Bank of America National Trust & Savings Ass'n v. Shirley

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No. 95-2898
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Bank of America National Trust *
and Savings Association, as *
Trustee for Farmer Mac *
Agricultural Real Estate Trust, *
Series 1992-2, *
*
Appellant, *
*
v. *
*
Bobby T. Shirley; Patricia E. *
Shirley, Shirley AG Service, *
Inc., * Appeal from the United States
* District Court for the
Appellees. * Southern District of Iowa
*
------------- *
*
Equitable Life Assurance *
Society of the United States; *
Western Farm Credit Bank; *
Federal Agricultural Mortgage *
Corporation; Iowa Bankers *
Association, *
*
Amicus Curiae. *

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Submitted: December 11, 1995

Filed: September 25, 1996
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Before McMILLIAN, JOHN R. GIBSON and BEAM, Circuit Judges.
____________

McMILLIAN, Circuit Judge.

Bank of America National Trust & Savings Association (BOA),
as trustee for the Farmer Mac Agricultural Real Estate Trust,
Series 1992-2, appeals from a final order entered in the District
Court for the Southern District of Iowa granting partial summary
judgment in favor of Bobby T. Shirley, Patricia Shirley and Shirley
Ag-Service, Inc. (appellees). Bank of America National Trust &
Savings Ass’n v. Shirley, No. 1-93-CV-100033 (S.D. Iowa May 19,
1994) (order granting partial summary judgment). For reversal BOA
argues the district court erred in (1) construing Iowa Code Ann.
§ 535.9(2) (West 1987) to bar enforcement of a contractual
prohibition against prepayment and (2) holding Iowa Code Ann.
§ 535.9(2) was not expressly preempted by federal law. For the
reasons discussed below, we hold federal law expressly preempts the
state law and accordingly reverse the order of the district court.

The following statement of facts is taken in large part from
the district court’s order granting partial summary judgment. The
material facts are not disputed. In December 1990 appellees
borrowed $3 million which they promised to repay pursuant to a
schedule set forth in a promissory note payable to 3 Rivers
Investment, Inc. (3 Rivers). The loan was secured by a mortgage on
several parcels of agricultural land. The note provided for an
initial interest-only payment and then semi-annual payments of
interest and principal in the amount of $175,560.76, over a term of
15 years, beginning on July 1, 1991, and ending on January 1, 2006.
The promissory note included the following prohibition against
prepayment, set forth in capital letters above the signature line:
PAYMENTS IN EXCESS OF THE PAYMENTS PROVIDED FOR IN THIS NOTE ARE
NOT PERMITTED.

3 Rivers then sold the loan to Prudential Insurance Co. and
Prudential Agricultural Credit, Inc. (together Prudential).
Prudential provided the funds that were distributed to appellees.
After performing an updated appraisal of the mortgaged property,
Prudential pooled the loan with other agricultural loans and sold
the pool into the “secondary market” pursuant to the Federal
Agricultural Mortgage Corp. program (Farmer Mac), and assigned it

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to BOA as trustee for Farmer Mac Agricultural Real Estate Trust,
Series 1992-2. As a result, BOA owns the loan in its capacity as

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trustee for the holders of certain securities (certificate holders)
pursuant to the pooling and servicing agreement between Prudential
and BOA. Farmer Mac guarantees payment to the senior certificate
holders.

In late June 1993 appellees contacted Prudential and asked for
a “pay-off figure” so they could prepay the note. Prudential
advised appellees that the note did not permit prepayments.
Appellees responded that they had the right to prepay the note,
regardless of the note’s express terms, pursuant to Iowa Code Ann.
§ 535.9(2), which provides in pertinent part:

Whenever a borrower under a loan prepays part
or all of the outstanding balance of the loan the
lender shall not receive an amount in payment of
interest which is greater than the amount
determined by applying the rate of interest agreed
upon by the lender and the borrower to the unpaid
balance of the loan for a period of time during
which the borrower had the use of the money loaned;
and the lender shall not impose any penalty or
other charge in addition to the amount of interest
due as a result of the repayment of that loan at a
date earlier than is required by the terms of the
loan agreement.

