DOCUMENTING AND COLLECTING AGRICULTURAL LOANS By Tom Flynn Brick Gentry, P.C. 6701 Westown Parkway, Suite 100 West Des Moines, IA 50266 Phone: 515-271-5915 tom.flynn@brickgentrylaw.com Prepared for Iowa Bankers Agricultural Conference March 17, 2014 1
I. Documenting the Loan A. Types of Borrowers 1. Individuals: Individuals often have variations in their names which begs the question of which name should be used on the UCC Financing Statement (full legal name, nick name, etc.) Much litigation has been generated concerning this issue. In Iowa, as of July 1, 2013, if borrower has an unexpired driver’s license – use the exact same name as appears on the driver’s license. Thus, you need a copy of the borrower’s current Driver’s License for your file. What if borrower does not have an unexpired driver’s license? Answer: the Financing Statement must indicate either (1) the “individual” name of the debtor or (2) the surname and first personal name of the debtor. What about UCCs for individuals filed prior to July 1, 2013? What if borrower has a driver’s license issued by another state? What if the driver’s license shows nicknames, misspellings or suffixes? What if the driver’s license expires post loan-closing? What if the borrower’s name changes on the license? (e.g. women gets remarried or takes maiden name). Does the name of the promissory note need to read exactly as the name on the driver’s license/UCC? 2. Corporations: need file-stamped copy of Articles of Incorporation, executed copy of Bylaws and Resolution authorizing borrowing (or guaranty), pledge of assets and who can sign loan documents. 3. Limited Partnerships and Limited Liability Partnerships: need file-stamped copy of Partnership Agreement and Resolution authorizing borrowing (or guaranty), pledge of assets and who can sign loan documents. 4. General Partnership: need executed copy of Partnership Agreement and Resolution authorizing borrowing (or guaranty), pledge of assets and who can sign loan documents. 5. Limited Liability Companies: need file-stamped copy of Articles of Organization, Operating Agreement and Resolution authorizing borrowing (or guaranty), pledge of assets and who can sign loan documents. CAVEAT: If Bank is taking a security interest in the borrower or guarantor’s shares or membership units you will probably need the written consent of the entity and other shareholders/members for such pledge. 6. Trusts and Estates: need executed copy of Trust Agreement and Resolution authorizing borrowing (or guaranty), pledge of assets and who can sign loan 2
documents. B. Credit Agreements IA Code § 535.17 contains a special statute of frauds applicable to “credit agreements”, which is intended to protect lenders against claims that there were oral agreements which modified the written loan documents. “Credit Agreement” is defined to mean any contract made or acquired by a lender to loan money, finance any transaction, or otherwise extend credit for any purpose, and includes all of the terms of the contract, but does not mean a contract to extend credit pursuant to a credit card or pursuant to open-end credit, or pursuant to a home equity line of credit, whether the loan, financing, or credit is for consumer or business purposes, or a consumer rental purchase agreement. i. A credit agreement is not enforceable in contract law by way of action or defense by any party unless a writing exists which contains all of the materials terms of the agreement and is signed by the party against whom enforcement is sought. ii. Unless otherwise expressly agreed in writing, a modification of a credit agreement which occurs after the person asserting the modification has been notified in writing that oral or implied modifications to the credit agreement are unenforceable and should not be relied upon, is not enforceable in contract law by way of action or defense by any party unless a writing exists containing the material terms of the modification and is signed by the party against whom enforcement is sought. This notification can be included among the terms of a credit agreement, can be included on a separate form or together with other disclosures that are provided when the agreement is made, or can be given wholly apart from the agreement and at any time after the agreement has been made. To be effective, the notification and its language must be conspicuous. A person who gives a notification is bound by it to the same extent as the person notified. A notification with respect to any credit agreement is effective with respect to all other credit agreements then in effect between the parties if the notification conspicuously so provides. When a modification is required by this section to be in writing and signed, such requirement cannot be modified except by clear and explicit language in a writing signed by the person against whom the modification is to be enforced. iii. A notification referred to in subsection 2 in the following form in boldface, ten-point type, complies with the requirements of this section: IMPORTANT: READ BEFORE SIGNING. THE TERMS OF THIS AGREEMENT SHOULD BE READ CAREFULLY BECAUSE ONLY THOSE TERMS IN WRITING ARE ENFORCEABLE. NO OTHER TERMS OR ORAL PROMISES NOT CONTAINED IN THIS WRITTEN CONTRACT MAY BE LEGALLY ENFORCED. YOU MAY CHANGE THE TERMS OF THIS AGREEMENT ONLY BY ANOTHER WRITTEN AGREEMENT. 3
iv. Notwithstanding subsections 1 and 2, a credit agreement or modification of a credit agreement which is not in writing, but which is valid in other respects, is enforceable if the party against whom enforcement is sought admits in court that the agreement or modification was made, but no agreement or modification is enforceable under this subsection beyond the terms admitted. C. Real Estate Loans i. Mortgages and Deeds of Trust. Mortgages and deeds of trust are provided for in IA Code Chapter 654. They are considered equivalent in substance, with similar rights and remedies, including foreclosure. IA Code §654.2. Purchase money mortgages have certain priority rights over other liens (e.g. priority over preexisting judgments against the purchaser). “Purchase Money Mortgage” is mortgage loan that enables purchaser to acquire real estate (or to refinance existing purchase money mortgages by same lender to same purchaser). IA Code §654.12B. All real estate documents to be recorded must be properly acknowledged to be effective against third parties. ii. Homesteads. a. Waiver on Mortgage. A mortgage against an agricultural homestead of 40 acres or more must contain the boldface homestead exemption waiver signed and dated by the borrower as provided in Iowa Code Section 561.22. Failure to include the required disclosure invalidates an agricultural mortgage. b. Spousal Signatures. Regardless of whose name the property is titled, both spouses must sign a mortgage on homestead property, or the mortgage is invalid, unless (i) the nonsigning spouse’s interest is terminated by a decree of dissolution of marriage or other order of the court; (ii) the nonsigning spouse’s right of recovery is barred by section 614.5; (iii) the encumbrance is a purchase money mortgage as defined in section 654.12B; and (iv) a court sitting in equity enters a decree holding that invalidating the conveyance or encumbrance or a contract to convey or encumber the homestead would, directly or indirectly, unjustly enrich the nonsigning spouse. c. Order of Collection. A lender that holds as collateral a debtor's homestead with other non-homestead property (whether real or personal) must collect its debt from the non-homestead property first. d. Truth in Lending Act-Notice of Right to Rescind. A lender that is taking a security interest in the debtor's principal dwelling must give the debtor written notice of his right to rescind the transaction within three days of signing the mortgage documents. If the notice is not given, the debtor may rescind the mortgage at any time within three years. If in 4
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