Opinion ID: 1231705
Heading Depth: 1
Heading Rank: 6

Heading: Propriety of Equitable Remedy.

Text: A. Equitable mortgage . Based on various equitable theories, the trial court and court of appeals decided that the bank was entitled to an equitable mortgage because the Michels admitted they intended to give the bank a mortgage on their homestead. These courts and the bank relied on our cases that have recognized an equitable mortgage where there was a deficiency or uncertainty in the written instrument that purported to create a security interest in the subject property. See, e.g., Tubbs v. United Cent. Bank, N.A., 451 N.W.2d 177, 185 (Iowa 1990) (recognizing equitable lien on non-homestead farmland based on representations made by property owners); Security Sav. Bank v. Colony Village Corp., 301 N.W.2d 702, 704 (Iowa 1981) (recognizing equitable mortgage on non-homestead property based on written instrument showing intent to use property as security for debt); Klotz v. Klotz, 440 N.W.2d 406, 408 (Iowa Ct.App.1989) (affirming equitable mortgage and lien on non-homestead real estate where parties' agreement showed intention to create a security interest in property). But in none of these cases was the deficiency in the instrument purporting to create a security interest in real property a failure to comply with a statutory prerequisite. Cf. Madrid Lumber Co. v. Boone County, 255 Iowa 380, 385-86, 121 N.W.2d 523, 526 (1963) (distinguishing cases that permit equitable relief where there were mere irregularities in proceedings or settlements made under valid contracts, noting case at hand involved an oral agreement contrary to the statutory requirements). This court has stated under other circumstances that courts of equity are bound by statutes and follow the law in [the] absence of fraud or mistake. Mensch v. Netty, 408 N.W.2d 383, 386 (Iowa 1987); accord Johnson County Sav. Bank v. City of Creston, 212 Iowa 929, 940, 231 N.W. 705, 710 (1930) (rejecting equitable remedy where contract was unenforceable and noting `in the absence of fraud, accident, or mistake,' court of equity cannot disregard statutory requirements (citation omitted)); Brunsdon v. Brunsdon, 199 Iowa 1099, 1113, 200 N.W. 823, 829 (1924) (The conclusion arrived at in this case may result in a grave injustice being done to appellees, but a court of equity cannot so expand its proper jurisdiction as to completely override statutes or ignore established doctrines.); Alvis v. Alvis, 123 Iowa 546, 551-54, 99 N.W. 166, 168-69 (1904) (rejecting theories of constructive trust and subrogation where attempted conveyance was held unenforceable due to failure of spouse to sign deed, as required for waiver of spouse's homestead rights, despite spouse's apparent later ratification of conveyance). This rule preserves the integrity of the legislature's judgment that certain transactions will be given effect only if they comply with the requirements set out in the statute. Granting an equitable mortgage here on the sole basis that the debtors knew they were mortgaging their homestead would render section 561.22 meaningless, and noncompliance with the statute of no moment. See Red River State Bank, 533 N.W.2d at 691 (rejecting bank's request for a presently enforceable equitable lien against the mortgaged homestead because it would render the statute requiring disclosure for effective waiver meaningless in this case). [5] B. Reformation . As noted above, the rule requiring courts to give effect to statutory requirements, whether the issue arises in law or equity, incorporates an exception for fraud or mistake. See Mensch, 408 N.W.2d at 386. The bank relies on the mistake exception to support its claim that its contract with the Michels should be reformed and deemed to include the signatures of the Michels to the agricultural homestead waiver. A contract may be reformed where, due to mistake, the contract does not reflect the actual intent of the parties. Wellman Sav. Bank v. Adams, 454 N.W.2d 852, 855 (Iowa 1990). While this remedy is available to change an instrument to reflect the true agreement of the parties, it may not be used to change the terms of the parties' agreement. See Kufer v. Carson, 230 N.W.2d 500, 503 (Iowa 1975). Furthermore, the decision to reform an instrument is within the discretion of the court, which may deny the remedy if it is inconsistent with the ends of justice. See Id., at 504; accord Wellman Sav. Bank, 454 N.W.2d at 855. The bank claims it was the intent of both parties that [the Michels'] home and [forty-seven] acre parcel be collateral for the $225,000 loaned to them. Even if this intent is equivalent to an intent by the Michels to waive their homestead exemption, we do not believe the bank is entitled to equitable relief. The law requires that the bank disclose to the Michels in a conspicuous manner the effect of their waiver of homestead rights. See Iowa Code § 561.22. The purpose behind this disclosure is to ensure the debtors truly comprehend what they are doing and consider the effect of the waiver in deciding whether to enter into the transaction. Here the disclosure was not given due to the