In September 1993 BOA filed an action seeking declaratory
judgment that Iowa Code Ann. § 535.9(2) did not make the
no-prepayment term unenforceable. BOA argued that the state
statute precluded penalties for prepayment but did not preclude
prohibitions against prepayment, and, if the state statute did bar
prohibitions against prepayment, federal law (Title VIII of the
Farm Credit Act, 12 U.S.C. § 2279aa-12(d)) preempted the state
statute. The parties filed cross-motions for summary judgment.
The district court granted partial summary judgment in favor of
appellees. The district court construed Iowa Code Ann. § 535.9(2)
to prohibit prepayment penalties in the form of interest or other

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finance charges as well as contractual terms that prevent borrowers
from prepaying any portion of the loan. The district court

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reasoned that the complete prohibition against prepayment is in
effect a penalty of the most extreme kind. For this reason, the
district court held that the promissory note term prohibiting
prepayment was unenforceable. Slip op. at A-6 to A-9 (pagination
as reproduced in addendum to Brief for Appellant), citing Los
Quatros, Inc. v. State Farm Life Insurance Co., 110 N.M. 750, 800
P.2d 184 (1990), and Naumburg v. Pattison, 103 N.M. 649, 711 P.2d
1387 (1985). Accord Groseclose v. Rum, 860 S.W.2d 554 (Tex. Ct.
App. 1993) (statute providing that prepayment charge or penalty may
not be collected on loan construed to mean that a provision barring
prepayment is a “penalty”). The district court also held that
federal law, 12 U.S.C. § 2279aa-12(d), did not apply because the
loan was not made by an “originator or certified facility.” Slip
op. at A-10. The district court found that the loan was
"originated" by 3 Rivers, which is not an “originator or certified
facility” under Farmer Mac, and not by Prudential, which is both an
“originator,” 12 U.S.C. § 2279aa(7), and a “certified facility,”
id. § 2279aa(3)(A). Slip op. at A-10.

Appellees had filed a counterclaim and third-party complaint
against Prudential. Appellees dismissed their claims without
prejudice, and both sides filed motions for entry of final
judgment. The district court entered final judgment in favor of
appellees and this appeal followed.

We review a grant of summary judgment de novo. The question
before the district court, and this court on appeal, is whether the
record, when viewed in the light most favorable to the non-moving
party, shows that there is no genuine issue as to any material fact
and that the moving party is entitled to judgment as a matter of
law. Fed. R. Civ. P. 56(c); see, e.g., Celotex Corp. v. Catrett,
477 U.S. 317, 322-23 (1986); Anderson v. Liberty Lobby, Inc., 477
U.S. 242, 249-50 (1986); Get Away Club, Inc. v. Coleman, 969 F.2d

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664, 666 (8th Cir. 1992); St. Paul Fire & Marine Insurance Co. v.
FDIC, 968 F.2d 695, 699 (8th Cir. 1992). Where the unresolved

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issues are primarily legal rather than factual, summary judgment is
particularly appropriate. E.g., Crain v. Board of Police
Commissioners, 920 F.2d 1402, 1405-06 (8th Cir. 1990). We agree
with the district court that the only issues presented are
questions of law; unlike the district court, however, we hold the
federal law expressly preempts the state statute.

BOA first argues that the district court erroneously construed
Iowa Code Ann. § 535.9(2) to bar enforcement of contractual terms
prohibiting prepayment. BOA argues that the plain language of the
state statute indicates that the statute does not apply to the
right to prepay but only provides that lenders cannot enforce any
prepayment penalties. In other words, BOA argues the state statute
does not grant borrowers a right to prepay; rather, the state
statute addresses the rights of borrowers and lenders when a right
to prepay exists. BOA argues that the state statute does not
address whether or in what circumstances a borrower may prepay; it
merely bars enforcement of any penalties for prepayment. Moreover,
BOA argues that a right to prepay should not be inferred from the
silence in § 535.9(2). BOA contrasts § 535.9(2) with the state
legislature’s express provision of a right to prepay granted for
real estate loans made by savings and loans in § 534.21(10) (now
repealed) or by credit unions in § 533.16(11).

BOA also argues that construing Iowa Code Ann. § 535.9(2) to
grant borrowers a right to prepay is inconsistent with Iowa case
law. BOA argues that, for more than 100 years, Iowa has followed
the common law “perfect tender in time” rule under which lenders do
not have to accept prepayment and can enforce the payment schedules
set forth in promissory notes. Anderson v. Haskell, 45 Iowa 45
(1876). BOA further argues that the Iowa Supreme Court reaffirmed
the perfect tender in time rule in 1981, after the state

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legislature enacted Iowa Code Ann. § 535.9(2). Lett v. Grummer,
300 N.W.2d 147, 150 (Iowa 1981) (decision does not mention the
statute).

