National Bank of Waterloo v. Moeller

• Decision Date: 25 January 1989
• Docket Number: No. 87-1716,87-1716
• Citation: 434 N.W.2d 887
• Parties: NATIONAL BANK OF WATERLOO, Appellee, v. John MOELLER, and Dorothy Moeller, Defendants, Mason City Production Credit Association, Appellant.
• Court: Iowa Supreme Court

Page 887

434 N.W.2d 887

NATIONAL BANK OF WATERLOO, Appellee, v. John MOELLER, and Dorothy Moeller, Defendants Mason City Production Credit Association, Appellant.

No. 87-1716.

Supreme Court of Iowa.

Jan. 25, 1989.

Rehearing Denied Feb. 20, 1989.

Charles W. McManigal and Darrell J. Isaacson of Laird, Burington, Heiny, McManigal, Walters and Winga, Mason City, for appellant.

Michael M. Pedersen of Martin, Nutting, Miller, Keith & Pedersen, Waterloo, for appellee.

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

NEUMAN, Justice.

This litigation began as an action in equity to foreclose deeds of trust on two parcels of farm real estate located in Howard County, Iowa. Judgment was entered against the principal defendants, John and Dorothy Moeller, and their real estate was subsequently sold at sheriff's sale. Deeds have remained in escrow pending resolution of the current controversy over the relative priority of two lienholders, appellee National Bank of Waterloo (bank) and appellant Mason City Production Credit Association (PCA).

The district court resolved the priority dispute in the bank's favor, holding alternatively that (1) PCA agreed in writing to subordinate its mortgages and the bank relied on that agreement to its detriment; and (2) later advances made by PCA with actual knowledge of the bank's intervening lien were junior to the bank's deed of trust.

On appeal, the PCA contends there was insufficient factual support for the court's first finding and no legal basis for the second. We agree and reverse the district court.

I. Factual Background.

Two parcels of agricultural real estate are involved here. The Moellers owned a 328-acre farm known as "Davis Corners." Across the road was the Pierce farm. In January 1983, John Moeller was approached by Pierce's agent, Luke Kollasch, about buying the Pierce farm. Moeller was interested but at the time he was "asset rich and cash poor."

Pierce's financial position at the time was nothing less than precarious. He was buying his farm on contract, and he faced a balloon payment in excess of $500,000 due March 1, 1983. The National Bank of Waterloo held an assignment of Pierce's interest in the real estate contract as security for $70,000 in outstanding loans. Thus the bank was as eager as Pierce to unload the property before Pierce's interest in it was forfeited.

The bank agreed to lend Moeller the full purchase price of the Pierce farm (approximately $565,000) on the representation by sales agent Kollasch that Moeller's regular financier, the PCA, would subordinate its four mortgages on Moeller's Davis Corners property so that it could be given as additional collateral. The bank neither discussed this proposed subordination with Moeller nor made it part of the loan commitment. Nevertheless, Moeller became aware of the proposal through Kollasch, and discussed the idea with PCA.

PCA was amenable to the subordination as long as Moeller could furnish substitute collateral. That did not appear to be a problem in view of Moeller's extensive land holdings. A nearby Minnesota farm seemed a likely substitute.

In early March 1983, bank officer Willis Crees and PCA branch manager James Morrow discussed the proposed subordination by telephone. Confirming that conversation, Morrow wrote a letter to Crees on March 21 which stated, in pertinent part:

PCA is agreeable to the substitution and we are currently in the process of accomplishing this. As discussed, about 30 days will be required due to Minnesota procedural problems and the nature of the collateral being secured. Provided no unexpected problems arise, PCA will subordinate our position to the bank's mortgage sometime before the end of April.

No further communication between the bank and PCA occurred. The bank closed the Pierce/Moeller deal on March 30. Funds were disbursed to pay off the Pierce contract and Moeller executed deeds of trust in favor of the bank on both the Pierce and Davis Corners properties. Contrary to its usual policy, however, the bank made no post-closing title search to assure itself of the priority of its liens.

Eighteen months later, when Moeller had difficulty servicing this new debt, the bank learned that the proposed subordination had never materialized. It turns out that Moeller had been unwilling to advance substantial attorney fees and title expense required to accomplish the substitution of collateral. In the interim, PCA had lent Moeller an additional $275,000 in operating loans pursuant to future advances clauses in PCA's prior mortgages on the Davis Corners property. Thus when the bank foreclosed its deeds of trust on both the Pierce farm and Davis Corners in April 1985, a controversy arose over who was entitled to priority on Davis Corners, the bank or PCA. From a judgment entered in favor of the bank, PCA now appeals.

