Opinion ID: 1280524
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Heading: utah trust deed act

Text: Peters contends that even if City were permitted to sue her on her note, Utah's trust deed deficiency statute, section 57-1-32, limits City's recovery to costs, attorney fees, and deficiency in excess of $70,250, the fair market value of the property at the time of Prudential's foreclosure sale. Since at that time, approximately $50,000 was owing to Prudential and approximately $17,000 to City, City would probably be precluded from recovering anything were it limited to a recovery in excess of $70,250. In 1961, the Utah legislature enacted the Utah Trust Deed Act, which provided an alternative to the mortgage foreclosure process. §§ 57-1-19 to -36. Other states passed similar acts around this same time period, such as Arizona in 1971 and Washington in 1965. Hoffmann, Court Actions Contesting the Nonjudicial Foreclosure of Deeds of Trust in Washington, 59 Wash.L.Rev. 323 (1984); Lawyer, The Deed of Trust: Arizona's Alternative to the Real Property Mortgage, 15 Ariz.L.Rev. 194 (1973). Prior to the Utah Trust Deed Act, upon default, a creditor had only one choice  judicial foreclosure  whether under a mortgage or under a trust deed. The Trust Deed Act introduced a second alternative: inexpensive nonjudicial foreclosure for creditors holding a trust deed, without the six-month statutory redemption period. To offset the benefit to creditors of a less expensive foreclosure and the elimination of the redemption period, states enacted statutes limiting a creditor's recovery of a deficiency judgment under a trust deed. See First State Bank of Forsyth v. Chunkapura, 226 Mont. 54, 734 P.2d 1203, 1205 (1987) (Mont. Trust Deed Act as quid pro quo: limits on creditor's right to deficiency judgments in exchange for limits on debtor's rights of possession and redemption). These types of statutory provisions, known as moratoria, were passed by many states during the Great Depression of the 1930s to limit creditors' rights to recover a deficiency judgment following foreclosure. Clifford, 4 Hastings L.J. at 252; see also U.S.B. & M. Liquidation Corp. v. Hilton, 307 Mass. 114, 115, 29 N.E.2d 684, 685 (1940) (moratorium laws were directed primarily to regulation of the remedy and ... they did not substantially impair the obligation of the contract (emphasis added)). There are two types of deficiency statutes: one type prohibits deficiency judgments, and the other limits such judgments by requiring an offset of the fair market value of the property at the time of sale. The Utah deficiency statute, the fair-market-value type, provides: At any time within three months after any sale of property under a trust deed, ... an action may be commenced to recover the balance due upon the obligation for which the trust deed was given as security, and in such action the complaint shall set forth the entire amount of the indebtedness which was secured by such trust deed, the amount for which the property was sold, and the fair market value thereof at the date of sale. Before rendering judgment, the court shall find the fair market value at the date of sale of the property sold. The court may not render judgment for more than the amount by which the amount of the indebtedness with interest, costs, and expenses of sale, including trustee's and attorney's fees, exceeds the fair market value of the property as of the date of the sale. Section 57-1-32 (emphasis added). Thus, a deficiency judgment after the sale of the security is limited to the amount by which the amount of the indebtedness exceeds the fair market value of the security foreclosed on at the time of foreclosure. See Wasatch Bank v. Leany, 727 P.2d 633 (Utah 1986) (creditor can only recover deficiency in excess of fair market value of property at time of foreclosure sale). In a recent decision, a federal district court stated that the purpose of the fair market provision of section 57-1-32 is to protect the debtor, who in a non-judicial foreclosure has no right of redemption, from a creditor who could purchase the property at the sale for a low price and then hold the debtor liable for a large deficiency. First Sec. Bank of Utah, N.A. v. Felger, 658 F. Supp. at 183; see also Roseleaf Corp. v. Chierighino, 59 Cal.2d at 37, 378 P.2d at 99, 27 Cal. Rptr. at 875 (fair market value provisions designed to prevent creditors from buying in at their own sales at deflated prices and realizing double recoveries by holding debtors for large deficiencies). For example, if a trust deed secures a $90,000 loan and the value of the property is $100,000, the fair market value deficiency statute limits a foreclosing creditor's deficiency judgment to costs, attorney fees, etc., in excess of $100,000, the value of the property. Prior to this statute, a creditor could pay $1,000 for the property at the foreclosure sale and then sue on the note for the balance of $89,000, plus costs and attorney fees. See Weisel v. Hagdahl Realty Co., 241 A.D. 314, 316, 271 N.Y.S. 629, 631 (1934) (first mortgagee foreclosed when mortgage balance was $96,000; creditor bought property for $1,000; $95,000 deficiency judgment). The question raised by the case at bar is, if a junior becomes unsecured by a senior's foreclosure, is the junior's subsequent suit against the debtor a suit for a deficiency, limited by section 57-1-32, or is it simply a suit on a note by a now general unsecured creditor? Glenn on Mortgages indicates that if the second is not secured as a result of the senior's foreclosure, the deficiency statute does not apply because the second's suit is not for a deficiency. 2 Glenn on Mortgages § 161 (emphasis added). Other authorities also support this reasoning: A deficiency judgment in California, and by the weight of authority in other jurisdictions, demands a prior sale under the power of sale of a deed of trust or a foreclosure under the mortgage by the creditor seeking the deficiency judgment. There was no such sale or foreclosure in this case. True, there was a foreclosure under the first mortgage, but how should that affect the second, other than to diminish the security. It is stretching [the fair market value deficiency statute] almost to the breaking point, and perhaps beyond, to say that foreclosure of the first mortgage affects the second so as to limit, and, in this case, destroy the creditor's rights. Clifford, 4 Hastings L.J. at 252 (citations omitted); see also U.S.B. & M. Liquidation Corp. v. Hilton, 307 Mass. at 114-15, 29 N.E.2d at 684-85 (although the fair market value of the house was sufficient to cover the amount due on both mortgages, the junior should not be denied full recovery of its debt [since] [t]he security of the mortgaged land has entirely disappeared as a result of the foreclosure of the prior mortgage); Roseleaf Corp. v. Chierighino, 59 Cal.2d at 37, 378 P.2d at 99, 27 Cal. Rptr. at 875 (fair market value limitations do not apply to sold-out junior). We have not heretofore had occasion to determine whether the fair market value limitation of section 57-1-32 applies to a sold out nonforeclosing junior lienor. However, the Utah Court of Appeals, in a recent decision, declined to apply the three-month limitation contained in section 57-1-32 to a nonforeclosing junior. G. Adams Ltd. Partnership v. Durbano, 782 P.2d 962 (Utah Ct.App. 1989). The court reasoned that the statute only applied to a creditor who had foreclosed. Since the second lienor had not foreclosed, section 57-1-32 did not apply. Id. at 963. Consistent with this ruling, we hold that since City, a sold-out junior, is unsecured, it is not pursuing a deficiency judgment and, therefore, the statute would not apply. As a result, City is not limited by the fair market value provision of section 57-1-32 from pursuing its claim against the debtor personally.