Opinion
No. 5-650 / 05-0047
Filed March 29, 2006
Appeal from the Iowa District Court for Black Hawk County, Jon C. Fister, Judge.
American General Life Insurance Company appeals from adverse rulings of the district court. REVERSED AND REMANDED.
Gary M. Meyers and Heather L. Palmer of Davis, Brown, Koehn, Shors Roberts, P.C., Des Moines, for appellant.
Eric W. Johnson of Beecher, Field, Walker, Morris, Hooffman Johnson, P.C., Waterloo, for appellee.
Heard by Mahan, P.J., and Hecht, J., and Schechtman, S.J.
Senior judge assigned by order pursuant to Iowa Code section 602.9206 (2005).
American General Life Insurance Company appeals from adverse rulings of the district court. We reverse.
I. Background Facts and Proceedings.
We begin with a summary of the facts to which the parties stipulated. In May of 1994, Gerald Schoenfelder and Montgomery Ward Holding Corporation (Wards) entered into a lease agreement for commercial property owned by Schoenfelder. In November of 1994, Schoenfelder executed a non-recourse mortgage on the leased commercial property in favor of Franklin Life Insurance Company (Franklin) to secure a $3,950,000 loan.
In the granting clause of the mortgage, Schoenfelder agreed to "sell and convey" the property to Franklin, "together with all rents, issues and profits thereof until the debt secured hereby is paid in full." Paragraph nine of the mortgage gave Franklin, upon Schoenfelder's default, "the right to enter into and upon the premises . . . and take possession thereof or to appoint a [receiver] for collection of the rents, issues and profits" from the property. Paragraph ten of the mortgage also stated that Schoenfelder, "as additional security for payment of the [secured debt] will transfer and assign to [Franklin] all of [Schoenfelder's] interest in and to the rents, issues and profits from the premises."
An addendum to the mortgage described the mortgage as "creating and constituting a lien on real estate." Paragraph IX of the document, titled "Grace Provisions," precluded acceleration of the debt in the event of a non-payment default until "such failure has continued for ten (10) days after written notice of such failure is given to [Schoenfelder]."
Schoenfelder contemporaneously executed a lease assignment "as additional security" for the loan. This document specifically noted that it was "supplementary to and not in substitution for [the] assignment of rents contained in the mortgage." The assignment called for Schoenfelder to maintain possession of the real estate and remain in the capacity of landlord with responsibility for receiving rents and performing necessary maintenance on the mortgaged property. In the event of a default on the note secured by the mortgage, Franklin was given the option following notice to the tenant, to collect and receive all rents generated by the property without taking possession.
Schoenfelder continued to act as landlord and to receive rent from the tenant until July 7, 1997, when Wards filed a bankruptcy petition. On December 1, 1997, Schoenfelder became delinquent on his loan payments and Franklin gave him notice of default. Wards rejected the lease in bankruptcy, prompting Schoenfelder to file his claim with the bankruptcy court for unpaid charges and lease rejection damages. Franklin, citing the lease agreement, filed its own claim in Wards' bankruptcy for unpaid charges and lease rejection damages.
On July 8, 1998, Franklin filed a mortgage foreclosure action in Iowa District Court for Black Hawk County. A receiver was appointed by that court on August 18, 1998. A foreclosure decree was filed on January 14, 1999, and the property in question was subsequently sold at a sheriff's sale.
Franklin's judgment against Schoenfelder totaled $4,314,743.26. Franklin bid $3,100,000 at the foreclosure sale, resulting in a deficiency of $1,214,743.26.
The bankruptcy court concluded Wards' liability flowing from the lease rejection would be discharged in bankruptcy by a total payment of $348,026.27. That court declined, however, to adjudicate the competing claims of Schoenfelder and American General Life Insurance Company (American), the successor by merger to Franklin's interests. The court instead opted to place the funds in escrow pending the resolution of the parties' competing claims in state court.
It is unclear from the bankruptcy court ruling what portion of this damage award represents rent payments that would have accrued prior to Schoenfelder's default on the mortgage but for Ward's rejection of the lease in bankruptcy. It is clear, however, that the distribution in escrow includes some amount of damages that accrued prior to Schoenfelder's default.
Schoenfelder filed this action for declaratory judgment seeking to establish he is the rightful owner of the funds in escrow. The petition asserted that while the mortgage granting clause appeared to convey to Franklin all rents generated by the property, other contemporaneously executed documents including the mortgage addendum and the assignment of lease, when read together with the mortgage, disclosed an intent inconsistent with an absolute assignment of rents. Schoenfelder asserted in particular that the documents effected not an absolute assignment or transfer of rents, but rather a mere pledge of the rents as additional security for the loan. In support of his position, Schoenfelder noted (1) the absence of language in the documents evincing an intent to establish an absolute transfer of rents, (2) the terms of the assignment of lease and the parties' course of conduct, both of which indicate Schoenfelder was at all times acting as landlord in possession of the property, and (3) the rules of contract construction place the risk of ambiguity on Franklin, the drafter of the contract. American asserted that the mortgage granting clause conveyed the rent to Franklin as primary security, creating a lien on the rent which was effective from the execution of the mortgage.
