Iowa State Bank & Trust Co. v. Michel

• Decision Date: 12 May 2004
• Docket Number: No. 02-1055.,02-1055.
• Citation: 683 N.W.2d 95
• Parties: IOWA STATE BANK & TRUST CO., Appellee, v. Phillip H. MICHEL and Marci K.Z. Michel, Appellants.
• Court: Iowa Supreme Court

683 N.W.2d 95

IOWA STATE BANK & TRUST CO., Appellee, v. Phillip H. MICHEL and Marci K.Z. Michel, Appellants.

No. 02-1055.

Supreme Court of Iowa.

May 12, 2004.

As Modified Upon Denial of Rehearing July 9, 2004.

Thomas L. Fiegen, Susan Daufeldt, and John G. Daufeldt of Fiegen Law Firm, P.C., Cedar Rapids, for appellants.

Gregg Geerdes, Iowa City, for appellee.

TERNUS, Justice.

This case concerns efforts by the plaintiff, Iowa State Bank & Trust Co., to reach homestead property owned by the defendants, Phillip and Marci Michel, to satisfy a personal judgment entered against the defendants on a defaulted loan. Although the Michels waived the statutory homestead exemption applicable to their property when they mortgaged the property as security for the loan, they did not sign the agricultural homestead disclosure required by Iowa Code section 561.22 (1997) for homestead exemption waivers on agricultural property. The trial court held the mortgage was enforceable despite the absence of a signed disclosure, after determining that the Michels' forty-seven-acre parcel was not agricultural land subject to section 561.22. In addition to upholding the written mortgage, the trial court found the bank was entitled to an equitable mortgage under various equitable theories. Finally, the court held that even if the bank was not entitled to foreclose on the defendants' homestead, their homestead, by statute, was limited to forty acres.

On the defendants' appeal, the court of appeals concluded the homestead was agricultural property within the meaning of section 561.22, rendering the bank's mortgage unenforceable. The court of appeals affirmed the district court, however, concluding the bank was entitled to an equitable mortgage.

The Michels were granted further review. Upon our consideration of the arguments of the parties, we think the court of appeals was only partially correct. We agree the defendants' property is agricultural land and therefore the bank's mortgage is unenforceable as to the homestead because the bank did not have the debtors sign the required agricultural homestead disclosure. On the other hand, we do not think the bank is entitled to an equitable mortgage. Accordingly, we vacate the court of appeals decision.

The Michels did not contest the trial court's alternative ruling that their homestead rights are limited to forty acres, thereby rendering seven acres of their property subject to foreclosure under the mortgage. Consequently, we affirm the trial court's judgment of foreclosure with respect to seven acres of the defendants' property and reverse the district court's judgment foreclosing the bank's mortgage on the Michels' forty-acre homestead.

I. Scope of Review.

Review of an equitable claim to foreclose a mortgage is de novo. Beal Bank v. Siems, 670 N.W.2d 119, 123 (Iowa 2003). "In equity cases, especially when considering the credibility of witnesses, the court gives weight to the fact findings of the district court, but is not bound by them." Iowa R.App. P. 6.14(6)(g).

II. Background Facts and Proceedings.

The Michels own forty-seven acres of land in rural Johnson County, Iowa. The area is zoned residential, although land in the vicinity of their property includes farms as well as residential areas. The defendants' home is located on this land and there is no dispute forty acres of the property qualifies as their homestead. See Iowa Code §§ 561.1 (defining "homestead"), 561.2 (limiting homestead not in city plat to forty acres). In addition to residing on the property, the Michels use eight acres of their land to pasture horses that they keep for their personal use. The defendants rotate corn, soybeans, oats, and hay on fifteen acres of their land and another fifteen acres is currently enrolled as a forest reservation.¹

In 1998 the defendants borrowed $225,000 from the bank to finance their investment in a convenience store. As security for the loan, they gave the bank a second mortgage on their property. Included in the mortgage agreement was a specific waiver of "all homestead or other exemptions to which [the Michels] would otherwise be entitled under any applicable law." In addition, the mortgage included the language required by Iowa Code section 561.22, but the bank, operating under the belief that the defendants' property was not "agricultural land," did not check the box by this section of the mortgage to indicate its applicability nor did the bank have the Michels sign and date this provision as required by the statute.

