Court of Appeals: One Action Rule Sometimes Prevents Collection on Guaranty

Under Michigan law, the one-action rule prohibits mortgage holders from collecting in multiple ways. Under the rule, a mortgagee who forecloses on property may not file another action or proceeding seeking to recover “the debt secured by the mortgage or any part of the mortgage.”

In Greenville Lafayette, LLC v Elgin State Bank, the Michigan Court of appeals had to determine whether MCL 600.3204(1)(b), the one-action rule, prevented a mortgagor from collecting on personal guaranties securing the debt on a mortgage. The Sixth Circuit Court of Appeals had previously ruled, in US v Leslie that MCL 600.3204(1)(b) permitted a mortgagor to foreclose on property and also collect on a personal guaranty.

Although the previous courts had ruled in favor of allowing two actions; one to foreclose on a mortgage, and one on a personal guaranty, the Michigan Court of Appeals ruled, in Greenville Lafayette, that the mortgagor could not both foreclose and collect on the guaranty.

The Michigan Court of Appeals noted a critical distinction: that the mortgage in Greenville Lafayette defined the personal guaranty as part of the debt secured by the mortgage. Whereas personal guaranties are generally treated as separate and distinct obligations from the mortgage securing a loan, the mortgage in Greenville Lafayette specifically referenced the personal guaranty as debt secured by the mortgage. As a result, the guaranty was incorporated into the mortgage and became “debt secured by the mortgage” for the purposes of MCL 600.3204(1)(b). Thus, the one-action rule prohibited a second suit based on the personal guaranty.

Greenville Lafayette likely has no impact on whether a mortgage holder may pursue a deficiency judgment. First, the Court of Appeals never considered that issue. Second, MCL 600.3204(1) governs when foreclosure by advertisement may be commenced. It does not govern the parties’ rights after the foreclosure sale.

In order to prevent this undesirable result, mortgagors should refrain from defining personal guaranties as being secured by the mortgage. Doing so prevents the mortgagor from collecting on a personal guaranty, while not proving any real benefit to the mortgage holder.