Heidi E. Koll v. Wells Fargo Bank, N.A.

• Court: Court of Appeals of Iowa
• Decided: August 4, 2021
• Docket: 20-1227
• Status: Published

Opinion

IN THE COURT OF APPEALS OF IOWA

No. 20-1227 Filed August 4, 2021

HEIDI E. KOLL, Plaintiff-Appellant,

vs.

WELLS FARGO BANK, N.A., Defendant-Appellee. ________________________________________________________________

Appeal from the Iowa District Court for Polk County, Coleman J. McAllister,

Judge.

Heidi Koll appeals an order dismissing her petition for declaratory judgment

and granting summary judgment to Wells Fargo Bank on the enforceability of its

mortgage lien following a bankruptcy discharge. AFFIRMED.

John P. Roehrick of Roehrick Law Firm, P.C., Des Moines, for appellant.

C. Anthony Crnic and Janelle G. Ewing of The Sayer Law Group, P.C.,

Waterloo, for appellee.

Heard by Bower, C.J., and Tabor and Ahlers, JJ. 2

TABOR, Judge.

Christopher and Heidi Koll filed for Chapter 7 bankruptcy in federal court,

claiming their current residence as an exempt homestead. See Iowa Code

§ 561.16 (2018). Wells Fargo Bank did not object to the exemption despite holding

a mortgage lien on the property for a home equity loan. The bankruptcy court

granted the Kolls’ discharge. Relying on that discharge order, Heidi sought a

declaratory judgment in state court that the bank’s mortgage lien was void and

unenforceable. The district court decided the mortgage lien “passed through” the

bankruptcy proceeding and remained enforceable against the Kolls’

property. Heidi now contests that ruling, claiming the court erred in deciding the

enforceability of the bank’s mortgage lien under federal bankruptcy law. She asks

us to reverse based on Iowa law governing real property and mortgages.

Finding the district court properly applied the federal principles of lien

survival after a debtor obtains a bankruptcy discharge, we affirm the ruling.

I. Facts and Prior Proceedings

In 2000, Christopher acquired a plot of land in Urbandale as the sole

owner. He obtained a loan from Wells Fargo to construct a new house on the real

estate. In return, he granted the bank a mortgage on the property, executing a

promissory note and security agreement the same day. In late June 2003,

Christopher entered a separate agreement with the bank for a home equity line of

credit. As security for this loan, the bank again took a non-purchase money second

mortgage on the property. Under the governing line-of-credit agreement,

Christopher agreed to waive his right to claim a homestead exemption. That

waiver provision stated: “I understand that homestead property is in many cases 3

protected from the claims of creditors and exempt from judicial sale; and that by

signing this contract, I voluntarily give up my rights to this protection for this

property with respect to claims based upon this contract.”

A few weeks later, in mid-July, Christopher and Heidi married and moved in

together. They have resided on the Urbandale property as joint tenants since

then. Despite their change in marital status, Christopher remained the sole

borrower under the earlier agreements.1

In May 2018, the Kolls filed for bankruptcy and sought protection under the

homestead exemption. Their joint petition scheduled both the construction loan

and home equity loan as claims secured by mortgage liens on their homestead

with Wells Fargo listed as the sole creditor.2 The bank received notice of the

proceeding but did not file a claim reaffirming its security interest in the Kolls’

property. Nor did it object to the homestead exemption. The bankruptcy court

ordered the Kolls’ discharge in early August.

After the bankruptcy proceeding, Wells Fargo mailed Christopher a notice

of right to cure default for missing a payment on his home equity loan. The letter

warned that if he failed to cure the default by the specified date, the bank could

1 In 2014, the Kolls refinanced the first loan and executed a new security agreement with the bank as husband and wife. But Heidi did not sign the accompanying promissory note. 2 In her resistance to the bank’s cross-motion for summary judgment, Heidi offered

as an exhibit an amended June 2018 bankruptcy petition. The amended petition reclassified Wells Fargo’s claim for the 2003 home equity loan from secured to unsecured. In other words, the petition did not show the line of credit was secured by a mortgage lien on the Kolls’ property. On appeal, neither Heidi nor Wells Fargo addresses this amendment in their briefs. After reviewing the summary judgment record, we agree with the district court that the bank’s second mortgage was properly secured by a lien on the property. 4

“take steps to terminate [his] ownership in the property by a foreclosure

proceeding, which could result in Lender or another person acquiring ownership of

the property.”