The convenience store was unsuccessful, causing the Michels to default on their loan. The bank then filed a petition to foreclose on the mortgage and requested a personal judgment against the defendants as well. The bank also raised various equitable theories for relief. The Michels asserted the bank's noncompliance with section 561.22 barred foreclosure.

After trial, the district court ruled the Michels' property was not agricultural land and therefore the bank did not have to obtain the signed disclosure required when the owner of agricultural land waives the homestead exemption. The court relied on several factual findings: (1) 32 of the 47 acres owned by the Michels had never been used for agricultural purposes; (2) no net income had ever been generated from the production activities conducted on the other fifteen acres, which had been used at various times to grow hay, soybeans, oats, and corn; (3) the defendants had never worked the land themselves, but had entered into crop-share leases with tenants; and (4) the property was zoned residential because, according to the county assessor, there was no bona fide farming operation on the land. Even though the court concluded section 561.22 did not apply and the mortgage was valid, it also held that each of the equitable theories asserted by the bank as a basis for equitable relief — equitable mortgage, specific performance, waiver/estoppel, reformation, constructive trust, and subrogation — were proven.

Based upon its findings of fact and conclusions of law, the district court entered judgment against the defendants in the sum of $292,704.48 plus interest. The court held the judgment was secured by the mortgage given on the Michels' homestead and that the mortgage was enforceable against the defendants' interest in that property. To carry out the equitable remedies found to be applicable, the court ordered the defendants to sign a mortgage and homestead waiver in favor of the bank. The court also deemed the bank to be a beneficiary of a constructive trust and holder of an equitable mortgage that the bank could enforce by sheriff's sale. Finally, the court held that even if the bank had failed to obtain a valid waiver of the defendants' homestead exemption, only forty of the forty-seven acres were exempt. In a post-trial ruling, the court awarded the bank attorney fees.

The defendants appealed, alleging error in the court's enforcement of the mortgage and the award of attorney fees. The Michels did not contest the personal judgment entered against them for the balance due on their loan. After filing the appeal, the defendants posted a supersedeas bond in order to stay proceedings under the judgment. As security for the bond, the Michels pledged their forty-seven-acre property.

The case was transferred to the court of appeals. Initially, the court rejected the bank's claim that the appeal was moot since the defendants had signed a waiver incorporating the agricultural homestead disclosure required by section 561.22 when they posted their land as security for the bond. The court then determined the Michels' property was agricultural land because it was "suitable for use in farming," as that phrase is used in the statutory definition of "agricultural land" found in Iowa Code section 9H.1(2). Based on this conclusion, the court of appeals held the bank's mortgage was unenforceable because the bank had not obtained the signed disclosure required by section 561.22. Nonetheless, because the evidence clearly established that the Michels knew they were mortgaging their homestead and intended to do so, the court held the bank had an equitable mortgage on the property that it could foreclose. As a final matter, the court rejected the defendants' challenge to the attorney fee award. The court ruled that the post-trial decision on attorney fees addressed a collateral matter and the defendants were required to file a separate notice of appeal to contest this award, which they had not done.

We granted the Michels' application for further review. They claim the court of appeals erred in ruling the bank was entitled to an equitable mortgage and in requiring a separate appeal of the attorney fee award. Although the bank resisted the defendants' application, it asserted that in the event further review was granted, this court should correct the court of appeals' decision in two particulars: (1) rule that the Michels' property was not agricultural land subject to the protection of section 561.22; and (2) hold that the posting of the homestead as security for the supersedeas bond waived the defendants' claim that the property was exempt. Should it become necessary, the bank also asks that we consider the other equitable theories the district court found applicable.

III. Effect of Using Homestead Property as Security for Supersedeas Bond.

The bank contends this appeal is moot because it can collect the unchallenged personal judgment under the terms of the bond, reaching the homestead property in this manner. This argument is based on the bank's supposition that the defendants' failure to appeal the personal judgment operated as an affirmance of that judgment, thereby making the bond available to satisfy it. We agree with the court of appeals that this argument has no merit.

The weakness in the bank's argument is revealed by an examination of two provisions of the Iowa Rules of Appellate Procedure. Rule 6.7(1) requires...