Prudential Ins. Co. v. Rand & Reed Powers Partner

• Decision Date: 07 August 1997
• Docket Number: No. C 94-4058-MWB.,C 94-4058-MWB.
• Parties: PRUDENTIAL INSURANCE COMPANY OF AMERICA, Plaintiff, v. RAND & REED POWERS PARTNERSHIP, Defendant.
• Court: U.S. District Court — Northern District of Iowa

972 F.Supp. 1194

PRUDENTIAL INSURANCE COMPANY OF AMERICA, Plaintiff, v. RAND & REED POWERS PARTNERSHIP, Defendant.

No. C 94-4058-MWB.

United States District Court, N.D. Iowa, Western Division.

August 7, 1997.

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Kimberly J. Walker of Faegre and Benson, Des Moines, IA, for Plaintiff.

Michael R. Bovee of Montgomery, Barry & Bovee, Spencer, IA, for Defendant.

MEMORANDUM OPINION AND ORDER REGARDING CROSS-MOTIONS FOR SUMMARY JUDGMENT

BENNETT, District Judge.

                                           TABLE OF CONTENTS
                  I. INTRODUCTION ................................................. 1198
                     A. The Stay of the Proceedings ............................... 1198
                     B. The Cross-Motions For Summary Judgment .................... 1199
                     C. Questions Of State Law .................................... 1199
                 II. STANDARDS FOR SUMMARY JUDGMENT ............................... 1201
                      A. Fed.R.Civ.P. 56 .......................................... 1201
                      B. Primarily Legal Questions ................................ 1202
                III.  FACTUAL BACKGROUND .......................................... 1203
                      A. The Contract ............................................. 1203
                      1. Iowa rules of contract construction and interpretation ... 1203
                      2. Construction and interpretation of the contract .......... 1204
                

                   B. The Common-Law Rule On Prepayment ........................... 1206
                   C. The Statute ................................................. 1206
                      1. Iowa rules of statutory interpretation ................... 1207
                      2. Interpretation of the statute ............................ 1210
                         a. Plain meaning ......................................... 1210
                         b. Ambiguity ............................................. 1211
                         c. Consequences of interpretation ........................ 1212
                    D. Declaration Of The Rights Of The Parties ................... 1215
                V.  CONCLUSION .................................................... 1215
                

Does an Iowa statute, Iowa Code § 535.9, which prohibits prepayment penalties and charges on a loan used in part for the purchase of agricultural land, also prohibit contractual language that forbids the prepayment of the loan? That is the principal question before the court in this declaratory judgment action between a lender asserting a contractual and common-law right to refuse to accept prepayment of a loan and a borrower asserting a statutory right to prepay the loan without penalty. Because the question presented involves issues of first impression under state law, and the parties have eschewed certification of questions to the state supreme court, this court must "predict, as best [it] can, how that [state high] court would decide the issue[s]." Brandenburg v. Allstate Ins. Co., 23 F.3d 1438, 1440 (8th Cir.1994). Little versed in the art of divination, finding no mystical symbols on its robe, and lacking any experience with examination of the entrails of birds or other omens,¹ this court turns from the tools of prognosticators and soothsayers of more superstitious ages to an examination of the insides of law books — a method the court believes will be both more reliable and less messy — to predict whether a contractual prohibition on prepayment of a loan is enforceable under Iowa statutory and common law.

I. INTRODUCTION

Plaintiff Prudential Insurance Company of America, a New Jersey corporation, filed this declaratory judgment action on July 22, 1994, against the Rand & Reed Powers Partnership (Powers Partnership), an Iowa partnership. Prudential seeks a declaration of the rights of the parties under a Note and Mortgage executed by the Powers Partnership on August 17, 1992, with regard to prepayment of the Note. The Powers Partnership answered the declaratory judgment complaint on September 9, 1994, also asserting a counterclaim that Prudential has violated Iowa Code § 535.9, and hence breached the terms of the loan agreement as modified by Iowa Code § 535.9, by refusing to accept prepayment of the loan agreement.

A. The Stay Of The Proceedings

This litigation was stayed approximately thirteen months after it was filed, because the central question presented here was before the Eighth Circuit Court of Appeals on appeal of another matter, Bank of Am. Nat'l Trust & Sav. Assoc. v. Shirley, No. 1-93-CV-10033 (S.D.Iowa May 19, 1994). However, in the decision on appeal of that case, handed down on September 25, 1996, the Eighth Circuit Court of Appeals did not in fact reach the question of whether Iowa Code § 535.9 bars enforcement of a "no prepayment" clause in a loan contract. See Bank of Am. Nat'l Trust & Sav. Assoc. v. Shirley, 96 F.3d 1108 (8th Cir.1996) (holding that Iowa Code § 535.9 is preempted by the Farm Credit Act, and thus, whether or not Iowa Code § 535.9 barred a "no prepayment" clause was "irrelevant"). Although the anticipated guidance of the Eighth Circuit Court of Appeals on the pertinent questions is lacking, the parties have submitted those questions to this court on cross-motions for summary judgment. Consequently, the stay on these proceedings is now lifted.

