The California Court of Appeal, Fourth District, recently held that an Iowa statute requiring foreign businesses to hold a certificate of authority to transact business in Iowa in order to avail themselves of Iowa's substitute service of process procedures impermissibly impairs a national bank's ability to sue, and that a national bank was thus not required to have obtained such a certificate of authority in order to have an enforceable judgment.
A copy of the opinion can be found at:
A copy of the opinion can be found at:
An Iowa company borrowed money from a national bank ("First Bank") for the purchase of real property in Iowa. The loan was personally guaranteed by the defendants in this case("Guarantors"), who are residents of California. First Bank sold and assigned the loan to a second national bank ("Second Bank"). The company later defaulted on the loan, and Second Bank filed suit in Iowa to foreclose on the property and to collect on the guaranty.
After unsuccessfully attempting to personally serve the summons and complaint on the Guarantors in California, Second Bank served the Guarantors by substitute service under Iowa law -- that is, by mailing copies of the foreclosure petition and other documents to the Iowa Secretary of State and to the Guarantors in California, pursuant to Iowa's substitute service statute (Iowa Code § 617.3).
Second Bank obtained a default judgment against the Guarantors in the Iowa action, and registered the Iowa judgment in California. Guarantors moved to vacate the judgment registered in California, claiming that they were never served with the summons and complaint and that the Iowa court thus lacked personal jurisdiction. Second Bank argued that the Iowa judgment was valid because the Guarantors were served by substitute service in accordance with Iowa law (Iowa Code § 617.3). The Guarantors claimed that section 617.3 was inapplicable, as section 617.3 required First Bank to be a "resident of Iowa" in order to utilize substitute service under that section, and First Bank was not a "resident of Iowa" at the time of the real estate loan agreement.
The lower court vacated the judgment, ruling that the Iowa court lacked personal jurisdiction over the Guarantors under section 617.3. The court concluded that substitute service was proper only where a contracting party at the time of the transaction was a "resident of Iowa" with the authority to transact business in Iowa, as evidenced by a certificate of authority, and that because First Bank did not have a certificate of authority to transact business in Iowa when the loan was extended, First Bank was not a "resident of Iowa" as required.
Second Bank appealed, and the Appellate Court reversed.
As you may recall, the National Bank Act ("NBA") allows national banks to engage in real estate lending, engage in acts necessary to collect on debts, and to sue and be sued in any court of law and equity as fully as natural persons. See 12 U.S.C. § 24 (Fourth). Iowa Code § 617.3 requires foreign corporations to hold a certificate of authority to transact business in Iowa, if they are to be deemed a "resident of Iowa" that may take advantage of the substitute service provisions allowed under that section.
Noting that residency in Iowa is determined at the time of the contract, the Appellate Court looked to the status of First Bank at the time of the loan transaction to determine whether First Bank was required to hold a certificate of authority to transact business in Iowa, which it would have been. The Court then considered the powers conferred on First Bank as a national bank and concluded that section 617.3's certificate of authority requirement was preempted by the NBA.
In so ruling, the Court noted that, while the particular issue before it had not been addressed in California, other jurisdictions that addressed state laws requiring national banks to hold certificates of authority in order to maintain lawsuits in state courts have overwhelmingly held that the NBA preempts such laws as an impermissible interference with a national bank's powers to sue in any court of law and equity as fully as natural persons.
Turning specifically to Iowa's procedures for substitute service of process, the Court rejected Guarantors' argument that section 617.3 pertains only to service of process, and not the ability to sue, because national banks, like natural persons, may avail themselves of Iowa courts and section 617.3's substitute service provision if they are residents of Iowa. In so ruling, the Court noted other courts' rulings that the NBA preempts even the most limited aspects of state licensing requirements as an impermissible burden on the ability of a national bank to conduct business in a state.
The Court also held that section 617.3 impermissibly discriminated against national banks in favor of state-chartered banks, because state-chartered banks were not required to obtain a certificate of authority for purposes of substitute service. The Court deemed it "especially discriminatory" to require national banks to obtain a certificate of authority in order to use Iowa's substitute service procedures, but not for purposes of conducting mortgage activities in Iowa. See Iowa Code § 490.1501(2(g),(h) (setting forth lending activities permitted in Iowa without certificate).
The Court also held that section 617.3 impermissibly discriminated against national banks in favor of state-chartered banks, because state-chartered banks were not required to obtain a certificate of authority for purposes of substitute service. The Court deemed it "especially discriminatory" to require national banks to obtain a certificate of authority in order to use Iowa's substitute service procedures, but not for purposes of conducting mortgage activities in Iowa. See Iowa Code § 490.1501(2(g),(h) (setting forth lending activities permitted in Iowa without certificate).
Accordingly, the Appellate Court reversed and remanded the case to reinstate the Iowa default judgment.
Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
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