IN THE SUPREME COURT OF IOWA. No

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1 IN THE SUPREME COURT OF IOWA No ELECTRONICALLY FILED JAN 29, 2016 CLERK OF SUPREME COURT CENTRAL BANK and REAL ESTATE OWNED, L.L.C., Plaintiffs/Appellants v. TIMOTHY C. HOGAN, AS TRUSTEE OF THE LIBERTY BANK LIQUIDATING TRUST; LIBERTY BANK, F.S.B; IOWA STATE BANK; FIRST STATE BANK; FARMERS SAVINGS BANK; FARMERS TRUST & SAVINGS BANK; and FIRST COMMUNITY BANK, Defendants/Appellees. APPEAL FROM THE IOWA DISTRICT COURT IN AND FOR DICKINSON COUNTY The Honorable Carl Peterson, District Judge Case No. EQCV DEFENDANT-APPELLEE PARTICIPANT BANKS FINAL BRIEF Craig A. Knickrehm (AT ) Andrew R. Biehl (AT ) WALENTINE, O TOOLE, McQUILLAN & GORDON, L.L.P Davenport St. P.O. Box Omaha, NE Ph: (402) Fx: (402) cknickrehm@womglaw.com abiehl@womglaw.com ATTORNEYS FOR DEFENDANT/APPELLEE PARTICIPANT BANKS i

2 CERTIFICATE OF FILING AND SERVICE The undersigned hereby certifies that on the 29 th day of January, 2016, the preceding Appellee s Final Brief was served by filing the same with the Court s Electronic Filing System and mailing to the following: Scot L. Bauermeister Fitzgibbons Law Firm, LLC 108 N. 7 th St. PO Box 496 Estherville, IA Robin K. Carlson Stinson Leonard Street, LLP 1201 Walnut Street, #2900 Kansas City, MO Nicholas J. Brown Nick Brown, P.C. 604 Lake Ave. PO Box 362 Storm Lake, IA /s/ Jean Ellis. i

3 TABLE OF CONTENTS CERTIFICATE OF SERVICE AND FILING. i TABLE OF CONTENTS.ii TABLE OF AUTHORITIES...iii STATEMENT OF ISSUES PRESENTED FOR REVIEW. 1 I. THE DISTRICT COURT CORRECTLY FOUND THAT THE PARTICIPANT BANKS MAINTAINED THEIR INTEREST IN THE INN...1 SCOPE OF REVIEW ROUTING STATEMENT STATEMENT OF THE CASE.. 2 STATEMENT OF FACTS ARGUMENT I. STANDARD OF REVIEW II. PRESERVATION OF ERROR III. THE DISTRICT COURT CORRECTLY FOUND THAT THE PARTICIPANT BANKS MAINTAINED THEIR INTEREST IN THE INN a. Each of the Participation Agreements constituted a sale of payment intangibles under Iowa Code Ann (1)(bi)... 4 b. The sales of payment intangibles effectuated by the Participation Agreements created security interests in favor of the Participant Banks which attached to, and were perfected in, the underlying note and mortgage covered by the Participation Agreements...7 c. The Participant Banks interest in the underlying note and mortgage was a fractional part of all legal and equitable right, title and interest in and to the original collateral, and later The Inn property when it was surrendered to Liberty Bank. 11 d. Real Estate Owned took The Inn property subject to Participant Banks interests CONCLUSION 20 ii

4 TABLE OF AUTHORITIES Cases Asset Restructuring Fund, L.P. v. Liberty Nat'l Bank & Resolution Corp., 886 S.W.2d 548, 551 (Tx. App. 1994).. 5, 14, 15 Boileau v. Records & Breen, 144 N.W. 336 (Iowa 1913)...18 Brenton Bros. v. Bissell, 239 N.W. 14, 18 (Iowa 1931)..18 Duntz v. Ames Cemetery Ass'n, 186 N.W. 443, 445 (Iowa 1922)...17 FDIC v. Mademoiselle of California, 379 F.2d 660, 665 (9 th Cir. 1967) 13 Franklin v. Comm r of Internal Revenue, 683 F , 128 n.9 (5 th Cir. 1982)...15 In re Drexel Burnham Lambert Group, Inc., 113 B.R. 830, (Bankr. S.D.N.Y. 1990)...15 In re Receivership of Mt. Pleasant Bank & Trust Co., 526 N.W.2d 549, 556 (Iowa 1995) Jefferson Savings & Loan Association v. Lifetime Savings & Loan Association, 396 F.2d 21, 24 (9 th Cir. 1968) Mack v. Tredway, 56 N.W.2d 678, 681 (Iowa 1953)...17, 18 Raymond v. Morrison, 13 N.W. 332 (Iowa 1882) Sanborn v. Maryland Casualty Company, 255 Iowa 1319, 125 N.W.2d 758 (1964)....3 Steele v. Sioux Valley Bank, 44 N.W. 564, 566 (Iowa 1890) iii

