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A Cautionary Tale to Banks: Avoiding a Civil Conspiracy During a Nonjudicial Voluntary Foreclosure

William Reasoner, Iowa Bankruptcy Law, Des Moines Iowa, Dickinson Law Firm, Iowa Real Estate & Land Use, Iowa Commercial Litigation, Iowa Banking Law

Posted on 12/06/2017 at 12:00 AM by William Reasoner

In an interesting case decided last November, the Iowa Court of Appeals held that transactions which occurred after a judgment lien expired did not amount to a fraudulent transfer. Copycat Photocopy Center, Inc. v. Frisco-Ozarks Partners, L.L.C., 889 N.W.2d 700, No. 15-2005 (Iowa Ct. App. 2016) (unpublished table decision). Plaintiff Copycat Photocopy Center, Inc. (“Copycat”) obtained a judgment from a prior case against defendant Frisco-Ozarks Partners, L.L.C. (“Frisco”) in 2012. Frisco was owned by Donald Goering. Mr. Goering also owned Double DG, L.L.C. (“Double DG”).

Several months after Copycat obtained the judgment, it issued an execution on real estate owned by Frisco. Copycat successfully credit bid $65,000 in partial satisfaction of the outstanding judgment. Copycat’s interest, however, was junior to a pre-existing mortgage on the property held by Northwest Bank.

Shortly after Copycat obtained the junior interest in the real estate, Frisco quit-claimed all of its remaining interest in the real estate to Northwest Bank and also entered into a nonjudicial voluntary foreclosure agreement with Northwest Bank as permitted under Iowa Code §§ 654.18 et seq. The Bank promptly sent notice to Copycat stating that Copycat’s interest would be extinguished in 30 days unless Copycat tendered nearly $320,000 in cash by exercising its statutory right of redemption. Copycat failed to redeem, and its interest in the real estate was extinguished at the end of the 30 day redemption period.

Subsequently, the Bank sold the real estate to TSM Hospitality, L.L.C. (“TSM”). Less than one month later, TSM sold the real estate to Double DG, the other company owned by Mr. Goering. Several months after Double DG acquired the property, it sold the real estate to a third party for $500,000. Copycat brought suit, claiming that the transactions which occurred after the foreclosure amounted to a civil conspiracy by Frisco, Double DG and Mr. Goering to defraud Copycat.

Generally, a party is liable for a fraudulent conveyance if it intends to place property beyond the reach of creditors. Here, the Court of Appeals affirmed the District Court in finding that Copycat presented no evidence that the defendants intended to defraud Copycat. Although Copycat urged the Court to look to the ultimate result of the case (where Double DG, which is owned by the same individual as Frisco, ultimately sells the real estate for nearly $180,000 free and clear), the Court held that Frisco could not be liable for defrauding Copycat. Importantly, the Court noted that while Frisco’s decision to consent to a voluntary foreclosure may have made it more difficult for Copycat to tender the cash amount in the shorten time frame, Frisco and the Bank nevertheless followed the procedures provided for by the Iowa Code. When Copycat declined to redeem the property within 30 days of receiving the notice from the bank, Copycat’s lien on the real estate was extinguished. Thus, any and all transactions occurring after the lien was extinguished could not amount to a fraudulent conveyance because the real estate was already beyond the reach of the creditor Copycat.

In this case, the same individual who owned the judgment debtor entity was able to reacquire (albeit through a different entity, but nonetheless still controlled by the same person who controlled the judgment debtor) property that was once encumbered free of the reach the judgment debtor’s creditors.

Importantly, the Court found that Northwest Bank took no part in the alleged conspiracy. The outcome of the case may have been different if the Bank was motivated to enter into this series of transactions with the intent to allow Mr. Goering to reacquire the real estate free of Copycat’s reach. With this in mind, before entering into this type of transaction with a mortgagor, banks, or any other purchaser, should always consult with an attorney to make sure that it is not unwittingly advancing the mortgagor’s attempt to defraud other creditors. 

For any questions regarding real estate please contact William Reasoner.  

The material in this blog is not intended, nor should it be construed or relied upon, as legal advice. Please consult with an attorney if specific legal information is needed. 

- William Reasoner

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