Opinion
No. 5-225 / 04-0927
Filed May 25, 2005
Appeal from the Iowa District Court for Polk County, Karen A. Romano, Judge.
Janis Hendrickson appeals from the district court's foreclosure decree. AFFIRMED.
David J. Lawler of Iowa Legal Aid, Council Bluffs, for appellant.
Rachelle L.K. Johnson of the Johnson Law Office, Montezuma, for appellee.
Heard by Vogel, P.J., and Miller and Hecht, JJ.
Janis Hendrickson appeals from the district court's foreclosure decree. We now affirm.
I. Background Facts and Proceedings.
On November 1, 1999, Poweshiek County Savings Bank, n/k/a Patriot Bank (Bank) loaned $70,000 to Paul and Janis Hendrickson for the purchase of real estate located in Polk County. The Hendricksons gave the bank a purchase money mortgage to secure the loan. Although the loan was paid off on July 7, 2000, the Bank failed to release the mortgage, and neither Paul nor Janis requested the Bank do so. The mortgage document, titled "Open Ended Real Estate Mortgage (With Future Advance Clause) signed by both Paul and Janis contained the following provisions relevant to this appeal:
The testimony of Bank employee Kevin James established that Paul, at the time he paid off the $70,000 note, made a specific request to have the mortgage remain open so as to provide security for future advances.
NOTICE: This mortgage secures credit in the amount of $70,000 . . . 3. [t]he total principal amount of the Secured Debt secured by this Mortgage at any one time shall not exceed the amount stated above. . . . Future advances are contemplated and, along with other future obligations, are secured by this Mortgage even though all or part may not yet be advanced.
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4. SECURED DEBT DEFINED: The term "Secured Debt" includes, but is not limited to, the following: (A) Promisory Note Dated November 1, 1999 in the amount of $70,000. (B) All future advances from the Lender to Mortgagor or other future obligations of Mortagor to Lender under any promissory note . . . existing now or executed after this Mortgage whether or not this Mortgage is specifically referred to in the evidence of debt and whether or not such future advances or obligations are incurred for any purpose that was related or unrelated to the purpose of the Evidence of Debt.
If more than one person signs this Mortgage as Mortgagor, each Mortgagor agrees that this Mortgage will secure all future advances and future obligations . . . given to or incurred by any one or more Mortgagor.
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25. JOINT AND INDIVIDUAL LIABILITY; CO-SIGNERS: SUCCESSORS AND ASSIGNS BOUND . . . Mortgagor agrees that Lender and any party to this Mortgage may extend, modify or make any change in the terms of this Mortgage or the Evidence of Debt without Mortgagor's consent. Such a change will not release Mortgagor from the terms of this Mortgage.
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26. APPLICABLE LAW; SEVERABILITY; INTERPRETATION . . . This Mortgage is complete and fully intergrated. This Mortgage may not be amended or modified by oral agreement.
(emphasis supplied).
After the purchase money loan was paid off the Bank subsequently made additional loans of $10,000, and $30,000 to Paul. Paul later borrowed $60,000 for the purchase of a combine and $35,000 to pay off the $30,000 note. The $60,000 and $35,000 notes, which expressly state they are secured by the mortgage, are in default. Janis did not sign them and she first learned Paul had incurred the additional debt when the Bank requested mediation on the notes in default. Soon thereafter, Janis and Paul divorced. The dissolution property division required Paul to execute a quitclaim deed transferring his interest in the mortgaged real estate to Janis.
It is undisputed that these four notes were executed solely for Paul's private business dealings and had no relationship to the loan secured by the purchase money mortgage. The loans were taken by Paul without Janis' knowledge or consent.
The Bank filed an action to foreclose the mortgage. Janis defended the action but Paul failed to serve an answer, and a default judgment was entered against him. At the foreclosure hearing on March 30, 2004, Janis testified she intended the mortgage to be a purchase money mortgage, designed to secure only the initial $70,000 note for the purchase of the real estate. Janis claimed she read the mortgage document carefully and voiced concern about the future advances clause, and informed the loan officer that she had "no intention . . . to borrow any other money." Janis claims she signed the mortgage document after receiving assurances from the loan officer that the clause would only apply if the Hendricksons wanted to borrow more money; and that if $70,000 was all they wanted to borrow, they need not worry about the clause. Janis, however, did not request the clause be stricken prior to signing the mortgage document.