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 We need not decide this difficult question of state law
because we hold that federal law expressly preempts application of
Iowa Code Ann. § 535.9(2) to agricultural loans made by an
originator or certified facility guaranteed by Farmer Mac. Whether
or not Iowa Code Ann. § 535.9(2) merely bars enforcement of
contractual terms that prohibit borrowers from prepaying any
portion of their loans as unlawful penalties or affirmatively
grants borrowers the right to prepay is irrelevant when considering
whether the state law is preempted.

Title VIII of the Farm Credit Act, 12 U.S.C. § 2279aa-12(d),
at the time of the district court's decision, provided in pertinent
part:

Any provision of the Constitution or law of any
State which expressly limits the rate or amount of
interest, discount points, finance charges or other
charges that may be charged, taken, received, or
reserved by agricultural lenders or certified
facilities shall not apply to any agricultural loan
made by an originator or a certified facility in
accordance with this [subchapter] that is included
in a pool for which [Farmer Mac] has provided a
guarantee.

BOA argues that this subsection is not limited to preemption of
state usury laws (the subsection heading is “state usury laws
superseded”) and preempts all state statutes that limit any charges
or otherwise limit the amount of interest that a lender can
receive. BOA argues that the Iowa statute in question expressly
limits interest penalties that an agricultural lender can assess
and, by granting borrowers the right to prepay, prevents lenders

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from collecting the amount of interest agreed to by the parties.1

The district court did not decide the preemption issue because
it held that federal law, 12 U.S.C. § 2279aa-12(d), did not apply
to appellees' loan. Slip op. at A-10. The district court found
that the loan was originated by 3 Rivers, which is not an
“originator or certified facility” under Farmer Mac, and not by
Prudential, which is both an “originator,” 12 U.S.C. § 2279aa(7),
and a “certified facility,” id. § 2279aa(3)(A).

As discussed below, we hold that the federal law applies and
that the federal law expressly preempted the state statute.

Congress’ intent is the touchstone of our
analysis of whether [the federal law] preempts the
[state statute]. Congress’ intent may be
“explicitly stated in the statute’s language or
implicitly contained in its structure and purpose.”
When Congress has not spoken expressly, a state law
is preempted if it conflicts with federal law or if
federal law “occupies a legislative field,”
indicating that Congress intended to leave no room
for the states to supplement the federal law.

When Congress has spoken expressly, however,
the preemptive scope of a federal law is governed

1
The Federal Agricultural Mortgage Corp. (Farmer Mac) filed a
brief as amicus curiae in support of BOA on this issue. Farmer Mac
argues that Title VIII of the Farm Credit Act prohibits application
of the state statute to appellees’ loan. For this reason Farmer
Mac takes no position on whether the district court correctly
construed the Iowa statute to bar prepayment. Farmer Mac thus
argues the term barring prepayment is enforceable. Farmer Mac also
agrees with BOA that, contrary to the district court’s finding,
Prudential was an “originator” of the loan and that the loan was
made in accordance with the Farmer Mac program.

Equitable Life Assurance Society/ Western Farm Credit Bank and
the Iowa Bankers Association also filed amicus briefs in support of
BOA.

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entirely by the express language. “When Congress
has considered the issue of pre-emption and has
included in the enacted legislation a provision
explicitly addressing that issue, and when that
provision provides a ‘reliable

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 indicium of congressional intent with respect to
state authority,’ ‘there is no need to infer
congressional intent to pre-empt state laws from
the substantive provisions’ of the legislation.”

Weber v. Heaney, 995 F.2d 872, 875 (8th Cir. 1993) (citations
omitted).

Although § 2279aa-12(d) did not contain the term “preempt,”
it plainly provided that a state law “which expressly limits the
rate or amount of interest, discount points, finance charges or
other charges . . . shall not apply to any agricultural loan made
by an originator or a certified facility in accordance with this
[subchapter] that is included in a pool for which [Farmer Mac] has
provided a guarantee.” (Emphasis added.) The subsection heading
even included the term “superseded.” We think § 2279aa-12(d) was
an explicit statement by Congress of its intent to preempt state
law. Our task is therefore to identify the domain expressly
pre-empted by § 2279aa-12(d). Freightliner Corp. v. Myrick, 115
S. Ct. 1483, 1488 (1995).