5 Statutes Iowa Code Ann , 9 Iowa Code Ann Official Comment Iowa Code Ann , 6, 9, 10, 12, 16 Iowa Code Ann Official Comment Iowa Code Ann Iowa Code Ann Official Comment 5 7, 9 Iowa Code Ann Iowa Code Ann Official Comment Iowa Code Ann Iowa Code Ann Iowa Code Ann , 16 Iowa Code Ann Official Comment 2.12 Iowa Code Ann Secondary Sources 1 Ia. Prac., Methods of Practice 7:2 17 David B. Simpson, Loan Participations: Pitfalls for Participants..15 Mark E. MacDonald, Loan Participations As Enforceable Property Rights in Bankruptcy A Reply to the Trustee's Attack, 53 Am. Bankr. L.J. 35, 39, 41 n.13, (1979).15 Bradford Anderson, Loan Participations and the Borrower s Bankruptcy, 64 Am. Bankr. L.J. 39, 40 (1990)..14 iv

6 STATEMENT OF ISSUES PRESENTED FOR REVIEW I. THE DISTRICT COURT CORRECTLY FOUND THAT THE PARTICIPANT BANKS MAINTAINED THEIR INTEREST IN THE INN. a. Whether the Participation Agreements constituted a sale of payment intangibles under Iowa Code Ann (1)(bi). b. If the Participation Agreements constituted a sale of payment intangibles under Iowa Code Ann (1)(bi), whether the sale of payment intangibles created a security interest in favor of the Participant Banks which attached to, and was perfected in, the underlying note and mortgage covered by the Participation Agreements. c. If the Participant Banks held a security interest in the underlying note and mortgage, whether such security interest was a fractional part of all legal and equitable right, title and interest in and to the original collateral, and later The Inn property when it was surrendered to Liberty Bank. d. Whether Central Bank took The Inn property subject to the Participant Banks interests. SCOPE OF REVIEW Appellees hereby consent to, adopt and incorporate Appellants statements with respect to the scope of review and standard of review. The District Court declaratory judgment action was tried in equity, and therefore is reviewed on appeal de novo. Sanborn v. Maryland Casualty Company, 255 Iowa 1319, 125 N.W.2d 758 (1964). 1

7 ROUTING STATEMENT Appellees hereby consent to, adopt and incorporate Appellants Routing Statement. This case should be retained by the Supreme Court pursuant to Iowa R. App. P (2)(c). STATEMENT OF THE CASE Appellees generally consent to and incorporate by reference the procedural posture described in Defendant-Appellee Trustee s Statement of the Case. Further supplementing Appellants Statement of the Case, this case generally involves application of Iowa common law and Uniform Commercial Code provisions to the parties respective interests which were created under various participation agreements (the Participation Agreements ), whereby the Appellees, in varying amounts, acquired participation interests in and to loans that Appellants predecessor, Liberty Bank, made or intended to make to Iowa Great Lakes Holding, L.L.C. As security for those loans, the Borrower mortgaged certain real property, The Inn, and associated personal property including Owner Cash ( The Inn ). (App., pp , 4-5 and p. 206, 14) 2

