Bank of America Nat. Trust and Sav. Ass'n v. Shirley, 95-2898

• Court: United States Courts of Appeals. United States Court of Appeals (8th Circuit)
• Writing for the Court: Before McMILLIAN, JOHN R. GIBSON and BEAM; McMILLIAN
• Citation: 96 F.3d 1108
• Parties: BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as Trustee for Farmer Mac Agricultural Real Estate Trust, Series 1992-2, Appellant, v. Bobby T. SHIRLEY; Patricia E. Shirley, Shirley AG Service, Inc., Appellees. Equitable Life Assurance Society of the United States; Western Farm Credit Bank; Federal Agricultural Mortgage Corporation; Iowa Bankers Association, Amicus Curiae.
• Docket Number: No. 95-2898,95-2898
• Decision Date: 23 October 1996

Page 1108

96 F.3d 1108 65 USLW 2225 BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as
Trustee for Farmer Mac Agricultural Real Estate
Trust, Series 1992-2, Appellant,
v.
Bobby T. SHIRLEY; Patricia E. Shirley, Shirley AG Service,
Inc., Appellees.
Equitable Life Assurance Society of the United States;
Western Farm Credit Bank; Federal Agricultural
Mortgage Corporation; Iowa Bankers
Association, Amicus Curiae. No. 95-2898. United States Court of Appeals,
Eighth Circuit. Submitted Dec. 11, 1995.
Decided Sept. 25, 1996.
Rehearing Denied Oct. 23, 1996.

Page 1109

Mark I. Levy, Washington, DC, argued (William E. Wallace, III, Edward B. Schwartz, and Leiv H. Blad, Jr., Washington, DC, K.J. Walker and Kasey W. Kincaid, Des Moines, IA, on the brief), for appellant.

Douglas E. Quinn, Omaha, NE, argued (Ronald L. Comes, on the brief), for appellees.

Before McMILLIAN, JOHN R. GIBSON and BEAM, Circuit Judges.

McMILLIAN, Circuit Judge.

Bank of America National Trust & Savings Association (BOA), as trustee for the Farmer Mac Agricultural Real Estate Trust, Series 1992-2, appeals from a final order entered in the District Court for the Southern District of Iowa granting partial summary judgment in favor of Bobby T. Shirley, Patricia Shirley and Shirley Ag-Service, Inc. (appellees). Bank of America National Trust & Savings Ass'n v. Shirley, No. 1-93-CV-100033 (S.D.Iowa May 19, 1994) (order granting partial summary judgment). For reversal BOA argues the district court erred in (1) construing Iowa Code Ann. § 535.9(2) (West 1987) to bar enforcement of a contractual prohibition against prepayment and (2) holding Iowa

Page 1110

Code Ann. § 535.9(2) was not expressly preempted by federal law. For the reasons discussed below, we hold federal law expressly preempts the state law and accordingly reverse the order of the district court.

The following statement of facts is taken in large part from the district court's order granting partial summary judgment. The material facts are not disputed. In December 1990 appellees borrowed $3 million which they promised to repay pursuant to a schedule set forth in a promissory note payable to 3 Rivers Investment, Inc. (3 Rivers). The loan was secured by a mortgage on several parcels of agricultural land. The note provided for an initial interest-only payment and then semi-annual payments of interest and principal in the amount of $175,560.76, over a term of 15 years, beginning on July 1, 1991, and ending on January 1, 2006. The promissory note included the following prohibition against prepayment, set forth in capital letters above the signature line: PAYMENTS IN EXCESS OF THE PAYMENTS PROVIDED FOR IN THIS NOTE ARE NOT PERMITTED.

3 Rivers then sold the loan to Prudential Insurance Co. and Prudential Agricultural Credit, Inc. (together Prudential). Prudential provided the funds that were distributed to appellees. After performing an updated appraisal of the mortgaged property, Prudential pooled the loan with other agricultural loans and sold the pool into the "secondary market" pursuant to the Federal Agricultural Mortgage Corp. program (Farmer Mac), and assigned it to BOA as trustee for Farmer Mac Agricultural Real Estate Trust, Series 1992-2. As a result, BOA owns the loan in its capacity as trustee for the holders of certain securities (certificate holders) pursuant to the pooling and servicing agreement between Prudential and BOA. Farmer Mac guarantees payment to the senior certificate holders.

In late June 1993 appellees contacted Prudential and asked for a "pay-off figure" so they could prepay the note. Prudential advised appellees that the note did not permit prepayments. Appellees responded that they had the right to prepay the note, regardless of the note's express terms, pursuant to Iowa Code Ann. § 535.9(2), which provides in pertinent part:

Whenever a borrower under a loan prepays part or all of the outstanding balance of the loan the lender shall not receive an amount in payment of interest which is greater than the amount determined by applying the rate of interest agreed upon by the lender and the borrower to the unpaid balance of the loan for a period of time during which the borrower had the use of the money loaned; and the lender shall not impose any penalty or other charge in addition to the amount of interest due as a result of the repayment of that loan at a date earlier than is required by the terms of the loan agreement.

In September 1993 BOA filed an action seeking declaratory judgment that Iowa Code Ann. § 535.9(2) did not make the no-prepayment term unenforceable. BOA argued that the state statute precluded penalties for prepayment but did not preclude prohibitions against prepayment, and, if the state statute did bar prohibitions against prepayment, federal law (Title VIII of the Farm Credit Act, 12 U.S.C. § 2279aa-12(d)) preempted the state statute. The parties filed cross-motions for summary judgment. The district court granted partial summary judgment in favor of appellees. The district court construed Iowa Code Ann. § 535.9(2) to prohibit prepayment penalties in the form of interest or other finance charges as well as contractual terms that prevent borrowers from prepaying any portion of the loan. The district court reasoned that the complete prohibition against prepayment is in effect a penalty of the most extreme kind. For this reason, the district court held that the promissory note term prohibiting prepayment was unenforceable. Slip op. at A-6 to A-9 (pagination as reproduced in addendum to Brief for Appellant), citing Los Quatros, Inc. v. State Farm Life Insurance Co., 110 N.M. 750, 800 P.2d 184 (1990), and Naumburg v. Pattison, 103 N.M. 649, 711 P.2d 1387 (1985). Accord Groseclose v. Rum, 860 S.W.2d 554 (Tex.Ct.App.-Dallas1993) (statute providing that prepayment charge or penalty may not be collected on loan construed to mean that a provision barring prepayment is a "penalty").

Page 1111

The district court also held that federal law, 12 U.S.C. § 2279aa-12(d), did not apply because the loan was not made by an "originator or certified facility." Slip op. at A-10. The district court found that the loan was "originated" by 3 Rivers, which is not an "originator or certified facility" under Farmer Mac, and not by Prudential, which is both an "originator," 12 U.S.C. § 2279aa(7), and a "certified facility," id. § 2279aa(3)(A). Slip op. at A-10.

Appellees had filed a counterclaim and third-party complaint against Prudential. Appellees dismissed their claims without prejudice, and both sides filed motions for entry of final judgment. The district court entered final judgment in favor of appellees and this appeal followed.

We review a grant of summary judgment de novo. The question before the district court, and this court on appeal, is whether the record, when viewed in the light most favorable to the non-moving party, shows that there is no genuine issue as to any material fact and that the moving party is...