Sanborn Sav. Bank v. Freed

• Decision Date: 24 June 2022
• Docket Number: 21-2816
• Parties: Sanborn Savings Bank Plaintiff-Appellee v. Connie R. Freed Defendant-Appellant
• Court: U.S. Court of Appeals — Eighth Circuit

Sanborn Savings Bank Plaintiff-Appellee v. Connie R. Freed Defendant-Appellant

No. 21-2816

United States Court of Appeals, Eighth Circuit

June 24, 2022

Submitted: March 15, 2022

Appeal from United States District Court for the Northern District of Iowa - Western

Before GRUENDER, BENTON, and ERICKSON, Circuit Judges.

ERICKSON, CIRCUIT JUDGE

Connie Freed seeks to retain the proceeds from the sale of a condominium despite her ex-husband's bankruptcy and an outstanding balance owed to Sanborn Savings Bank on a business loan. The trial court^[1] found Sanborn Savings Bank was entitled to the proceeds. We have jurisdiction pursuant to 28 U.S.C. § 1332(a) and 28 U.S.C. § 1291, and we affirm.

I. BACKGROUND

Connie Freed ("Connie") and her then-husband, Dean Freed ("Dean"), purchased a condominium in Sioux Falls, South Dakota for $525,000. At the time of the purchase, they intended to make the condo their primary residence. To finance the couple's purchase, on September 15, 2014, Dean executed a consumer loan note for $384,777.13 (the "Original Note") from Sanborn Savings Bank ("Sanborn"). Connie consented to Dean's execution of the Original Note, but she was not a signatory. The same day, Connie and Dean jointly granted Sanborn a mortgage on the condominium to secure the Original Note (the "Mortgage"). Both Dean and Connie initialed the pages of the Mortgage and signed the final page.

The Mortgage included three key provisions: (1) a choice-of-law provision specifying that the Mortgage was governed by Iowa law; (2) a homestead waiver, in which Connie and Dean "waive[d] all appraisement and homestead exemption rights relating to" the condominium, except as prohibited by law; and (3) a future advances clause or "dragnet clause." See Decorah State Bank v. Zidlicky, 426 N.W.2d 388, 390 (Iowa 1988) (recognizing a future advances clause is also called a dragnet clause). The future advances clause and related clauses granted Sanborn a security interest in the Mortgage covering future funds Dean might borrow:

SECURED DEBTS AND FUTURE ADVANCES. 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 September 15, 2014, from DEAN E. FREED (Borrower) to [Sanborn], with a loan amount of $384,777.13.

B. Future Advances. All future advances from [Sanborn] to DEAN E. FREED under the Specific Debts executed by DEAN E. FREED in favor of [Sanborn] after this Security Instrument. If more than one person signs this Security Instrument, each agrees that this Security Instrument will secure all future advances that are given to DEAN E. FREED either individually or with others who may not sign this Security Instrument. All future advances are secured by this Security Instrument even though all or part may not yet be advanced. All future advances are secured as if made on the date of this Security Instrument. Nothing in this Security Instrument shall constitute a commitment to make additional or future advances in any amount. Any such commitment must be agreed to in a separate writing. In the event that [Sanborn] fails to provide any required notice of the right of recission, [Sanborn] waives any subsequent security interest in the Mortgagor's principal dwelling that is created by this Security Instrument. This Security Instrument will not secure any other debt if [Sanborn] fails, with respect to that other debt, to fulfill any necessary requirements or conform to any limitations of Regulations Z and X that are required for loans secured by the [condominium].

C. All Debts. All present and future debts from DEAN E. FREED to [Sanborn], 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. If more than one person signs this Security Instrument, each agrees that it will secure debts incurred either individually or with others who may not sign this Security Instrument. . . .

Approximately four years later, Dean borrowed $693,986.82 from Sanborn under three notes to keep his business running (the "Business Notes"). Connie was not a party to the Business Notes. A few months after taking out the Business Notes, Dean filed a petition for relief under Chapter 7 of the Bankruptcy Code. Connie did not declare bankruptcy. Around this same time, the condominium was sold for $650,000, the couple initiated divorce proceedings, and Connie moved to a different state.