8 STATEMENT OF FACTS Appellees hereby consent to, adopt and incorporate by reference Defendant-Appellee Trustee s Statement of Facts. ARGUMENT I. STANDARD OF REVIEW. The District Court declaratory judgment action was tried in equity, and therefore is reviewed on appeal de novo. Sanborn v. Maryland Casualty Company, 255 Iowa 1319, 125 N.W.2d 758 (1964). II. PRESERVATION OF ERROR Appellants have not provided any statement to support preservation of error. III. THE DISTRICT COURT CORRECTLY FOUND THAT THE PARTICIPANT BANKS MAINTAINED THEIR INTEREST IN THE INN. As discussed in the following sections, the District Court correctly found that the Participant Banks maintained their interest in The Inn property because the Participation Agreements entered into between the Participant Banks and Liberty Bank constituted a sale of payment intangibles under Iowa Code Ann (1)(bi), and as such the Participation Agreements created a security interest in favor of the Participant Banks which automatically attached to the underlying note and 3

9 mortgage covered by the Participation Agreements. By operation of the Uniform Commercial Code, the Participant Banks security interests constituted a fractional part of all legal and equitable right, title and interest in and to the original collateral, i.e., to the underlying note and mortgage. Further, the Participant Banks security interest in the underlying note and mortgage also was attached to, and perfected in, The Inn property when it was surrendered to Liberty Bank, because The Inn constituted proceeds of the original note and mortgage covered by the Participation Agreements. Thus, since the Participant Banks originally owned a fractional part of all legal and equitable right, title and interest in and to the original note and mortgage collateral, after The Inn was surrendered to Liberty Bank, the Participant Banks owned a fractional part of all legal and equitable right, title and interest in and to The Inn. Finally, because Central Bank and/or its subsidiary took title to The Inn via Quit Claim Deed, Central Bank and/or its subsidiary s interest in The Inn is subject to the respective legal and equitable rights, title and interests of the Participant Banks. a. Each of the Participation Agreements constituted a sale of payment intangibles under Iowa Code Ann (1)(bi). An analysis of the Participation Agreements determines the nature of the Participating Banks' interest in the collateral because "[t]he terms of the 4

10 participation agreement govern the participation relationship " Asset Restructuring Fund, L.P. v. Liberty Nat'l Bank & Resolution Corp., 886 S.W.2d 548, 551 (Tx. App. 1994) (citations omitted). Reading the plain language of the Participation Agreements, Liberty Bank sold, and the Participating Banks purchased, a participation interest in the underlying financial assets and security. Therefore, the Participating Banks were not mere creditors of Liberty Bank. Section 1 of the Participation Agreements provides that "[Liberty Bank] hereby sells to Participating Bank and Participating Bank hereby purchases from Originating Bank a participation interest.... " (emphasis added). (App., pp , 209, 218, 227, 237, 246, 256, 265, 275, 284, and 293) Section 3 states, Originating Bank shall hold the Note and Loan Documents, in trust, for the undivided interest of Participating Bank and other participating banks, if any, subject to the terms and conditions of this Agreement Upon the Insolvency of [Liberty Bank] or any event which, pursuant to this Agreement, makes it legally necessary for Participating Bank to obtain possession of, or legal title to, the Note, Loan Documents, Loan file or business records regarding the Loan in order for Participating Bank to enforce its rights pursuant to this Agreement, [Liberty Bank] shall surrender possession and legal title shall revert to Participating Bank, regarding such documents and records so held in trust by [Liberty Bank] for Participating Bank. Id. Finally, Section 9 of the Participation Agreements provides: 5

11 In the event the Borrower is determined to be in default under the Loan Documents executed in connection with the Loan, the interests of the Originating and Participating Banks in such Defaulted Loan and in any of the Security therefore shall be deemed ratably concurrent and payments received therefore shall be deemed ratably concurrent and any payments received thereafter from such Borrower or any other parties to the Loan Documents executed in connection with such Defaulted Loan or by liquidation of collateral, application of deposits, or otherwise shall be applied in proportion to each Bank's then respective interest in the total amount of the Defaulted Loan outstanding (such interest then being each Bank's "pro rata share"). Id. The Participation Agreements are properly characterized as payment intangibles under Iowa law. Iowa s version of Article 9 of the Uniform Commercial Code defines payment intangible as a general intangible under which the account debtor s principal obligation is a monetary obligation. Iowa Code Ann (1)(bi). The Official Comments to the U.C.C. describe bank loan participations as one of the primary instances in which sales of payment intangibles occur: Certain sales of payment intangibles primarily bank loan participation transactions should not be subject to the Article 9 filing rules. These transactions fall in a residual category of collateral, "payment intangibles" (general intangibles under which the account debtor's principal obligation is monetary), the sale of which is exempt from the filing requirements of Article 9. See Sections 9-102, 9-109, (perfection upon attachment). The perfection rules for sales of promissory notes are the same as those for sales of payment intangibles. 6

