California’s One-Action Rule May Apply to Federal Lenders

California’s one-action rule provides that “[t]here can be but one form of action for the recovery of any debt or the enforcement of any right secured by mortgage upon real property or an estate for years therein . . . .” Cal. Code Civ. Proc. § 726(a). In other words, the one-action rule prescribes that the only process for recovery of a debt secured by a mortgage or deed of trust is to foreclose on the lien. The rule aims to prevent a multiplicity of actions and vexatious litigation, and to force a beneficiary to look to all of the security as the primary fund for payment of a debt before looking to the trustor’s other assets.

Application of the One-Action Rule to Federal Lenders

As a general rule, federal law applies to the enforcement of a loan made or guaranteed by a federal agency, but because there is no general federal common law for debt collection or the enforcement of security interests, federal courts will adopt the state law as a statement of federal common law unless the state law is inconsistent with the federal policy underlying the federal loan or guaranty program. See U.S. v. Kimbell Foods, Inc., 440 U.S. 715, 726–29, 740 (1979) (holding federal law governs the priority of liens stemming from federal lending programs, but that because a uniform national rule is unnecessary to protect federal interests under the Small Business Administration and FHA loan programs, nondiscriminatory state law of priorities will apply to provide content of federal law); U.S. v. Yazell, 382 U.S. 341, 356–57 (1966) (adopting state law regarding deficiency judgments to define the content of federal law applicable to the SBA because uniform rules are not required, the SBA individually negotiates each contract according to state law, and the federal government’s interest in collecting debts does not outweigh the state rules involved); U.S. v. Ellis, 714 F.2d 953, 954–56 (9th Cir. 1983) (holding state law of redemption applies despite contract provision between Farmers Home Administration and debtor waiving right of redemption because purpose of federal program is to support farming segment of the economy and ease financial burden on farmers, and state debtor protection law providing right of redemption does not adversely affect that federal policy, and may even advance it); U.S. v. MacKenzie, 510 F.2d 39, 41–42 (9th Cir. 1975) (holding protections of Nevada law limiting deficiency judgments and Arizona law regarding redemption rights apply where property involved is security for loans made by the SBA); U.S. v. Crain, 589 F.2d 996, 1000 (9th Cir. 1979) (adopting state law requiring creditor—the SBA—to exhaust debtor’s security prior to enforcement of guarantee).

For example, in Crain, the defendant debtors (husband and wife) personally guaranteed an SBA loan made to the company the husband defendant worked for. Id. at 998. The guarantee provided the SBA could proceed against the defendants without pursuing any rights it might have against the principal debtor, the company itself. Id. A clause in the guarantee purported to waive rights under Arizona state law providing a creditor must first seek satisfaction from the principal debtor. Id. at 998 n.1. The District Court granted the government’s motion for summary judgment, holding that federal rather than state law governs the interpretation of an SBA loan guarantee, and that the language of the guarantee did not require the SBA move against collateral pledged by the principal debtor prior to bringing an action on the guarantee. Id. at 998. On appeal, the Ninth Circuit affirmed in part, and reversed and remanded in part, holding that because there are “no clear and substantial interests of the National Government, which . . . will suffer major damage if the state law is applied . . . the district court should have adopted Arizona law as the proper federal common law rule.” Id. at 998, 1000 (internal citation and quotation marks omitted).

In so holding, the court found that adoption of state law was consistent with the overriding purpose of the Small Business Act: “the Government should aid, counsel, assist, and protect, insofar as is possible, the interests of small business concerns in order to preserve free competitive enterprise . . . and to maintain and strengthen the overall economy of the nation.” Id. at 999 n.4. The court further found that rejecting “Arizona’s rule in the name of uniformity would unnecessarily introduce a lack of uniformity into debtor-creditor relationships in [Arizona]” and that “[n]o federal interest requires such an intrusion into state regulation of commercial transactions.” Id. at 1000. In other words, “rejection of the state rule should be avoided where the adoption of a different federal rule would unduly interfere with the state’s interests.” Id. at 999.

Conclusion and Takeaways

In deciding whether to apply the state debtor protection rules or to fashion uniform federal rules, federal courts balance the federal policies that underlie the particular federal loan or guaranty program and the interests that the state law seeks to preserve by the particular statute. See generally 5 Cal. Real Est. § 13:157 (4th ed.). Both Kimbell and Yazell emphasize that where uniformity of rules is not required, the state law should govern. Kimbell, 440 U.S. at 727–30; Yazell, 382 U.S. at 357 (noting that “SBA transactions in each State are specifically and in great detail adapted to state law”). Put differently, in Yazell the Supreme Court held that state interests “should be overriden by the federal courts only where clear and substantial interests of the National Government . . . will suffer major damage if the state law is applied.” Yazell, 382 U.S. at 352. Thus, “[w]hether or not state law will be adopted as the federal common law depends on “whether the state law can be given effect without . . . conflicting with federal policy.” Crain, 589 F.2d at 999 (“Even when an ‘action arises under and is clearly determined by federal law, state law limiting the enforcement of a federal right is sometimes adopted as the federal rule.’”) (citing United States v. Haddon Haciendas Co., 541 F.2d 777, 783 (9th Cir. 1976)). Where the purposes of a federal program are not at odds with the policy objectives of the one-action rule, federal lenders may find themselves subject to California’s one-action rule.