West Branch State Bank v. Gates, 90-579

• Decision Date: 20 November 1991
• Docket Number: No. 90-579,90-579
• Citation: 477 N.W.2d 848
• Parties: WEST BRANCH STATE BANK, Appellant, v. Ferral L. GATES, Brenda Lee Gates, Appellees, and Darrell H. Roegler, Florine G. Roegler, Paul B. Gilbaugh and Mildred L. Gilbaugh, Defendants.
• Court: Iowa Supreme Court

Page 848

477 N.W.2d 848

WEST BRANCH STATE BANK, Appellant, v. Ferral L. GATES, Brenda Lee Gates, Appellees and Darrell H. Roegler, Florine G. Roegler, Paul B. Gilbaugh and Mildred L. Gilbaugh, Defendants.

No. 90-579.

Supreme Court of Iowa.

Nov. 20, 1991.

Richard K. Updegraff and Jill Thompson Hansen of Brown, Winick, Graves, Donnelly, Baskerville & Schoenebaum, Des Moines, for appellant.

Peter C. Riley of Tom Riley Law Firm, P.C., Cedar Rapids, and Robert L. Horak of Horak & Rasmussen, Jefferson, for appellees.

Considered by McGIVERIN, C.J., and HARRIS, CARTER, NEUMAN and ANDREASEN, JJ.

ANDREASEN, Justice.

In this foreclosure action, we review the financial transactions between the creditor, West Branch State Bank (bank) and the debtors, Ferral and Brenda Gates. Also involved in the factual background of this suit is Ferral's brother, Gale Gates. Gale owned and operated an elevator known as Gates Grain Company, Ltd. (Grain Co.). Ferral owned and operated a trucking business. Both Ferral and Gale and their businesses were customers of the bank.

In 1982, Gale decided to expand the grain storage capacity at the Grain Co. Eventually, Gale decided to construct two 350,000 bushel bins. Gale did not, however, have the money necessary to buy or construct the bins. Apparently, both Gale and the Grain Co. had reached their credit limit at the bank. Since he could not obtain a loan himself, Gale persuaded Ferral to obtain a loan in Ferral's name for one of the bins Gale wished to construct. Ferral obtained a loan in the amount of $250,000 from the bank. The bank was aware that Ferral was borrowing the money for the benefit of Gale, although there was no surety, cosignature, or guaranty agreement on the loan to Ferral.

The loan was made to Ferral and his wife Brenda in September 1982. They signed a note requiring annual payments of $80,852.50, due on December 15th of 1982, 1983, 1984, and 1985, with the balance due on December 15, 1987. Payments were first to be applied to interest (18.5%) and the balance to principal. The note was secured by a U.C.C. security agreement on the bin as well as a deed of trust upon an eighty-acre farm owned by Ferral.

The borrowed money was used to purchase the 350,000 bushel bin, which was erected on the Grain Co.'s property. Ferral received a bill of sale and was the owner of the bin, subject only to the bank's security interest. Ferral knew that the land upon which the bin was built was subject to a first mortgage to the Federal Land Bank. Ferral understood that Gale would turn over the storage income from the bin to him. These payments from Gale would in turn be paid over as loan payments to the bank. The first installment payment, due on December 15, 1982, was paid and applied to both interest and principal.

In 1983, the government implemented the PIK farm program. The demand for grain storage began to diminish. The annual payment due on December 15, 1983, was extended by agreement of the parties with Ferral paying only the interest due. The first half of interest due in 1984 was paid to the bank. However, in December of 1984, Ferral received no storage income from Gale and accordingly did not make any payment on the bin loan. By agreement with the bank, the 1984 annual payment was extended and the interest due was paid with the proceeds from a new loan that Ferral obtained from the bank for that purpose. The 1985 annual payment was also extended, and the interest due was paid by Ferral with the proceeds from a second interest loan. Both of the interest loans were expressly secured by the original deed of trust and the security agreement on the bin.

