Lender not required to list all grounds for default when accelerating a note's balance

Mollie Pawlosky Iowa Banking Law Dickinson Law Des Moines, Iowa

Posted on 12/29/2016 at 07:30 AM by Mollie Pawlosky

For several decades, Iowa lenders have been required to “take some positive action to exercise [the] option to declare payments due under an acceleration clause.” Thus, even when the terms of a note allow a lender, without providing notice or demand, to accelerate the balance upon default, the Iowa Supreme Court has ruled that such provisions are not “self-executing.”

However, the Iowa Court of Appeals has recently held that the notice provided by a lender need not “specifically list all grounds of default,” unless the note requires that the notice state all grounds of default. The debtor in First American Bank v. Midwest Creamery, Inc., No. 15-1433 (Sept. 28, 2016), complained that demand letters were, “silent as to why the bank chose to accelerate the notes.” However, in this commercial credit situation, the Iowa Court of Appeals found no legal authority that required that the letters listed the grounds of default.

The appellate court also affirmed the lower court’s finding that the lender had proven a default. The debtor pointed to disputed evidence as to whether the debtor completely failed to provide required financial documents to the lender.  However, there was no dispute that the debtor provided the financial documents late, which also constituted a default under the notes.

Moreover, the appellate court affirmed the holding that the debtor had defaulted by being locked out from one of its locations, due to failure to pay rent, which led to a separate lawsuit. The notes stated a default occurred when the debtor became involved in a legal action that the lender believed could materially affect the debtor’s ability to pay. Because of the debtor’s pre-existing financial concerns, the lockout justifiably affected the lender’s belief regarding the debtor’s ability to pay. And, the lender did not waive its right to accelerate by waiting 30 days after learning of the lockout before filing suit, as the delay was “minimal.”

The appellate court also agreed that the lender owned and was entitled to enforce all notes at issue. The lender had transferred a portion of one of the notes, prior to default. However, even after the transfer, the lender retained possession of the note and all rights and responsibilities associated with the note; remained the payee; and kept all servicing responsibilities. Moreover, having repurchased the portion of the note before trial, any transfer of rights before default was irrelevant in light of the lender’s repurchase of the portion of the note before trial.

Finally, the lender was awarded attorney’s fees for work performed before the lender declared default, because the notes’ terms allowed the lender to incur expenses to enforce the terms of the notes and to preserve or dispose of collateral, which language was broad enough to cover actions before the lender declared a default.

For further information regarding First American Bank v. Midwest Creamery, Inc. or lender’s collections issues, contact Mollie Pawlosky.

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.

- Mollie Pawlosky 


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