Best if printed in landscape.

Intangible Property

This page introduces the concept of intangible property; that is, property rights exist even though there is no physical item of property. In this North Dakota case, the court's decision is based in part on whether the right to use water is an item of property. As in many states, the right for an individual to use water in North Dakota is granted by state government.

Lake Region Credit Union v. Crystal Pure Water, Inc., 502 N.W.2d 524 (N.D. 1993)

Levine, Justice.

Franzella Gilliss appeals from a district court judgment foreclosing mortgages on real property, foreclosing security interests, and enforcing personal guaranties. We affirm.

Crystal Pure Water [Crystal] is a closely held corporation which bottles spring water and distilled water. Crystal is owned by Russell Gilliss, Sr., Franzella Gilliss, Bruce Gilliss, and Renae Gilliss. The corporation's bottling plant is located on a .9 acre tract of land, referred to as the one-acre tract, in Eddy County. The wells and springs are located on a surrounding 50.63 acre tract, referred to as the fifty-acre tract. Since 1984, title to the one-acre tract has been held by the corporation. Russell and Franzella Gilliss resided on and held title to the fifty-acre tract.

The corporation and the Gillisses encountered financial difficulties, and in 1987 the First State Bank of New Rockford sued to foreclose a mortgage on the fifty-acre tract. A sheriff's sale was held on July 30, 1987.

The Gillisses contacted Lake Region Credit Union [hereafter Credit Union] seeking to refinance their operation. The Credit Union agreed to loan $125,000 to Crystal to purchase the sheriff's certificate from First State Bank, pay off other outstanding debts and judgments, and pay insurance and taxes. The Credit Union took real estate mortgages against both tracts and received security interests in all of the corporation's personal property, including a water permit. The Gillisses each personally guarantied the corporate debt.

The parties agreed that, upon the refinancing, title to both tracts of land would be held by the corporation. The sheriff's certificate was purchased in the Credit Union's name, and it received a sheriff's deed when the period for redemption expired. The Credit Union then executed and tendered a quit claim deed of the fifty-acre tract to Crystal. The Gillisses apparently refused to accept the deed executed to the corporation, desiring to hold the fifty-acre tract individually.

The corporation defaulted on the loan, and the Credit Union brought this action to foreclose its mortgages and security interests, and to recover on the personal guaranties. Bruce and Renae Gilliss settled with the Credit Union before trial. The matter was tried to the court. Judgment was entered in favor of the Credit Union foreclosing its mortgages and security agreements, and against the Gillisses on their personal guaranties. The court also appointed a trustee to protect the property. Franzella Gillis appealed.

...

Franzella asserts that the trial court erred in granting foreclosure of the Credit Union's security interest in "an absolute and perfected state water permit." Franzella has not cited any cases, authorities, or supportive reasoning for her assertion. Although her argument on this issue is somewhat confusing, we presume that she means to assert that a perfected water permit is not a property right subject to a security interest under the Uniform Commercial Code, as codified at Title 41, N.D.C.C.

Section 41-09-02(1)(a), N.D.C.C. [U.C.C. 9-102], provides that a security interest may be created in personal property, including "general intangibles." Section 41-09-06, N.D.C.C. [U.C.C. 9-106], defines "general intangibles": "'General intangibles' means any personal property (including things in action) other than goods, accounts, chattel paper, documents, instruments, and money."

Although we have not found any case addressing whether a state water permit falls within the U.C.C. definition of general intangibles, other courts have held that similar permits and licenses issued by governmental authorities do constitute general intangibles subject to a security interest...

The provisions governing issuance, retention, and transferability of a state water permit are generally similar to those governing liquor licenses and other government-issued licenses and permits. See Chapter 61-04, N.D.C.C. There are specific criteria for issuance of a permit [Section 61-04-06, N.D.C.C.], procedures for revocation of a permit [Sections 61-04-23, -24, and -25, N.D.C.C.], and provisions for assignment or transfer of a permit [Section 61-04-15, N.D.C.C.]. We find no specific prohibition in Chapter 61-04 against creation of a security interest in a water permit. We conclude that a water permit is a general intangible under Section 41-09-06, N.D.C.C., and may be the subject of a valid security interest.

E-Mail agecinf@ndsuext.nodak.edu
Published by Agribusiness and Applied Economics
Morrill Room 217, P.O. Box 5636
North Dakota State University, Fargo, ND 58105-5636
Phone: (701) 231-7441
Fax: (701) 231-7400