The district court, while sympathetic to Janis' plight resulting from Paul's actions, found no ambiguity in the language of the mortgage that would negate the effect of the future advances clause. Because the future advances clause expressly provides security for future debts and obligations "incurred by any one or more Mortgagor," the court concluded Janis' ownership interest in the real estate secured the individual debts of Paul up to the $70,000 ceiling established in the mortgage. Therefore, the district court ordered the mortgage foreclosed.
Janis now appeals, alleging the district court should have denied foreclosure because (1) the mortgage was satisfied when the purchase money loan was paid off, and should have been released before Paul incurred additional debt, (2) the future advances clause is unenforcable as a matter of law, and (3) the foreclosure ordered was inequitable under the circumstances.
II. Scope and Standard of Review.
The foreclosure of a real estate mortgage is an action in equity and therefore our review is de novo. Iowa R. App. P. 6.4; First State Bank v. Kalkwarf, 495 N.W.2d 708, 711 (Iowa 1993). Although we accord some weight to the findings of the district court, we are not bound by them. Production Credit Ass'n v. Shirley, 485 N.W.2d 469, 471 (Iowa 1992).
III. Discussion. A. Failure to Release Mortgage.
Janis relies on Iowa Code chapter 655 (2001) in asserting the district court should have ordered the mortgage cancelled and released of record as of the time when the purchase money loan in the amount of $70,000 was paid in full on or about July 7, 2000. Section 655.1 creates a duty on the part of the Bank to acknowledge satisfaction of the mortgage by executing and filing a written document releasing the mortgage upon full payment of the underlying debt. The record clearly shows this was not done. However, because we find the parties intended the purchase money mortgage to be open-ended, and the mortgage clearly states that future advances are contemplated, the duty created in section 655.1 did not arise under the circumstances presented in this case. Where, as here, the mortgage contemplates future advances or additional indebtedness, a mortgagor may, by agreement with the mortgagee, hold the otherwise satisfied mortgage open. As noted above, the testimony of Bank employee Kevin James established that Paul made a specific request to keep the mortgage of record to provide security for future advances. We note the mortgage terms contemplate "that Lender and any party to this Mortgage may extend, modify or make any change in the terms of this Mortgage or the Evidence of Debt without Mortgagor's consent" and that "[s]uch a change will not release Mortgagor from the terms of this Mortgage." Thus either Paul or Janis, without the consent of the other, could direct the Bank to keep the mortgage open so as to provide security for additional advances, and bind the other's interest in the mortgaged real estate. This express agreement between Paul and the Bank to hold the mortgage open despite full satisfaction of the intial indebtedness waived the Bank's duty under section 655.1 to release the mortgage of record. We therefore affirm on this issue.
We acknowledge that the purchase money note which precipitated the mortgage expressly stated future advances were not contemplated "under this note."
The supreme court of South Carolina interpreted that state's statutory analog to Iowa Code section 655.1 (2001) to permit the holding open of a mortgage by mutual agreement between the lender and the mortgagor. Central Prod. Credit Ass'n v. Page, 231 S.E.2d 210, 214 (S.C. 1977). Were we to strictly construe section 655.1 to require the mortgagee to release the mortgage every time the secured debt was reduced to zero, we would effectively halt the utility of the open-ended/future advances type mortgage. As the court in Page stated,
The advantages of [a future advances clause], in which the borrower wants only a part of the loan to begin with but will need more in the future, are numerous and substantial. The mortgagor saves interest on the surplus until ready to use it. He also avoids the expense and inconvenience of refinancing the mortgage so as to include the additional needed sum, or, in the alternative, of executing a second and later mortgage for each new advance, with the attendant expenses.
Id. at 213-14. To hold otherwise would result in forcing borrowers seeking future advances to either execute new mortgages each time the debt was paid down, or constantly maintain a balance on the loans they have secured by the mortgage. As it would remove from a borrower all the advantages outlined in Page, we reject Janis's request for cancellation of the mortgage.