The district court declared from the stipulated record that Schoenfelder is the owner of the escrowed funds. The court reasoned that (1) the "pledge" of rents as "additional security" in paragraph 10 of the mortgage, (2) the "grace provisions" in paragraph IX of the mortgage addendum precluding acceleration of the indebtedness until ten days after notice to Schoenfelder of his breach, and (3) the assignment of lease provision delaying the mortgagee's right to collect rent after Schoenfelder's default until notice was given to the lessee were all inconsistent with "an absolute assignment of rents" as primary security for the debt. The district court further concluded that whether Franklin's lien against the rent was primary or secondary, it was inchoate when Wards breached the lease on July 6, 1997, and remained so at least until Schoenfelder defaulted and Franklin gave the required notices on March 6, 1998. Based on that chronology, the court reasoned that the mortgage could not be entitled to rents and lease rejection damages payable before Schoenfelder defaulted.
American filed a motion urging the district court to amend its ruling to give effect to the Assignment of Lease which contained an express limitation of its effect: "[T]his assignment is intended to be supplementary to and not in substitution for an assignment of rents contained in the mortgage." The district court denied American's motion, and American now appeals, urging this court to hold that the granting clause of the mortgage created a primary lien in Franklin's favor on all rents accruing after the mortgage was executed, thus making American, as Franklin's successor in interest, the rightful owner of the escrowed funds.
II. Scope of Review.
Our review of a declaratory judgment depends upon the posture in which the district court considered the matter. Citizens Sav. Bank v. Sac City State Bank, 315 N.W.2d 20, 24 (Iowa 1982). The district court was asked in this case to declare the meaning of the parties' contemporaneously executed contracts. When interpreting contractual language, the court must ascertain the meaning of words employed by the parties. Iowa R. App. P. 6.14(6)( n). We review the district court's interpretation as a legal issue unless it depended on extrinsic evidence. Connie's Const. v. Fireman's Fund Ins., 227 N.W.2d 207, 210 (Iowa 1975). When the district court is required to construe a contract, it decides the legal effect of the agreement. Construction is always reviewed as an issue of law. Allen v. Highway Equip. Co., 239 N.W.2d 135, 139 (Iowa 1976).
The district court did not deem it necessary to consider extrinsic evidence in determining the meaning of the contracts in this case. Therefore, our review of the district court's interpretation and construction of the contracts is at law. Connie's Const., 227 N.W.2d at 210. Where the facts are not in dispute, appellate review in a declaratory judgment action is to determine whether the district court correctly determined the legal consequences arising from a contract. Shelter General Insurance Company v. Lincoln, 590 N.W.2d 726, 728 (Iowa 1999).
III. Discussion.
American contends the mortgage granting clause, when harmonized with other provisions of the contract documents, conveyed the rents to Franklin as "primary security" for the indebtedness. We do not review that clause in isolation, but instead we strive to interpret it in such a fashion as to render it consistent with the agreement as a whole. Fashion Fabrics of Iowa v. Retail Investors Corp., 266 N.W.2d 22, 26 (Iowa 1978). After doing so, we conclude the granting clause may be reconciled with the other provisions of the parties' agreement and that the parties did intend to grant a primary security interest in Franklin's favor against the rent.
Our resolution of this issue is strongly influenced by our supreme court's decision in Federal Land Bank of Omaha v. Lower, 421 N.W.2d 126 (Iowa 1988). In that case, the court concluded that a mortgage granting clause created a lien in favor of the mortgagee on rents from the encumbered land effective from the date of execution of the mortgage. Lower, 421 N.W.2d at 129. We acknowledge that Lower presented a somewhat different factual scenario. In Lower, the borrower rented the land and received cash rent after the district court ordered foreclosure of the lender's mortgage. Id. at 127. In contrast, the rent and lease rejection damages at issue in the case before this court became due to Schoenfelder before he defaulted. The court in Lower also framed the issue to be decided narrowly, limiting it to "whether a mortgagor must account to a mortgagee's receiver for rent the mortgagor received on encumbered land during the period between the entry of a foreclosure decree and the request for appointment of a receiver." Id. Although Lower is not in our view controlling because of its factual dissimilarities and the narrow articulation of the issue presented there, it did require the court to construe a rent assignment with language very similar to that which is present here. We therefore find the reasoning of the Lower court to be persuasive as we determine the legal effect of the rent assignment in this case. See Allen, 239 N.W.2d at 139.
In reaching a contrary conclusion, the district court considered several factors which we will discuss in turn. First, the court noted that paragraph 10 of the mortgage refers to the assignment of rents as "additional security." This provision of the mortgage does not, in our view, diminish or render ambiguous the granting clause which contains language of conveyance. On the contrary, we conclude paragraph 10 contemplates a redundant or additional form of security for the debt.
