Do Purchase Money Mortgages Disregard Spouse’s Rights?

In this case, the Iowa Court of Appeals once again examined mortgage foreclosure issues- this time discussing purchase money mortgages and spousal rights. The Iowa Code (§633.211) provides that if a decedent dies without a will leaving a surviving spouse, the surviving spouse shall receive the value of all real property possessed by the decedent during the marriage. However, if the decedent executed a “purchase money mortgage” (whereby the buyer finances the sale of property through the seller, as opposed to a third party, or a lender advances funds to enable the purchase) then the lien created by a recorded mortgage of this type has priority over “any other right title, interest, or lien arising either directly or indirectly by, through, or under the purchaser (Iowa Code 654.12B). This means that a purchase–money mortgage may disregard a spouse’s rights in the property under §633.211. 

Here, the husband entered into an “Open-End Real Estate Mortgage” for the purchase of Iowa real estate with a bank that contained a clause indicating that the bank’s interest was senior to the indebtedness of other creditors holding subsequently recorded or filed mortgages or liens. The mortgage was signed by the husband and allegedly signed by the wife. The document was also notarized, indicating that both parties were known to the notary and signed it voluntarily. The husband died without a will in the summer of 2008. When the estate was opened, it was discovered that the note securing the bank’s mortgage was in default (along with several other financial liabilities). The bank sued the estate and the wife for foreclosure. The wife contended that she had never consented to sign the mortgage agreement. 

At trial, the wife argued that since she never signed the mortgage, the mortgage was void and title to the property passed to her under Iowa Code § 633.211. Attorneys for the estate also argued that because the wife’s signature was allegedly forged, the mortgage was not valid. However, they additionally argued that the property was subject to the “debts and charges of the estate.” Despite assuming that the wife’s signature was forged, the bank argued that while Iowa Code §633.211 requires both spouses to sign the mortgage document, this was a purchase money mortgage that was governed by Iowa Code §654.12B. According to the trial court, prior case law recognizes that there is a common law priority of purchase money mortgages. Thus, the trial court foreclosed the mortgage and entered judgment in favor of the bank. The court ordered that the land be sold at sheriff’s sale with any remaining surplus being paid to the estate. 

Both the estate and the wife appealed and the Iowa Court of Appeals first addressed whether this was a purchase money mortgage, making it superior to the rights of the wife and rights of the estate to the property. The wife and the estate argued that it was not a purchase money mortgage and that the wife’s rights trumped the bank’s, because they did not arise “either directly or indirectly by, through, or under the purchaser” as required for a purchase-money mortgage under Iowa Code §654.12B. Thus, they made the argument that from the moment of marriage, the spouse’s interest becomes paramount to any other person claiming under the spouse by any subsequent act. They cited Iowa caselaw for the proposition that the dower right given to a wife in the property of her husband by the Iowa Code “cannot be defeated or impaired by any act of her husband or by any title emanating from him…”. However, the bank was quick to point out that later cases no longer supported that position. Instead, the bank argued that the later cases exhibited a different approach where courts have held that the spouse’s dower interest in real estate attaches subject to the superior rights of a purchase money mortgage. Thus, according to this approach, the widow was not entitled to assert a claim. 

The Iowa Court of Appeals next addressed the issue of the wife’s supposed signature and the issues of fairness and equity. The bank was never able to show proof that the wife did, indeed, sign the document. Thus, the transaction was deemed fraudulent. However, the court found that the purchase money mortgage and subsequent deed transfer constituted a single transaction and the bank should be allowed to prevail and foreclose on the mortgage. 

The next issue was whether the surplus after sheriff’s sale should go to the estate or to the wife. The wife argued that many cases have interpreted Iowa Code §633.211(1) to mean that the interest of a widow in the lands of her deceased husband is not subject to the debts and charges against his estate and property should flow directly to the wife. The estate argued that the decedent’s property should pass to the decedent’s heirs through the administration of the estate. The estate further contended that only assets passing free of all of decedent’s debts are the homestead and exempt property of the widow. Here, the decedent’s debts were quite substantial. Though Iowa Code 633.211 gives the real estate to the widow, §633.350 and §633.218 allow the estate to take control of the property and pass the property through the estate for payment of debts. 

The Iowa Court of Appeals did not agree with the estate’s analysis. While the court did recognize that both parties’ arguments had merit, the plain language of §633.211 does give the real estate to the widow. The court acknowledged that there are inconsistencies between §633.211 and §633.218, but it is up to the legislature to correct the contradiction.Freedom Financial Bank v. Estate of Boesen, No. 9-926/09-0397, 2010 Iowa App. LEXIS 756 (Iowa Ct. App., Jul. 14, 2010)