In the current economic climate and declining property values, there are more defaults under obligations secured by deeds of trust.  These types of defaults raise a myriad of questions and issues.  Because the property encumbered by a deed of trust may not be worth the amount of the obligation, I am often asked whether the beneficiary can commence litigation against the borrower without dealing with the property.  The short answer is no.
 
        The Idaho deed of trust statutes provide that, with certain exceptions, the beneficiary may not institute a judicial action against the grantor to enforce the obligation secured by a deed of trust unless the deed of trust has been foreclosed or the beneficiary’s interest in the property covered by the deed of trust is substantially valueless.  The term “substantially valueless” is generally construed as meaning the beneficiary’s interest in the property has little or no practical value to the beneficiary, taking into account factors such as the existence of senior liens, the cost to the beneficiary of satisfying or making payments on senior liens, the cost of marketing the property and the nature of the property, such as the existence of liability for contaminants or hazardous materials. 

          Upon determining that the property is worth less than the amount of the obligation secured by the deed of trust, but is not substantially valueless, the question becomes how to proceed with the foreclosure and against the borrower.  The deed of trust statutes provide that the beneficiary may institute a judicial action for the deficiency after the foreclosure has been completed.  In that event, there are two primary issues to remember. 

First, the time to commence that action is very short -- three months after the trustee’s sale.  Also, the amount of the judgment that can be obtained is limited to the difference between the entire indebtedness and the greater of the market value of the property at the time of the sale and the amount for which the property sold at the trustee’s sale.  If the beneficiary desires to pursue a judgment for the deficiency, it is important to make that decision prior to the trustee’s sale and determine the value of the property at that time.

        The best method of determining the value is an appraisal, not only to obtain an accurate value but also to provide evidence of value admissible in the subsequent judicial action.  Once the value is determined, the beneficiary should bid the value, not the amount of the indebtedness, at the trustee’s sale.  A bid for more than the market value will affect the beneficiary’s ability to obtain a judgment against the borrower for the deficiency.  For example, assume the indebtedness is $300,000 and the market value of the property is $200,000.  The beneficiary may be entitled to a judgment for the deficiency of $100,000 but only if the property sells for $200,000 or less at the trustee’s sale.  If the beneficiary enters a bid for $250,000, a judgment for the deficiency will be limited to $50,000.  If the beneficiary bids the full indebtedness of $300,000 at the trustee’s sale, there can be no judicial action for a deficiency. 

       If the deed of trust covers multiple parcels, such as undeveloped lots in a subdivision, the beneficiary may want to sell the parcels or lots individually in order to attempt to maximize the value because it may be more likely that a third party will purchase an individual lot or parcel.  The Idaho deed of trust statutes provide for selling the property at the trustee’s sale in parcel, but provide little guidance.  The statute contains a single sentence which states “[t]he Trustee shall sell the property in one parcel or in separate parcels at auction to the highest bidder.”  The statute does not require that the notices of the trustee’s sale state that the property is to be sold in parcels or specify any order in which the parcels are to be sold.  Therefore, the decision to sell in parcels or lots can be deferred until the time of the sale.  In that event, the beneficiary should be in a position to enter separate bids for each parcel after determining the market value for each, and instruct the trustee accordingly.

          There are several other issues which can arise in connection with a foreclosure of a deed of trust, many of which are not specifically addressed in the statutes.  Beneficiaries who are not familiar with the process should obtain advice from counsel or an experienced trust officer at a title company during the process.
 

          
Richard Mollerup is a partner with the law firm Meuleman Mollerup LLP, practicing in the areas of real property law, title insurance and escrow law, and in business matters including formation and operation of corporations, partnerships and joint ventures. Mr. Mollerup can be reached at 208.342.6066 or by email at This e-mail address is being protected from spam bots, you need JavaScript enabled to view it .  More information is available online at www.lawidaho.com .