Opinion ID: 2109249
Heading Depth: 1
Heading Rank: 2

Heading: The Equitable Issues.

Text: The receiver claims that the Exchange Bank depositors are entitled to an equitable interest in the Burchette farmland and all future payments under the participation loans between Exchange Bank and UCB. The district court denied all equitable relief, and the court of appeals affirmed as to the participation notes. As to the farmland, however, the court of appeals held that an equitable lien should be impressed on the land on behalf of the depositors. Our review in this equitable phase of the case is de novo. A. The farmland. As already noted, the farmland owned by the Steckels, and later the Burchettes, had been held out for many years as an asset available to secure deposits of the customers of Exchange Bank. This was made clear in the estate records of W.J. Steckel, his widow and his daughter, all of which contained statements by the personal representative that the farmland and other Burchette assets would remain available for the depositors. When Edward Burchette transferred the bank to Peter and Nan in 1980, the notice of transfer discussed in division I was recorded in Davis County. It stated: [T]he undersigned, EDWARD BURCHETTE, continues to make available all of his farms, bank stocks and other assets, both real estate and personal, for the security of Exchange Bank. Officers of UCB were aware of the statement by Burchette to the effect that his land would be available to the Exchange Bank depositors. The receiver argues that Edward Burchette's mortgage to UCB was fraudulent as to the Exchange Bank depositors and that the depositors are entitled to equitable claims against the land with priority over UCB's mortgage. He raises theories of equitable liens, constructive trust, equitable subordination, and estoppel. As to the lien argument, we have stated that equitable liens are generally recognized, [however] the doctrine is one of obscure definition. It has been said it is difficult to give an accurate and comprehensive definition of the term equitable lien and, ... it frequently has been stated such a lien is a right not recognized at law, to have a fund or a specific property, or its proceeds, applied in whole or in part to the payment of a particular debt or class of debts. Smith v. Village Enters., Inc., 208 N.W.2d 35, 38 (Iowa 1973) (quoting 51 Am.Jur.2d Liens § 22 (1970)). As we noted in Smith, the concept of equitable lien may cover many varying factual situations. Smith, 208 N.W.2d at 38. The equitable lien is said to be a restitution concept applied by courts of equity to avoid injustice and particularly to avoid unjust enrichment. Restatement of Restitution § 161 (1937). The lien may arise either by the express contract of the parties or by implication under equitable principles. In Farmers & Merchants Bank v. Commissioner of Internal Revenue, 175 F.2d 846, 849 (8th Cir.1949), the Court stated: An equitable lien arises either from either a written contract which shows an intention to charge some particular property with the debt or the obligation, or is implied and declared by a court of equity out of general considerations of a right and justice as applied to the relations of the parties and the circumstances of their dealings. The receiver argues that he is entitled to an equitable lien on the bases of express contract and general equitable principles of right and justice. The evidence, we believe, supports an equitable lien under the express contract theory, thus it is unnecessary to address the receiver's alternative equitable arguments. Edward Burchette, and his predecessors, as owners of the farmland, went to great lengths to assure the Exchange Bank depositors that their deposits were safe, despite the fact that federal deposit insurance was not available to a private bank such as Exchange Bank. The basis for that confidence was the availability of the farmland. UCB had actual and constructive notice of those commitments before it took the mortgages on the Burchette farmland. UCB argues that the public statements and recorded notices to the effect that the land would remain available to the depositors were not intended to be equitable liens, only comfort statements. The only comfort that such notice could reasonably evoke in a depositor, however, was the comfort of knowing that, if the bank went sour, the land would still be there. The language of the public notices to the effect that the land was made available to the creditor, rather than pledged to them is a distinction without a real difference. The purpose was to create confidence in the depositors that they had a form of home-fashioned deposit insurance. That, we believe, was done with design. We believe the evidence supports a finding of an equitable lien, and we so hold. Moreover, because this lien existed prior to UCB's mortgage, because of the pledging of the land by Edward Burchette, and because UCB had actual knowledge of that fact, the equitable lien in favor of the depositors is entitled to priority over the mortgage to UCB. The equitable lien may be enforced by a separate action in equity. See Restatement of Restitution § 161 comment b (1937). B. The participation notes. As already discussed, Exchange Bank's liquidity needs were met in large part through participation loans with its correspondent banks. Exchange Bank customers gave their notes, with supporting financial data and security agreements, if any, to Exchange Bank. Exchange Bank then entered into a participation agreement with UCB, which credited Exchange Bank's correspondent account. The original notes remained with Exchange Bank, pursuant to standard practice among banks. Exchange Bank collected the payments and forwarded them to UCB. In most cases, the Exchange Bank customers were not even aware that their loans had been participated. When Exchange Bank's problems became fully known to UCB, UCB took physical possession of the participation notes. It now claims the right to the future payments under the notes under the theories that (1) it is the owner of the notes, or (2) it has a perfected security interest in them by having taken possession of them. See Iowa Code § 554.9302(1). The receiver counters that he is entitled to the future payments under the participation notes because any claim of ownership or security interest on the part of UCB is voidable on the ground that they were fraudulent conveyances; that they are subordinate to equitable liens in favor of the depositors; that enforcement must be denied under general principles of equitable estoppel and that the notes are subject to a constructive trust in favor of the depositors. He argues that the Exchange Bank held out these notes as being a part of the bank's assets, just as had been done with the farmland. On a procedural matter, UCB argues that, while this claim was filed as an equitable matter, it was tried at law, and the trial court's findings are supported by substantial evidence. The receiver counters that this still retained its equitable character and that our review is de novo. We agree with the receiver; while some of the aspects of the trial suggest that the whole case was tried at law, we believe these issues retained their equitable status, and we therefore examine the facts in regard to those issues de novo. To support his argument that the attempted security interest is voidable as fraudulent, the receiver contends that UCB allegedly participated in and knew of the fraud on the part of the Burchettes and in permitting Exchange Bank to retain possession of the disputed notes as well as its last minute perfection by seizing possession of them. It is clear that a security interest in the notes may be obtained by taking possession of them. See Iowa Code § 554.9302(1). Therefore, our only question is whether the security interest is voidable, or is subordinate to the receiver's claims on one of the grounds urged by him. We believe that it is not. First, regarding the receiver's claim of fraud, the evidence is clear that UCB did not know of the true condition of Exchange Bank until the very eve of its collapse, and for the reasons previously discussed, it cannot be found to be guilty of fraud. Retention of the participated notes, moreover, was in accordance with established banking practices. There is nothing unusual in permitting the originating bank to retain possession of the original notes, for the purpose of allowing customers to make payments on them and for the originating bank to service the loan. We also reject the receiver's claim that the notes in question should be subjected to the imposition of an equitable lien in favor of the depositors. The facts which warrant imposition of an equitable lien as to the farmland simply do not exist with respect to the notes, which were never held out as being security for the bank's depositors. We find no merit in the receiver's claim of priority as to the participated notes and therefore affirm the court of appeals decision in that respect. In summary, we affirm the district court in its judgment in favor of the defendant, UCB, on the law claims of aiding and abetting and conspiracy and affirm on the equitable claim to the participation notes. We reverse the district court judgment insofar as it denied the receiver an equitable lien on the farmland. We thus affirm the court of appeals decision, with the exception that we reject the law claims of conspiracy and aiding and abetting on their merits. We remand for entry of a judgment and decree implementing this opinion. DECISION OF COURT OF APPEALS AFFIRMED; JUDGMENT OF DISTRICT COURT AFFIRMED IN PART AND REVERSED IN PART.