Iowa Banking Law Blog

Iowa Bankers, You’re Not as Secure as You Think: Iowa Supreme Court Rules Feed Supplier’s Lien Has Priority Status

- Posted by John E. Lande

In Oyens Feed & Supply Co. v. Primebank, the Iowa Supreme Court dealt a blow to financial institutions’ ability to secure first priority for livestock under Article 9. The case arose as a result of the competing security interests of the financial institution Primebank and the feed supplier Oyens Feed.

Primebank had extended credit to a farm, securing that credit with an interest in the farm’s livestock. Oyens Feed extended credit for the farm to purchase feed for the farm’s livestock. Pursuant to Iowa Code § 570A.3, Oyens Feed’s credit was secured by the livestock that consumed the feed—the same livestock securing Primebank’s credit extension.

The Iowa Supreme Court began its analysis by looking at the history of security interests in livestock. It noted that Chapter 570A was enacted during the depths of the farm crisis of the 1980s. The goal of that section was to ensure that farmers, even in difficult times, could always secure funds to purchase necessary farm inputs. Pursuant to § 570A.2, a farm dealer could then ensure it had a first priority security interest in the livestock by filing a certified request with any other lien holders.

The legislature then amended Chapter 570A in 2003 for the purpose of maintaining the priority status of agricultural liens over other security interests and liens. In other words, Oyens Feed’s security interest in the livestock would continue to trump Primebank’s interest in livestock to the extent that the livestock’s value was enhanced by Oyens Feed’s feed.

The dispute in this case arose over whether Oyens Feed’s security interest still took precedence over Primebank’s when Oyens Feed failed to file a certified request pursuant to § 570A.2. After analysis of the legislative history of Chapter 570A, the Court concluded that the overriding purpose of that chapter is to ensure that farmers are able to weather difficult times by guaranteeing access to credit for livestock feed. The Court explained that there is a specific rule—imposed by § 570A.5(3)—that livestock feed suppliers be granted special priority. Thus, a feed supplier’s lien will have first priority over all other liens, even prior perfected lien.

The decision has limitations that are worth noting. First, the Court made it clear that this special priority status only applies to feed supplied for livestock consumption, not crop inputs. Second, the Court did not address what actions a supplier must take in order to perfect its lien.

Nevertheless, financial institutions should pay close attention to a farmer’s operation where that farmer secures credit with livestock. An institution’s perfected security interest will have priority only up to the acquisition price of the livestock. A feed supplier will have priority over any value added as a result of the livestock’s feed consumption. If an institution wants to maintain its priority, it should consider extending credit on behalf of a farmer for the purchase of the feed. This ensures that a feed supplier will not gain a superior interest in the value added to the livestock.

For more information, please contact John Lande at 515-246-4509 / jlande@dickinsonlaw.com.

Changes in Iowa Law Affecting Banks

- Posted by Howard Hagen

Below is a very brief summary of changes in the 2011 legislative session that could affect Iowa banks:

Loans to Borrowing Groups
Section 524.904 of the Code was amended to expand the universe of potential “groups” for purposes of loan limits.  The concept of a “corporate group” for loan limit purposes has been replaced with a more expansive “borrowing group” concept.  The Act includes a comprehensive definition of what constitutes a “borrowing group."

With respect to borrowing groups, banks must document a borrowing entity’s current ownership, the persons who have voting rights with respect to the entity, the names of the entity’s senior management, and the entity’s means of servicing the loan—including the specific reasons that support such assessment.  In addition, loan files must contain financials, present and projected economic and financial performance, and the significance of financial support from borrowing group members and third parties.

The Superintendent of Banking is given the authority to approve a loan limit of up to 50% of aggregate capital if all the loans to any one borrower with a borrowing group otherwise meet the requirements of the 25% and 35% loan limit provisions, and the financial strength of any one group member is not relied upon as a basis for loans to any other group member.

With regard to renewals or loan restructurings, if a bank has made reasonable efforts to bring a loan into compliance, consistent with safe and sound banking practices, the loan will be exempted from the lending limits.  However, such exemption will not be available if new funds are advanced, a new borrower replaces the original borrower, or the Superintendent concludes that the renewal or restructuring was done to evade lending limits.

Loan and Deposit Production Offices
The provision stating that a bank could not operate a loan production or deposit production office in the state unless it either had prior approval from the Superintendent or had operated the office before July 1, 2006, was eliminated.