12 Iowa Code Ann , Official Comment 4(d) (emphasis added). Further, the Official Comments to the U.C.C. also specify that a sale of a promissory note or a payment intangible includes a sale of a right in the receivable, such as a sale of a participation interest. Iowa Code Ann , Official Comment 5 (emphasis added). Importantly, Central Bank has never disputed that the Participation Agreements constituted sales of payment intangibles to the Participant Banks, thereby triggering application of the U.C.C. Indeed, Central Bank admits in multiple instances that the Participant Banks acquired a right to payment under the Participation Agreements, which as shown by the preceding paragraphs clearly constitutes a sale of payment intangible warranting application of U.C.C. Article 9. See, e.g., Appellants Proof Brief pp (p. 9: parties had a right to payments received ), (p. 10: The Participating Banks had a right in and to the proceeds received by Liberty Bank from Central Bank ), (p. 11: the parties simply had a contractual right to receive payment ), (p. 12: nothing other than a contractual right to payment was received by the Participating Banks in the loan ). Accordingly, because the Participation Agreements clearly constituted sales of payment intangibles from Liberty Bank to the Participant Banks, it 7

13 is necessary to analyze whether the Participation Agreements created security interests in favor of the Participant Banks which attached to, and were perfected in, the underlying note and mortgage covered by the Participation Agreements. b. The sales of payment intangibles effectuated by the Participation Agreements created security interests in favor of the Participant Banks which attached to, and were perfected in, the underlying note and mortgage covered by the Participation Agreements. Central Bank apparently argues that because the Participation Agreements did not specifically grant security interests in favor of the Participant Banks, no security interests could be created thereby. Appellant s Proof Brief p. 10. However, Central Bank cites no legal authority for the proposition that a document must specifically state that it is creating a security interest in order for a security interest to arise thereunder, because no legal authority for that proposition exists. Indeed, it seems as if Central Bank seriously misapprehends both the nature of security interests under the U.C.C., and the manner in which security interests are created under the U.C.C. Throughout this litigation, Central Bank has falsely conflated the U.C.C. term security interest as being the equivalent of a lien interest. However, the U.C.C. s definition of security interest encompasses more than merely lien interests. Under U.C.C , any interest of 8

14 a buyer of a payment intangible in a transaction that is subject to Article 9 is defined as a security interest. See, Iowa Code Ann (2)(ai). The District Court correctly concluded that a sale of payment intangibles is a transaction that is subject to U.C.C. Article 9. See, Iowa Code Ann (1)(bi); Id., Official Comment 5(d); see also, Iowa Code , Official Comment 5. Indeed, various other transaction types that create more than mere lien interests are considered to be security interests that fall within the scope of U.C.C. Article 9, e.g., sales of accounts, consignments, and certain lease transactions. See, generally, Iowa Code Ann (2)(ai); Iowa Code Ann Moreover, the Participation Agreements function as security agreements under the U.C.C. because they created the security interest (i.e., the interest of a buyer of a payment intangible ) in favor of the Participant Banks. See, Iowa Code Ann (1)(bv) ( security agreement means an agreement that creates or provides for a security interest ); see also, Iowa Code Ann (2)(ai). Thus, it is clear that under Iowa s U.C.C., the Participation Agreements created security interests in favor of the Participant Banks because they created an interest in a buyer of a payment intangible. 9