In response, the Kolls’ attorney, John Roehrick, asked the bank “to validate

an error was made” in sending the default notice. Roehrick pointed out that the

Kolls’ bankruptcy case discharged Christopher’s obligations related to the

homestead. Rather than provide that validation, the bank replied: “We’ve

determined the account was handled properly and no corrections are needed as

no error has occurred. . . . [T]he Chapter 7 bankruptcy releases the customer from

the liability of the account. The lien is still valid and enforceable on the property.”

After two years of passivity, in January 2020, Wells Fargo sent Roehrick a

statement of Christopher’s account reflecting a $69,000 payoff amount for the

home equity loan. In reaction to that letter, Heidi brought a declaratory-judgment

action against the bank to contest the validity and enforceability of the second

mortgage lien.3 She alleged the line-of-credit agreement between her husband

and the bank should be voided because (1) she did not consent to it; (2) the

bankruptcy court discharged the obligation; and (3) the mortgage lien impaired her

homestead right. She also acknowledged that her husband could not raise those

same arguments, noting, “By reason of the non-severance of the homestead, the

lien should be avoided on the interest of Christopher Koll as well.”

3 Christopher was not a party to the action because he waived the homestead protection when executing the security agreement that established the mortgage lien at issue. Because Heidi did not bind herself to the second mortgage, she relied on her alleged homestead interest to avoid the lien as to both of them. 5

Wells Fargo moved to dismiss her petition for failure to state a claim upon

which relief can be granted. It rejected Heidi’s first and third allegations under the

“first in time, first in right” maxim, asserting her rights were subject to its

encumbrance on the property—given its agreement with Christopher predated

their marriage. The bank argued Christopher’s waiver of his homestead right

under that agreement applied to Heidi for the same reason that the homestead

was non-severable. On Heidi’s remaining allegation, the bank asserted the

bankruptcy discharge did not affect its mortgage lien. Finding Heidi’s petition

sufficient under the notice-pleading standard, the court denied the bank’s motion

to dismiss.

From the pleadings, Heidi moved for summary judgment. She claimed the

bank’s mortgage lien was unenforceable as a matter of law because it impaired

her homestead right and did not survive the bankruptcy discharge. In her view,

there were no genuine issues of material fact concerning her interest in the

property and the effects of the bankruptcy discharge on the debt securing the

mortgage.

Disagreeing with Heidi’s application of law, Wells Fargo also moved for

summary judgment. In its view, both federal bankruptcy law and Iowa’s homestead

law precluded her summary judgment claims. The bank reiterated Heidi had no

bases for relief under the homestead statute because its lien existed before she

married Christopher. See id. § 561.13. Put differently, Heidi needed to possess

her homestead right at the time of, or before, the bank’s encumbrance to claim any

impairment. As for the bankruptcy discharge, the bank accused Heidi of ignoring

the well-established principle of federal bankruptcy law “that a mortgage lien 6

remains ‘intact’ even though the personal debt is discharged in bankruptcy.” The

bank argued Heidi’s position that a mortgage lien could not survive once the debt

had been discharged was incorrect because it stemmed from “ancient Iowa state

law cases which merely discuss generic mortgage concepts, outside of

bankruptcy.”

The district court granted summary judgment to the bank. The court found

the federal cases holding that a mortgage lien survived a bankruptcy discharge on

point. The court then dismissed Heidi’s petition for declaratory judgment, deciding

she was not entitled to homestead protection.4 Heidi appeals.

4 Heidi abandons her homestead argument on appeal. Still, Wells Fargo dedicates the first section of its brief to defending the district court’s ruling on this alternative ground. Although not crucial to our analysis, we agree with Wells Fargo that its mortgage lien does not impair Heidi’s homestead interest. Under Iowa Code section 561.16, a homestead is generally beyond the reach of creditors. But section 561.21 lists several classes of debts that allow the sale of the homestead. Critical here is the second exception: “Those created by written contract by persons having the power to convey, expressly stipulating that it shall be liable, but then only for a deficiency remaining after exhausting all other property pledged by the same contract for the payment of the debt.” Id. § 561.21(2). The district court found the timing of the bank’s encumbrance dispositive. Because the bank entered the line-of-credit agreement with Christopher when Heidi did not have a homestead interest, the court decided “[her] homestead rights had to necessarily come subject to the already perfected mortgage lien Wells Fargo had on the property.” We agree. And given that no one spouse can have a homestead interest greater than the other, the same is true for Christopher’s interest. See Decorah State Bank v. Zidlicky, 426 N.W.2d 388, 391 (Iowa 1988) (“It is well established that the homestead interests of a husband and wife cannot be split; if the interests of one are not subject to execution, neither are the interests of the other.”); Coyle v. Kujaczynski, 759 N.W.2d 637, 642 (Iowa Ct. App. 2008) (“Kujaczynski contends she is entitled to a greater interest in the property because she has designated the property as her homestead. We find no authority or support for her claim, and consequently conclude the claim is without merit.”). 7

II. Scope and Standard of Review

We review a summary judgment ruling for correction of legal error. Bauer v.

