Heidi E. Koll v. Wells Fargo Bank, N.A.

IN THE COURT OF APPEALS OF IOWA
No. 20-1227
Filed August 4, 2021
HEIDI E. KOLL,
Plaintiff-Appellant,
vs.
WELLS FARGO BANK, N.A.,
Defendant-Appellee.
________________________________________________________________
Appeal from the Iowa District Court for Polk County, Coleman J. McAllister,
Judge.
Heidi Koll appeals an order dismissing her petition for declaratory judgment
and granting summary judgment to Wells Fargo Bank on the enforceability of its
mortgage lien following a bankruptcy discharge. AFFIRMED.
John P. Roehrick of Roehrick Law Firm, P.C., Des Moines, for appellant.
C. Anthony Crnic and Janelle G. Ewing of The Sayer Law Group, P.C.,
Waterloo, for appellee.
Heard by Bower, C.J., and Tabor and Ahlers, JJ.
2
TABOR, Judge.
Christopher and Heidi Koll filed for Chapter 7 bankruptcy in federal court,
claiming their current residence as an exempt homestead. See Iowa Code
§ 561.16 (2018). Wells Fargo Bank did not object to the exemption despite holding
a mortgage lien on the property for a home equity loan. The bankruptcy court
granted the Kolls’ discharge. Relying on that discharge order, Heidi sought a
declaratory judgment in state court that the bank’s mortgage lien was void and
unenforceable. The district court decided the mortgage lien “passed through” the
bankruptcy proceeding and remained enforceable against the Kolls’
property. Heidi now contests that ruling, claiming the court erred in deciding the
enforceability of the bank’s mortgage lien under federal bankruptcy law. She asks
us to reverse based on Iowa law governing real property and mortgages.
Finding the district court properly applied the federal principles of lien
survival after a debtor obtains a bankruptcy discharge, we affirm the ruling.
I. Facts and Prior Proceedings
In 2000, Christopher acquired a plot of land in Urbandale as the sole
owner. He obtained a loan from Wells Fargo to construct a new house on the real
estate. In return, he granted the bank a mortgage on the property, executing a
promissory note and security agreement the same day. In late June 2003,
Christopher entered a separate agreement with the bank for a home equity line of
credit. As security for this loan, the bank again took a non-purchase money second
mortgage on the property. Under the governing line-of-credit agreement,
Christopher agreed to waive his right to claim a homestead exemption. That
waiver provision stated: “I understand that homestead property is in many cases
3
protected from the claims of creditors and exempt from judicial sale; and that by
signing this contract, I voluntarily give up my rights to this protection for this
property with respect to claims based upon this contract.”
A few weeks later, in mid-July, Christopher and Heidi married and moved in
together. They have resided on the Urbandale property as joint tenants since
then. Despite their change in marital status, Christopher remained the sole
borrower under the earlier agreements.1
In May 2018, the Kolls filed for bankruptcy and sought protection under the
homestead exemption. Their joint petition scheduled both the construction loan
and home equity loan as claims secured by mortgage liens on their homestead
with Wells Fargo listed as the sole creditor.2 The bank received notice of the
proceeding but did not file a claim reaffirming its security interest in the Kolls’
property. Nor did it object to the homestead exemption. The bankruptcy court
ordered the Kolls’ discharge in early August.
After the bankruptcy proceeding, Wells Fargo mailed Christopher a notice
of right to cure default for missing a payment on his home equity loan. The letter
warned that if he failed to cure the default by the specified date, the bank could
1 In 2014, the Kolls refinanced the first loan and executed a new security
agreement with the bank as husband and wife. But Heidi did not sign the
accompanying promissory note.
2 In her resistance to the bank’s cross-motion for summary judgment, Heidi offered
as an exhibit an amended June 2018 bankruptcy petition. The amended petition
reclassified Wells Fargo’s claim for the 2003 home equity loan from secured to
unsecured. In other words, the petition did not show the line of credit was secured
by a mortgage lien on the Kolls’ property. On appeal, neither Heidi nor Wells Fargo
addresses this amendment in their briefs. After reviewing the summary judgment
record, we agree with the district court that the bank’s second mortgage was
properly secured by a lien on the property.
4
“take steps to terminate [his] ownership in the property by a foreclosure
proceeding, which could result in Lender or another person acquiring ownership of
the property.”
In response, the Kolls’ attorney, John Roehrick, asked the bank “to validate
an error was made” in sending the default notice. Roehrick pointed out that the
Kolls’ bankruptcy case discharged Christopher’s obligations related to the
homestead. Rather than provide that validation, the bank replied: “We’ve
determined the account was handled properly and no corrections are needed as
no error has occurred. . . . [T]he Chapter 7 bankruptcy releases the customer from
the liability of the account. The lien is still valid and enforceable on the property.”
