Mortgage Lender’s Discretion for How to Apply Proceeds of Foreclosure Sale Affirmed
The Iowa Court of Appeals recently issued its decision in Primebank, Inc. v. Tegrootenhuis as Tr. of Willard TeGrootenhuis Revocable Tr. Dated April 25, 2013. This case should be viewed favorably by lenders as it reinforces the right of a lender to apply the proceeds from a foreclosure sale to any promissory note of the borrower when the underlying mortgage contains a cross-collateralization clause securing all obligations of the borrower and the borrower has waived his right to have the property marshalled. However, this case should serve as a reminder to lenders on the importance of giving a borrower a reasonable opportunity to pay a debt prior to bringing an action to enforce the debt if the lender seeks to recover its attorney’s fees incurred in bringing the claim.
Borrower Scott TeGrootenhuis executed a $977,000 promissory note to refinance his 400th Street acreage, which Primebank, his lender, secured with a mortgage on the property. This mortgage contained a cross-collateralization clause that secured all of borrower’s obligations to lender and waived his right to have the property marshalled. The Willard TeGrootenhuis Revocable Trust dated April 15, 2013 gave a second mortgage of up to $800,000 on the trust’s farm to secure Scott’s $977,000 note. Over the next few years, Scott executed eleven more promissory notes with Primebank. Scott soon defaulted on all of his notes, and as a result, Primebank sought to collect on all twelve of Scott’s notes, to foreclose on the 400th Street acreage mortgage, and to foreclose on the second mortgage on the trust’s farm. Following trial, the district court foreclosed on both the 400th Street acreage and the second mortgage on the trust’s farm and ordered for them to be sold with the proceeds from the sales being used to satisfy the amounts owed under Scott’s twelve notes in default.
On appeal, the trust argued that the proceeds from the sale of the 400th Street acreage must first be applied to Scott’s $977,000 note before any proceeds may be applied to any of Scott’s eleven other notes, and that the second mortgage on the trust’s farm securing up to $800,000 only secured the deficiency on the $977,000 note after the proceeds from the sale of the 400th Street acreage had been applied. The trust also argued that Primebank was not entitled to attorney fees.
The Iowa Court of Appeals found that as the result of the cross-collateralization clause in the 400th Street mortgage, the mortgage secured not only Scott’s $977,000 note, but also his eleven other notes with Primebank. The Court of Appeals also found that the 400th Street mortgage and second mortgage on the trust’s farm contained a waiver of the right to have the properties marshalled. As a result, the Court of Appeals found that the notes and mortgages were unambiguous, and affirmed the district court’s ruling that the relevant documents gave Primebank discretion to apply the proceeds from the sale of the 400th Street property to any of Scott’s twelve notes, and that nothing in the loan documents required that Primebank first apply the proceeds from the sale of the 400th Street property to Scott’s $977,00 note prior to applying the proceeds from the sale of the trust’s farm.
However, the Iowa Court of Appeals did overrule Primebank’s recovery of attorney fees against the trust. In its original petition, Primebank had sought to foreclose on its second mortgage on the trust farm. Primebank subsequently dismissed this claim, but later amended its petition to re-include it. While Primebank did not provide the trust with a notice of default and right to cure before filing its original petition, Primbank did provide these prior to amending its petition. The Iowa Court of Appeals found that Primebank did not comply with the provisions of Iowa Code §§ 654.4B(1) and 625.25 when Primebank failed to provide the trust with a notice of default and right to cure before filing its original petition, and as a result, was prohibited from recovering its attorney fees.
While the outcome of this case is not ground breaking, it is an important case for lenders as it demonstrates that when lenders utilize unambiguous cross-collateralization clauses and waivers of a borrower’s right to have its property marshalled, a court will not interfere with the right of the lender to determine how and what order sale proceeds will be applied to defaulting notes. Additionally, this case serves as a reminder to lenders as to the importance of providing a reasonable opportunity for defaulting borrowers to cure a default prior to initiating any proceedings when the lender seeks to be compensated for its reasonable attorneys fees, because if the proper steps are not initially taken by a lender, a court will not allow the lender to later cure such defects.
Please contact a banking and finance attorney if you have any questions.
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Simmons Perrine Moyer Bergman PLC is a full service law firm with locations in Cedar Rapids and Coralville, Iowa. For more information, visit spmblaw.com.
Disclaimer: This information is intended for general information purposes only and is not intended, nor should it be construed or relied on, as legal advice. Please consult your attorney if specific legal information is desired.