Bank allowed to pursue attorney's fees based on personal guaranty that did not merge into in rem judgment, but not awarded prejudgment interest on attorneys' fees

Mollie Pawlosky Iowa Bankruptcy law, Iowa Banking Law Iowa Commercial Litigation Dickinson Law Des Moines Iowa

Posted on 12/09/2015 at 11:22 AM by Mollie Pawlosky

In DuTrac Community Credit Union v. Hefel, No. 15-0143 (Iowa Court of Appeals Nov. 25, 2015), the Iowa Court of Appeals addressed several issues that are important in collections suits following foreclosures. DuTrac loaned Star Properties, Inc. more than $2 million to buy and develop two residential subdivisions. Douglas and Sheila Hefel, the sole members of Star Properties, executed the loan documents for the company, and executed a personal guaranty for additional security. Star Properties defaulted, and DuTrac filed suit, seeking judgments in rem and alleging personal liability against the Hefels under the guaranty. The Hefels filed a chapter 7 bankruptcy petition and were dismissed from the suit without prejudice; DuTrac obtained a judgment against Star Properties. The Hefels were later found to have committed bankruptcy fraud, and the bankruptcy court revoked the Hefels' bankruptcy discharge. DuTrac then filed suit against the Hefels based on the guaranty. After discovery, the case was argued before the trial court as a motion for summary judgment. DuTrac argued that since it owned the judgment against Star Properties, DuTrac controls the timing of the Sheriff sale, such that appellate court should reject the Hefels' argument that interest should not be awarded for the period between the scheduled sheriff's sale date and the date the sale actually occurred. DuTrac also argued that it was entitled to all costs expended in trying to obtain a judgment. The Hefels argued that the Hefels' guaranty had merged into the in rem judgment received by Dutrac, thus limiting the amount of fees to award; the Hefels alternatively argued that the amount of attorney's fees sought was unreasonable. The district court held that the merger doctrine did not apply, but did not award DuTrac all attorneys' fees requested.

Both parties appealed. On appeal, the Hefels argued that all loan documents, including the guaranty, merged into the judgment, such that DuTrac could not maintain an action for additional fees based on the guaranty. Thus, the Hefels argued that the suit should be limited to the deficiency amount after the sale, along with interest. The Court of Appeals agreed that the documents that formed the basis of DuTrac's foreclosure suit merged into the judgment, but the Court of Appeals held that the guaranty was not one of the documents that formed the basis for the foreclosure decree. The guaranty contained a separate promise to pay attorney's fees; the Hefels were not the debtor in the foreclosure action and were not even parties in the foreclosure after dismissal. DuTrac sought relief from the Hefels, who were separately liable for the unpaid judgment, based on the guaranty. Further, the Court of Appeals held that the Hefels waived the defense of merger in the guaranty. On DuTrac's cross appeal, the Court of Appeals held that, as the owner of the judgment, as long as DuTrac met its obligation to have the sheriff's sale held within the two year statute of limitations, the district court had no basis to constructively treat the sale as if it had occurred earlier for equitable reasons, which would have decreased the amount of fees awarded. Again, the Court of Appeals also held that the Hefels had waived such defense in the guaranty. Regarding the district court's reduction of attorney's fees requested by DuTrac, the appellate court remanded to the district court for a fresh consideration as to whether the trial court had intended to exclude all attorneys' fees incurred for 2010, and all of the fees incurred for 2011, when the exclusion seemed inconsistent with the trial court's stated intention to award fees for over three and one-half years.

Finally, DuTrac argued that the trial court erred in failing to award DuTrac interest on attorney's fees, as stated in the commercial loan agreement, the mortgage and the guaranty. Reading the loan documents in tandem with the statutory section that allows the court to award attorney's fees pursuant to a contract, the Court of Appeals held that the Code section made it clear that no party is entitled to costs until a judgment is recovered; the right accrues at the end of the suit. Thus, the Court of Appeals adopted the Hefels’ position, holding that the fees were unliquidated until awarded and were awarded as costs, not monetary damages, such that prejudgment interest on the fees was unwarranted. For questions regarding DuTrac Community Credit Union v. Hefel, or regarding estate mortgage foreclosures or collections suits, contact Mollie Pawlosky.

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