After two years of passivity, in January 2020, Wells Fargo sent Roehrick a
statement of Christopher’s account reflecting a $69,000 payoff amount for the
home equity loan. In reaction to that letter, Heidi brought a declaratory-judgment
action against the bank to contest the validity and enforceability of the second
mortgage lien.3 She alleged the line-of-credit agreement between her husband
and the bank should be voided because (1) she did not consent to it; (2) the
bankruptcy court discharged the obligation; and (3) the mortgage lien impaired her
homestead right. She also acknowledged that her husband could not raise those
same arguments, noting, “By reason of the non-severance of the homestead, the
lien should be avoided on the interest of Christopher Koll as well.”
3 Christopher was not a party to the action because he waived the homestead
protection when executing the security agreement that established the mortgage
lien at issue. Because Heidi did not bind herself to the second mortgage, she
relied on her alleged homestead interest to avoid the lien as to both of them.
5
Wells Fargo moved to dismiss her petition for failure to state a claim upon
which relief can be granted. It rejected Heidi’s first and third allegations under the
“first in time, first in right” maxim, asserting her rights were subject to its
encumbrance on the property—given its agreement with Christopher predated
their marriage. The bank argued Christopher’s waiver of his homestead right
under that agreement applied to Heidi for the same reason that the homestead
was non-severable. On Heidi’s remaining allegation, the bank asserted the
bankruptcy discharge did not affect its mortgage lien. Finding Heidi’s petition
sufficient under the notice-pleading standard, the court denied the bank’s motion
to dismiss.
From the pleadings, Heidi moved for summary judgment. She claimed the
bank’s mortgage lien was unenforceable as a matter of law because it impaired
her homestead right and did not survive the bankruptcy discharge. In her view,
there were no genuine issues of material fact concerning her interest in the
property and the effects of the bankruptcy discharge on the debt securing the
mortgage.
Disagreeing with Heidi’s application of law, Wells Fargo also moved for
summary judgment. In its view, both federal bankruptcy law and Iowa’s homestead
law precluded her summary judgment claims. The bank reiterated Heidi had no
bases for relief under the homestead statute because its lien existed before she
married Christopher. See id. § 561.13. Put differently, Heidi needed to possess
her homestead right at the time of, or before, the bank’s encumbrance to claim any
impairment. As for the bankruptcy discharge, the bank accused Heidi of ignoring
the well-established principle of federal bankruptcy law “that a mortgage lien
6
remains ‘intact’ even though the personal debt is discharged in bankruptcy.” The
bank argued Heidi’s position that a mortgage lien could not survive once the debt
had been discharged was incorrect because it stemmed from “ancient Iowa state
law cases which merely discuss generic mortgage concepts, outside of
bankruptcy.”
The district court granted summary judgment to the bank. The court found
the federal cases holding that a mortgage lien survived a bankruptcy discharge on
point. The court then dismissed Heidi’s petition for declaratory judgment, deciding
she was not entitled to homestead protection.4 Heidi appeals.
4 Heidi abandons her homestead argument on appeal. Still, Wells Fargo dedicates
the first section of its brief to defending the district court’s ruling on this alternative
ground. Although not crucial to our analysis, we agree with Wells Fargo that its
mortgage lien does not impair Heidi’s homestead interest. Under Iowa Code
section 561.16, a homestead is generally beyond the reach of creditors. But
section 561.21 lists several classes of debts that allow the sale of the
homestead. Critical here is the second exception: “Those created by written
contract by persons having the power to convey, expressly stipulating that it shall
be liable, but then only for a deficiency remaining after exhausting all other property
pledged by the same contract for the payment of the debt.” Id. § 561.21(2). The
district court found the timing of the bank’s encumbrance dispositive. Because the
bank entered the line-of-credit agreement with Christopher when Heidi did not
have a homestead interest, the court decided “[her] homestead rights had to
necessarily come subject to the already perfected mortgage lien Wells Fargo had
on the property.” We agree. And given that no one spouse can have a homestead
interest greater than the other, the same is true for Christopher’s interest. See
Decorah State Bank v. Zidlicky, 426 N.W.2d 388, 391 (Iowa 1988) (“It is well
established that the homestead interests of a husband and wife cannot be split; if
the interests of one are not subject to execution, neither are the interests of the
other.”); Coyle v. Kujaczynski, 759 N.W.2d 637, 642 (Iowa Ct. App. 2008)
(“Kujaczynski contends she is entitled to a greater interest in the property because
she has designated the property as her homestead. We find no authority or
support for her claim, and consequently conclude the claim is without merit.”).
