If you fall behind in your mortgage payments, California’s “one-action rule” says that your lender can only take one action against you, whether it is to conduct a trustee’s sale, sue on the promissory note for the balance of the debt, or judicially foreclose. Utah has a similar rule.
Read on to learn more about the one-action rule in California, how this rule relates to the state’s “security-first” rule, and what happens in the case of junior mortgages and home equity lines of credit (HELOCs). Also, learn about Utah’s one-action rule and security-first approach.
Most residential foreclosures in California are nonjudicial, which means the lender does not have to go through state court to foreclose. Though, sometimes, California foreclosures are judicial and go through the state court system.
California law restricts a lender with a secured interest in real property—for example, the lender that made your home loan—to taking only one action to enforce the debt. The one-action rule states “There can be but one form of action for the recovery of any debt or the enforcement of any right secured by mortgage upon real property.” (Cal. Code Civ. Proc. § 726(a)).
So, a lender is allowed to do only one of the following:
Ultimately, this rule limits a lender to bringing only one foreclosure proceeding or court action against a borrower who falls behind in mortgage payments.
The one-action rule appears to allow the lender to sue the borrower personally based on the promissory note and skip foreclosure altogether. But California courts have interpreted the rule to mean that a lender must pursue the real estate before suing the borrower personally. (See Walker v. Community Bank, 10 Cal. 3d 729 (1974)). This concept is known as the “security-first rule.” The goal of this rule is to prevent a secured lender from suing the defaulting borrower on the debt itself before foreclosing on the security interest.
So, a mortgage lender (or the current loan holder) must foreclose the security—your home—rather than suing you directly on the underlying promissory note. (Cal. Code Civ. Proc. § 726(a)). As a result of the one-action and security-first rules, the lender’s options are significantly limited when a borrower defaults on a mortgage.
If the first-mortgage lender forecloses and you have a second or third mortgage, or a HELOC, in certain circumstances, you might face a lawsuit from one of those lenders.
What happens to junior lienholders in a foreclosure. When a senior lienholder forecloses, any junior liens—like second mortgages and HELOCs, among others—are also foreclosed and those junior lienholders lose their security interest in the real estate. A foreclosed lienholder is then referred to as a “sold-out junior lienholder.”
A sold-out junior lienholder can generally sue the borrower personally on the promissory note because it has not had its “one action” yet and it is not limited by the security-first rule because the property has already been foreclosed. So, if your house is underwater, you might face lawsuits from those lenders to collect the balance of the loans.
Utah foreclosures are typically nonjudicial, but judicial foreclosures are also possible. Utah has a “one-action” rule which states that there can be only “one action for the recovery of any debt, or the enforcement of any right, secured solely by mortgage [or deed of trust] upon real estate.” (Utah Code Ann. § 78B-6-901). Basically, this statute limits the lender to one civil (court) action to collect the debt.
Based on the wording of the statute, Utah’s one-action rule appears to permit the lender to sue the borrower personally on the promissory note for a money judgment and skip foreclosure altogether. However, the Utah Supreme Court has interpreted this law to mean that a lender must first foreclose on the real estate before suing the borrower for a money judgment if and when the proceeds from the foreclosure sale are insufficient to pay off the debt. This is known as a “security-first” approach. The purpose of the security-first approach is to stop a mortgage lender from going after the defaulting borrower’s other assets before foreclosing on the real property to satisfy the debt.
Under Utah law, the lender may file a deficiency action within three months after a nonjudicial foreclosure sale. (Utah Code Ann. § 57-1-32). This action then counts as the lender’s one civil action. If the lender chooses to foreclose judicially, it may include a claim for a deficiency judgment in the foreclosure suit, which counts as its one action.
After the first-mortgage lender forecloses, if your outstanding mortgage debt, including second and third mortgages, is more than your home is worth, you might face lawsuits from those other lenders to collect the balance of the loans.
If you're facing a foreclosure in California or Utah and want to learn more about the process, consider talking to a foreclosure attorney.