Enforceability of Mortgage Lender’s Lien Following Bankruptcy Discharge Reaffirmed

The Iowa Court of Appeals recently issued its decision in the matter of Koll v. Wells Fargo Bank, wherein the appellate court upheld the enforceability of a mortgage lender’s lien following the borrower’s Chapter 7 bankruptcy discharge. While this outcome should not come as a surprise to mortgage lenders given the well-established principles under federal bankruptcy law and Iowa state law, lenders in Iowa should nonetheless view this decision favorably as it reinforces the mortgage lender’s lien position and available remedies following a borrower’s bankruptcy discharge.

In June 2003, Christopher Koll entered into a home equity line of credit with Wells Fargo, wherein Wells Fargo took a second mortgage on Mr. Koll’s residence in Urbandale. Under the terms of the line-of-credit agreement, Christopher waived his right to claim a homestead exemption in the property. A few weeks later, Christopher married his spouse, Heidi, and both continued to reside in the Urbandale property.

In May 2018, the Kolls filed for Chapter 7 bankruptcy protection and claimed their residence as exempt homestead under Iowa Code § 561.16. Wells Fargo did not object to the exemption claim despite having a mortgage lien against the property under the Kolls’ home equity loan. Following discharge, Wells Fargo initiated the foreclosure process, seeking to foreclose on its mortgage. In an effort to block the foreclosure, Ms. Koll filed an action in state court seeking a declaratory judgment that the bank’s lien was void and unenforceable. The district court granted summary judgment in favor of Wells Fargo and found the mortgage lien “passed through” the bankruptcy proceeding and remained enforceable.

On appeal, Ms. Koll argued that, under Iowa law, the district court should have found her bankruptcy discharge extinguished the mortgage debt and consequently terminated the bank’s right to proceed against the property. The Iowa Court of Appeals disagreed and found that while under bankruptcy law a borrower’s in personam (i.e. personal) liability may be discharged, the lender’s mortgage lien will survive and the lender can bring a foreclosure action against the borrower in rem in order to satisfy the obligation owed under the loan.  This holding is consistent with precedent established under bankruptcy law and the prior decisions of the Iowa Court of Appeals. See e.g. Moad v. Neill, 451 N.W.2d 4 (Iowa App. 1989) and Norwest Bank Iowa, N.A. v. Corey, 2000 WL 526681 (Iowa App. Apr. 28, 2000).  

While not groundbreaking by any means, the Koll decision is nonetheless a victory for Iowa lenders seeking to preserve and protect their collateral through the foreclosure process moving forward.

For questions relating to this article, please contact a member of our bankruptcy and creditors' rights practice group.

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Simmons Perrine Moyer Bergman PLC is a full service law firm with locations in Cedar Rapids and Coralville, Iowa. For more information, visit spmblaw.com.  

Disclaimer: This information is intended for general information purposes only and is not intended, nor should it be construed or relied on, as legal advice. Please consult your attorney if specific legal information is desired.