B. The Cross-Motions For Summary Judgment

On February 21, 1997, following a status conference during the stay of these proceedings, the court set oral arguments for July 18, 1997, on anticipated cross-motions for summary judgment. On March 26, 1997, the parties submitted a joint revised scheduling report setting deadlines and a briefing schedule for those dispositive motions. Pursuant to the scheduling order, on June 18, 1997, Prudential moved for summary judgment and the Powers Partnership filed its cross-motion for partial summary judgment on Prudential's declaratory judgment claim.² Prudential resisted the Powers Partnership's motion for partial summary judgment on July 2, 1997, and the Powers Partnership resisted Prudential's motion for summary judgment the following day, on July 3, 1997. Prudential filed a reply brief in support of its motion for summary judgment on July 11, 1997. Oral arguments on the motions took place as scheduled on July 18, 1997.³

C. Questions Of State Law

There is no dispute that state law governs the question of the effect of Iowa Code § 535.9 on the Powers Partnership's ability to prepay its Note in light of contractual language prohibiting prepayment, as well as every other issue, pertaining to the enforceability of the Note's ban on prepayment. Furthermore, the briefs of the parties and the court's own preliminary research indicated that there are no decisions of Iowa appellate courts at all construing Iowa Code § 535.9, upon which the Powers Partnership principally relies for a right to prepay the Note. Consequently, the court suggested that the parties consider the possibility of certifying questions raised in this litigation to the Iowa Supreme Court. See N.D. Ia. L.R. 83.10 (authorizing certification of questions "as to which it appears there is no controlling precedent in the decisions of the appellate courts of the state"); Iowa Code § 684A.1 (authorizing the Iowa Supreme Court to answer certified questions "as to which it appears to the certifying court there is no controlling precedent in the decisions of the appellate courts of this state"); see also Employers Ass'n, Inc. v. United Steelworkers of Am., AFL-CIO-CLC, 19 F.3d 405, 408 (8th Cir.1994) (observing that, in the absence of an interpretation of state law by the state's high court, "the most prudent course is to await a definitive interpretation by [the state's] highest court," at least when the question is actually pending before the state court), opinion vacated, 23 F.3d 214 (8th Cir.1994) (vacating the prior opinion was vacated upon the discovery by the court of appeals that the Minnesota Supreme Court had in fact ruled upon the question thought to be one of first impression just prior to the handing down of the federal appellate court's decision).⁴

Although the parties had no objection to the court certifying questions to the Iowa Supreme Court sua sponte, both expressed a preference that this court decide the questions presented. The parties were concerned that this litigation had already been stayed for some time while the principal question here was pending before the Eighth Circuit Court of Appeals in another case, and that further delays were likely to arise from certification of questions to the Iowa Supreme Court. Therefore, they indicated a preference that this court proceed to the merits of the cross-motions for summary judgment instead of certifying questions to the Iowa Supreme Court.

Federal courts must often interpret state law in diversity actions, and sometimes, as here, those determinations are on questions of first impression. A federal court is bound by the interpretation of a state's statutes by the state's highest court. Missouri v. Hunter, 459 U.S. 359, 366-68, 103 S.Ct. 673, 678-79, 74 L.Ed.2d 535 (1983); Rhode v. Olk-Long, 84 F.3d 284, 290 (8th Cir.), cert. denied, ___ U.S. ____, 117 S.Ct. 232, 136 L.Ed.2d 163 (1996); Employers Ass'n, Inc., 19 F.3d at 408 ("`[W]e are of course bound by a State's interpretation of its own statute ..." quoting Garner v. Louisiana, 368 U.S. 157, 166, 82 S.Ct. 248, 253, 7 L.Ed.2d 207 (1961)); Becker v. Lockhart, 971 F.2d 172, 174 (8th Cir.1992) (noting that state courts may give the terms of a state statute "whatever meaning they wish," and "`[the federal courts] are obliged to accept their interpretation, just as though it were written into the statute in so many words,'" unless that interpretation is "`so unexpected, so outlandish, that no reasonable person could have expected it.'" quoting Welton v. Nix, 719 F.2d 969, 970 (8th Cir.1983)), cert. denied, 510 U.S. 830, 114 S.Ct. 98, 126 L.Ed.2d 65 (1993); Edens v. Shelter Mut. Ins. Co., 923 F.2d 79, 81 (8th Cir.1991) ("As a federal court interpreting a state statute, we are bound by the construction given the statute by the highest c...