Beal Bank v. Siems

• Decision Date: 08 October 2003
• Docket Number: No. 02-0556.,02-0556.
• Citation: 52 UCC Rep. Serv.2d 11,670 N.W.2d 119
• Parties: BEAL BANK, Appellant, v. Edwin R. SIEMS, Michael Fort, and Teresa A. Vokoun, Appellees.
• Court: Iowa Supreme Court

670 N.W.2d 119

52 UCC Rep. Serv.2d 11

BEAL BANK, Appellant, v. Edwin R. SIEMS, Michael Fort, and Teresa A. Vokoun, Appellees.

No. 02-0556.

Supreme Court of Iowa.

October 8, 2003.

Michael J. Cunningham and Jeffrey A. Kelso of Howe, Cunningham & Lowe, P.L.C., Urbandale, for appellant.

Jerrold Wanek of Garten, Wanek & Morse, Des Moines, for appellees Edwin R. Siems and Teresa A. Vokoun.

Jerry C. Estes of Estes Law Offices, Fort Dodge, for appellee Michael Fort.

TERNUS, Justice.

The appellant, Beal Bank, sought to enforce its rights under various mortgages and personal guaranties given by the appellees, Edwin R. Siems, Michael Fort, and Teresa A. Vokoun, to secure a loan made by a predecessor bank to Douglas Avenue Storage Limited [DASL]. The district court ruled Beal Bank could not foreclose a mortgage given on property owned by Vokoun and located on North 3rd Street in Marshalltown because it was the homestead. The court also held Beal Bank could not enforce a personal guaranty given by Fort because Fort's guaranty had been discharged. On Beal Bank's appeal, we affirm.

I. Background Facts and Proceedings.

Edwin Siems, Wayne Catron, Timothy Titus, and Michael Fort were the original owners of DASL, a limited liability company formed for the purpose of building and operating a large storage facility in Urbandale, Iowa. From the beginning, it was anticipated that Fort's involvement would be limited to construction of the facility and its initial operation. Construction financing was obtained through Hartford Carlisle Savings Bank [hereinafter "Hartford"] in 1996. Collateral for the loan consisted of a mortgage on the storage facility, unlimited personal guaranties from Catron and Siems, and a $100,000 guaranty from Fort. These guaranties expressly covered future loans to DASL and were effective until the debt was satisfied or until the guarantor sent notice of revocation by certified mail.

Vokoun was Siems' wife. She mortgaged two Marshall County properties titled in her name as security for the loan made to DASL. One property was identified as 304 North 3rd Street, Marshalltown, Iowa, and the other as 1351 Prairie Avenue, Marshalltown, Iowa. It was understood that these mortgages would be released upon completion of construction and that occurred in April 1998.

During the summer of 1998, Titus bought out Catron's and Fort's interests in DASL. Hartford approved the buyout and, pursuant to a conversation between Fort and Hartford's president, Fort wrote to the president setting forth the conditions of the sale and enclosing a notarized assignment of Fort's interest to Titus. Fort requested in the letter that Hartford "hold on" to the assignment until three matters had been completed: (1) a "full release" of Fort's guaranty; (2) payment of the sale price; and (3) payment of a bill for tax services rendered to DASL by Fort. Fort did not specify the manner of release of his guaranty, but checks were subsequently issued by Hartford in satisfaction of the second and third conditions.

In September 1998 permanent financing was put into place with a new loan issued by Hartford to DASL, and the original loan was marked paid. The new note was secured by mortgages on DASL's real estate, as well as personal guaranties from Vokoun, Siems, and Titus. Vokoun also executed new mortgages on the two Marshall County properties. At that time, Vokoun was living at the North 3rd Street address, caring for her mother who had a terminal illness. Siems was living at the residence on Prairie Avenue. Siems did not sign either mortgage.

Subsequently, Hartford went into receivership and the Federal Deposit Insurance Corporation (FDIC) was appointed the receiver. The promissory notes, guaranties, and mortgages associated with DASL were purchased from the FDIC by Beal Bank. By then, DASL was in default. So, on July 19, 2000, Beal Bank filed a petition for foreclosure on DASL's property and, in addition, sought recovery from the various guarantors and mortgagors securing the September 1998 DASL note. A judgment and decree of foreclosure was entered against DASL. A subsequent sale of the storage facility left a sizable deficiency judgment. Beal Bank then attempted to collect the deficiency from Siems, Catron, Titus, Vokoun, and Fort based on their personal guaranties and to foreclose on the mortgages given by Vokoun.