In the present case, the question is whether Iowa Code Ann.
§ 535.9(2) is a state law which “expressly limits the rate or
amount of interest, discount points, finance charges or other
charges.” In our view, Iowa Code Ann. § 535.9(2) clearly falls
within the domain expressly preempted by § 2279aa–12(d). Our
reading of the scope of § 2279aa-12(d) was confirmed by its
amendment in 1996. Leaving the sub-section heading the same,
Congress struck subsection (d) and replaced it with the following:

A provision of the Constitution or law of any State
shall not apply to an agricultural loan made by an
originator or a certified facility in accordance with
this title for sale to the Corporation or to a certified
facility for inclusion in a pool for which the

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Corporation has provided, or has committed to provide, a
guarantee, if the loan, not later than 180 days after the
date the loan was made, is sold to the Corporation or

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 included in a pool for which the Corporation
has provided a guarantee, if the provision--

(1) limits the rate or amount of
interest, discount points, finance charges, or
other charges that may be charged, taken,
received, or reserved by an agricultural
lender or a certified facility; or

(2) limits or prohibits a prepayment
penalty (either fixed or declining), yield
maintenance, or make-whole payment that may be
charged, taken, or received by an agricultural
lender or a certified facility in connection
with the full or partial payment of the
principal amount due on a loan by a borrower
in advance of the scheduled date for the
payment under the terms of the loan, otherwise
known as a prepayment of the loan principal.

Farm Credit System Reform Act of 1996, § 112, 1996 U.S.C.C.A.N.
(106 Stat.) 162, 165-66 (to be codified at 12 U.S.C.
§ 2279aa-12(d)) (effective Feb. 10, 1996). Thus, the version of
§ 2279aa-12(d) now in effect expressly refers to state laws which
limit or prohibit prepayment penalties. Cf. Smiley v. Citibank
(South Dakota), N.A., 116 S. Ct. 1730, 1733-35 (1996) (deferring to
regulation interpreting statutory term “interest” to include credit
card late-payment fees).

As noted above, the district court held § 2279aa-12(d) did not
apply to appellees’ loan because 3 Rivers closed the loan and
3 Rivers was not an originator or a certified facility. We do not
agree. Section 2279aa-12(d) applies to any loan that is “made by
an originator or a certified facility in accordance with this
[subchapter] that is included in a pool for which [Farmer Mac] has
provided a guarantee.” (The 1996 amendment applies to any loan
“made by an originator or a certified facility in accordance with
this title for sale to the Corporation or to a certified facility
for inclusion in a pool for which the Corporation has provided, or

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has committed to provide, a guarantee.”) It is undisputed that the
loan was originally closed by 3 Rivers and that 3 Rivers was not an

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originator or a certified facility. It is also undisputed that the
loan was “included in a pool for which [Farmer Mac] has provided a
guarantee.” However, we think 3 Rivers’s status is irrelevant.
Rather, it is Prudential’s status that is dispositive, at least for
purposes of the Farmer Mac loan program.

Prudential is an originator and a certified facility. Title
12 U.S.C. § 2279aa(7) provides that “[t]he term ‘originator’ means
any . . . entity that originates and services agricultural mortgage
loans.” However, the statute does not define “originates.” Farmer
Mac has interpreted the term “originates” to include causing the
performance of an updated appraisal or reappraisal of an existing
loan, “regardless of the identity of the entity in whose name the
loan was originally closed.” Federal Agricultural Mortgage Corp.,
Securities Guide §§ 3.38(e), 4.6(e) (1990). Under this definition,
an originator can be an entity (e.g., Prudential) that purchases an
“existing loan” from another entity that actually closed the loan
(e.g., 3 Rivers) and performs an updated appraisal or reappraisal
of an existing loan. “Existing loans” are qualified loans for
which the most recent appraisal (excluding an updated appraisal or
reappraisal) precedes the application for a Farmer Mac Guarantee by
more than 180 days. Id. at 4. Appellees’ loan was an “existing
loan” because the original appraisal was performed on July 12,
1990, approximately 5 months before the loan closed in December
1990. Prudential’s application for a Farmer Mac Guarantee was
dated May 31, 1992. Thus, in accordance with the definition of
“existing loan,” the original appraisal on appellees’ loan preceded
the application for a Farmer Mac Guarantee by more than 180 days.
Prudential caused an updated appraisal of the loan to be performed
on May 1, 1992, so that the loan could be pooled in accordance with
the requirements of the Securities Guide. Because appellees’ loan
was an existing loan and Prudential caused an updated appraisal to

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be performed, Prudential is deemed to be the originator of the
loan, even though 3 Rivers originally closed the loan. For this

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reason, appellees’ loan was “made by an originator or certified
facility in accordance with” Title VIII, that is, Prudential.

In sum, we hold that 12 U.S.C. § 2279aa-12(a) expressly
preempts application of Iowa Code Ann. § 535.9(2) to agricultural
loans made by an originator or certified facility guaranteed by
Farmer Mac. Accordingly, we reverse the order of the district
court granting partial summary judgment in favor of appellees.

A true copy.

Attest:

CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT.

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