After the condominium was sold and related expenses were paid (including the Original Note), $249,117.65 of the sale proceeds were deposited in escrow. In the bankruptcy proceedings, Dean argued that his half of the sale proceeds was exempt from paying down his Business Notes because the condominium was a homestead, notwithstanding the Mortgage's future advances clause, homestead waiver, or other provisions. Dean also waived his right to discharge the Business Notes in bankruptcy. Sanborn resisted Dean's claim that the sale proceeds were exempt. The bankruptcy court concluded Dean's portion of the escrowed sale proceeds must pay down his Business Notes pursuant to the Mortgage's future advances clause and that Dean could not claim a homestead exemption for those proceeds.^[2]

Sanborn then commenced an action in diversity against Connie in the United States District Court for the Northern District of Iowa, seeking a declaratory judgment that (1) Connie's portion of the escrowed sale proceeds was subject to the Mortgage's future advances clause, and (2) Sanborn could apply the proceeds to Dean's Business Notes. Sanborn successfully moved for summary judgment, and Connie appeals. Connie requests that we certify several questions to the Iowa Supreme Court. In her reply brief, Connie raised a new argument and Sanborn has filed a motion to strike it. We deny both motions and affirm.

II. DISCUSSION

Connie raises a number of issues on appeal, each of which attacks the district court's finding that Sanborn is entitled to the escrowed condominium sale proceeds under the terms of the Mortgage's future advances clause and Dean's Business Notes. We "review de novo the district court's grant of summary judgment," Hallmark Specialty Ins. v. Phoenix C &D Recycling, Inc., 999 F.3d 563, 567 (8th Cir. 2021) (quoting Van Dorn v. Hunter, 919 F.3d 541, 544 (8th Cir. 2019)), viewing the "record in the light most favorable to the nonmoving party and draw[ing] all reasonable inferences in that party's favor," Kohlbeck v. Wyndham Vacation Resorts, Inc., 7 F.4th 729, 737 (8th Cir. 2021) (quoting Richardson v. Omaha Sch. Dist., 957 F.3d 869, 876 (8th Cir. 2020)). We will affirm only when "there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(a).

We apply state substantive law in diversity actions. See Martin v. Wal-Mart Stores, Inc., 183 F.3d 770, 772 (8th Cir. 1999). The parties agree the Mortgage is governed by Iowa law.

1. The Future Advances Clause Encompasses the Business Notes

Connie contends the district court erred when it found the Mortgage's future advances clause secures the Business Notes. While Iowa recognizes the validity of future advances clauses, it does so with a "definite lack of enthusiasm." Zidlicky, 426 N.W.2d at 390; see Blue Grass Sav. Bank v. Cmty. Bank &Tr. Co., 941 N.W.2d 20, 25 (Iowa 2020) (noting that even if disfavored, mortgages with dragnet clauses are enforceable). "Iowa courts have enforced future advances mortgage clauses against joint mortgagors for the individual, secret debts of a mortgagor." Poweshiek Cnty. Sav. Bank v. Hendrickson, 699 N.W.2d 684, 2005 WL 1224745, at *3 (Iowa Ct. App. May 25, 2005) (unpublished table decision) (citing Corn Belt Sav. Bank v. Kriz, 219 N.W. 503, 504 (Iowa 1928)). When determining whether a future advances clause encompasses a particular debt, Iowa courts apply the following standard:

In the absence of clear, supportive evidence of a contrary intention, a mortgage containing a dragnet type clause will not be extended to cover future advances unless the advances are of the same kind and quality or relate to the same transaction or series of transactions as the principal obligation secured or unless the document evidencing the subsequent advance refers to the mortgage as providing security therefor.

Freese Leasing, Inc. v. Union Tr. &Sav. Bank, 253 N.W.2d 921, 927 (Iowa 1977) (cleaned up).

Connie notes the Business Notes are of a "completely different character" than the Original Note, which was a purchase-finance note for the condominium. Under Iowa law the distinct nature of the debt is material only when there is no "clear, supportive evidence of a contrary intention" that the mortgage may secure other, unrelated debt. Id. (citation omitted). Here, the Mortgage makes plain that it may secure "[a]ll present and future debts from [Dean] to [Sanborn]," regardless of whether the Mortgage is mentioned in the future debt instrument, the "future debt is unrelated to or of a different type than this debt," or if Dean "incur[s] [debts] either individually or with others who may not sign this [Mortgage]." The clause is both broad in scope and conspicuously printed in bold under the header "SECURED DEBTS AND FUTURE ADVANCES" on the second page of the Mortgage. See Wells Fargo Bank, N.A. v. Valley Bank &Tr., 839 N.W.2d 675, 2013 WL 4767889, at *2 (Iowa Ct. App. Sept. 5, 2013) (unpublished table decision) (concluding the parties intended the future advances clause to cover the notes when, in part, the clause was written broadly and had an obvious presence). Given the clause's unambiguous language,...