Prior to commencement of this action, Siems, Vokoun, and Titus received a discharge from their debts in bankruptcy court. In the bankruptcy proceeding involving Siems and Vokoun, Vokoun asserted the North 3rd Street property was exempt as her homestead, while Siems claimed the Prairie Avenue property as his exempt homestead. Both exemptions were allowed, although the discharge stated that a creditor having a valid mortgage against the debtor's property could enforce the lien if it had not been eliminated in the bankruptcy case. (At the time the present case was tried, Siems and Vokoun resided together at the Prairie Avenue property and considered it to be their homestead.)

The case proceeded to trial before the court. The only issues submitted to the court were the enforceability of the mortgages given by Vokoun on the Marshall County properties and the liability of Fort under the personal guaranty he gave Hartford to secure the construction loan. (The plaintiff had previously dismissed Titus from the action, and Catron confessed judgment at trial and was excused from further proceedings.)

The district court ruled that the mortgages were not enforceable. First, the court noted that Siems, the mortgagor's spouse, did not sign the mortgages and, therefore, pursuant to Iowa Code section 561.13 (2001), the encumbrances were "absolutely void," not only as to Siems, but as to Vokoun, the mortgagor, as well. Alternatively, the court concluded that Siems enjoyed a dower right in the properties that could not be divested without his consent.

Regarding the limited guaranty by Fort, the trial court concluded it had been discharged in several ways or abandoned by Hartford. First, the court ruled that Hartford's actions upon Fort's buyout by Titus operated to discharge the guaranty. The court rejected Beal Bank's argument that revocation by certified mail was required, noting that the discharge here was more akin to a release than a revocation. Secondly, the court found evidence of abandonment of Fort's guaranty in the permanent financing documents. The new financing did not include a personal guaranty from Fort, even though the remaining owners signed new guaranties. In addition, the new note expressly included as "collateral" the guaranties of Siems, Vokoun, and Titus, but not those of Catron and Fort. Moreover, a subsequent promissory note for $25,000, while listing all five individuals, showed that Catron's and Fort's names had been crossed out. The final reason mentioned by the court in support of its ruling was the fact that under banking standards Fort should have been given notice of the new note and terms if he was to guarantee the obligation, but the record showed he was not given such notice.

Although Beal Bank argued that it was a holder in due course, entitled to enforce Fort's guaranty, the trial court held the documents known to the plaintiff provided it with notice that Fort's guaranty had been released. The court also rejected Beal Bank's contention that the statute of frauds relating to credit agreements contained in Iowa Code section 535.17(2) barred Fort's oral understanding with Hartford. The court concluded this code section was not applicable under the facts of this case.

Beal Bank's appeal from these rulings is now before this court. Beal Bank challenges the district court's application of section 561.13 to bar enforcement of the mortgage on the North 3rd Street property. It also claims error in the trial court's conclusion that Fort's obligation under the guaranty was discharged.

II. Enforceability of Vokoun's Mortgage on North 3rd Street Property.

A. Scope of review. Our review of the trial court's judgment on Beal Bank's equitable claim to foreclose Vokoun's mortgage is de novo. Hawkeye Bank & Trust Co. v. Michel, 373 N.W.2d 127, 129 (Iowa 1985).

B. Issues. The trial court held the mortgages executed by Vokoun on the Marshall County properties were void because Siems, Vokoun's spouse, had not signed the mortgages. Beal Bank challenges this ruling only as it pertains to the North 3rd Street property. The plaintiff does not assign as error the court's ruling that the mortgage given on the Prairie Avenue property is unenforceable and, therefore, we do not address the validity of the mortgage on that real estate.¹ Additionally, because we conclude the North 3rd Street property's status as a homestead renders the mortgage on that parcel unenforceable, we do not consider the district court's alternative ruling that Siems' dower interest in the property precluded foreclosure of the mortgage.

C. Discussion. Our analysis begins with the statute imposing restrictions on the transfer or encumbrance of homestead property, Iowa Code section 561.13. That statute provides in relevant part:

A conveyance or encumbrance of ... the homestead, if the owner is married, is not valid, unless and until the spouse of the owner executes the same or a like instrument, or a power of attorney for the execution of the same or a like instrument, and the instrument or power of attorney sets out the legal description of the homestead.

Iowa Code § 561.13; see also id. § 561.16 (providing person's homestead is exempt from judicial sale). There is no dispute in the present case that Siems—the spouse of the owner—did not execute the mortgage Beal Bank seeks to enforce, nor did he sign a similar instrument or power of attorney. The only issue, then, is whether the North 3rd Street property qualifies as a "homestead."

The legislature has defined a "homestead" as follows:

The homestead must embrace the house used as a home by the

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