Blue Grass Sav. Bank v. Cmty. Bank & Trust Co.

Decision Date27 March 2020
Docket NumberNo. 19-0657,19-0657
Parties BLUE GRASS SAVINGS BANK, Appellee, v. COMMUNITY BANK & TRUST COMPANY, Appellant.
CourtIowa Supreme Court

H. Raymond Terpstra II of Terpstra & Epping, Cedar Rapids, for appellant.

Richard A. Davidson of Lane & Waterman LLP, Davenport, for appellee.

MANSFIELD, Justice.

I. Introduction.

This case requires us to interpret an Iowa statute relating to priority of advances under mortgages. See Iowa Code § 654.12A (2013). A bank made a series of loans to a farmer between April 2011 and March 2017. Near the middle of that time period, in 2014, the bank obtained a mortgage on a farm property with a future-advances clause. The bank’s mortgage contained specific-dollar-amount language, as required by Iowa Code section 654.12A :

NOTICE: THIS MORTGAGE SECURES CREDIT IN THE AMOUNT OF $148,000.00. LOANS AND ADVANCES UP TO THIS AMOUNT, TOGETHER WITH INTEREST, ARE SENIOR TO INDEBTEDNESS TO OTHER CREDITORS UNDER SUBSEQUENTLY RECORDED OR FILED MORTGAGES AND LIENS.

In May 2017, with his indebtedness to this bank exceeding $556,000, the farmer turned to another bank for financing. He took out a loan from the second bank for approximately $589,000, also secured in part by the same farm property. In 2018, the first bank filed a foreclosure proceeding. The fighting issue now is whether the first bank’s lien on the farm priority has priority for all amounts due to the first bank or only up to $148,000, plus interest.

Based on the text of the statute, and other relevant considerations we discuss within this opinion, we conclude the first bank’s priority is capped at $148,000, plus interest. We also hold the first bank is not allowed to collect default interest at 18% as part of its first-priority lien because there was no written agreement to pay such a rate. Accordingly, we reverse the foreclosure decree entered by the district court and remand for further proceedings.

II. Facts and Procedural History.

The facts of this case are relatively straightforward and undisputed. Joseph L. Stecher is a farmer in Muscatine County. Between April 2011 and March 2017, he borrowed money from and issued promissory notes to Blue Grass Savings Bank. About halfway into the relationship, on May 23, 2014, Stecher entered into a purchase money mortgage with Blue Grass as mortgagee. The mortgage covered Lot 1 of Stecher Farms Subdivision in Muscatine County (Stecher Farms) and read in part as follows:

1. CONVEYANCE. For good and valuable consideration, the receipt and sufficiency of which is acknowledged, and to secure the Secured Debts and Mortgagor’s performance under this Security Instrument, Mortgagor does hereby grant, bargain, warrant, convey and mortgage to Lender, the following described property:
Lot 1, of Stecher Farms Subdivision in Muscatine County, Iowa.
....
NOTICE. THIS MORTGAGE SECURES CREDIT IN THE AMOUNT OF $148,000.00. LOANS AND ADVANCES UP TO THIS AMOUNT, TOGETHER WITH INTEREST, ARE SENIOR TO INDEBTEDNESS TO OTHER CREDITORS UNDER SUBSEQUENTLY RECORDED OR FILED MORTGAGES AND LIENS. HOWEVER, THE PRIORITY OF A PRIOR RECORDED MORTGAGE UNDER THIS SECTION DOES NOT APPLY TO LOANS OR ADVANCES MADE AFTER RECEIPT OF NOTICE OF FORECLOSURE OR ACTION TO ENFORCE A SUBSEQUENTLY RECORDED MORTGAGE OR OTHER SUBSEQUENTLY RECORDED OR FILED LIEN.
2. MAXIMUM OBLIGATION LIMIT. The total principal amount secured by this Security Instrument at any one time and from time to time will not exceed the amount stated above. Any limitation of amount does not include interest and other fees and charges validly made pursuant to this Security Instrument. Also, this limitation does not apply to advances made under the terms of this Security Instrument to protect Lender’s security and to perform any of the covenants contained in this Security Instrument.
3. SECURED DEBTS. The term "Secured Debts" includes and this Security Instrument will secure each of the following:
A. Specific Debts. The following debts and all extensions, renewals, refinancings, modifications and replacements. A promissory note or other agreement, dated May 23, 2014, from Mortgagor to Lender, with a loan amount of $148,000.00 and maturing on May 23, 2017.
B. All Debts. All present and future debts from Mortgagor to Lender, even if this Security Instrument is not specifically referenced, or if the future debt is unrelated to or of a different type than this debt.