bank's determination that the statutory requirement was inapplicable and, as a consequence, the Michels were deprived of the beneficent effect of the statutory admonition. As a consequence, their intent to mortgage their property was formed without the benefit of the required disclosure. We think reformation to reflect the true agreement of the parties would be inappropriate under these circumstances because the statutory requirement that was ignored could have potentially affected the debtors' decision to agree to the terms of the mortgage. Therefore, we choose not to exercise our discretion to reform the mortgage instrument. C. Waiver/estoppel. The bank alleges a misrepresentation by the Michels to support its theories of waiver and estoppel. It claims the Michels represented that they were not engaged in any agricultural activities when they provided their tax returns and other documentation showing no such activities. Assuming for purposes of our discussion only that proof of waiver or estoppel would warrant equitable relief despite the bank's noncompliance with statutory requirements for a mortgage on homestead property, we do not think the bank has proven these theories. As for the bank's waiver argument, there is no connection between the Michels' income tax returns and whether they knew of and intentionally relinquished their right to the agricultural homestead disclosure. See generally Huisman v. Miedema, 644 N.W.2d 321, 324 (Iowa 2002) (`waiver is an intentional relinquishment of a known right' (citation omitted)). With respect to the equitable estoppel theory, the bank has not shown it was justified in relying on the alleged representation in deciding whether it needed to make the disclosure required for agricultural land. See generally Iowa-Ill. Gas & Elec. Co. v. Iowa State Commerce Comm'n, 412 N.W.2d 600, 606 (Iowa 1987) (to establish an estoppel claim a party must demonstrate reasonable reliance upon an adversary's conduct). As we explained earlier, the necessity of having the debtors sign a section 561.22 disclosure depends not on whether the debtors are actively engaged in farming, but on whether the mortgaged property is suitable for farming. Thus, the bank is not entitled to equitable relief based on the alleged misrepresentation arising from the defendants' production of their tax returns. D. Specific performance. The bank also seeks specific performance, asserting the Michels should be required to execute proper documents granting the bank an enforceable mortgage. It relies on our decision in Quint-Cities Petroleum Co. v. Maas, 259 Iowa 122, 143 N.W.2d 345 (1966), in which we required debtors to execute an assignment that was to serve as security for a loan on their homestead. In that case, the debtors refused to execute and deliver the agreed-upon assignment and this court affirmed the district court's judgment granting specific performance. Quint-Cities Petroleum, 259 Iowa at 127, 131, 143 N.W.2d at 348, 350. In contrast, in the present case, the Michels executed the very documents proffered by the bank. Thus, the bank has already received the performance it requested of the defendants. Moreover, to require the Michels to execute a different set of papers would improperly disregard the bank's failure to comply with statutory requirements in obtaining its mortgage on the Michels' homestead. As we have already discussed, the agricultural homestead disclosure required by section 561.22 was intended to alert potential mortgagees to the effect of their waiver of homestead rights before execution of the mortgage documents so they would think twice before mortgaging their homestead. To require an after-the-fact execution of the disclosure would totally defeat the purpose of this statute. E. Constructive trust. Finally, we address the bank's misplaced reliance on Cox v. Waudby, 433 N.W.2d 716 (Iowa 1988) and similar cases to support its claim that it should have an equitable lien on the Michels' property based on a constructive trust theory. In Cox, the owners of the homestead property at issue had purchased the property with the proceeds of a fraudulent transaction. 433 N.W.2d at 718. The property owners sought to preclude the defrauded party from tracing the proceeds of the fraud to the property in question, arguing the property was protected by the homestead exemption. Id. This court held that while homestead property is ordinarily immune from ... judgment liens, the defrauded party in that case had an interest in the property... greater than that of an ordinary judgment lien. Id. Because the defrauded party had a constructive trust in the proceeds of the fraudulent transaction, it could reach whatever had been obtained through the use of those proceeds, including homestead property purchased with the tainted funds. Id. The Cox case is clearly distinguishable from the present situation, where the bank did not have a constructive trust on the proceeds used to purchase the property it seeks to reach and has otherwise made no showing of fraud on the part of the Michels. [6] Therefore, the bank is not entitled to equitable relief based on a theory of constructive trust.