Recordkeeping
The  mandatory recordkeeping requirement for banks was reduced from 11 years to 7 years.  The statute of limitations for claims based on written contracts or bank record entries was reduced from 10 years to 6 years.

Summary
The major change this past year was the change to loan limits vis-à-vis “borrowing groups.”  These new limits could present new risks to lenders and may necessitate even greater scrutiny of borrowers and added due diligence.  Such efforts should be undertaken to prevent inadvertent violations of the lending limit rules as a result of certain loans being combined on the basis of the borrowers constituting a “borrower group” under the expanded definitions.  The possibility of increasing the loan limit to 50% of capital with the approval of the Superintendent is a welcome addition for Iowa community banks.

As with all new legislation, the Iowa Division of Banking may be consulted regarding specific questions or issues; in this case, particularly regarding the new borrowing group language.

For more information, please contact Howard Hagen at 515-246-4543 / hhagen@dickinsonlaw.com. 

Partial “Payoff” of Prior Equipment Lien Without Assurance That Remainder of Lien Will Be Satisfied Proves Costly to Iowa Lender

- Posted by Jon P. Sullivan

A case recently decided by the Iowa Court of Appeals illustrates the importance to purchase-money lenders of withholding any advances on a purchase money loan until receiving adequate assurance that the advances will result in the release of any prior liens on the property being financed by that lender.   The National Bank (“TNB”) agreed to lend $193,500 to Freedom Transportation, Inc. (“Freedom”) for the purpose of purchasing five used trucks from Alliance Transportation Group, L.L.C. (“Alliance”).  The trucks were subject to a lien of approximately $232,000 in favor of FCC Equipment Financing, Inc. (“FCC”).  Freedom agreed with TNB that Freedom would satisfy the balance of the $232,000 FCC lien from its own funds – Freedom even provided TNB with a copy of a check, payable to FCC, for that difference of $38,784.  In reliance on that understanding, TNB wired loan proceeds in the amount of $193,500 to FCC, which applied those funds to reduce the balance of its loan that was secured by the trucks.  Unfortunately for TNB, FCC never received from Freedom the balance of what it was owed and accordingly refused to release its lien against the trucks.  TNB then sued FCC for the return of the $193,500 it had wired to FCC.

The Iowa Court of Appeals refused TNB’s request for the return of the funds it wired to FCC.  TNB based its request for the return of its wire on the theory that FCC knew that a full payoff was planned, not a partial one, so that FCC should have known that the partial payment it received from TNB by wire was a “mistake” that would “unjustly enrich” FCC.  The Court of Appeals rejected that argument, observing that “it is one thing to say FCC anticipated [full payment], and quite another to say FCC knew the partial payment it had received from TNB was in error.”  “In fact,” the Court went on to say, “TNB’s mistake lay not in wiring the $193,125 . . . its real error was that it sent that money without assuring the rest of the payoff would also be made.” 

There are at least two simple precautions TNB could have taken that would have avoided the result in this case.  First, TNB could have delayed wiring any funds to FCC until TNB knew that FCC had good funds from Freedom for the balance of the release price.  Second, TNB could have communicated to FCC in writing, at or before the time it sent the wire, that FCC’s acceptance of the wire would create an obligation on FCC’s part to release its lien against the trucks.  Because TNB failed to take either such precaution, FCC took the wired funds without notice that the payment was a “mistake” and was not required to return the wired funds to TNB.

For more information, please contact Jon Sullivan at 515-246-4522 or jsullivan@dickinsonlaw.com.

New Delaware Supreme Court Decision Preserves Purpose of Staggered Board of Directors



In a decision issued on November 23, 2010, the Delaware Supreme Court invalidated a bylaw amendment that would have had the effect of moving up the date of the Airgas Inc. annual meeting, thereby shortening the terms of three members of its nine-member board of directors.  The disputed bylaw amendment arose out of an attempted takeover of Airgas by Air Products and Chemicals, Inc.   The Delaware Supreme Court’s decision reversed the Court of Chancery’s October 8, 2010 decision which had upheld the validity of the bylaw amendment.    

