Iowa Supreme Court Rules That Although Mandatory Mediation Requirements Are Jurisdictional, They Do Not Apply to Foreclosures Initiated by Farm Creditors Through Compulsory Counterclaims

December 13, 2013 | Kristine Tidgren

In Schaefer v. Putnam, et al., No. 12-0064, 2013 Iowa Sup. LEXIS 128 (Iowa Sup. Ct. Dec. 13, 2013), the Iowa Supreme Court interpreted the mandatory mediation requirements of Iowa Code § 654A.6(1) and held that compliance by farm creditors with the law is a jurisdictional prerequisite for filing a foreclosure action against “agricultural property.”  The Court ruled, however, that a creditor is not subject to the same mediation requirements when seeking foreclosure through a compulsory counterclaim in response to a debtor-initiated action.

The debtors filed a declaratory judgment action against their farm creditor and others, alleging that their mortgages were unenforceable because the defendants had breached fiduciary duties. The farm creditor filed a counterclaim, seeking to foreclose the debtors’ mortgages. The debtors filed motions to quash, asserting, inter alia, that the district court lacked subject matter jurisdiction to foreclose on its forty-acre homestead because it was “agricultural property.” As such, argued the debtors, the farm creditor was required to secure a “mediation release” pursuant to Iowa Code § 654A.6(1) prior to asserting its counterclaim. Iowa Code § 654A.6(1) requires a creditor “desiring to initiate a proceeding to enforce a debt against agricultural property” to file a request for mediation with the farm mediation service and thereafter obtain a release. The district court denied the debtors’ motion to quash, and the debtors appealed.

On appeal, the Iowa Court of Appeals analyzed the statute and—finding that the legislature intended a broad construction to protect farmers facing foreclosure—held that the phrase “desiring to initiate a proceeding” encompassed the filing of a counterclaim. Because the creditor had not obtained a mediation release prior to asserting its counterclaim, the court of appeals ruled that it had not met the jurisdictional prerequisites of Iowa Code § 654A.6(1). Thus, reasoned the court of appeals, the district court lacked jurisdiction to consider the foreclosure counterclaim.

In vacating that portion of the court of appeals’ ruling, the Supreme Court acknowledged that the statute was ambiguous, susceptible of two interpretations. Applying statutory construction principles, the Court ruled that the statute did not require a creditor to seek mediation before seeking foreclosure through a compulsory counterclaim against a debtor. The Court reasoned that because the word “initiate” meant to “commence,” the mandatory mediation provisions were only intended to apply to creditors starting a proceeding. Because the creditor in this case did not file the civil action initiating the foreclosure proceeding, the mediation requirements did not apply. The Court found this interpretation consistent with the purpose of Iowa Code § 654A.6(1), which was to slow down  the foreclosure process by placing a procedural hurdle in front of the creditor. In this case, the Court noted there was no process to slow down because both parties were already in court. “The well was poisoned,” the Court reasoned.

Although it determined that the mediation provision did not apply to the facts at hand, the Court answered the open subject matter jurisdiction question, holding that compliance with the mediation requirements is a jurisdictional prerequisite to a farm creditor filing a foreclosure action. In so holding, the Court relied upon its decision in Klinge v. Bentien, 725 N.W.2d 13 (Iowa 2006), in which it held that similar mediation requirements in Iowa Code § 654B.3(1) created a jurisdictional prerequisite to litigating certain farm disputes.  Finding no reason to depart from its holding in Klinge, the Court held that a farm creditor’s failure to comply with the mandatory mediation requirements under Iowa Code § 654A.6(1) would deprive a court of subject matter jurisdiction.

The import of this case is the Court’s finding that the requirements of Iowa Code § 654A.6(1) are jurisdictional. Farm creditors are well advised to strictly adhere to the requirements of this statute or face dismissal of foreclosure actions. Where such actions are not taken, debtors may seek to quash the foreclosure.