Don't Forget Utah's One Action Rule - March 2014

Terry Jessop & Bitner Newsletter

Issue 7, March 2014

Can I Sue That #*%! Borrower?

If you are a lender with a mortgage, your rights are affected by Utah's One Action Rule. Section 78B-6-901 of the Utah Code says, "There is only one action for the recovery of any debt, or the enforcement of any right, secured solely by a mortgage upon real estate and that action shall be in accordance with the provisions of this chapter." The Utah Supreme Court has interpreted this statute as preventing a creditor from suing the debtor personally on the note until it first forecloses against the real property. Citi Consumer Services, Inc. v. Peters, 815 P.2d 234, 235 (Utah 1991). Real property is peculiar. Anytime a lender decides to take a lien on real property, the lender better not forget that doing so may limit its remedies or options if the debtor stops paying. You may think it is faster or more effective to sue your borrower directly rather than mess with a costly and slow foreclosure. A drop in property values may also have rendered your mortgage valueless. But don't fall into the trap, because Utah's One Action Rule obligates you to foreclose before you can sue.

What If I Have a Guaranty Or Other Collateral?

The One Action Rule applies when the debt is secured "solely" by mortgage upon real estate. The plain reading would suggest that if the debt were additionally secured by equipment as well as a mortgage on real property, the Rule would not apply. Unfortunately, several legal scholars and some of the lower Utah courts have ignored the word "solely" and applied the Rule even though other collateral secured the debt. Regardless of how a court might determine this question, you are always left with a debt secured solely by a mortgage once you have repossessed any other collateral securing the debt. Although the question of mixed collateral remains unanswered, the Utah Supreme Court has decided that personal guarantors can be sued without first foreclosing. See Machock v. Finck, 2006 UT 30, 137 P.3d 785. But please consult us or your attorney because there are pitfalls if you later chose to foreclose.

What About Setoff Rights?

In today's hostile environment to financial institutions, some have suggested that mortgage payments cannot be taken from accounts which the debtor maintains at the financial institution. They argue that setoff is "an action" which does the same thing as a judgment. Would the court today broaden that interpretation and declare that setoff is "an action" prohibited by the Utah One Action Rule?

Two things hopefully prevent that. (1) The Supreme Court stated that "an action" is a lawsuit and not anything else that could be characterized as "an action." After all, sending a notice of default is "an action" that certainly is not prohibited. (2) As we discussed above, the One Action Rule contains the word "solely". When a creditor has a setoff right and that setoff right has not been eliminated by the written terms of the trust deed or mortgage instrument, then the debt is additionally secured by deposit accounts and no longer "solely" by the mortgage. But an answer you can take to the bank on this question is only possible with a review of contract documents and after you contact us or speak to your attorney.

©Terry Jessop & Bitner March 2014