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 California's one action rule relates to the state’s “security first” rule, and what happens in the case of junior mortgages and 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. (Read more about the California Foreclosure Laws and Procedures.)
Though, sometimes, California foreclosures are judicial and go through the state court system. (To learn more about the difference between judicial and nonjudicial foreclosure, and the procedures for each, see Will Your Foreclosure Take Place In or Out of Court?)
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).) This means that a lender is only allowed to do 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. Walker v. Community Bank, 10 Cal. 3d 729 (1974). This 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.
This means that a mortgage lender—whether its loan is a first mortgage, second, or HELOC—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.
Sold-out junior lienholders. If 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. This is referred to as a “sold-out junior lienholder.”
A sold-out junior lienholder can 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—where the equity in your home doesn’t cover all of the outstanding debt including second and third mortgages—you may face lawsuits from those lenders to collect the balance of the loans.
When a sold-out junior lienholder might not be able to get a personal judgment against you. For years, courts have followed a decision by the First District Court of Appeal, Simon v. Superior Court, 4 Cal.App.4th 63 (1992), which said that if the lender that foreclosed the first mortgage is the same lender on the junior loan, that lender can't sue you personally on the promissory note for the junior loan after foreclosing the senior loan. But, in 2017, the U.S. Court of Appeals for the Fourth District disagreed with the holding in Simon, and held that California Code of Civil Procedure § 580d does not preclude a sold-out junior lienholder from seeking a deficiency judgment, even when the same lender holds both the senior and junior liens. (Black Sky Capital, LLC v. Cobb, 12 Cal.App.5th 887 (2017)). The California Supreme Court granted review of the Black Sky case but has not made a decision on the matter as of mid-2018.
Also, under California law, the lender can't get a personal judgment against you if the loan was:
(Learn more in Nolo's article Deficiency Judgments After Foreclosure in California.)
Similar to California, Utah foreclosures are typically nonjudicial, but judicial foreclosures are also possible. (Learn more about Utah foreclosures.)
Also like California, 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.) (Learn more about the difference between a mortgage and a deed of trust.) Basically, this 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 statute 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.
When a lender forecloses, the total debt owed by the borrower to the lender often exceeds the foreclosure sale price. The difference between the sale price and the total debt is called a "deficiency" and a lawsuit to recover that deficiency is called a “deficiency action.”
Example. Say the total debt owed is $300,000, but the home only sells for $250,000 at the foreclosure sale. The deficiency is $50,000. The lender may file a deficiency action against the borrower to recover the $50,000 deficiency.
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 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.
Much like in California, under Utah’s one action rule and security first approach, a mortgage lender—whether the loan is a first mortgage, second mortgage, or HELOC—must foreclose the home before suing you personally on the underlying promissory note.
Sold-out junior lienholders. In Utah, 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.