Second, the district court found important the "grace provision" enumerated in paragraph IX of the addendum to the mortgage, precluding Franklin from accelerating the debt until ten days after notice of failure to pay was given to Schoenfelder. Although this addendum provision is clearly calculated to limit the timing of the mortgagee's enforcement of the lien, by its language the provision does not interfere with either the lien's attachment to or its effectiveness against the rent. See Federal Land Bank of Omaha v. Lower, 421 N.W.2d 126, 129 (Iowa 1988) (holding that a rent assignment contained in a mortgage's granting clause created a lien which was effective from the date of the execution of the mortgage). We therefore conclude paragraph IX of the mortgage addendum is not inconsistent with our conclusion that the mortgage granting clause created a primary security interest in the rent effective at the time of the execution of the mortgage and related documents.
Third, the district court determined that the assignment of lease provision that delayed the mortgagee's right to collect rent until after (1) Schoenfelder defaulted and (2) notice was given to the tenant further signaled that the parties did not intend an "absolute assignment." We conclude, however, that these provisions of the lease assignment, like paragraph IX of the mortgage addendum, merely relate to the timing of the enforcement of the lien, not its attachment or effectiveness. As such, we conclude they are not incompatible with the parties' intent to create a primary security interest in the rent.
As we have concluded that the granting clause created a primary security interest in the rent in favor of Franklin, Lower's reasoning suggests and we here decide that interest was created when the mortgage was executed. Id. We therefore conclude it is of no moment that the rent and lease rejection damages deposited in the escrow account were payable to Schoenfelder before he defaulted, because Franklin's security interest in the escrow proceeds arose at the mortgage's inception. Upon Schoenfelder's subsequent default, under the terms of the mortgage addendum, the lien on all rents received became enforceable. American is therefore legally entitled to the funds in the escrow account. Accordingly, we reverse the district court's decision and remand for entry of judgment consistent with this opinion.
REVERSED AND REMANDED.
Mahan, P.J., concurs; Schechtman, S.J., dissents.
I dissent. I would affirm the district court.
The escrow sum was the result of the mortgagor's rental acceleration efforts which prompted all the rental to become due one day prior to the lessee, Montgomery Ward, filing its bankruptcy petition. Although the mortgagee's lien on the rentals was effective from the date of the mortgage, as concluded by Federal Land Bank of Omaha v. Lower, 421 N.W.2d 126, 129 (Iowa 1988), that lien is inchoate until the lender has activated it, pursuant to its terms.
It is fundamental that courts should strive to give effect to all the language in a contract when construing its terms. Fashion Fabrics of Iowa v. Retail Investors Corp., 266 N.W.2d 22, 26 (Iowa 1978). Because a contract is to be interpreted as a whole, it is assumed that no part is superfluous; an interpretation which gives a reasonable, lawful, and effective meaning to all its terms is preferred to an interpretation which leaves a part unreasonable, unlawful, or of no effect. Id.
The majority appears to equate a lien with an absolute assignment. It finds Lower "persuasive," through acknowledging its factual differences. It recites the fact that the lessor, Schoenfelder, was current for four months after the lessee filed its petition in bankruptcy, yet ignores its critical importance. It explains the need for a default notice as tied to the lien's enforcement rather than its effectiveness.
The documents did not entitle the mortgagee, American, to an absolute assignment of rents for these cogent reasons: (1) the "grace provision" precludes the mortgagee from acceleration until ten days after a notice of default which reflects its inchoate character; (2) paragraph nine of the mortgage provides that the rents are "specifically pledged" to the payment of the mortgage debt — again contrary to an absolute assignment and supporting a finding that the rentals were mere pledged security; (3) paragraph ten provides for an assignment of rents as "additional security"; an assignment of one's own rentals to itself is redundant; and (4) the assignment of lease provides, after default, that the mortgagee may collect the rents only "after notice to the lessor."
Each of these contractual provisions are independently inconsistent with an absolute assignment. They collectively dilute the granting clause and assist in determining that it is conditioned by other provisions of the mortgage (and its assignment) each prepared by the mortgagee. Therefore, the rentals are pledges and are not assigned until the default notice is activated which only then renders the security interest cohoate.
The trial court correctly concluded its ruling with the following findings:
Stated otherwise, what the parties agreed to was that the Defendant had no right to possession of any of its security, including rent, until the expiration of Defendant's ten day notice of default, which in this case was March 6, 1998. The rent, however, had been accelerated and became due and payable to Plaintiff on July 6, 1997, the day before the tenant filed its bankruptcy petition. Based on this set of facts, all of the rent was due Plaintiff nearly five months before Plaintiff defaulted on his mortgage and Defendant cites no authority for the proposition that a mortgagee is entitled to rents payable to a mortgagor-landlord prior to default. Accordingly, the escrowed rent payment is Plaintiff's rent because it had all accrued not only prior to March 6, 1998, but also prior to December 1, 1997.
I would direct that the entire lease rejection damages, escrowed in the course of the tenant's bankruptcy proceeding, be paid to the plaintiff mortgagor/landlord, Schoenfelder.