The Iowa Court of Appeals recently entered a ruling which should be of general interest to lenders. The case of Regions Bank v. City State Bank, filed December 30, 2009, makes it clear that “non-judicial” foreclosures may in fact be subject to judicial review, even where the foreclosure appears to have complied with the strict requirements of Iowa’ non-judicial foreclosure statute. The borrower in that case deeded approximately 117 acres of real estate to City State Bank, the first mortgage lien holder, pursuant to a written non-judicial foreclosure agreement between City State and the borrower. City State Bank then notified Regions Bank, a second lien holder, of its statutory right to redeem the real estate by paying City State the full amount of the mortgage debt. Regions had no interest in paying the full amount of the Regions debt in order to redeem all 117 acres, but alleged in a lawsuit it filed to set aside the non-judicial foreclosure action that it had the right to redeem one specific lot located within the 117 acres by paying a fraction of the total indebtedness owed to City State. Regions based that claim on an agreement between City State and its borrower which contemplated that City State would have released certain lots from its mortgage, had the borrower paid some of the funds it borrowed from Regions Bank to City State, in exchange for partial releases of its mortgage.
Although the District Court found that City State had complied with the express requirements of Iowa’s non-judicial foreclosure statute and therefore granted summary judgment in City State’s favor, the Iowa Court of Appeals reversed the District Court’s decision, finding that the District Court should have at least granted Regions Bank more time to gather facts in support of its case before granting summary judgment to City State. The Court of Appeals did not dispute the District Court’s finding that City State had followed the statutory requirements for non-judicial foreclosure set forth in the Code. Unlike the District Court, however, the Court of Appeals found that that City State’s compliance with those statutory requirements did not preclude further judicial review of the foreclosure, because the Court of Appeals could not “foretell what effect, if any, [the alleged agreement between the borrower and City State] would have on the foreclosure process without examining its terms.”
At a time when many lenders and their borrowers are finding Iowa’s non-judicial foreclosure process to be the most cost-effective and speedy method for foreclosure of real estate mortgages, many junior lien holders are disappointed to find that their liens can be extinguished upon thirty days notice without judicial oversight of any kind. This ruling will provide ammunition to those junior lien holders who may feel that judicial review of a particular non-judicial foreclosure is warranted.
If you have questions, please contact Jon Sullivan at 515-246-4522 or jsullivan@dickinsonlaw.com.
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