify the situation.” Id. at -790. Minn.Stat. § 549.211, subd. 4(a) (2004) includes an almost identically worded “safe-harbor” provision.

A request for conduct-based attorney fees made under MinmStat. § 549.211 or rule 11 that arises out of the conduct of a party in a district court proceeding must be presented to the district court at a stage in the proceedings where the deterrent effect of the applicable rule and statute will be advanced. Empire Fire & Marine Ins. Co. v. Carlson, 476 N.W.2d 666, 669 (Minn.App.1991). “Since one of the primary purposes of Rule 11 is to deter litigation abuse, this notice should be given as early as possible during the proceedings to provide the attorney and party the opportunity to correct future conduct.” Id. “A policy of deterrence is not well served by tolerating abuses during the course of an action and then punishing the offender after the trial is at an end.” Id.

Here, appellant argues that the September 2005 letter from respondent requesting attorney fees did not provide her with the opportunity to respond or correct her action under Minn.Stat. § 549.211, subd. 4(a), or Minn. R. Civ. P. 11.03(a). Specifically, appellant asserts that notice was not received until after the district court dismissed the OFP in August 2005. The record supports appellant’s position. Respondent first requested attorney fees orally at an unrelated marriage-dissolution hearing in September 2005. The letter requesting attorney fees followed soon thereafter. The request for attorney fees was entered after the conclusion of litigation regarding the OFP and therefore does not advance the purpose of deterrence under the statute and the rule.

The proper procedure for obtaining a domestic-abuse-related OFP in Minnesota is codified in Minn.Stat. § 518B.01 (2004). The procedure for obtaining an ex parte OFP is fast-moving, and thus adherence to the procedural guidelines set forth in Minn.Stat. § 549.211 and Minn. R. Civ. P. 11 is admittedly difficult. But for the recovery of attorney fees under these provisions, it would require legislative action to make an exception to the “safe-harbor” requirement where the party seeking attorney fees has been subject to a bad-faith ex parte OFP. See Martinco v. Hastings, 265 Minn. 490, 497, 122 N.W.2d 631, 638 (1963) (holding that a change in the statutes must come from the legislature).

Because respondent’s oral request and letter requesting attorney fees came after the dismissal of the OFP and almost nine months after respondent’s first motion to modify the OFP, they fail to satisfy the “safe-harbor” provisions of the statute and the rule. Appellant was not afforded time to withdraw or appropriately correct the challenged conduct pursuant to Minn. Stat. § 549.211 and Minn. R. Civ. P. 11. While the district court has the authority to assess sanctions under these provisions, that authority is circumscribed by the 21-day “safe-harbor” provisions of the statute and the rule. By failing to apply the mandatory “safe-harbor” provision, the district court erred as a matter of law.

DECISION

Because we conclude that the district court erred as a matter of law when it awarded attorney fees despite respondent’s failure to adhere to the mandatory “safe-harbor” provisions of Minn.Stat. § 549.211 (2004), and Minn. R. Civ. P. 11, we reverse.

Reversed.