No. 92-267
IN THE SUPREME COURT OF THE STATE OF MONTANA
MIDFIRST BANK, STATE SAVINGS BANK,
Plaintiff and Respondent,
LARRY D. RANIERI; UNITED STATES
OF AMERICA - DEPARTMENT OF THE
TREASURY - INTERNAL REVENUE SERVICE:
and STATE MONTANA - DEPARTMENT
APPEAL FROM: District Court of the First Judicial District,
In and for the County of Lewis and Clark,
The Honorable Thomas Honzel, Judge presiding.
COUNSEL OF RECORD:
For Appellant:
Carl A. Hatch; Small, Hatch, Doubek & Pyfer,
Helena, Montana
For Respondent:
Mark E. Noenning; Hendrickson, Everson & Noennin,
Billings, Montana
Submitted on Briefs: December 3, 1992
Decided: March 18, 1993
Filed:
Justice Karla M. Gray delivered the Opinion of the Court.
Larry Ranieri appeals from an order of the First Judicial
District Court, Lewis and Clark County, granting summary judgment
in favor of Midfirst Bank. We affirm.
We state the issues on appeal as follows:
1) Did the District Court err in concluding that a deficiency
judgment was available following judicial foreclosure of a deed of
trust securing a single family dwelling that the borrower operated
as rental property?
2) Did the District Court err in determining that Midfirst
Bank could cancel nonjudicial foreclosure proceedings prior to the
trustee's sale and elect to foreclose judicially?
The parties do not dispute the relevant facts in this case.
Appellant Larry Ranieri (Ranieri) is a retired Army officer who has
sold real estate and owned various rental properties. In 1982,
Ranieri's daughter, Vicki, moved to Helena and purchased a
townhouse located at 911 Hialeah in Helena. She attempted to
finance the home through a HUD loan, but that financing fell
through, leaving her with monthly payments significantly higher
than anticipated. In July of 1983, Vicki moved to Wisconsin, and
asked her father to either sell or rent the townhouse to cover the
monthly loan payments. Ranieri obliged, although the rent he
received was about $ 2 0 0 less than the monthly payment. In January
of 1984, Ranieri began paying the difference between the rent and
the loan payment for his daughter. He also claimed rental income
and depreciated the property for tax purposes beginning in 1984.
2
In October of 1985, Ranieri attempted to refinance Vicki's
loan in his name in hopes of lowering the monthly payments and
possibly moving into the townhouse until he sold it. He withdrew
his application, however, when his wife refused to move into the
townhouse. Six days later, Ranieri accepted a warranty deed for
the townhouse from his daughter.
Renters continued to occupy the townhouse. Between renters in
April of 1985, Ranieri stayed at the townhouse for approximately
fifteen days while briefly separated from his wife. After
reconciling, his wife agreed to move into the townhouse, and
Ranieri again applied for refinancing. On November 4, 1985, he
executed a Note and Trust Indenture to Midfirst Bank (Midfirst) to
secure the new loan. Prior to closing, however, his wife rented
another home; Ranieri and his wife did not move into the townhouse
as planned. The current renters continued to reside at 911
Hialeah.
Shortly after the refinancing was completed, the Ranieris
separated for approximately one year. During this separation,
Ranieri lived with a friend or in his real estate office, "sleeping
out of a suitcase." Between renters, he stayed at the townhouse
twice, for approximately a week each time. He collected mail at
his real estate office, however, and considered it his permanent
residence.
Throughout his ownership of the townhouse, Ranieri rented the
townhouse to various tenants. From 1984 through 1990, Ranieri
claimed rental income, depreciation and business deductions
generated by the townhouse on his federal and state income tax
returns. In total, he claimed in excess of $20,000 in rental
income and over $50,000 of deductions.
Ranieri defaulted on the trust indenture on November 1, 1989.
In September of 1990, Midfirst initiated a nonjudicial foreclosure
and sent notice of the trustee's sale; the sale was postponed once
and then canceled altogether. Ranieri made no further payments.
Midfirst then initiated judicial foreclosure proceedings. On
November 9, 1990, Midfirst filed a complaint seeking a personal
judgment and a deficiency judgment against Ranieri. Both parties
moved for summary judgment. The District Court granted summary
judgment for Midfirst, and entered a judgment and decree of
foreclosure on April 27, 1992. Ranieri appeals.