Notably, paragraphs 1 and 2 of the mortgage stated that the mortgage secured credit up to a principal amount of $148,000. The mortgage also stated that loans and advances up to that amount were "senior to indebtedness to other creditors under subsequently recorded or filed mortgages and liens." Paragraph 3, on the other hand, defined "secured debts" to include not only the $148,000 loan but "[a]ll present and future debts from Mortgagor to Lender." Paragraph 3, however, did not discuss priority vis-à-vis subsequent lienholders.

By March 2017, Stecher’s outstanding borrowings from Blue Grass on the various promissory notes totaled approximately $556,965.32, not including interest. Yet on the 2014 note that had been used specifically to buy Stecher Farms, the principal balance was approximately $139,341.51, down from the original $148,000.

At that point, Stecher sought financing from another source—Community Bank & Trust Company. On March 18, 2017, Community Bank loaned Stecher $589,502.59, taking a mortgage on the same farm property (i.e., Stecher Farms). A Community Bank loan officer reviewed Blue Grass’s existing mortgage at the time of the transaction. He concluded that Blue Grass’s mortgage only gave Blue Grass lien priority up to $148,000, plus interest.

About a year-and-a-half passed. On August 10, 2018, following unsuccessful farm mediation, Blue Grass filed a petition in the Iowa District Court for Muscatine County to foreclose on Stecher Farms. Blue Grass alleged that its mortgage secured its entire $556,965.32 debt, plus interest.

Stecher did not contest foreclosure. However, Community Bank, which was named as a defendant because of its junior mortgage, filed an answer alleging that Blue Grass’s mortgage was "capped at a loan amount of $148,000.00." Blue Grass moved for summary judgment of foreclosure; Community Bank resisted the motion.

The district court held a hearing, and on April 8, 2019, the court granted Blue Grass’s summary judgment motion. Relying largely on an unpublished decision of our court of appeals, the district court found that Blue Grass’s priority over Community Bank was not limited to the $148,000 amount set forth in the mortgage. Rather, Blue Grass’s priority extended to all debt secured by the Blue Grass mortgage to the extent the funds had been advanced to Stecher before the recording of the Community Bank mortgage. The district court also ruled that Blue Grass was entitled to charge an 18% rate of interest after default.

That same day, the district court entered a decree of foreclosure. The decree was consistent with the court’s summary judgment ruling, although it did not include interest at the default rate because the court decided the interest rate was a moot point. Since the principal amount of the debt being foreclosed on by Blue Grass far exceeded the value of the property, it did not matter what interest rate was allowed.1

Community Bank appealed, and we retained the appeal.

III. Standard of Review.

"We review rulings on motions for summary judgment for correction of errors at law." Young v. Iowa City Cmty. Sch. Dist. , 934 N.W.2d 595, 601 (Iowa 2019).

IV. Analysis.

A. Is the Priority of Blue Grass’s Mortgage Lien Capped at $148,000 in Principal? Iowa Code section 654.12A, entitled "Priority of advances under mortgages," was enacted in 1984 and amended in 1990. See 1990 Iowa Acts ch. 1001, § 1; 1984 Iowa Acts ch. 1272, § 2. It provides in relevant part,

Subject to section 572.18, if a prior recorded mortgage contains the notice prescribed in this section and identifies the maximum credit available to the borrower, then loans and advances made under the mortgage, up to the maximum amount of credit together with interest thereon, are senior to indebtedness to other creditors under subsequently recorded mortgages and other subsequently recorded or filed liens even though the holder of the prior recorded mortgage has actual notice of indebtedness under a subsequently recorded mortgage or other subsequently recorded or filed lien. So long as credit is available to the borrower, payment of the outstanding mortgage balance to zero shall not extinguish the prior recorded mortgage if it contains the notice prescribed by this section. The notice prescribed by this section for the prior recorded mortgage is as follows:
NOTICE: This mortgage secures credit in the amount of....... Loans and advances up to this amount, together with interest, are senior to indebtedness to other creditors under subsequently recorded or filed mortgages and liens.

Iowa Code § 654.12A (2013). The May 23, 2014 mortgage between Stecher and Blue Grass had such a notice, identifying $148,000 as the relevant amount of credit. Yet it also purported to secure not just the $148,000 loan that had just been extended, but "[a]ll present and future debts from Mortgagor to Lender." This is sometimes referred to as a "dragnet clause." See Freese Leasing, Inc. v. Union Tr. & Sav. Bank , 253 N.W.2d 921, 923 (Iowa 1977).

The question then becomes, "What is the legal significance of the notice prescribed by Iowa Code section 654.12A ?" Community Bank contends that the amount in the notice—$148,000 plus interest—is the maximum priority that Blue Grass’s mortgage can obtain over a subsequently recorded mortgage on the same property. Blue Grass, on the other hand, contends that the notice does not limit its priority where the advances occurred before the second mortgage was recorded. In other words, according to Blue Grass, the dollar credit limit in the section 654.12A notice only applies to advances that occur after the later mortgage is...

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