 

The Delaware Supreme Court concluded that the bylaw amendment was invalid because it conflicted with provisions in the Delaware General Corporation Law and the Airgas charter.  The Delaware statute authorized a staggered board and specified that such directors were to be chosen for a “full term.”  The Airgas charter required a supermajority vote to enact a bylaw inconsistent with the staggered board arrangement or to remove a director without cause.  The bylaw amendment had been adopted by a majority vote that fell short of this supermajority requirement.  Of course, the bylaw amendment would be invalid if it was inconsistent with either the statute or the charter.  Therefore, the issue became whether the term to which these directors had been elected could effectively be shortened by adoption of a bylaw by a simple majority that had the effect of moving the date of the next annual meeting to a substantially earlier date.  This would depend on whether these directors had been elected to a three-year term or merely to a term that would expire at whatever time the annual meeting is held in the third year following their election.  Concluding that the wording of the statute and the Airgas charter was ambiguous, the Delaware Supreme Court determined that a three-year term was intended. 

 

The Delaware Supreme Court’s decision preserves the purpose of staggering the membership of the board of directors.  The Iowa Supreme Court may follow the same approach.  At a minimum, the existence of this new decision will tend to discourage efforts to “work around” staggered boards of directors.  Although Iowa law is not identical with Delaware law, there is enough similarity to make the new decision relevant, if not controlling authority, for Iowa corporations that have staggered boards and such supermajority requirements.

 

The Iowa Business Corporation Act (the “IBCA”) permits staggered membership of boards of directors.  Iowa Code Section 490.806 provides as follows:

 The articles of incorporation may provide for staggering the terms of directors by dividing the total number of directors into two or three groups, with each group containing one-half or one-third of the total, as near as may be.  In that event, the terms of directors in the first group expire at the first annual shareholders’ meeting after their election, the terms of the second group expire at the second annual shareholders’ meeting after their election, and the terms of the third group, if any, expire at the third annual shareholders’ meeting after their election.  At each annual shareholders’ meeting held thereafter, directors shall be chosen for a term of two years or three years, as the case may be, to succeed those whose terms expire.

 

The IBCA also restricts the removal of directors.  Iowa Code Section 490.808(4) provides as follows:

A director may be removed by the shareholders only at a meeting called for the purpose of removing the director and after notice stating that the purpose, or one of the purposes, of the meeting is removal of the director.  A director shall not be removed pursuant to written consents under Section 490.704 unless written consents are obtained from the holders of all the outstanding shares of the corporation entitled to vote on the removal of the director.

If you have questions, please contact Howard Hagen at 515-246-4543 or hhagen@dickinsonlaw.com.

New State of Washington Legislation Protects Financial Institutions in Security Breaches

On the heels of the TJ Maxx and Heartland Payment Systems credit and debit card security breaches, at least two states now have legislation to protect financial institutions from losses resulting from breaches of payment card information.  When TJX Companies in 2007 and Heartland Payment Systems in 2009 announced that their systems had been breached, leaving millions of consumers vulnerable to hackers with access to their names and card numbers, thousands of financial institutions across the country scrambled to replace their customers’ bank cards in an effort to protect them from further fraud.

 

Beginning July 1, 2010, the state of Washington will be the second state to enact legislation that imposes liability on merchants for payment card breaches.  The new law provides that if a business fails to take reasonable care to protect against unauthorized access to payment card data, and if such failure is deemed to be the proximate cause of a breach, the business may be liable to the financial institution for the institution’s costs associated with the reissuance of cards (to the financial institution’s customers who are residents of the state of Washington).  A business may be exempt from liability, however, if the payment card data was encrypted and if the business was certified compliant with PCI data security standards at the time of the breach.

 

Minnesota was the first state to pass a similar law, titled the Plastic Card Security Act, on May 21, 2007.  Parts 1 and 2 of Minnesota’s Plastic Card Security Act prohibit the retention of certain payment card data for more than 48 hours, while Parts 3 and 4 of the Act – similar to the state of Washington’s new legislation – provide financial institutions with the right of reimbursement and the right to file lawsuits to recover costs associated with reissuing cards as a result of a breach.

 

At one time, four other states – Massachusetts, Illinois, Connecticut and Texas – were considering similar legislation.  Iowa does not have a law providing financial institutions the right to receive reimbursement resulting from such security breaches, but Iowa – like 45 other states – does have laws requiring notice to customers in the event of a breach.  Section 715C of the Iowa Code requires any person who owns or licenses computerized data that contains a consumer’s personal information and was subject to a breach to give notice to the consumer as expeditiously as possible.  This notice can be a written notice to the last known address, an electronic notice if communications have been typically done electronically, or a substitute notice under certain circumstances.  Such a notice must include a description of the breach, the date of the breach, the type of information obtained, and contact information for reporting agencies.  Such a notice must also advise the consumer to report any suspected identity theft.