B. Enforcability of the Future Advances Clause.
Janis next argues the parties did not intend, at the time the mortgage was executed, to make the future advances clause operable, and it therefore should not be enforced. Janis also contends that under the "relatedness" rule the clause should not be enforced because Paul's subsequent debts are unrelated to the original debt secured by the purchase money mortgage. Janis seeks reformation of the contract to remove the future advances clause to effectuate the intent of the parties. We decline to do so.
In Farmers Trust and Savings Bank v. Manning, 311 N.W.2d 285, 289 (Iowa 1981), the court noted Iowa views with disfavor the inclusion of future advances clauses within mortgages drafted by the lender, especially when those clauses are situated within the mortgage contract in such a way that lends itself easily to lender overreaching and surprise. See also In re Simpson, 403 N.W.2d 791, 793 (Iowa 1987) (stating "[t]ypically, the fine print future advances clause buried in a security agreement will not convey the broad scope of its coverage to the borrower"). Nonetheless, future advances clauses have been upheld in this jurisdiction. Id. Iowa courts have enforced future advances mortgage clauses against joint mortgagors for the individual, secret debts of a mortgagor. Corn Belt Sav. Bank v. Kriz, 207 Iowa 11, 219 N.W. 503, 504 (1928). Significantly, the future advances clause in Kriz secured "all other indebtedness . . . against said mortgagor, or either of them." Id. (emphasis supplied). In First Bank and Trust Co. of Ottumwa v. Welch, 219 Iowa 318, 320, 258 N.W. 96, 97 (1934), the husband borrowed sums on the jointly executed mortgage without his wife's knowledge or consent. There, the future advances clause found in the mortgage did not contain language making the mortgage security for "all other indebtedness . . . against said mortgagor, or either of them." Zidlicky, 426 N.W.2d at 389 (emphasis in original). Consequently, the court distinguished Kriz and held the mortgage did not secure the separate future advance given by the lender to one of the mortgagors. The future advances clause at issue here subjects both Janis's and Paul's interest in the mortgaged real estate to the individual debts of either by its use of the phrase "given to or incurred by any one or more Mortgagor." Accordingly, we conclude the rule stated in Kriz controls our disposition on this issue.
Janis also relies on Decorah State Bank v. Zidlicky, 426 N.W.2d 388, 390 (Iowa 1988). In that case, Mr. and Mrs. Zidlicky executed a mortgage on their home in 1973 to finance their farming operation. The document included a "Spouse's Joinder" clause that obligated both spouses on the individual indebtedness of the other, and provided the security would remain in full force until the Zidlickys gave the bank written notice not to extend further credit. Id. at 389. The Zidlickys gave the bank another mortgage in 1976, but that document did not contain a similar joinder clause. Id. When the 1973 loan was paid in full, the related mortgage was not released. Id. The 1973 and 1976 mortgages were referenced in a 1983 note given to the bank by Mr. Zidlicky. Id. at 390. After Mr. Zidlicky defaulted on the 1983 note, the bank sought to foreclose the mortgages against the Zidlickys' residence. Our supreme court refused to enforce either the joinder clause or the future advances clause within the 1973 mortgage. Id. at 391. The court reasoned the 1976 mortgage did not contain a joinder clause and thus did not obligate the wife for subsequent notes she did not sign. Id. The court further reasoned that the 1973 joinder clause had lapsed as the Zidlickys "cannot be said to have intended that the [clause] remain valid after they sold their farming operation and moved to town." Id. We conclude, however, that significant factual differences distinguish Zidlicky from the case now before the court. There is no indication in Zidlicky that the clauses at issue were ever discussed or explained at the time the mortgages were signed, leaving the parties' intent as to their scope in doubt. Further, the future advances clause in the 1976 Zidlicky mortgage did not expressly bind the wife's interest in the collateral to the subsequent individual debts of her husband. Had the future advances clause in Zidlicky contained the language found in the mortgage at issue in this case or in Kriz, we are convinced our supreme court would have reached a different result.
We take it that a joinder clause operates in similar fashion to a future advances clause that specifically obligates the mortgage to any future debt incurred either individually or jointly, such as was found in Kriz and in this case.
