Lenders Beware: Ambiguity Surrounds Iowa Code §654.2A and its Protections to Agricultural Borrowers

Patience can have its rewards.

The Iowa Code has pitfalls for agricultural lenders who act too quickly on a foreclosure action. Waiting until the proper time has elapsed might result in a quicker and less costly foreclosure judgment.

Lenders in Iowa whose debt is secured by agricultural land must be cautious during the 45-day cure period provided to an agricultural borrower under Iowa Code §654.2A. The broad, ambiguous language of this section could be interpreted to prevent a wide array of actions by a lender during the borrower’s statutory cure period. A lender’s violation of Iowa Code § 654.2A risks increasing the time and costs of a foreclosure, as well as potentially the foreclosure judgment itself.

Origins and Creditor Prohibitions

In the midst of the farm crisis of the 1980s, Iowa passed a number of laws aimed at giving “some relief to farmers in dire financial straits.” Iowa Code §654.2A was one such piece of legislation. Although the farm crisis eventually subsided, the protections codified in the Iowa Code continue. In the event of an agricultural borrower’s default, Iowa Code §654.2A provides certain notice and cure rights for the borrower.

In particular, Iowa Code §654.2A(2) generally provides that, following default, a lender whose debt is secured by agricultural land must give the borrower notice of the default and, if applicable, the opportunity to cure such default. In most instances, once the lender gives notice, Iowa Code §654.2A(4)(b) provides the borrower 45 days to cure the default by tendering payment or rendering performance. During this 45-day period, a creditor is prohibited from taking three types of actions: (i) “accelerat[ing] the maturity of the unpaid balance of the obligation,” (ii) “demand[ing] or otherwise tak[ing] possession of the land, other than by accepting a voluntary surrender of it,” or (iii) “otherwise attempt[ing] to enforce the obligation.”

While the first two prohibitions of § 654.2A are directed at specific actions (accelerating the balance on the note and taking possession), the third is ambiguous and broad. What constitutes an “attempt to enforce [an] obligation”?

Interpreting the Language

The Iowa Code gives little direction about what constitutes an “attempt” at enforcement during the cure period. Additionally, Iowa courts have yet to publish a decision interpreting the “attempt to enforce [an] obligation” language. Thus, lenders are left with little direction about what actions can and cannot be taken during the 45-day cure period.

In the face of the potential consequences of a failure to comply with the Iowa Code, agricultural lenders should act cautiously.

Consequences for Non-Compliance

A finding that a lender made an “attempt to enforce” the borrower’s obligation during the cure period could severely impact the lender’s collection efforts.

The Iowa Code requires that a lender “not initiate an action…until the creditor has complied with [Iowa Code §654.2A].” A finding that the lender interfered with the borrower’s statutory cure period likely would result in a court ordering the lender to re-notice the borrower. It may also result in the borrower getting an additional 45-day cure period.

More concerning, however, for a lender is that any default judgment obtained in the event of violation of the statute may be voidable since the Iowa Code requires compliance with its provisions prior to suit. Although no courts have directly addressed the issue, at least one federal court has stated that it believes that the results of failing to follow Iowa Code §654.2A would be a voidable judgment.

Proceed with Caution

Agricultural lenders may be tempted to act to protect their collateral and otherwise try to limit a borrower’s damage in the event of default on a mortgage secured by agricultural land. Such actions, however, could expose the lender to risks in a foreclosure proceeding that could increase the time (and costs) needed to obtain a valid foreclosure judgment. Given the uncertainty, lenders holding debts secured by other collateral as well as non-agricultural land must be particularly cautious that any steps taken to protect interests in other collateral are not viewed as “attempt[s] to enforce” their obligation.

Agricultural lenders in Iowa should work closely with legal counsel to decide on a strategy that best suits each situation. Nyemaster Goode’s team of attorneys is experienced in representing agricultural lenders in distressed situations. Nyemaster’s Creditor Rights team offers a collaborative approach, with lawyers providing expertise in banking, secured transactions, foreclosures, out-of-court workouts and restructurings, bankruptcy, collections, and distressed commercial litigation. For more information, visit Nyemaster Goode’s Creditor Rights team page or contact Roy Leaf.