7
II. Scope and Standard of Review
We review a summary judgment ruling for correction of legal error. Bauer v.
Brinkman, 958 N.W.2d 194, 197 (Iowa 2021). We will uphold the ruling if the record
shows no genuine issues of material fact and the movant is entitled to judgment
as a matter of law. Id. As the reviewing court, our inquiry is “limited to whether a
genuine issue of material fact exists and whether the district court correctly applied
the law.” Pillsbury Co. v. Wells Dairy, Inc., 752 N.W.2d 430, 434 (Iowa
2008). Summary judgment is appropriate if “the facts are undisputed and only the
legal consequences are at issue.” Breese v. City of Burlington, 945 N.W.2d 12, 17
(Iowa 2020).
III. Analysis
We begin by clarifying the scope of this appeal. Heidi does not dispute the
district court’s finding that Wells Fargo held a secured claim against her
property. Nor does she contest the ruling that she was not entitled to homestead
protection. The narrow legal question presented is whether the enforceability of a
mortgage lien following discharge of the underlying debt must be decided by state
law rather than federal bankruptcy law.
Heidi argues the district court erred in relying on federal bankruptcy law to
determine the bank’s mortgage lien passed through the bankruptcy proceeding
and remained enforceable against her property. She claims the court should have
relied on Iowa law to resolve the enforceability issue. Although she acknowledges
the “substantial body” of federal law governing lien survival post-bankruptcy
discharge, she contends those authorities are not compelling once the bankruptcy
proceeding is closed. Put another way, Heidi asserts those principles govern only
8
when the validity and enforceability of a lien is disputed during the bankruptcy
case; if it is disputed after bankruptcy, state law controls. Based on that premise,
Heidi argues Iowa law prevents enforcement of Wells Fargo’s mortgage lien
because the underlying debt no longer exists.
To understand the context of this litigation, we must explore what a
bankruptcy discharge does and does not do. Under the Bankruptcy Code, a
discharge in a Chapter 7 liquidation “voids any judgment at any time obtained, to
the extent that such judgment is a determination of the personal liability of the
debtor with respect to any debt . . . whether or not discharge of such debt is
waived.” 11 U.S.C. § 524(a)(1). In other words, a discharge releases only the
debtors’ personal liability on their creditors’ claims. Johnson v. Home State Bank,
501 U.S. 78, 84 n.5 (1991). By obtaining a bankruptcy discharge, debtors can
prevent a creditor from taking any action “to collect, recover or offset” its debts
against them personally. 11 U.S.C. § 524(a)(2).
But even if the debtor’s personal obligations are discharged, certain
creditors can avoid the bankruptcy proceeding while preserving their right to
repayment. A fundamental principle of bankruptcy law provides that when a
creditor’s claim is secured by a mortgage on the debtors’ property, “the creditor’s
right to foreclose on the mortgage survives or passes through the
bankruptcy.” Johnson, 501 U.S. at 83 (citations omitted). Even when debtors
obtain a discharge for their debts, a secured creditor still can bring a foreclosure
action and use the sale proceeds to satisfy their obligation. Put simply, a discharge
“extinguishes only one mode of enforcing a claim—namely, an action against the
debtor in personam—while leaving intact another—namely, an action against the
9
debtor in rem.” Id. at 84. Since Johnson, both federal and state courts have
reiterated the distinction between in personam and in rem liability to support the
view that a discharge does not void or prevent enforcement of a secured creditor’s
lien that attached to the debtors’ property before their bankruptcy petition. See
Conklin v. Iowa Dist. Ct., 482 N.W.2d 444, 447 (Iowa 1992) (collecting cases).
Heidi contests the district court’s reliance on those bankruptcy concepts in
granting summary judgment to the bank. Beyond claiming a state court cannot
rely on federal law to determine the enforceability of a mortgage lien in a
post-bankruptcy context, she tries to distance Johnson. She does so by focusing
on its description of the mortgage interest surviving a Chapter 7 proceeding. In
dicta, Justice Marshall reflected: “A mortgage is an interest in real property that
secures a creditor’s right to repayment.” Johnson, 501 U.S. at 82. Considering
that description, Heidi claims the lien-survival framework adopted in Johnson and
recited in later decisions does not apply because in Iowa a mortgage is not an
interest in real property.
To support her contention, Heidi cites Clinton County v. Cox, 37 Iowa 570(1873), and Burns v. Burns, 11 N.W.2d 461 (Iowa 1943), for the general rule that
a mortgage is “a mere incident” to the debt, and not an interest in real property.