We believe the intent of the parties may be discerned from the mortgage executed by the Hendricksons. The future advances clause was not buried in the document in any way that would lure an unsuspecting borrower into a surprised foreclosure. The document's title clearly indicates the inclusion of a future advances clause. Simpson, 403 N.W.2d 791, 793. Janis testified she had read the mortgage form thoroughly prior to signing, and understood the ramifications of the future advances clause well enough to put pointed questions to the lender's representative concerning the clause's effect. Her uncontroverted testimony, however, does not prove she was misled to believe the clause would be inoperable. We find from Janis' own testimony that the Bank's agent represented the future advances clause would not be of consequence unless the Hendricksons decided to borrow more money prior to the mortgage's discharge. Janis did not testify that she clearly informed the Bank she would not be bound by the clause before she executed the mortgage. Rather, she only claims to have told the Bank's representative she would not borrow additional sums. When the parties signed the mortgage — a fully integrated document — they evidenced their intent to be bound by its terms. "In the construction of written contracts, the cardinal principle is that the intent of the parties must control; and except in cases of ambiguity, this is determined by what the contract itself says." Iowa R. App. P. 6.14( n). The mortgage language is not ambiguous; it clearly obligates the mortgaged property as collateral for any subsequent debt incurred by any one or more mortgagor up to the $70,000 cumulative limit. The use of the words "any one or more" clearly conveys to a reasonable person that not only will the joint debts incurred by all mortgagors be secured by the mortgage, but that debts to which a particular mortgagor is not a party will also be secured. Welch, 219 Iowa at 320, 258 N.W. at 97. We refuse to reform the mortgage to delete the future advances clause where (1) the language of the clause has an established meaning and is not ambiguous; (2) the document is fully integrated, and specifically disclaims the authority of the parties to orally modify the agreement; and (3) the testimony upon which Janis relies to establish her intent to vitiate the clause merely establishes her intent not to borrow additional sums from the Bank.
Janis further contends the "relatedness" rule prohibits foreclosure of the mortgage to collect Paul's individual debts that are completely unrelated to the transaction for which the mortgage was given. Our supreme court has applied the rule in holding that a future advances clause will not cover subsequent debts if they are "not of the same kind and quality" as the principal obligation, or if they fail to "relate back to the same transaction or series of transactions as the principal obligation." Freese Leasing, Inc. v. Union Trust Sav. Bank, 253 N.W.2d 921, 925 (Iowa 1977). However, the "relatedness" rule does not render future advances clauses meaningless; rather it is designed to evidence the parties' intent concerning the clause's scope where that intent is not adequately manifested in the contract itself. Id. at 927. While we agree the subsequent loans made by the Bank to Paul were not related to the initial purchase money real estate loan, we do not find persuasive Janis' contention that the parties did not intend the future advances clause in the subject mortgage to secure Paul's subsequent loan transactions in this case.
The Freese court acknowledged the parties to a mortgage may freely state their intention with regard to the scope of future advances to be secured by the mortgage. Id.; Simpson, 403 N.W.2d at 793 (stating "[p]arties can either clearly state their intent when drafting a future advances clause or refer back to the clause when making new loans in order to clarify the series of transactions"). We believe the parties did clearly state their intent that all future advances given by the bank to the Hendricksons, or either of them, would be secured by the mortgage "whether or not such future advances or obligations are incurred for any purpose that was related or unrelated to the purpose of the [original] Evidence of Debt." Because the purposes of the relatedness rule were served by the mortgage in this case, Janis may not avoid enforcement of the future advances clause in this case.
C. Equitable Considerations.
Janis maintains it is generally inequitable to allow the Bank to cover its losses on the bad loans made to Paul by employing the future advances clause in the mortgage where the Bank had given assurances to Janis that the clause would not be used. We have already found that Janis failed to meet her burden to prove the Bank misrepresented the terms of the mortgage. Although we share the district court's sympathy for Janis's circumstances, we find no inequity in holding her to contract terms that were read, explained, and understood. After de novo review, we find no merit in any of the assignments of error advanced by Janis, and we therefore affirm the district court's decision to foreclose the mortgage.