Federal Land Bank of Omaha v. Arnold, 87-1309

• Decision Date: 15 June 1988
• Docket Number: No. 87-1309,87-1309
• Parties: The FEDERAL LAND BANK OF OMAHA, A Corporation, Appellant, v. Eldon L. ARNOLD, Rhonda J. Arnold, Donald Arnold and Neva Mae Arnold, Defendants, State of Iowa, Intervenor-Appellee.
• Court: Iowa Supreme Court

Page 153

426 N.W.2d 153

The FEDERAL LAND BANK OF OMAHA, A Corporation, Appellant, v. Eldon L. ARNOLD, Rhonda J. Arnold, Donald Arnold and Neva Mae Arnold, Defendants, State of Iowa, Intervenor-Appellee.

No. 87-1309.

Supreme Court of Iowa.

June 15, 1988.

John C. Monroe of Lynch, Dallas, Smith & Harman, Cedar Rapids, for appellant.

Diane M. Stahle of Davis, Hockenberg, Wine, Brown, Koehn & Shors, Des Moines, for amicus curiae Mut. Ben. Life Ins. Co.

Thomas J. Miller, Atty. Gen., and Tim Benton, Asst. Atty. Gen., for intervenor-appellee.

Considered by HARRIS, P.J., and SCHULTZ, CARTER, NEUMAN and SNELL, JJ.

NEUMAN, Justice.

On May 25, 1987, the Iowa General Assembly enacted legislation which significantly and retroactively altered the law with respect to the redemption of homesteads situated on agricultural land which has been foreclosed. See 1987 Iowa Acts ch. 142, § 29 (hereinafter the "Act"). This appeal challenges a district court decision which upheld the Act's constitutionality against a claim that three of its subsections violate various provisions of the Iowa and United States Constitutions. The issues now before us, ably briefed and argued by counsel, address squarely the power of the legislature to ameliorate the suffering and dislocation which has wracked Iowa farm families in recent years. But we are convinced that the means used to achieve this noble end cannot withstand scrutiny under constitutional doctrine prohibiting denial of equal protection of the law and the impairment of contracts by the State. We must therefore reverse the district court.

I. The facts giving rise to this controversy are not disputed. In February 1986, plaintiff Federal Land Bank of Omaha (FLB) filed a petition to foreclose its mortgage on 420 acres of agricultural land owned by defendants Eldon, Rhonda, Donald and Neva Mae Arnold. Two months later, FLB was granted summary judgment in the sum of $404,626.10 with interest at 15.25 percent, costs and attorney fees. Pursuant to the provisions of chapter 628 then in effect, the decree of foreclosure granted Arnolds a one-year period of redemption following sheriff's sale. Prior to sale, Arnolds designated two forty-acre homesteads, one for each Arnold couple, in accordance with Iowa Code section 654.16 (1987) (enacted by 1986 Iowa Acts ch. 1216, § 2).

At the sheriff's sale held June 18, 1986, FLB successfully bid on all three parcels. Arnolds made no redemption in the year following sale. Thus, under the decree of foreclosure and the law in effect at the time of the sheriff's sale, FLB would have been entitled to sheriff's deeds for all of the foreclosed real estate on June 19, 1987. See Iowa Code § 626.95, 626.98, and 628.3 (1985).

Meanwhile, the Iowa legislature amended Iowa Code section 654.16, effective June 4, 1987, to retroactively extend the redemption period for agricultural homesteads in certain cases and to revise the procedure for valuing such a homestead subject to redemption. See 1987 Iowa Acts ch. 142, §§ 4, 5, 28. Section 4 of the Act provides that if a designated homestead is sold at a foreclosure sale to satisfy the judgment, the court shall determine its fair market value. Section 5 provides that the mortgagor may redeem the designated homestead by tendering the fair market value

at any time within two years from the date of the foreclosure sale, pursuant to the procedures set forth in chapter 628. However, this paragraph shall not apply to a member institution which has purchased a designated homestead at a foreclosure sale.

(Emphasis added). "Member institution" is defined in section 5 as "any lending institution that is a member of the federal deposit insurance corporation, the federal savings and loan insurance corporation, the national credit union administration, or an affiliate of such institution." For such institutions, the redemption period is only one year, subject to a right of first refusal granted the mortgagor for one year thereafter. See 1987 Iowa Acts ch. 142, § 5. Finally, section 28 of the Act provides, in pertinent part, that these amendments apply to foreclosure sales held after the effective date of the act and

to foreclosure sales of agricultural land held within one year before the effective date of this Act if the holder of the sheriff's certificate of sale is a mortgagee who has not sold or otherwise disposed of the agricultural land and whose mortgage was enforced by the foreclosure sale.

