Insight New Idaho Supreme Court Decision Allows Debtors to Use a Creditor’s Violation of the One-Action Rule as a Sword, Not Just a Shield.
On August 31, 2020, the Idaho Supreme Court issued a unanimous decision, Bennett v. Bank of Eastern Oregon, No. 47346, 2020 WL 5683073 (Idaho Aug. 31, 2020), wherein the Court held, for the first time, that a debtor can use the one-action rule as a sword in a quiet title action against a creditor who has violated the rule.
A Quick Overview of the One-Action Rule.
Idaho has a one-action requirement for both mortgages and deeds of trust, which are addressed under separate statutory schemes. The “one-action” rule, also referred to as the “single-action” rule or “security first” rule, is codified at Idaho Code Section 6-101 for mortgages and other liens, and Idaho Code Section 45-1501 for deeds of trust. This article will focus on deeds of trust, specifically.
In simple terms, the one-action rule requires a secured creditor to first foreclose on the secured real property before filing an action against a borrower personally to recover on an underlying debt, unless the security interest is deemed “substantially valueless” or other discrete criteria are met1. The purpose of such a rule is to protect a borrower from double impairment of their assets2. Put another way, a creditor can only impair the borrower’s assets that the borrower pledged as collateral (the real property) unless there is a deficiency after foreclosing on the real property.
Until recently, the Idaho Supreme Court had not addressed the consequences for a secured creditor who violates the one-action rule. Specifically, in the case discussed below, both parties agreed the rule could be used as a shield, if the creditor tried to foreclosure on the property. However, the borrower successfully argued it could also be used a sword in a quiet title action3.
The Facts of Bennett v. Bank of Eastern Oregon.
The facts of the case were relatively straightforward and not disputed by the parties. In 2007, the Bennetts owned a business in Oregon and obtained a promissory note (“Note”) and several other loans from the Bank of Eastern Oregon (“Bank”). The Note was secured by a deed of trust on the Bennetts’ residence, which was located in Idaho (“Property”).4 Two years later, the Bennetts defaulted on their obligations, including those owed under the Note, and the Bank filed an action against the Bennetts in Oregon state court seeking to recover on all of the Bennetts’ debts.
In 2010, the Bank successfully obtained a judgment in Oregon and domesticated it in Idaho. The Bank then recorded the judgment in the real property records where the Property was located, thus creating a judgment lien.
One month later, the Bennetts filed a Chapter 7 bankruptcy. During that proceeding, the Bank filed a proof of claim for the amount of its judgment lien, $281,597.57, as an unsecured debt and received $4,658.38 from the bankruptcy estate for its claim. The bankruptcy estate then abandoned the Property and the Bennetts later received their final bankruptcy discharge.
Eight years later, the Bennetts filed an action to quiet title to the Property against the Bank, arguing both the deed of trust and judgment lien were unenforceable. The Bennetts argued the Bank had taken the position the Property was substantially valueless by domesticating the Oregon judgment in Idaho before foreclosing on the Property, and that the judgment lien expired because the Bank failed to renew it. The lower court granted the Bank’s motion to dismiss for failure to state a claim.
The Idaho Supreme Court’s Decision.
On appeal, the Idaho Supreme Court reversed the district court’s decision. The Court held that the Bank violated the one-action rule by seeking to recover on the Note from the Bennetts personally before foreclosing on the Property. The Court clarified that the “proper focal point” for whether the one-action rule was violated was the nature of the proceeding in Oregon, and not the subsequent domestication in Idaho.
The Court went on to hold that a debtor may use the one-action rule as a sanction in a quiet title action against a creditor who has violated the rule5. The Bank had argued that, even if it had violated the one-action rule, the appropriate sanction was to bar the foreclosure of the deed of trust.
The Idaho Supreme Court disagreed, holding that the Bank’s violation of the one-action rule rendered its security interest in the Property unenforceable6. In so holding, the Court explained that the only way the Bank could have been permitted to institute an action against the Bennetts personally, instead of through foreclosure, was if the security interest had been deemed substantially valueless, and the interest in the property reconveyed back to the debtor. The Court also stated that, if the Bank lost only its right to foreclose, the trustee of the deed of trust would no longer hold any legal interest without the power of sale. Thus, the Court concluded, whether it be because the Property was substantially valueless, or because the Bank lost the power to sell the Property through foreclosure “the consequence is that [the Bank’s] security interest in the property is unenforceable and the district court may quiet title in favor of the [debtors]7.”
The Court rejected the equitable arguments advanced by the Bank, stating that a creditor, such as the Bank, “simply makes an election of remedies and waives its security interest” when it sues the debtors personally without first foreclosing on the property8. The Court specifically highlighted the fact that the Bank had obtained a judgment lien on the Property through the suit against the Bennetts. The fact that the Bank let that judgment lien expire had no impact on the Court’s analysis regarding equity.
In that regard, the Bennetts had also sought to quiet title against the judgment lien created when the Bank domesticated and recorded the Oregon judgment in Idaho. The judgment lien, as well as the underlying judgment, had expired due to the Bank’s failure to renew the judgment and lien. The Court concluded that a property owner may quiet title as to an expired judgment lien, which remains a cloud on the title even once expired. Further, the Bennetts’ personal liability on the lien had been discharged in the bankruptcy proceeding, leaving no avenue for the Bank to collect on its judgment.
Conclusion.
In sum, the Bank ended up collecting just over $4,000 on a nearly $300,000 debt. It also had to pay the Bennetts’ costs on appeal, as they were deemed the prevailing party. Thus, this case highlights the draconian consequences of failing to strictly adhere to the one-action rule, and the failure to timely renew underlying judgments and their corresponding liens. Creditors should work closely with their counsel in developing a litigation strategy in order to avoid any violation of the one-action rule, and potential loss of their security interest.
1Bennett v. Bank of E. Oregon, No. 47346, 2020 WL 5683073, at *4 (Idaho Aug. 31, 2020). “Substantially valueless” is defined to mean “that the beneficiary’s interest in the property covered by the trust deed has become valueless through no fault of the beneficiary, or that the beneficiary’s interest in such property has little or no practical value to the beneficiary after taking into account” various factors impacting the value of the property. I.C. § 45-1503(2). Even if there has been no foreclosure, and the property is not deemed “substantially valueless”, a creditor may nonetheless institute a judicial action against the grantor personally if “[t]he action is one for foreclosure of mortgages on real property” or “[t]he action is excluded from the meaning of ‘action’ under Idaho Code section 6-101(3).” I.C. § 45-1503(1).
2Bennett, 2020 WL 5683073, at 4.
3Id.
4Id. at 1.
5Id. at 7.
6Id.
7Id.
8Id. at 8.