II. Arguments on Appeal.

Preliminarily we note that this case was tried in equity and thus our appellate review is de novo. Iowa R.App.P. 4. We may give weight to the trial court's findings but are not bound by them. Israel v. Farmer's Mut. Ins. Ass'n, 339 N.W.2d 143, 146 (Iowa 1983).

The district court resolved this priority dispute on alternative grounds: first, on a theory of promissory estoppel; second, on a common-law theory that future advances made by a senior mortgagee with knowledge of an intervening lien of a junior mortgagee are inferior thereto if not obligatory. We shall consider the PCA's appellate challenge to these alternative holdings in turn.

A. Promissory estoppel.

The district court found that PCA's March 21 letter to the bank evidenced a promise by PCA to subordinate its mortgages on Davis Corners in order to give the bank a superior lien on the property. ¹ The court further found that in reliance on that promise the bank advanced loan proceeds to Moeller to its detriment and PCA is now estopped from asserting the priority of its lien.

On appeal, PCA argues the bank presented insufficient proof of any agreement to support a recovery based on promissory estoppel. From our de novo review of the record, we quite agree.

The essential elements of promissory estoppel are well established: (1) a clear and definite agreement; (2) proof that the party urging the doctrine acted to its detriment in reasonable reliance on the agreement; and (3) a finding that the equities support enforcement of the agreement. In re Estate of Graham, 295 N.W.2d 414, 418 (Iowa 1980); Johnson v. Pattison, 185 N.W.2d 790, 795 (Iowa 1971); Miller v. Lawlor, 245 Iowa 1144, 1154, 66 N.W.2d 267, 273 (1954). The burden of proving estoppel is on the party asserting it and strict proof of all elements is required. Pillsbury Co. v. Ward, 250 N.W.2d 35, 39 (Iowa 1977).

Turning to the first element--a clear and definite agreement--we note that no Iowa case has squarely defined this fundamental feature of the doctrine. A comparison of pertinent cases may illuminate the concept, however. In the case of In re Estate of Graham, we found that deposition testimony relating a conversation in which a decedent said he wanted to "keep the farm in the family" was insufficient to prove an agreement to devise the property to his brother, the other party to the conversation. See 295 N.W.2d at 419. By contrast, in Miller v. Lawlor we upheld an oral promise by a landowner not to construct a home on his property that would block his neighbor's view. See 245 Iowa at 1151-57, 66 N.W.2d at 272-75. We upheld a similar promise not to use land for commercial purposes in Johnson v. Pattison, 185 N.W.2d at 795.

By way of distinguishing these cases, we observe that Miller and Pattison, unlike Graham, demonstrated a clear understanding by the promisor that the promisee was seeking an assurance upon which he could rely and without which he would not act. See Miller, 245 Iowa at 1155, 66 N.W.2d at 274. This dual emphasis on clarity and inducement parallels the Restatement (Second) definition of an agreement for purposes of promissory estoppel as "[a] promise which the promisor should reasonably expect to induce action ... on the part of the promisee." Restatement (Second) of Contracts § 90 (1981).

With this background in mind, we look at the record before us. Preliminarily we note that the parties seem equivocal about whether they think the language of the March 21 letter is clear or ambiguous. If the former, then of course the intent of the parties must control and that is determined by what the writing itself says. Iowa R.App.P. 14(f)(14). If the latter, then other evidence can be considered in ascertaining the true intent of the parties. Ted Spangenberg Co. v. Peoples Natural Gas, 305 F.Supp. 1129, 1133 (S.D.Iowa 1969).

The bank persuaded the trial court that the March 21 letter--when read in the light of the earlier conversation between bank and PCA officers--can only be interpreted as an unconditional promise by PCA to subordinate its mortgages by the end of April. The bank does not seriously dispute that the earlier conversation closed with PCA amenable, but uncommitted, to subordination. But because the Pierce forfeiture deadline was rapidly approaching, the bank insists that it impressed upon PCA its need for a commitment to subordinate at the earliest possible date. Receipt of the March 21 letter allegedly signaled the unqualified agreement to subordinate that it was looking for.

The PCA, on the other hand, contends that the very language of the letter bespeaks a conditional response to the bank's proposal. It asserts that the "agreeable to substitution" language merely confirmed the tenor of the previous conversation. In other words, the letter restated PCA's status: amenable, but not yet committed, to subordination. It argues that the phrase "[p]rovided no unexpected problems arise" clearly conveyed a tentative agreement subject to future conditions.

We need not resort to maxims of contract interpretation to sort out these conflicting arguments. Whe...