Amid the COVID-19 pandemic, the Iowa Supreme Court opinion released on March 27, 2020 in Blue Grass Savings Bank v. Community Bank & Trust Company has the potential to disrupt the lending industry for years to come. In what began as a simple foreclosure of a mortgage by a lender, where the borrower issued a default judgment, the Iowa Supreme Court ultimately ruled on Iowa Code § 654.12A which should worry holders of higher privileges about the security of their seniority.
In this case, Blue Grass Savings Bank (“BGSB”) loaned money to a borrower in exchange for a mortgage. As with all other standard mortgages in Iowa, this mortgage included a clause that read:
NOTE. THIS MORTGAGE GUARANTEES A CREDIT IN THE AMOUNT OF $ 148,000.00. LOANS AND ADVANCES UP TO THIS AMOUNT, AS WELL AS INTEREST, ARE GREATER THAN DEBT TO OTHER CREDITORS UNDER MORTGAGES AND GUARANTEES REGISTERED OR DEPOSITED THEREFORE. HOWEVER, THE PRIORITY OF A PREVIOUS MORTGAGE REGISTERED UNDER THIS SECTION DOES NOT APPLY TO LOANS OR ADVANCES MADE AFTER RECEIPT OF NOTICE OF SEIZURE OR ACTION TO PERFORM A SUBSEQUENT REGISTERED MORTGAGE OR ANY OTHER GUARANTEE. LATER REGISTERED OR DEPOSITED.
The mortgage also stated that “[a]All present and future debts of the mortgagor to the lender “were secured by the mortgage.
BGSB then loaned additional money to the borrower, securing these loans with the same mortgage. At the time of foreclosure, the total amount owed to BGSB exceeded $ 500,000.
Between the time of the mortgage and the foreclosure, the borrower obtained a loan from the Community Bank & Trust Company (“CBTC”) for almost $ 600,000. This loan was secured by a mortgage on the same property that was mortgaged to BGSB.
When BGSB began the foreclosure, it sought to recover the full amount of the debt from the secured property. CBTC denied this and argued that BGSB’s senior security in real estate was capped at $ 148,000 (plus interest and fees). CBTC argued that the provision of the mortgage which read: “This mortgage secured a credit in the amount of $ 148,000. Loans and advances up to this amount, plus interest, have priority. . . “capped the amount of top security that BGSB had in the property.
The Iowa Supreme Court agreed.
The Court considered the mortgage and the Iowa Code § 654.12A. The Court held that under § 654.12A, the amount stated in the notice of the credit amount in the mortgage is a cap on the extent of the mortgage’s first collateral (plus interest) . So even if a mortgage contains a hitch clause securing future loans as the same mortgage, the seniority of these future loans depend on the amount of credit shown in the mortgage.
Thus, even though BGSB held collateral for the full amount of its loan to the borrower (approximately $ 500,000), only a portion of that amount took priority over CBTC’s collateral on the same property. As noted above, the Court authorized the inclusion of the accrued interest on the original loan of $ 148,000 in the maximum senior guaranteed amount. However, all other advances made by BGSB were inferior to CBTC.
What does this case say to lenders in Iowa? Check out registered mortgages afterward before advancing money under a entrainment clause! In addition, the Court noted that BGSB could have required the borrower to sign modified mortgages increasing the amount of credit secured by the mortgage before granting additional credit (obviously, after checking whether there was had subsequent liens on the mortgaged property).
Lenders should not be slack and just rely on the training clauses. Diligence in checking records for subsequent privileges is a must.