15 Further, with respect to the issue of attachment, U.C.C states that a security interest attaches to collateral when it becomes enforceable against the debtor with respect to that collateral. Iowa Code Ann (1). The term collateral means the property that was subject to the security interest, i.e., the payment intangibles, and the term debtor means the seller of the payment intangible, i.e., Liberty Bank. Iowa Code (1) subparts (l)(1) and (ab)(2). Thus, in the instant case, the security interest (i.e., the interest purchased by the Participant Banks, or all legal and equitable right, title and interest) attached to the collateral (i.e., the payment intangible) when the Participant Banks interests in the payment intangible became enforceable against the debtor (i.e., the Liberty Bank). It is not disputed that the Participant Banks interests in the loan participations arose at the time the Participation Agreements were executed by Liberty Bank. What Central Bank fails to grasp, however, is that under the U.C.C., the execution of the Participation Agreements by Liberty Bank also gave rise to a security interest (constituting all legal and equitable right, title and interest) in favor of the Participant Banks. Participant Banks security interest attached at that moment because (1) the Participant Banks gave value, (2) Liberty Bank had rights in the participation interests that 10

16 were sold or the power to transfer the participation interests to the Participant Banks, (3) and Liberty Bank authenticated a security agreement (i.e., the Participation Agreements) that described the participation interest sold. See, Iowa Code (2). Moreover, by operation of U.C.C , the Participant Banks security interest was automatically perfected upon attachment. Iowa Code Ann Further, the attachment of Participant Banks security interest also automatically attached to the underlying note and mortgage securing the payment intangible. See, Iowa Code Ann (5); see also, Iowa Code parts (6) and (7). U.C.C (7) states that: [t]he attachment of a security interest in a right to payment or performance secured by a security interest or other lien on personal or real property is also attachment of a security interest in the security interest, mortgage, or other lien. Iowa Code Ann (7). This principal codifies the common-law rules that a transfer of an obligation secured by a security interest or other lien on personal or real property also transfers the security interest or lien. Id. at Official Comment 9 (citing Restatement (3d) Property (Mortgages) 5.4(a) (1997)). Additionally, the Participant Banks perfected security interest continued in the proceeds of the payment intangible and its collateral, i.e., The Inn property. Iowa Code Ann (3). Thus, when The Inn was 11

17 surrendered to Liberty Bank, it was subject to the perfected security interest in favor of the Participant Banks. See, Iowa Code Ann (1)(bl)(2) ( proceeds defined as whatever is collected on, or distributed on account of, collateral). c. The Participant Banks interest in the underlying note and mortgage was a fractional part of all legal and equitable right, title and interest in and to the original collateral, and later The Inn property when it was surrendered to Liberty Bank. The U.C.C. makes clear that operation of the term security interest does not limit the interest obtained by the buyer of a payment intangible when the intent is a full transfer of rights. Under the U.C.C., a debtor that has sold an account, chattel paper, payment intangible, or promissory note does not retain a legal or equitable interest in the collateral sold. Iowa Code Ann (1). The Official Comments to the U.C.C. emphasize this point as follows: The fact that a sale of an account or chattel paper gives rise to a security interest does not imply that the seller retains an interest in the property that has been sold. To the contrary, a seller of an account or chattel paper retains no interest whatsoever in the property to the extent it has been sold. Subsection (a) also applies to sales of payment intangibles and promissory notes, transactions that were not covered by former Article 9. Iowa Code Ann , Official Comment 2 (emphasis added). 12

18 Thus, the term security interest as used in this analysis must connote that the Participant Banks received all legal and equitable right, title and interest in and to the original collateral, and later the proceeds thereof, and not merely a lien interest in the traditional sense. Or, alternatively stated, the Iowa U.C.C. makes it clear that, as a matter of law, Liberty Bank retained no interest whatsoever in the 40.52% interest in the loans and collateral it sold via the Participation Agreements. Case law in Iowa and other jurisdictions supports the conclusion that loan participation agreements typically convey to loan participants all legal and equitable right, title and interest in the underlying loans and collateral. Specifically, the Iowa Supreme Court has recognized that a buyer of a participation interest in a financial asset is not a creditor of the lead bank, but rather becomes an owner of an interest in the underlying financial asset. In re Receivership of Mt. Pleasant Bank & Trust Co., 526 N.W.2d 549, 556 (Iowa 1995). In an FDIC receivership proceeding of an insolvent lead lender bank, the court held banks that had purchased participation interests in the insolvent bank's loans were not mere "creditors" of the bank's receivership estate. Id. Thus, the receiver did not violate any duty to the failed bank's creditors by making 100% payment to the participating banks 13