Up until this time, Ferral was still the owner of the bin located on the Grain Co.'s property. However, sometime in 1985 or 1986, Ferral transferred his ownership interest in the bin to the Grain Co. Apparently, this transfer was made to allow the Grain Co. to reflect a higher net worth in an attempt to satisfy state and federal licensing regulations. At the request of the Grain Co.'s attorney, the bank also released its security interest in the bin. Ferral refused to borrow additional money from the bank to make interest payments on the bin loan. No payments on the bin loan were made to the bank in 1986.

The Grain Co. eventually had its license suspended, and in 1987, the Federal Land Bank, who held the first mortgage on the real estate of the Grain Co., began a foreclosure action. The bank was joined as a codefendant, because it held a second mortgage on the Grain Co.'s real estate arising from separate Grain Co. transactions. The Federal Land Bank completed foreclosure and, at the foreclosure sale in 1987, obtained a sheriff's certificate. Later, the bank bought the sheriff's certificate from the Federal Land Bank, and it currently owns the land upon which the bin is located.

The bank additionally, also from unrelated transactions, held a security interest in all the personal property of the Grain Co. In settlement of unrelated litigation, the bank acquired all of the personal property of the Grain Co., including the grain bin. Thus, through unrelated transactions, the bank now has both possession and ownership of the grain bin and the land upon which it sits.

The bank commenced this foreclosure proceeding in July of 1987. It sought judgment and foreclosure with respect to the three notes relating to the bin. The bank also sought to foreclose on three additional loans and collateral unrelated to the bin and interest loans. Ferral and Brenda filed a counterclaim against the bank on several theories, including deceit, fraud and violation of the duty of disclosure.

In January 1989, Ferral filed a voluntary chapter 13 bankruptcy petition. When the automatic stay was lifted as against the eighty acres securing the bin debts, the bank proceeded with its suit. Because Ferral had taken bankruptcy, the bank sought an in rem judgment against the collateral and a personal judgment for any deficiencies against Brenda Gates, now Ferral's ex-wife.

Following trial, the court ordered foreclosure of the collateral securing the three notes unrelated to the bin loans. However, as to the bin loan and the two interest loans, the court denied foreclosure of the eighty acres. The court found that the parties intended the bin to be the primary security for the loan. Accordingly, the court held that allowing the bank to foreclose on the eighty acres of farmland would unjustly enrich the bank. The court concluded that foreclosure as to the eighty acres was premature:

This Court ... finds that foreclosure against the farm property of the defendants Gates is in reality a claim for a deficiency judgment and that there is nothing in the record to establish the amount of said deficiency. If the bank establishes, by the sale of the "bin", an amount of loss, then there will be consideration for foreclosure. Until this fact is established, the Court finds that said foreclosure is premature and must fail.

The court dismissed the counterclaim.

The bank appealed and Ferral cross-appealed. The bank contends that the district court erred in concluding that any foreclosure of the eighty acres, prior to the sale of the bin and a determination of a deficiency, would result in unjust enrichment. The bank's position is that it cannot be unjustly enriched because it came into possession of the bin not in satisfaction of Ferral's debt, but in an unrelated settlement of the Grain Co.'s debts. It argues there was no express or implied agreement that the bin would be primary security for the bin loans.

Ferral's position on cross-appeal is that he is only a surety. He contends that his willingness to transfer the bin to the Grain Co. was conditional upon his understanding that the eighty acres which he owned at the time of the loan and pledged as security for the bin would also be released.

Because we conclude that foreclosure of the eighty acres is not premature, we reverse the district court's denial of foreclosure. We affirm the remainder of the district court order and decree.

I. Scope of Review.

Foreclosure of a deed of trust is an action in equity. Iowa Code § 654.1 (1987). Accordingly, our scope of review is de novo. Iowa R.App.P. 4.

II. Foreclosure of the "Eighty Acres."

A. Release of a Security Agreement.

There is no dispute that Ferral provided the bank with both real and personal property as collateral for the bin loan. Four years later, Ferral transferred his ownership of the bin to the Grain Co. and the bank released its security interest in the bin. Ferral urges the bank's release of its security interest in the bin impaired his rights as surety to discharge or reduce his obligation...