At the time these amendments took effect, FLB had not sold or otherwise disposed of the agricultural land obtained through foreclosure of the Arnold mortgage. More importantly, as a member of the farm credit system, FLB did not qualify for the preferred, one-year redemption period accorded "member institutions" under section 5 of the Act. Thus the amendments required FLB, at the end of what had been the redemption period, to allow Arnolds yet another year to exercise their redemption rights to the homestead and to accept, in lieu of the amount bid at sheriff's sale, the fair market value of the homesteads in satisfaction of its judgment.

In an attempt to challenge the enforcement of these amendments, FLB filed a petition for supplemental relief in the foreclosure proceedings. See Iowa R.Civ.P. 266. It claimed the amendments violated the contract, commerce, and supremacy clauses of the United States Constitution and the equal protection and due process clauses of the United States and Iowa Constitutions. The State of Iowa intervened in order to defend the constitutionality of the challenged amendments. After hearing, the district court upheld the constitutionality of the Act, thereby denying FLB's request for supplemental relief.

On appeal, FLB renews its constitutional challenges. Specifically, FLB claims that section 5 of the Act (establishing redemption periods based on member/non-member classification) denies FLB equal protection under the law in violation of the fourteenth amendment to the United States Constitution and Article I, section 6 of the Constitution of the State of Iowa; that sections 4, 5, and 28 of the Act impair the contractual obligations existing between FLB and Arnolds in violation of Article I, section 10 of the United States Constitution (contract clause); that sections 4, 5, and 28 violate FLB's right to due process under the fourteenth amendment of the United States Constitution and Article I, section 9 of the Constitution of the State of Iowa, and violate Article I, section 8, (commerce clause) of the United States Constitution; and that section 5 violates the supremacy clause of the United States Constitution, Article VI.

II. Our review of FLB's constitutional claims is de novo. Iowa Auto Dealers Ass'n v. Iowa State Appeal Bd., 420 N.W.2d 460, 462 (Iowa 1988). Because of the presumption of constitutionality accorded legislative acts, FLB bears the heavy burden of proving the Act's unconstitutionality beyond a reasonable doubt. See id.; see also Roth v. Reagen, 422 N.W.2d 464, 467 (Iowa 1988). For the reasons discussed below, we are persuaded that FLB has successfully carried that burden with regard to its claimed denial of equal protection and contract impairment. Thus we need not address the merits of the remaining constitutional claims. Harryman v. Hayles, 257 N.W.2d 631, 635 (Iowa 1977).

III. The thrust of FLB's equal protection argument is that the establishment of different redemption periods for "member" and "nonmember" institutions impermissibly burdens nonmember institutions with a limitation on their right to liquidate foreclosed property which is twice as long as that endured by member institutions. Such a discriminatory classification, claims FLB, violates the equal protection clauses of the federal and state constitutions.

The parties agree that because the distinction drawn involves neither a fundamental right nor an inherently suspect classification, the legislation need withstand only the least rigorous equal protection scrutiny. See New Orleans v. Dukes, 427 U.S. 297, 303, 96 S.Ct. 2513, 2516-17, 49 L.Ed.2d 511, 517 (1976). Known as the "rational basis test," this standard allows us to uphold legislative classifications which bear a rational relationship to a legitimate state interest. Metropolitan Life Ins. Co. v. Ward, 470 U.S. 869, 881, 105 S.Ct. 1676, 1683, 84 L.Ed.2d 751, 761 (1985). Whether we examine the challenged statute under the federal or state equal protection clauses, our scrutiny is the same. Miller v. Boone County Hosp., 394 N.W.2d 776, 778 (Iowa 1986). To overcome the presumption of legislative constitutionality, FLB must prove that no conceivable state of facts could justify the class distinction drawn by the statute. In re Bishop, 346 N.W.2d 500, 505 (Iowa 1984). This deferential scrutiny is particularly appropriate where, as here, the state is exercising its police power in the realm of economic policy and regulation. New Orleans v. Dukes, 472 U.S. at 303, 96 S.Ct. at 2516, 49 L.Ed.2d at 517. But even in the economic sphere, a citizen's guarantee of equal protection is violated if desirable legislative goals are achieved by the state through wholly arbitrary classifications or otherwise invidious discrimination. See Chicago Title Ins. Co. v. Huff, 256 N.W.2d 17, 28 (Iowa 1977).

By definition, applying the rational basis test to an equal protection challenge involves a two-step analysis. First we must examine the legitimacy of the end to be achieved; we then scrutinize the means used to achieve that end. See generally L. Tribe, American Constitutional Law 1439-1443 (2d ed. 1988). That task is simplified in the present case because FLB concedes the legitimacy of the challenged legislation's public purpose. It has no quarrel with the social and economic benefit to be gained through measures such as extended redemption periods and fair market valuation of homesteads, which, as expressed by the trial court would "provide the farm community some relief from recession...