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

• Decision Date: 23 October 1996
• Docket Number: No. 95-2898,95-2898
• 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.
• Court: U.S. Court of Appeals — Eighth Circuit

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.

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 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"). 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 entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c); see, e.g., Celotex Corp. v. Catrett, 477 U.S. 317, 322-23, 106 S.Ct. 2548, 2552-53, 91 L.Ed.2d 265 (1986); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249-50, 106 S.Ct. 2505, 2510-11, 91 L.Ed.2d 202 (1986); Get Away Club, Inc. v. Coleman, 969 F.2d 664, 666 (8th Cir.1992); St. Paul Fire & Marine Insurance Co. v. FDIC, 968 F.2d 695, 699 (8th Cir.1992). Where the unresolved issues are primarily legal rather than factual, summary judgment is particularly appropriate. E.g., Crain v. Board of Police Commissioners, 920 F.2d 1402, 1405-06 (8th Cir.1990). We agree with the district court that the only issues presented are questions of law; unlike the district court, however, we hold the federal law expressly preempts the state statute.

BOA first argues that the district court erroneously construed Iowa Code Ann. § 535.9(2) to bar enforcement of contractual terms prohibiting prepayment. BOA argues that the plain language of the state statute indicates that the statute does not apply to the right to prepay but only provides that lenders cannot enforce any prepayment penalties. In other words, BOA argues the state statute does not grant borrowers a right to prepay; rather, the state statute addresses the rights of borrowers and lenders when a right to prepay exists. BOA argues that the state statute does not address whether or in what circumstances a borrower may prepay; it merely bars enforcement of any penalties for prepayment. Moreover, BOA argues that a right to prepay should not be inferred from the silence in § 535.9(2). BOA contrasts § 535.9(2) with the state legislature's express provision of a right to prepay granted for real estate loans made by savings and loans in § 534.21(10) (now repealed) or by credit unions in § 533.16(11).

BOA also argues that construing Iowa Code Ann. § 535.9(2) to grant borrowers a right to prepay is inconsistent with Iowa case law. BOA argues that, for more than 100 years, Iowa has followed the common law "perfect tender in time" rule under which lenders do not have to accept prepayment and can enforce the payment schedules set forth in promissory notes. Anderson v. Haskell, 45 Iowa 45 (1876). BOA further argues that the Iowa Supreme Court reaffirmed the perfect tender in time rule in 1981, after the state legislature enacted Iowa Code Ann. § 535.9(2). Lett v. Grummer, 300 N.W.2d 147, 150 (Iowa 1981) (decision does not mention the statute).

We need not decide this difficult question of state law because we hold that federal law expressly preempts application of Iowa Code Ann. § 535.9(2) to agricultural loans made by an originator or certified facility guaranteed by Farmer Mac. Whether or not Iowa Code Ann. § 535.9(2) merely bars enforcement of contractual terms that prohibit borrowers from prepaying any portion of their loans as unlawful penalties or affirmatively grants borrowers the right to prepay is irrelevant when considering whether the state law is preempted.

Title VIII...