19 in satisfaction of the insolvent bank's participation agreements with the participant banks. Id. In reaching its conclusion, the Iowa Supreme Court cited with approval FDIC v. Mademoiselle of California, 379 F.2d 660, 665 (9 th Cir. 1967) (finding that upon insolvency of the lead bank, the proceeds of the underlying participated loans in the hands of the receiver are property of the participating banks). The Iowa Supreme Court looked to Mademoiselle for the proposition that the participating banks held an equitable ownership interest in the participated loan, stating: [A] direct recovery against the receiver [by a participant bank] in preference to the general pro rata distribution of assets 'is authorized in situations where the facts are such that the court must say in equity that the property is not that of the bank but that of the [participant bank]. 526 N.W.2d at 556 (emphasis added). In Mademoiselle, the Ninth Circuit found that a participant owns an undivided portion of the loan itself. 379 F.2d at 665. Simply stated, the Ninth Circuit concluded the proceeds belong to the participant bank, not the lead bank. No Iowa cases directly address a participant's ownership interest in collateral for a participated loan. However, the Court of Appeals of Texas' analysis in Asset Restructuring Fund, L.P. v. Liberty National Bank & Resolution Corp., 886 S.W.2d 548 (Tx. App. 1994), is on point. The court 14

20 recognized and adopted the majority view that a participation is "a complete transfer of ownership interest in the loan and collateral to the participant." 886 S.W.2d at 552 (citing Bradford Anderson, Loan Participations and the Borrower's Bankruptcy, 64 Am. Bankr. L.J. 39, 40 (1990)); see also, Franklin v. Comm'r of Internal Revenue, 683 F.2d 125, 128 n.9 (5th Cir.1982); In re Drexel Burnham Lambert Group Inc., 113 B.R. 830, 843, (Bankr. S.D.N.Y. 1990); Mark E. MacDonald, Loan Participations As Enforceable Property Rights in Bankruptcy A Reply to the Trustee's Attack, 53 Am. Bankr. L.J. 35, 39, 41 n. 13, (1979); David B. Simpson, Loan Participations: Pitfalls for Participants, 31 Bus. Law. 1977, 1977 (1976). The court considered whether a participating bank acquired its interest in foreclosed collateral at the time the lead bank foreclosed on the collateral or when the lead bank received proceeds from a sale of the collateral. The court explained, "[I]t follows that if a participant has a percentage ownership in the underlying loan, it also shares a percentage ownership of the collateral securing the loan." Asset Restructuring Fund, L.P., 886 S.W.2d at 552. The court then held that the participating bank held an undivided ownership interest in the collateral foreclosed upon when the loan went into default and foreclosure occurred. Id. at

21 Also instructive is the Ninth Circuit's analysis in Jefferson Savings & Loan Association v. Lifetime Savings & Loan Association, 396 F.2d 21, 24 (9 th Cir. 1968). In Jefferson Savings, the lead bank sold a participation interest in 75% of a loan to Jefferson Savings. The lead bank later purchased the collateral parcels of real estate for the participated loan in its own name at a trustee's sale. The trustee, however, sold the real estate in a manner that violated the trust. Jefferson Savings sought damages. The Ninth Circuit concluded that a participant holds equitable title and an ownership interest in former collateral in amounts equal to the extent to which it funded the underlying loan and that the lead bank in the case held the property as a cotenant with the participating bank. Ultimately the court determined that the participant was entitled to its proportional share 75% of the fair market value of the property. Additionally, the U.C.C. provides that a perfected security interest remains perfected in the proceeds of the original collateral. Iowa Code Ann (3). In this case, as described above, the perfected security interest held by the Participant Banks was 40.52% of the legal and equitable right, title and interest in and to the payment intangible and its underlying collateral. Accordingly, when The Inn was surrendered to Liberty Bank, it was subject to the perfected security interest in favor of 16

