8th Circuit says bank is entitled to proceeds from condo sale

Courts State Issues Iowa Appellate Eighth Circuit Bankruptcy Mortgages Consumer Finance

On June 24, the U.S. Court of Appeals for the Eighth Circuit affirmed a trial court’s decision that a plaintiff bank is entitled to the proceeds from the sale of a condominium despite the defendant’s ex-husband’s bankruptcy and an outstanding balance owed to the bank on a business loan. When the defendant signed and initialed a mortgage securing the financing of a condominium, she consented to her ex-husband’s execution of the note but was not a signatory. The mortgage contained three provisions, including (i) a choice-of-law provision specifying that Iowa law governed the mortgage; (ii) a homestead waiver, in which the defendant and her ex-husband “waive[d] all appraisement and homestead exemption rights relating to” the condominium, except as prohibited by law; and (iii) a future advances clause or “dragnet clause,” which granted the plaintiff a security interest in the mortgage that covered future funds the ex-husband may borrow. The plaintiff initiated litigation against the defendant seeking a declaratory judgment that the defendant’s portion of the escrowed sale proceeds was subject to the mortgage’s future advances clause, and that the plaintiff could apply the proceeds to her ex-husband’s business loan. The trial court concluded that the bank was entitled to the proceeds.

On appeal, the 8th Circuit concluded that the mortgage’s future advances clause encompassed and secured the defendant’s ex-husband's business loan. Among other things, the appellate court rejected the defendant’s arguments that (i) the plaintiff failed to make a prima facie case that it was entitled to the condo sale proceeds because it purportedly “did not prove the proceeds comported with the mortgage’s maximum obligation limit clause (finding “no miscarriage of justice in declining to analyze her claim”); and (ii) the mortgage forced “her to waive her homestead rights in contravention of public policy” and in violation of the FTC’s “unfair credit practices” regulation (16 C.F.R. § 444.2)—a regulation, the appellate court pointed out, that does not apply to “banks” by its own terms. The 8th Circuit also rejected defendant’s unconscionability claim under Iowa law, stating that the “doctrine of unconscionability does not exist to rescue parties from bad bargains.” The appellate court further rejected the defendant’s other “equitable arguments” as “untenable” primarily because the mortgage is a “credit agreement” regulated under Iowa Code § 535.17(5)(c), and that statute expressly displaces equitable remedies.