Partial payoff of prior equipment lien without assurance that remainder of lien will be satisfied proves costly to Iowa lender

A case recently decided by the Iowa Court of Appeals illustrates the importance to purchase-money lenders of withholding any advances on a purchase money loan until receiving adequate assurance that the advances will result in the release of any prior liens on the property being financed by that lender.   The National Bank ('TNB') agreed to lend $193,500 to Freedom Transportation, Inc. ('Freedom') for the purpose of purchasing five used trucks from Alliance Transportation Group, L.L.C. ('Alliance').  The trucks were subject to a lien of approximately $232,000 in favor of FCC Equipment Financing, Inc. ('FCC').  Freedom agreed with TNB that Freedom would satisfy the balance of the $232,000 FCC lien from its own funds – Freedom even provided TNB with a copy of a check, payable to FCC, for that difference of $38,784.  In reliance on that understanding, TNB wired loan proceeds in the amount of $193,500 to FCC, which applied those funds to reduce the balance of its loan that was secured by the trucks.  Unfortunately for TNB, FCC never received from Freedom the balance of what it was owed and accordingly refused to release its lien against the trucks.  TNB then sued FCC for the return of the $193,500 it had wired to FCC. The Iowa Court of Appeals refused TNB's request for the return of the funds it wired to FCC.  TNB based its request for the return of its wire on the theory that FCC knew that a full payoff was planned, not a partial one, so that FCC should have known that the partial payment it received from TNB by wire was a 'mistake' that would 'unjustly enrich' FCC.  The Court of Appeals rejected that argument, observing that 'it is one thing to say FCC anticipated [full payment], and quite another to say FCC knew the partial payment it had received from TNB was in error.'  'In fact,' the Court went on to say, "TNB's mistake lay not in wiring the $193,125 . . . its real error was that it sent that money without assuring the rest of the payoff would also be made." There are at least two simple precautions TNB could have taken that would have avoided the result in this case.  First, TNB could have delayed wiring any funds to FCC until TNB knew that FCC had good funds from Freedom for the balance of the release price.  Second, TNB could have communicated to FCC in writing, at or before the time it sent the wire, that FCC's acceptance of the wire would create an obligation on FCC's part to release its lien against the trucks.  Because TNB failed to take either such precaution, FCC took the wired funds without notice that the payment was a 'mistake' and was not required to return the wired funds to TNB.