22 the Participant Banks. See, Iowa Code (1)(bl)(2) ( proceeds defined as whatever is collected on, or distributed on account of, collateral). The security interest held by the Participant Banks was the same interest they held in the payment intangible/participation interest and its underlying collateral, i.e., all legal and equitable right, title and interest in and to 40.52% of The Inn. In short, the U.C.C., the Participation Agreements, and applicable case law all lead to the same result Liberty Bank sold interests to the Participating Banks, each of which continue to have an interest in the collateral at issue in this litigation. d. Real Estate Owned took The Inn property subject to Participant Banks interests. Real Estate Owned took title to the Real Estate Collateral through a quit claim deed. Aff. Tim Brown Nov. 25, 2014, Ex 9. The Quit Claim Deed states: "[Liberty Bank] does hereby quit claim to [Real Estate Owned] all its right, title, interest, estate, claim, and demand in the following described real estate." (emphasis added). Id. The quit claim deed does not state that Liberty Bank is transferring fee simple absolute title, nor that it is attempting to transfer the equitable interest of the third party Participating Banks. Id. 17

23 A quit claim deed conveys only such title or interest the grantor has at the time the deed is given. This is in contrast to conveyance by, for example, a general warranty deed or a special warranty deed. The general warranty deed typically is used to convey a fee simple title. "The use of the general warranty deed causes the grantor to covenant and warrant that he is indefeasibly vested of an estate in fee simple with full power to convey, that the property is free of all encumbrances except as listed in the deed..." 1 Ia. Prac., Methods of Practice 7:2; see, Raymond v. Morrison, 13 N.W. 332 (Iowa 1882) (a grantee who takes real estate by a quit claim deed only cannot be regarded as a good faith purchaser, and is not entitled to protection as against prior equities of which he had no notice, but one who takes from such grantee by a warranty deed, in good faith and without notice of such equities, will be protected). Similarly, "[t]he special warranty deed is used when the grantor is willing to warrant that the title is good as against anyone claiming by, through or under him, but not as against others." 1 Ia. Prac., Methods of Practice 7:2; Mack v. Tredway, 56 N.W.2d 678, 681 (Iowa 1953). The Iowa recording statute for real property establishes that "[a]n instrument affecting real estate is of no validity against subsequent purchasers for a valuable consideration, without notice... unless the 18

24 instrument is filed and recorded in the county in which the real estate is located." Iowa Code Ann (emphasis added). The grantee of a quit claim deed, however, is "conclusively presumed to have knowledge of all prior equities" and therefore cannot be afforded the recording statue's protection. Duntz v. Ames Cemetery Ass'n, 186 N.W. 443, 445 (Iowa 1922). Under Iowa law, the grantee of a quit claim deed, such as Real Estate Owned, is presumed to be on notice that the purchase price accounts for any outstanding equities. See Steele v. Sioux Valley Bank, 44 N.W. 564, 566 (Iowa 1890) (stating that the recipient of a quit claim deed is "bound to inquire and ascertain at his peril what outstanding equities exist, if any" as the grantor "virtually declares to him that he will not warrant the title, even as against himself; and it may be presumed that the purchase price was fixed accordingly."). It has long been established under Iowa law that one who acquires title by quit claim deed is not protected against prior claims. Brenton Bros. v. Bissell, 239 N.W. 14, 18 (Iowa 1931) ("[O]ne who acquires title by quit claim is not protected against prior bona fide claims and that he takes with notice thereof. Authorities need not be cited to sustain this contention. It is familiar doctrine."). By receiving and accepting a quit claim deed, the grantee takes title "with notice of prior equities, whatever they may be." 19

25 Mack, 56 N.W.2d at 681; see Boileau v. Records & Breen, 144 N.W. 336 (Iowa 1913) (stating that where plaintiff took title to land by a quit claim deed, he took whatever title passed to him with knowledge that it was charged with the risk of defects that could have been ascertained by investigation). Plaintiffs had actual notice of the Participating Banks' participation interests in the Collateral before signing the P&A Agreement. 1 However, even if Plaintiffs dispute that they had actual notice of the participation interests, Plaintiffs are deemed to have constructive notice that Real Estate Owned was receiving title to the Real Estate Collateral subject to the Participating Banks' interests. As a matter of law, when Real Estate Owned took title to the real property through a quit claim deed, Real Estate Owned was charged with knowledge of any title defects or outstanding equities of the Participating Banks. CONCLUSION As shown in the foregoing sections, the District Court correctly found that the Participant Banks had an interest in The Inn because the Participation Agreements constituted a sale of payment intangibles under the U.C.C., and as such created security interests in favor of the Participant 1 Plaintiffs have not alleged that Liberty Bank defrauded them in the sale. As part of the negotiation of the transaction, the parties agreed that all representations and warranties terminated as of the closing. 20