Brinkman, 958 N.W.2d 194, 197 (Iowa 2021). We will uphold the ruling if the record

shows no genuine issues of material fact and the movant is entitled to judgment

as a matter of law. Id. As the reviewing court, our inquiry is “limited to whether a

genuine issue of material fact exists and whether the district court correctly applied

the law.” Pillsbury Co. v. Wells Dairy, Inc., 752 N.W.2d 430, 434 (Iowa

2008). Summary judgment is appropriate if “the facts are undisputed and only the

legal consequences are at issue.” Breese v. City of Burlington, 945 N.W.2d 12, 17

(Iowa 2020).

III. Analysis

We begin by clarifying the scope of this appeal. Heidi does not dispute the

district court’s finding that Wells Fargo held a secured claim against her

property. Nor does she contest the ruling that she was not entitled to homestead

protection. The narrow legal question presented is whether the enforceability of a

mortgage lien following discharge of the underlying debt must be decided by state

law rather than federal bankruptcy law.

Heidi argues the district court erred in relying on federal bankruptcy law to

determine the bank’s mortgage lien passed through the bankruptcy proceeding

and remained enforceable against her property. She claims the court should have

relied on Iowa law to resolve the enforceability issue. Although she acknowledges

the “substantial body” of federal law governing lien survival post-bankruptcy

discharge, she contends those authorities are not compelling once the bankruptcy

proceeding is closed. Put another way, Heidi asserts those principles govern only 8

when the validity and enforceability of a lien is disputed during the bankruptcy

case; if it is disputed after bankruptcy, state law controls. Based on that premise,

Heidi argues Iowa law prevents enforcement of Wells Fargo’s mortgage lien

because the underlying debt no longer exists.

To understand the context of this litigation, we must explore what a

bankruptcy discharge does and does not do. Under the Bankruptcy Code, a

discharge in a Chapter 7 liquidation “voids any judgment at any time obtained, to

the extent that such judgment is a determination of the personal liability of the

debtor with respect to any debt . . . whether or not discharge of such debt is

waived.” 11 U.S.C. § 524(a)(1). In other words, a discharge releases only the

debtors’ personal liability on their creditors’ claims. Johnson v. Home State Bank,

501 U.S. 78, 84 n.5 (1991). By obtaining a bankruptcy discharge, debtors can

prevent a creditor from taking any action “to collect, recover or offset” its debts

against them personally. 11 U.S.C. § 524(a)(2).

But even if the debtor’s personal obligations are discharged, certain

creditors can avoid the bankruptcy proceeding while preserving their right to

repayment. A fundamental principle of bankruptcy law provides that when a

creditor’s claim is secured by a mortgage on the debtors’ property, “the creditor’s

right to foreclose on the mortgage survives or passes through the

bankruptcy.” Johnson, 501 U.S. at 83 (citations omitted). Even when debtors

obtain a discharge for their debts, a secured creditor still can bring a foreclosure

action and use the sale proceeds to satisfy their obligation. Put simply, a discharge

“extinguishes only one mode of enforcing a claim—namely, an action against the

debtor in personam—while leaving intact another—namely, an action against the 9

debtor in rem.” Id. at 84. Since Johnson, both federal and state courts have

reiterated the distinction between in personam and in rem liability to support the

view that a discharge does not void or prevent enforcement of a secured creditor’s

lien that attached to the debtors’ property before their bankruptcy petition. See

Conklin v. Iowa Dist. Ct., 482 N.W.2d 444, 447 (Iowa 1992) (collecting cases).

Heidi contests the district court’s reliance on those bankruptcy concepts in

granting summary judgment to the bank. Beyond claiming a state court cannot

rely on federal law to determine the enforceability of a mortgage lien in a

post-bankruptcy context, she tries to distance Johnson. She does so by focusing

on its description of the mortgage interest surviving a Chapter 7 proceeding. In

dicta, Justice Marshall reflected: “A mortgage is an interest in real property that

secures a creditor’s right to repayment.” Johnson, 501 U.S. at 82. Considering

that description, Heidi claims the lien-survival framework adopted in Johnson and

recited in later decisions does not apply because in Iowa a mortgage is not an

interest in real property.

To support her contention, Heidi cites Clinton County v. Cox, 37 Iowa 570

(1873), and Burns v. Burns, 11 N.W.2d 461 (Iowa 1943), for the general rule that

a mortgage is “a mere incident” to the debt, and not an interest in real property.

