After discovering that a property used as secondary collateral had been sold and the debtor had defaulted on its loan to purchase a hotel in Lincoln, Mont., a bank held a non-judicial foreclosure sale of the hotel. It placed a full-credit bid of the money the debtor owed, then filed suit to recover the deficiency between what it was owed and the price for which it eventually sold the hotel.
The case is First Bank of Lincoln v. Land Title of Nez Perce County Inc. (Supreme Court of Idaho, No. 46000).
Donald Tuschoff purchased a bowling alley in Asotin County, Wash., in July 1994 from Rex and Helen Humphrey. The purchase was financed with a note secured by a deed of trust. Tuschoff sold the property in October 1998 to an investor group, Schwab. This sale was financed with another note secured by a deed of trust. The second note was delivered to a company which later was purchased by Land Title of Nez Perce County Inc.
In January 2011, First Bank of Lincoln loaned Tuschoff $440,000 to purchase the Hotel Lincoln in Lincoln, Mont. The loan was secured by a deed of trust against the hotel as well as an assignment of Tuschoff’s interest in the bowling alley note and deed of trust.
Schwab sold the bowling alley in June 2013 to Banana Belt Gaming LLC. It executed a $1.1 million note payable to Tuschoff in monthly installments. Schwab also executed a deed of trust listing Tuschoff as the beneficiary. Tuschoff placed that note and deed of trust in escrow with Land Title.
First American Title Co. handled the closing of the Schwab/Banana Belt sale. It obtained a title commitment from Land Title listing the Tuschoff/Humphrey deed of trust, the Schwab/Tuschuff deed of trust and the assignment to First Bank. First American requested a payoff quote from Land Title, as well as confirmation that the quote amount would pay off both deeds of trust. Land Title confirmed that both deeds of trust would be paid.
First American then sent Land Title a check for the quoted payoff amount. Land Title distributed the funds to the Humphreys and Tuschoff. It did not distribute funds to First Bank.
First Bank later discovered that the bowling alley had been sold and the proceeds had been distributed. The bank brought suit in April 2014 in Washington against Tuschoff and Banana Belt seeking a declaratory judgment as to its interest in the bowling alley. Tuschoff defaulted on the Hotel Lincoln loan.
In June 2014, First Bank had the hotel appraised at $210,000. It held a nonjudicial foreclosure sale Aug. 24, 2014. It was the only bidder and bid the entire amount due on Tuschoff’s underlying note, $425,748.50. It later sold the hotel for $193,000.
A trial court in the Washington litigation granted summary judgment in favor of Banana Belt. It held that Banana Belt’s payment of the Schwab/Tuschoff deed of trust extinguished First Bank’s interest. In April 2016, the Washington Court of Appeals reversed the trial court’s ruling, holding that Banana Belt purchased the bowling alley subject to First Bank’s assignment and that the Hotel Lincoln note created a separate obligation against the bowling alley. The appellate court remanded the case and directed Banana Belt to file suit in Montana so that a Montana court could determine whether First Bank was owed a deficiency judgment.
Banana Belt did not refile in Montana, but entered into a stipulated resolution with First Bank wherein both parties dismissed their claims against each other and First Bank gave up the right to restore its interest in the bowling alley.
First Bank filed the current suit in November 2016. It alleged negligence and breach of contract against Land Title and sought recovery of the $170,000 balance on the loan to Tuschoff, plus interest. The trial court determined that Montana law applied and concluded that under Montana law, a successful credit bid on a property in foreclosure is credited to the overall outstanding debt of a debtor. It held that when First Bank bid the full amount owed by Tuschoff on the Hotel Lincoln, it extinguished all of Tuschoff’s debt and that thus, there no longer was any outstanding debt between Tuschoff and First Bank and no damages to recover for any alleged negligence or breach of contract on the part of Land Title for its failure to direct the quoted payoff amount to First Bank.
First Bank appealed.
The appellate court affirmed the trial court’s determination that First Bank’s full credit bid extinguished Tuschoff’s debt and that once that debt was extinguished, the assignment of Tuschoff’s interest in the bowling alley as collateral for that debt was also extinguished.
On appeal, the Supreme Court of Idaho addressed the following issues:
- Does Montana’s anti-deficiency statute apply in this case?
- Even if section 71-1-317 is inapplicable, does First Bank’s negligence claim against Land Title have merit?
- Is either party entitled to attorney’s fees on appeal?
While the parties agreed that the trust indenture securing the Hotel Lincoln was foreclosed by a trustee’s advertisement and sale, First Bank argued that the Montana Supreme Court had limited section 71-1-317 to apply only to deeds of trust used as security for the financing of occupied, single-family residential properties, while Land Title argued that Montana law was unclear on the issue. Land Title urged the court to apply the plain meaning of the statute, which would disallow the possibility of any deficiency judgment.
“In the absence of controlling precedent, this court applies the plain language of section 71-1-317,” the court stated. “Both Montana and Idaho law are clear that when a statute’s plain ‘language is clear and unambiguous, no further interpretation is necessary.’
“Here, there is no dispute that the trust indenture, the deed of trust on the Hotel Lincoln, was foreclosed non-judicially because it was ‘foreclosed by advertisement and sale,’ ” the court stated. “Thus, pursuant to the plain language of 71-1-317, no further action may be taken against Tuschoff. If no deficiency can exist against Tuschoff, then First Bank subsequently has no action against Land Title because its action against Land Title exists solely based on the deficiency it claims against Tuschoff. While the Montana Supreme Court has indicated the anti-deficiency statute is not applicable in commercial transactions, as was the case here, those cases have all addressed judicial as opposed to non-judicial foreclosures. Indeed, the original Chunkapura opinion clearly stated ‘[i]t is certain that when a trustee conducts a foreclosure sale, a deficiency judgment is not allowed …’. Thus, because there is no controlling precedent to the contrary, no deficiency action exists against Tuschoff and subsequently Land Title under the plain language of section 71-1-317.”
Although the court held that the case was resolved by the application of the plain language of Montana Code section 71-1-317, both parties urged the court to consider the merit of First Bank’s negligence claim.
Applying Idaho law, the court noted that negligence consists of four elements: “(1) a duty, recognized by law, requiring the defendant to conform to a certain standard of conduct; (2) a breach of that duty; (3) a causal connection between the defendant’s conduct and the resulting injury; and (4) actual loss or damage.”
The court also noted that it adheres to a general rule prohibiting the recovery of purely economic losses in all negligence actions.
“Here, the loss is purely economic,” the court stated. “When the bowling alley was sold to Banana Belt and Land Title received the funds to pay off the Schwab/Tuschoff note, Land Title disbursed the funds directly to Tuschoff rather than disbursing the funds to First Bank. And First Bank initiated this litigation to recover that financial loss. The loss is not connected to an injury to a person or property. There are no unique or compelling circumstances requiring a different allocation of the risk, nor is there a special relationship between the parties. Land Title was holding the note and deed of trust in escrow for Tuschoff.
“Although Tuschoff later assigned his interest in the note and deed to First Bank, First Bank and Land Title did not themselves have any relationship. Land Title’s holding of the escrow account was a contractual relationship between Land Title and Tuschoff. Without any evidence of an agreement extending that contractual relationship to assignees (which does not appear in the record), or any case requiring such an extension, the contractual relationship does not extend to First Bank.”
The court also found that neither party was entitled to attorney’s fees on appeal because First Bank was not the prevailing party and the commercial transaction at issue was not between First Bank and Land Title.