26 Banks which by operation of the U.C.C. automatically attached to the underlying note and mortgage, and later The Inn property (consisting of real estate and personal property, including Owner Cash) as proceeds of the note and mortgage. The interest of the Participant Banks in The Inn after it was distributed to Liberty Bank was the same as it had been in the original payment intangible, i.e., all legal and equitable right, title and interest in and to their proportionate share of The Inn. Further, because Real Estate Owned, LLC took title to Liberty Bank s interest in The Inn via Quit Claim Deed, Real Estate Owned, LLC is presumptively ascribed notice of the Participant Banks interest in The Inn. Therefore, the fact that Real Estate Owned, LLC performed title and abstract searches prior to accepting title and allegedly intended to purchase a 100% fee simple interest in and to The Inn should have no bearing on the outcome of this case. The Participant Banks therefore respectfully submit that the District Court s Order should be affirmed. 21

27 Respectfully submitted, By: /s/craig A. Knickrehm. Craig A. Knickrehm (AT ) Andrew R. Biehl (AT ) WALENTINE, O TOOLE, MCQUILLAN & GORDON, L.L.P Davenport St. P.O. Box Omaha, NE Ph: (402) Fx: (402) cknickrehm@womglaw.com abiehl@womglaw.com ATTORNEYS FOR DEFENDANT- APPELLEE PARTICIPANT BANKS 22

28 REQUEST FOR ORAL ARGUMENT Defendant-Appellee Participant Banks hereby requests to be heard in oral argument on this appeal. By: /s/craig A. Knickrehm Craig A. Knickrehm (AT ) Andrew R. Biehl (AT ) WALENTINE, O TOOLE, MCQUILLAN & GORDON, L.L.P Davenport St. P.O. Box Omaha, NE Ph: (402) Fx: (402) cknickrehm@womglaw.com abiehl@womglaw.com ATTORNEYS FOR DEFENDANT- APPELLEE PARTICIPANT BANKS 23

29 ATTORNEY'S COST CERTIFICATE Defendant- Appellee Participant Banks hereby certify that the cost of the above and foregoing Final Brief was $ 0. By: /s/craig A. Knickrehm. Craig A. Knickrehm (AT ) Andrew R. Biehl (AT ) WALENTINE, O TOOLE, MCQUILLAN & GORDON, L.L.P Davenport St. P.O. Box Omaha, NE Ph: (402) Fx: (402) cknickrehm@womglaw.com abiehl@womglaw.com ATTORNEYS FOR DEFENDANT- APPELLEE PARTICIPANT BANKS 24

30 CERTIFICATE OF COMPLIANCE WITH TYPE-VOLUME LIMITATION, TYPEFACE REQUIREMENTS, AND TYPE-STYLE REQUIREMENTS 1. This brief complies with the type-volume limitation of Iowa R. App. P (1)(g)(1) or (2) because this brief contains 5,444 words, excluding the parts of the brief exempted by Iowa R. App. P (1)(g)(1). 2. This brief complies with the typeface requirements of Iowa R. App. P (1)(e) and the type-style requirements of Iowa R. App. P (1)(f) because this brief has been prepared in a proportionally spaced typeface using Microsoft Word in 14 point Times New Roman font. By: /s/craig A. Knickrehm. Craig A. Knickrehm (AT ) Andrew R. Biehl (AT ) WALENTINE, O TOOLE, MCQUILLAN & GORDON, L.L.P Davenport St. P.O. Box Omaha, NE Ph: (402) Fx: (402) cknickrehm@womglaw.com abiehl@womglaw.com ATTORNEYS FOR DEFENDANT- APPELLEE PARTICIPANT BANKS 25