Opinion ID: 2633539
Heading Depth: 2
Heading Rank: 1

Heading: a creditor may proceed directly against a guarantor of payment without foreclosing a trust deed

Text: ¶ 11 Fink first contends that the one-action rule required Machock to foreclose the trust deed to Harmer's Bountiful home before bringing a claim based on the guaranty. We disagree. ¶ 12 The one-action rule is established by statute. It provides that [t]here can be but one action for the recovery of any debt or the enforcement of any right secured solely by mortgage upon real estate which action must be in accordance with the provisions of this chapter. Utah Code Ann. § 78-37-1 (2002). We have interpreted this statute as preventing a creditor from suing the debtor personally on the note until it first forecloses against the real property. City Consumer Servs., Inc. v. Peters, 815 P.2d 234, 236 (Utah 1991). We have also recognized the statute's applicability to trust deeds. Id. We have not directly addressed, however, whether the one-action rule applies to actions against guarantors. We take this opportunity to do so. ¶ 13 We have held that a guarantee of payment is absolute, and the guaranteed party need not fix its losses by pursuing its remedies against the debtor or the security before proceeding directly against the guarantor. Strevell-Paterson Co. v. Francis, 646 P.2d 741, 743 (Utah 1982). But Fink argues that this rule does not apply where the collateral is real property. The sole support he offers for this argument is Surety Life Insurance Co. v. Smith, 892 P.2d 1 (Utah 1995), in which we held that the protections of Utah Code section 57-1-32 (Supp. 2005) apply to deficiency actions against guarantors. In essence, Fink contends that, because Surety Life applied one foreclosure rule to guarantors, all foreclosure rules apply to guarantors, including the one-action rule. We disagree. ¶ 14 The one-action rule does not apply to suits against guarantors of payment because (1) the holding in Surety Life is based on the language of section 57-1-32, not principles of foreclosure law generally, (2) the purpose of the one-action rule is not furthered by extending its application to guarantors, and (3) applying the one-action rule to guarantors unnecessarily limits parties' ability to allocate risk. We will address these points in turn. ¶ 15 First, our holding in Surety Life was based specifically on section 57-1-32's broad language. In Surety Life, the creditor foreclosed a trust deed, purchased the property for much less than market value, and brought an action against the guarantor more than three months after the trustee's sale. 892 P.2d at 2, 3 n. 2. The creditor argued that the guaranty was independent of any security for the trust deed note and, thus, section 57-1-32 did not apply. Id. at 3. We concluded that the type of instrument on which the action was founded was irrelevant because, by its plain language, section 57-1-32 applies to any action to recover the balance due on the obligation secured by a trust deed, following a nonjudicial foreclosure sale, regardless of whether the creditor is suing the debtor or the guarantor. Id. Thus, in Surety Life, we concluded only that section 57-1-32 applies to guarantors and did not address the applicability of other foreclosure rules to suits against guarantors. ¶ 16 Second, the plain language of the one-action rule statute does not mandate its application to guarantors, and construing the statute to do so would not further the purpose the rule was intended to serve. We interpret a statute according to its plain meaning and seek to effectuate the intent of the legislature. See State v. Ireland, 2006 UT 17, ¶ 11, 133 P.3d 396. The text of the one-action rule contains no direct reference to actions against guarantors, but instead speaks in terms of action[s] for the recovery of any debt . . . secured solely by mortgage upon real estate. Utah Code Ann. § 78-37-1 (2002) (emphasis added). Although we could arguably interpret this language broadly enough to apply to actions against guarantors, it is more readily interpreted as protecting only debtors. ¶ 17 Furthermore, construing the one-action rule broadly would do nothing to serve the purposes for which the Legislature passed the rule. The Legislature passed the one-action rule to eliminate harassment of debtors and multiple litigation which sometimes occurred under the common-law rule which allowed a creditor to foreclose and sell the land, and to sue on the note. Utah Mortgage & Loan Co. v. Black, 618 P.2d 43, 45 (Utah 1980). As application of the one-action rule to guarantors would not lessen harassment of debtors or eliminate multiple litigation against debtors, the purpose of the rule is not served by applying it to actions against guarantors. Furthermore, to the extent that the one-action rule has the purpose of preventing double recovery, that purpose is already served by section 57-1-32. Applying the one-action rule to actions against guarantors would not further that purpose. ¶ 18 Finally, applying the one-action rule to actions against guarantors would undermine the primary purpose of guaranties of payment. Guaranties are meant to protect the creditor. See Strevell-Paterson Co. v. Francis, 646 P.2d 741, 743 (Utah 1982). While a creditor may choose to accept a more limited guaranty of collection (where recovery is conditioned on the creditor's exhaustion of remedies against the debtor), the law allows a creditor to bargain for the additional protection offered by an absolute guaranty of payment. See id.; 38 Am.Jur.2d Guaranty § 19 (1999). Under a guaranty of payment, the creditor may proceed directly against the guarantor. Strevell-Paterson, 646 P.2d at 743. Extending the one-action rule to guarantors would severely limit the effectiveness of guaranties of payment by eliminating the distinction between the two types of guaranties for notes secured by real property. This would be an undesirable result. ¶ 19 A guaranty of payment shifts much of the risk of delay or loss from the creditor to the guarantor by allowing the creditor to recover directly from the guarantor without exhausting the collateral or seeking recovery from the debtor. Without a guaranty of payment, a creditor may experience significant delay in waiting for a buyer willing to pay fair market value for a trust property. Furthermore, given our holding in Surety Life, creditors that, in the interest of expediency, choose to accept less than fair market value would suffer a loss of the difference between the sale price and the fair market value of the property. See 892 P.2d at 3. In effect, a guaranty of payment shifts to the guarantor the burden of exhausting the collateral and seeking a deficiency because, under the equitable doctrine of subrogation, the guarantor may step into the position of the creditor, foreclose the trust deed, and seek a deficiency from the debtor. See Martin v. Hickenlooper, 90 Utah 150, 59 P.2d 1139, 1140-42 (1936); 38 Am.Jur.2d Guaranty § 120 (1999). But application of the one-action rule would undermine the risk- and burden-shifting purpose of guaranties of payment because the creditor would be forced to foreclose the trust deed before bringing any action based on the guaranty agreement. In essence, application of the one-action rule to guarantors would transform all guaranties, regardless of the parties' intent, into guaranties of collection. ¶ 20 In sum, to abolish guaranties of payment in the context of debts secured by real property would unnecessarily limit parties' ability to allocate risk as they see fit. We therefore conclude that the one-action rule does not prevent creditors from bringing suit against a guarantor of payment prior to foreclosure. Thus, Machock's breach-of-guaranty complaint was not, as Fink argues, invalid from its inception under the one-action rule. ¶ 21 Having established that Machock's initial complaint based on the guaranty was allowable even though he had not foreclosed the trust deed, we next turn to the question of whether his decision to foreclose the trust deed activated section 57-1-32.