From there, she reasons a lien cannot survive if the debt has been discharged.
Because a bankruptcy discharge prevents a creditor from collecting a debt from
the debtor personally, according to Heidi, under Iowa law that means the debt is
extinguished and the creditor loses its right to proceed against the debtor’s
property.
10
Wells Fargo disagrees with Heidi’s logic. The bank asserts her argument is
flawed because she is “equating a bankruptcy discharge with a debt being paid,
forgiven, or otherwise discharged under state law” and “mischaracterizing the
effect of a bankruptcy discharge on the underlying debt.” We agree. The
authorities cited in Heidi’s brief do not support a prohibition on the bank’s right to
pursue in rem liability after the bankruptcy proceeding.
As discussed, a bankruptcy discharge extinguishes debtors’ personal
liability for their creditors’ claims. Heidi’s assertion that a discharge erases the
debt and thereby terminates the bank’s right to proceed against the property is
unsupported by federal or state law. To the contrary, it is well-established under
governing federal principles that a creditor may choose to bypass the bankruptcy
proceeding and “enforce its lien in a foreclosure proceeding outside of the
bankruptcy.” In re Lane, 959 F.3d 1226, 1229–30 (9th Cir. 2020) (collecting
cases). True, the creditor must prove its secured status. Our record shows Wells
Fargo secured its claim under the line-of-credit agreement.5 Because the
creditor’s right to foreclose is distinct from its right to proceed against the debtor
personally, a bankruptcy discharge does not invalidate the mortgage lien.
Heidi wants us to look beyond those federal principles. Yet in gravitating to
state law she overstates the relief afforded by a bankruptcy discharge. The
enforceability of the lien depends on what survived the bankruptcy. Heidi claims
5 While the Kolls did file an amended petition listing the home equity debt as
unsecured, that proof is insufficient to invalidate the bank’s mortgage lien. See
HSBC Bank USA, N.A. v. Hallums, 192 A.3d 517, 521 (Conn. App. 2018) (“The
defendant cannot avoid this conclusion by unilaterally describing in his bankruptcy
filings his obligation as something it is not.”).
11
her discharge extinguished the debt. That framing is incorrect. And it fails to
recognize the distinction between in personam and in rem liability. See Johnson,
501 U.S. at 84 (“The Court of Appeals thus erred in concluding that the discharge
of petitioner’s personal liability on his promissory notes constituted the complete
termination of the Bank’s claim against petitioner.”). The discharge extinguished
only one mode of enforcing the bank’s claim. Thus, we agree with the district
court’s conclusion that the mortgage lien survived the bankruptcy discharge and
remained enforceable against the Kolls’ property.
Plus, even under state law, the lien survives. As Wells Fargo points out,
the district court cited bankruptcy decisions as persuasive authority but found
Moad v. Neill, 451 N.W.2d 4 (Iowa Ct. App. 1989) dispositive. There, Neill filed for
bankruptcy after the mortgagee bank sold his property at a foreclosure
sale. Id. at 5. Under the foreclosure decree, the bank obtained a right to collect
rents and profits from the real estate to satisfy the deficiency of the debt. Id. Neill
argued the bank was not entitled to apply the rents to its deficiency judgment
because the debt had been discharged in bankruptcy. Id. at 8. We rejected his
argument based on the general principle that “the discharge in bankruptcy does
not affect or prevent enforcement of valid liens existing prior to
discharge.” Id. (collecting cases). We also clarified the timing of foreclosure was
insubstantial, noting “it is the date of the existence of the lien” that determines
whether the lien survives the bankruptcy. Id. (citing Webber v. King, 218 N.W.
282, 284 (1928)).
We upheld that principle again in Norwest Bank Iowa, N.A. v. Corey, Nos.
1999-382, 9-635, 98-2109, 2000 WL 526681, at *4 (Iowa Ct. App. Apr. 28,
12
2000). In Corey, the district court relied on Burns to conclude the mortgage
creditor could not enforce its security agreement after the debtor obtained a
bankruptcy discharge. Citing Johnson as persuasive authority, we rejected that
reading of Burns. We found “no justification in denying the holder of a distinct and
recognized in rem claim the relief that party would have enjoyed but for the fortuity
of an intervening bankruptcy.”
Against those precedents, Heidi’s argument fails. Under both federal and
state law, the bank could bypass the bankruptcy proceeding, yet preserve its in
rem claim. Because the bank obtained its mortgage lien fifteen years before
Heidi’s bankruptcy petition, Wells Fargo was entitled to judgment as a matter of
law that its lien survived the discharge of her personable obligations.
AFFIRMED.