 

For more information, please contact Mary A. Zambreno at 515-246-4512 or mzambreno@dickinsonlaw.com.

Takeaways from Iowa Supreme Court Ruling in Bank of the West v. Phyllis J. Kline and Christine Walters

On May 14, 2010, the Iowa Supreme Court issued a ruling in the case of Bank of the West v. Phyllis J. Kline and Christine Walters, Iowa Supreme Court Case No. 08-1106, that interprets and applies the provisions of the Equal Credit Opportunity Act, or “ECOA.”  Alleged violations of the ECOA were raised as a counterclaim and affirmative defense to the bank’s attempt to enforce unlimited guaranties of the obligations of Acme Land Company, L.L.C. that were signed by Phyllis J. Kline and Christine Walters.  Phyllis and Christine alleged that they were required to sign the guaranties solely because they were the spouses of John C. Kline and Randal L. Walters and not because other parties obligated to the bank were not sufficiently creditworthy to satisfy Acme’s obligations.   The Supreme Court affirmed the trial court’s ruling, entered in connection with a motion for summary judgment by Phyllis and Christine, that a violation of ECOA had occurred which barred the bank from recovery on the wives’ guaranties.

 

The Court’s ruling clarified two aspects of ECOA law as applied in Iowa.  First, it establishes beyond doubt that any party who is contractually liable for a debt is entitled to assert alleged ECOA violations in connection with that debt (prior to the adoption of certain ECOA regulations by the Board of Governors of the Federal Reserve, there had been some doubt whether anyone other than the party who actually applied for the credit had standing to raise an ECOA violation).  Second, it aligns the Iowa Supreme Court with courts in other jurisdictions which have ruled that once the two-year statute of limitations has run from the date of the occurrence of an ECOA violation, that violation is available to the injured party only as an affirmative defense or as a “set-off” to the enforcement of the debt – i.e., the victim of the violation cannot bring an affirmative action for damages against the lender.

 

The Court’s ruling is perhaps most noteworthy insofar as it demonstrates the need for any party resisting a motion for summary judgment to timely raise any factual issue that may exist at the time it files its resistance.  The bank in this case raised various legal arguments in resistance to Phyllis and Christine’s motion for summary judgment based on the alleged ECOA violation, but “did not file any pleadings or affidavits concerning the issue of whether Acme and/or Christine’s and Phyllis’s spouses were not sufficiently creditworthy so as to entitle the bank to obtain Christine’s and Phyllis’s unlimited personal guaranties.”  The Supreme Court found that the bank’s attempt to subsequently raise the “creditworthy” issue in a trial brief came too late, and accordingly upheld the trial court’s finding that the bank violated ECOA by requiring the guaranties from Phyllis and Christine.      

 

If you have questions, please contact Jon Sullivan at 515-246-4522 or jsullivan@dickinsonlaw.com. 

Bank Employee Terminated for Refusing to Open Customer Account in Violation of Federal Regulations; Claims Retaliatory Discharge

This Tennessee appellate case is instructive for banks located in Iowa and elsewhere regarding employees who claim they have been terminated for failing to violate banking statutes and regulations.

 

In VanCleave v. Reelfoot Bank, 2009 WL 3518211 (Tenn. App. 2009), the plaintiff, Mary Beth VanCleave, had been employed by Reelfoot Bank as an Assistant Vice President for approximately 14 years.  A long-time customer of the bank asked VanCleave to open an account for him.  VanCleave was aware that the customer had previously had overdue loans and that the customer’s other accounts had been subject to executions. In meeting with VanCleave about opening the new account, the customer explained he wanted to open the  account in his employer’s name, with a check made payable to the employer, and that any checks written on the account could only be signed by the customer.  The customer further explained the check “was really [his] money,” not the employer’s.  VanCleave believed she would be violating banking laws by doing what the customer asked; therefore, she refused unless the customer would agree to sign a signature card and provide identification.  The customer refused.  After another bank employee set up the account at the direction of higher management (but only after the employer came in to set it up), VanCleave was terminated. 

 

VanCleave sued the bank for retaliatory discharge, alleging that she did not open the account in the manner the customer requested because she was protecting the bank, complying with banking laws, and acting in accordance with how she had been trained to set up accounts. The trial court dismissed VanCleave’s case on the bank’s motion for summary judgment because the Court concluded the underlying purpose of VanCleave’s actions was not “to protect the public,” but only to protect the bank. 