From there, she reasons a lien cannot survive if the debt has been discharged.

Because a bankruptcy discharge prevents a creditor from collecting a debt from

the debtor personally, according to Heidi, under Iowa law that means the debt is

extinguished and the creditor loses its right to proceed against the debtor’s

property. 10

Wells Fargo disagrees with Heidi’s logic. The bank asserts her argument is

flawed because she is “equating a bankruptcy discharge with a debt being paid,

forgiven, or otherwise discharged under state law” and “mischaracterizing the

effect of a bankruptcy discharge on the underlying debt.” We agree. The

authorities cited in Heidi’s brief do not support a prohibition on the bank’s right to

pursue in rem liability after the bankruptcy proceeding.

As discussed, a bankruptcy discharge extinguishes debtors’ personal

liability for their creditors’ claims. Heidi’s assertion that a discharge erases the

debt and thereby terminates the bank’s right to proceed against the property is

unsupported by federal or state law. To the contrary, it is well-established under

governing federal principles that a creditor may choose to bypass the bankruptcy

proceeding and “enforce its lien in a foreclosure proceeding outside of the

bankruptcy.” In re Lane, 959 F.3d 1226, 1229–30 (9th Cir. 2020) (collecting

cases). True, the creditor must prove its secured status. Our record shows Wells

Fargo secured its claim under the line-of-credit agreement.5 Because the

creditor’s right to foreclose is distinct from its right to proceed against the debtor

personally, a bankruptcy discharge does not invalidate the mortgage lien.

Heidi wants us to look beyond those federal principles. Yet in gravitating to

state law she overstates the relief afforded by a bankruptcy discharge. The

enforceability of the lien depends on what survived the bankruptcy. Heidi claims

5 While the Kolls did file an amended petition listing the home equity debt as unsecured, that proof is insufficient to invalidate the bank’s mortgage lien. See HSBC Bank USA, N.A. v. Hallums, 192 A.3d 517, 521 (Conn. App. 2018) (“The defendant cannot avoid this conclusion by unilaterally describing in his bankruptcy filings his obligation as something it is not.”). 11

her discharge extinguished the debt. That framing is incorrect. And it fails to

recognize the distinction between in personam and in rem liability. See Johnson,

501 U.S. at 84 (“The Court of Appeals thus erred in concluding that the discharge

of petitioner’s personal liability on his promissory notes constituted the complete

termination of the Bank’s claim against petitioner.”). The discharge extinguished

only one mode of enforcing the bank’s claim. Thus, we agree with the district

court’s conclusion that the mortgage lien survived the bankruptcy discharge and

remained enforceable against the Kolls’ property.

Plus, even under state law, the lien survives. As Wells Fargo points out,

the district court cited bankruptcy decisions as persuasive authority but found

Moad v. Neill, 451 N.W.2d 4 (Iowa Ct. App. 1989) dispositive. There, Neill filed for

bankruptcy after the mortgagee bank sold his property at a foreclosure

sale. Id. at 5. Under the foreclosure decree, the bank obtained a right to collect

rents and profits from the real estate to satisfy the deficiency of the debt. Id. Neill

argued the bank was not entitled to apply the rents to its deficiency judgment

because the debt had been discharged in bankruptcy. Id. at 8. We rejected his

argument based on the general principle that “the discharge in bankruptcy does

not affect or prevent enforcement of valid liens existing prior to

discharge.” Id. (collecting cases). We also clarified the timing of foreclosure was

insubstantial, noting “it is the date of the existence of the lien” that determines

whether the lien survives the bankruptcy. Id. (citing Webber v. King, 218 N.W.

282, 284 (1928)).

We upheld that principle again in Norwest Bank Iowa, N.A. v. Corey, Nos.

1999-382, 9-635, 98-2109, 2000 WL 526681, at *4 (Iowa Ct. App. Apr. 28, 12

2000). In Corey, the district court relied on Burns to conclude the mortgage

creditor could not enforce its security agreement after the debtor obtained a

bankruptcy discharge. Citing Johnson as persuasive authority, we rejected that

reading of Burns. We found “no justification in denying the holder of a distinct and

recognized in rem claim the relief that party would have enjoyed but for the fortuity

of an intervening bankruptcy.”

Against those precedents, Heidi’s argument fails. Under both federal and

state law, the bank could bypass the bankruptcy proceeding, yet preserve its in

rem claim. Because the bank obtained its mortgage lien fifteen years before

Heidi’s bankruptcy petition, Wells Fargo was entitled to judgment as a matter of

law that its lien survived the discharge of her personable obligations.

AFFIRMED.