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8th Cir. Holds Future Advances Clause Applied to Separate Business Loans to Co-Mortgagor

mortgage lawThe U.S. Court of Appeals for the Eighth Circuit recently held that the language of a future advances clause entitled the foreclosing mortgagee to the surplus proceeds of a condominium sale where there was an outstanding balance owed to same mortgagee on separate business loans extended to a different co-mortgagor.

A copy of the opinion in Sanborn Savings Bank v. Freed is available at:  Link to Opinion.

The appeal arose out of a consumer loan extended by the plaintiff mortgagee (“Mortgagee”) to the defendant’s husband (“Husband”). The loan was secured by a mortgage executed by the defendant (“Wife”) and Husband and secured by their condominium located in Iowa. The mortgage included a future advances clause which granted Mortgagee a security interest in the condominium covering future funds Husband might borrow.

Husband subsequently borrowed additional sums under three notes to keep his business running (the “Business Notes”). Wife was not a party to these notes.  Shortly thereafter, Husband filed for Chapter 7 Bankruptcy. Husband and Wife subsequently sold the condominium, divorced, and Wife moved to a different state.

After the note evidencing the loan to Wife was paid from the sale, approximately $249,117.65 remained of the sale proceeds which were deposited in escrow in Husband’s bankruptcy. The bankruptcy court found that pursuant to the future advances clause, Husband’s portion of the escrowed proceeds were required to pay down the Business Notes. The bankruptcy court further found that Husband could not claim a homestead exemption for the proceeds.

Mortgagee subsequently brought a separate action against Wife seeking a declaratory judgment that Wife’s portion of the proceeds be subject to the mortgage’s future advances clause and that Mortgagee could apply the proceeds to the Business Notes. The trial court granted summary judgment in favor of Mortgagee and Wife appealed.

Wife first argued that the trial court erred in finding that the mortgage’s future advances clause secured the Business Notes.

In Iowa, when there is no clear supportive evidence of a contrary intention, a future advances clause will encompass a particular debt in two instances: (1) when they are of the same kind and quality or relate to the same transaction or series of transactions as the principal obligation secured; and (2) 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).

Wife argued that the Business Notes were of a “completely different character” than the original note evidencing the loan made to her.

However, the Eighth Circuit pointed out that the nature of the debt is only material when there is no “clear, supportive evidence of a contrary intention” that the mortgage can secure other, unrelated debt. The mortgage at issue made it plain that it could secure “[a]ll present and future debts from [Husband] to [Bank],” without requiring the debt to be mentioned in the future debt instrument, whether the “future debt [wa]s unrelated to or of a different type than th[at] debt,” or if Husband “incur[red] [debts] either individually or with others who may not sign this [Mortgage].”

The Eighth Circuit held that the indisputable evidence demonstrated the mortgage also secured the Business Notes, noting the unambiguous language of the future advances clause, its bold presence and Wife’s signature at the end of the Mortgage as well as her initials on the page containing the future advances clause.

Wife alternatively argued that the mortgage was rendered unenforceable by various contractual formation problems.

Wife first argued that there was no meeting of the minds as she did not discuss or understand the terms of the future advances provision. However, under Iowa law, it is not a defense to enforcement of a contract that a party did not read fully and consider the terms of the contract. Bryant v. Am. Express Fin. Advisors, Inc., 595 N.W.2d 482, 486 (Iowa 1999). Because there was no evidence of duress, incapacity, coercion or other formation problems, and Wife accepted the terms by signing the contract, the Eighth Circuit found Wife was bound by the contract. See Gosiger, Inc. v. Elliot Aviation, Inc., 823 F.3d 497, 502 (8th Cir. 2016).

Wife next argued that her initials and signature on the mortgage did not equate to her having agreed to be bound by its terms and implications. The Eighth Circuit again found no evidence that called into question her execution of the Mortgage. See Bryant, 595 N.W.2d at 487. The argument that the mortgage forced Wife to waive her homestead rights in contravention of public policy, was also rejected as the regulation relied on by Wife did not apply to banks such as Mortgagee.

Wife further claimed that the clause was unconscionable. The Eighth Circuit noted that Wife’s argument was essentially that the contract was a bad bargain and thus, rejected the claim.  See C&J Vantage Leasing Co. v. Wolfe, 795 N.W.2d, 65, 80 (Iowa 2011) (“[T]he doctrine of unconscionability does not exist to rescue parties from bad bargains.”)

Wife also argued that Mortgagee failed to make a prima facie showing of its entitlement to the proceeds because it failed to prove the proceeds comported with the Mortgage’s maximum obligations limit clause.  The Eighth Circuit rejected this argument as well, as it was raised for the first time on appeal.

Similarly, the argument that the mortgage was not a credit agreement due to its lack of the disclosure that would be required by Iowa Code § 535.17(3) was rejected as it was also raised for the first time on appeal.

Wife further made numerous equitable arguments which were precluded because the mortgage was a “credit agreement” under Iowa Code § 535.17(5)(c).  Although Wife argued that the mortgage was not a “credit agreement” under this provision of the Iowa Code, the Eighth Circuit disagreed finding that a mortgage fits within Iowa’s definition of “credit agreement.” Finally, all Wife’s remaining arguments were not addressed as the Court found them “wholly devoid of merit and/or frivolous.

Thus, the Eighth Circuit affirmed the judgment of the trial court, denied Wife’s motion to certify questions of law to the Iowa Supreme Court and denied Mortgagee’s motion to strike a portion of Wife’s reply brief as moot.

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The attorneys of Maurice Wutscher are seasoned business lawyers with substantial experience in business law, financial services litigation and regulatory compliance. They represent consumer and commercial financial services companies, including depository and non-depository mortgage lenders and servicers, as well as mortgage loan investors, financial asset buyers and sellers, loss mitigation companies, third-party debt collectors, and other financial services providers. They have defended scores of putative class actions, have substantial experience in federal appellate court litigation and bring substantial trial and complex bankruptcy experience. They are leaders and influencers in their highly specialized area of law. They serve in leadership positions in industry associations and regularly publish and speak before national audiences.

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