Key Points

  • A homestead co-owner who signs a mortgage designated as "Borrower" but does not sign the promissory note is a "borrower on a . . . mortgage" entitled to a notice of right to cure under Iowa Code section 654.2D(2).
  • The court held that section 654.2D(2) is a real property protection for homesteads, not a shield against personal liability, so personal liability on the note is not required.
  • A mortgage clause making notice to one borrower notice to all did not excuse the missing notice, because the statute requires notice to each borrower in default.
  • The court reversed the foreclosure judgment, vacated the court of appeals, and remanded for the district court to address whether section 654.2B's substantial-prejudice requirement applies to a failure to give notice.
  • The court expressly reserved cases involving a single notice addressed to both borrowers and cases where the challenger had actual or constructive notice.

The Iowa Supreme Court ruled Friday that a homeowner who signed a mortgage on her house, but not the promissory note it secured, was a "borrower" under the state's homestead foreclosure law and should have received a written chance to catch up on missed payments before the lender sued.

The decision reverses a foreclosure judgment against Lynae D. McMillen Dickey Tesdall, who lived in the Mason City house, and vacates a court of appeals ruling against her. Justice Mansfield wrote for the court, and all participating justices joined the opinion. Justice Waterman took no part in the case.

Iowa Code section 654.2D requires a creditor foreclosing on a homestead to send "a borrower on a . . . mortgage" a notice of right to cure, which gives the borrower 30 days to pay the overdue amount and stop the foreclosure. Both lower courts had held that the law protects only people personally liable on the loan. The Supreme Court held that a co-owner the lender itself named as a borrower in the mortgage also qualifies. "We conclude that a person with this status is indeed a borrower on the mortgage," Justice Mansfield wrote.

According to the opinion, Tesdall and Donald Aegerter bought the house in 2019 as joint tenants with right of survivorship, with $260,775 in financing from Wells Fargo Bank, N.A. Aegerter alone signed the note. Both signed the mortgage, which Wells Fargo prepared, and the mortgage defined both of them as the "Borrower." One paragraph obligated both to make the payments, while another said a co-signer who did not sign the note was not personally obligated to pay.

Aegerter moved to Waterloo in November 2021, and Tesdall stayed in the house. After the loan went into default in June 2022, Wells Fargo sent cure notices only to Aegerter, at both addresses, and sent nothing to Tesdall. The opinion says Wells Fargo representatives refused to give Tesdall information about the amounts due when she called between July and December, saying they were not authorized to do so. The August notice put the overdue amount at $6,110.54.

Wells Fargo filed for foreclosure in Cerro Gordo County District Court in February 2023, seeking a judgment against the property alone and waiving any deficiency claim. In August 2024, while the case was pending, Wells Fargo assigned the mortgage to Newrez LLC, which does business as Shellpoint Mortgage Servicing, and Newrez was substituted as the plaintiff.

Judge Rustin Davenport of the Iowa District Court for Cerro Gordo County granted summary judgment to the lender. The district court held that Tesdall was not a borrower because she was not obligated on the note, and he relied in the alternative on a mortgage clause providing that notice to one borrower is notice to all. The court of appeals affirmed on the borrower ground alone, writing, "[S]he is not a borrower by the plain and ordinary meaning of that term."

The Supreme Court read the statute differently. The law does not use the word "borrower" in the abstract, Justice Mansfield wrote, but refers to a borrower on a mortgage, and it is a real property law. "It provides a special limit on foreclosure of homesteads, not a shield against personal liability," he wrote. "We know that Tesdall is a borrower on the mortgage because the mortgage—prepared by Wells Fargo—said that she was."

The court rejected Wells Fargo's description of the label as a mere "drafting tool." It pointed to Iowa Code section 561.21(2), which lets a creditor take a homestead only for debts contracted by people with the power to convey it. Aegerter could not convey Tesdall's half-interest, so the bank needed her to have contracted the debt. "Given that Tesdall had contracted a debt, she was a borrower," the opinion states. Justice Mansfield added that by pledging her half of the house, "In effect, Tesdall had a nonrecourse loan from Wells Fargo."

The court also invoked its rule of construing homestead laws broadly in favor of the people they protect. It cited a line of New York appellate decisions holding that a homeowner who did not sign the note but was named a borrower in the mortgage was owed a statutory pre-foreclosure notice, writing that the illustrative case it discussed "is not a solo performance."

The court turned aside the notice-to-all clause as well. That clause applies "unless Applicable Law expressly requires otherwise," and the court said the statute does. "In other words, the law requires notice to each borrower in default, including Tesdall," Justice Mansfield wrote, adding, "That's not a technical point here because Aegerter was no longer living in the house; only Tesdall was." Accepting the bank's view, the opinion said, would give Wells Fargo "a ready mechanism for circumventing her statutory homestead protection."

In a footnote, the court limited its holding. It said it was not deciding a case in which a lender sent one notice addressed to both borrowers, or one in which the challenger received actual or constructive notice. "We leave resolution of those cases for another day," the court wrote.

Lawyers for Tesdall included David M. Loetz of Iowa Legal Aid. Newrez's lawyers included Matthew E. Laughlin of Dentons Davis Brown PC.

The case now returns to the district court. Section 654.2B says a defective cure notice is not a defense unless the person raising it proves substantial prejudice, and Wells Fargo had not argued lack of prejudice on appeal. The justices did not decide whether that provision reaches a notice that was never sent. They said "the best course of action is for the potential applicability of section 654.2B to be addressed on remand." The court noted that Tesdall had submitted an affidavit saying she could have gathered enough money to cure the default had she been notified.