Summary of a Recent
Judicial Development in
Secured Transactions

Mortgage on Agricultural Land, Waiver of Homestead Exemption

Walt McCarter
National AgLaw Center Research Associate

Summary of Decision

In Iowa State Bank and Trust Co. v. Michel, 683 N.W.2d 95 (Iowa 2004), the Supreme Court of Iowa held that a bank had not substantially complied with required formalities in the mortgage documents and thus had not obtained a waiver of the debtor's homestead exemption rights as intended, and so allowed the debtors to retain their 40 acres of agricultural land.

Background

The Defendants borrowed money from Iowa State Bank & Trust to open a convenient store in 1998, granting the Bank a second mortgage on their property in return. Id. at 99. The mortgage included a specific waiver of all homestead exemptions. Id. The Bank, unaware that the property was agricultural land, did not require the Defendants to review or sign the "agricultural land" section of the mortgage. Id. When the Defendants subsequently defaulted on the loan, the Bank brought a foreclosure action. Id. The Defendants claimed that the Bank's failure to follow procedure (by not having them sign the agricultural section of the mortgage) barred foreclosure on their 40-acre homestead, but the district court found that the property was not "agricultural land" and entered judgment in favor of the Bank. Id. The Defendants appealed, and the appellate court found that the 40-acre property was "agricultural land"; however, because the Defendants understood what they were doing and had intended to mortgage their homestead, the court granted the bank an equitable mortgage. Id. at 100. The Defendants appealed to the Iowa Supreme Court. Id.

Arguments

The Bank argued that the Defendants' homestead was not "agricultural land" subject to the protection of Iowa Code § 561.22. Id.

The Defendants argued that the bank was not entitled to an equitable mortgage on their homestead. Id.

Analysis and Holdings

"Agricultural land" is defined in Iowa Code § 9H.1(2) as "land suitable for use in farming." Id. at 102. The court explained that "farming" included crop production and grazing, and "crops" included plants grown for profit or for sustenance. Id. The court pointed out that the district court and the Bank had mistakenly ignored the statement "suitable for use in," and had simply relied on the fact that the Defendants were not using the land for farming. Id. The court found that the evidence clearly showed the property was fit for crop production and grazing livestock, and so held that the property was "agricultural land." Id. at 102-03. The court further held that the Bank had not substantially complied with state mortgage requirements because "informing a debtor that he is mortgaging his home is not the same as informing the debtor that he is waiving his homestead exemption right by doing so," and stated the Defendants' subjective understanding of the transaction did not constitute substantial compliance or excuse the Bank's noncompliance. Id. at 103-05.

The court also refused to grant the Bank an equitable mortgage, stating that it was bound by the statute "absent fraud or mistake," and "granting an equitable mortgage here on the sole basis that the debtors knew they were mortgaging their homestead would render § 561.22 meaningless, and noncompliance with the statute of no moment." Id. at 107. The Bank claimed that due to their "mistake," the contract should be reformed, but the court explained that reformation is proper only when the contract does not reflect the actual intent of the parties, and may not be used to change the terms of the agreement. Id. at 108.

The case was decided on May 12, 2004.