 

Under Iowa law, a cause of action for this type of claim requires that the plaintiff show: (1) the existence of a clearly defined public policy that protects employee activity; (2) the public policy would be jeopardized by the discharge from employment; (3) the employee engaged in the protected activity, and that this conduct was the reason for the employee’s discharge; and (4) there was no overriding business justification for the employee’s termination.  Tennessee law is similar in most respects to Iowa law regarding this type of claim, and the Tennessee appellate court found that VanCleave’s case should not have been dismissed, because she presented evidence that she believed her refusal to do what the customer wanted involved an important public policy concern, not that she was somehow protecting the public by her actions.  The Court further found that among the laws the employee believed were implicated was the Bank Secrecy Act.  In addition, whether VanCleave believed she was protecting herself, the bank, or the “public good” was immaterial.  The Court concluded it was sufficient that the basis for the refusal to participate was her belief that doing as the customer asked would violate banking regulations, go against her own training, and put the bank in jeopardy.  This case is instructive generally for claims of “retaliatory discharge” or “discharge in violation of public policy”; however, other jurisdictions may have different standards.

 

If you have questions, please contact Rebecca Boyd Dublinske at 515-246-4505 or rdublinske@dickinsonlaw.com.

State Bank Acquistion of Interest in Wind Energy

On May 1, 2008, the Governor signed Senate File 2405 into law.  SF 2405 provides for state bank acquisition of an equity interest in wind energy production facilities and eligibility for production tax credits.  It also permits manufacturing facilities to acquire such credtis for on-site consumption of wind energy.  The new Act will amend Chapter 476B and 476C of the Iowa Code.

A bank's ability to take a financial position in a wind facility is subject to some conditions: 1) creditworthiness review; 2) the bank may not participate in the operation of the facility or the production or sale of energy; 3) if the facility does not perform as projected the bank may sell its interest or liquidate; 4) the bank may not share in any appreciation in value of its interest or in the customer's assets; 5) at the end of the maximum 10 year holding period, the bank must sell at book value. 

In Interpretive Letters 1048 and 1048a the OCC approved a bank's acquisition of an equity interest with similar conditions.  The OCC concluded that a bank's acquisition of such interests was an integral part of an authorized banking activity.

For a copy of S.F. 2405, click here (redirect to Iowa Legislature site).

If you have any questions regarding this law, contact Paul Horvath at Dickinson Mackaman Tyler & Hagen, P.C.

Iowa Ranks 4th in Nation in Subprime Foreclosures, 9th in Overall Foreclosures

According to a report by the Mortgage Bankers Association, Iowa ranks fourth in the nation in subprime foreclosure rate, with a rate of 8.63% (of Iowa loans).  Iowa ranks ninth in total foreclosure rate with 1.65% (of Iowa loans).  In an article on ABC's Ottumwa affiliate website the president of the Iowa Bankers Mortgage Corporation said that most of these subprime loans were given out by brokers and national institutions. 

In response to this growing problem, Attorney General Tom Miller announced an ititiative to assist borrowers facing foreclosure and to encourage loan modification between lender and borrower.  The project will feature a Foreclosure Hotline borrowers can call for assitance.  Miller stated that 50% of people foreclosed upon never contact their lender to attempt to avoid foreclosure.  It is his hope that this initiative will increase communication between lenders and borrowers and decrease the rate of foreclosures by guiding borrowers through the maze that can be created when the originating party transfers the loan to another party, who may then sell the loan further down the line or have another company service the loan. 

This effort meshes very well with the guidance issued by the federal regulators (discussed here).  The Attorney General and the regulators seem to understand that it is not community banks causing this problem, but brokers and other less regulated entities.  Hopefully, Congress will see this as well.

Employers Now Liable for Overdraft Charges Under Iowa Law

Beginning July 1, 2007, employers are liable for overdraft charges incurred by employees when direct deposits are not transferred to the employees’ accounts on or by the regular payday. The overdraft charges may be the basis of a claim under Iowa Code section 91A.10 and for damages under section 91A.8. There is the potential for "liquidated damages" and the employee may also recover attorney fees.  This change will not take a bank off the hook for any errors or delays in its role in receiving a direct deposit.  It is likely that if an employee makes a claim against an employer for failure to deposit funds, the employer may turn to the bank for indemnification if the error was attributable to the bank.  Therefore, banks should be sure their direct deposit process adequately protects against any delays or errors that could be attributable to the bank.