Did the District Court err in concluding that a deficiency
judgment was available following judicial foreclosure of a deed of
trust securing a single family dwelling that the borrower operated
as rental property?
Summary judgment is appropriate if no genuine issues of
material fact exist and if the moving party is entitled to judgment
as a matter of l a w . Rule 56(c), M.R.Civ.P. In this case, the
parties do not dispute any genuine issue of material fact.
Therefore, we review the District Court's legal conclusions to
determine if they are correct, Steer, Inc. v. Department of
Revenue (19901, 245 Mont. 470, 475, 803 P.2d 601, 603.
The District Court concluded that Midfirst could collect a
deficiency judgment following judicial foreclosure of Ranieri's
trust indenture. The court determined that ~anieridid not qualify
for the exception to deficiency judgments set out by this Court in
4
First State Bank of Forsyth v. Chunkapura (1987), 226 Mont. 54, 734
P.2d 1203, which p r o h i b i t s d e f i c i e n c y judgments foLlowing judicial
foreclosure of trust indentures secured by occupied, single family
residential property. The court reasoned that, because Ranieri
resided at the townhouse for an insignificant amount of time and
collected rents and depreciated the property, the Chunka~ura
exception did not apply.
On appeal, Ranieri argues that collecting rent from the
property to make the loan payment does not make the property
commercial in nature; therefore, he asserts, the rental of the
townhouse does not prevent him from invoking the Chunkapura
exception. He also argues that renters can occupy the property
without disqualifying the borrower from Chunkamma's protection,
claiming that his intent to make the townhouse his residence should
bring him within Chunkapura.
In Chunkapura, we held that a creditor seeking judicial
foreclosure of an occupied, single family residential home secured
by a trust deed cannot obtain a deficiency judgment. Chunkapura,
734 P.2d at 1 2 1 1 . ~nterpretingMontana's S m a l l Tract ~inancing
Act, we concluded that a deficiency judgment under those
circumstances would be inconsistent with the provisions and
legislative intent of the Act. On rehearing, we carefully limited
the holding to the facts of Chunka~ura--atrust deed secured by an
occupied, single family residential property--and expressly
excluded those trust deeds securing loans in commercial settings.
Chunkapura, 734 P.2d at 1211.
We subsequently have interpreted Chunka~ura in relation to
three different factual scenarios. We refused to apply Chunkawura
to a trust deed securing a commercial warehouse in Carpenters
Employers Retirement Trust v. Galleria Partnership (1989), 239
Mont. 250, 780 P.2d 608, We stated that the limited holding of
Chunka~uradid not apply to a purely commercial loan. Galleria,
780 P.2d at 613.
Here, Ranieri has operated the townhouse as a rental unit
since he obtained title from his daughter. He has claimed rental
income and taken significant deductions on his federal income taxes
related to the townhouse. The Internal Revenue Code allows these
deductions only if incurred in the taxpayer's trade or business or
for the production of income. See 26 U.S.C. 5 8 162-167. Ranieri's
tax returns evidence his own perceptions and intentions regarding
the commercial nature of the townhouse.
Ranieri disagrees that the townhouse is commercial in nature.
He argues that our decision in First Fed. Sav. & Loan v. Anderson
(1989), 238 Mont. 296, 7 7 7 P.2d 1281, allows the borrower to rent
out the property without changing its residential character to
commercial. Ranieri overstates our fact-specific holding in
Anderson.
In Anderson, the family executed a trust deed to secure their
residential dwelling, which they occupied for the following seven
years. When they put the property up for sale, they rented it out
for eighteen months to make the payments. Anderson, 777 P.2d at
1282. We concluded that when the lender accepted the trust
indenture, the deed related to occupied, single family residential
property, and the fact that the family had rented it out briefly
before sale did not preclude application of Chunkapura. Anderson,
777 P.2d at 1284.
Anderson involved residential property purchased and occupied
as the family's primary residence; the family purchased the home
with the loan secured by the trust indenture and immediately
occupied it. In contrast, when Midfirst accepted the trust deed
from Ranieri, Ranieri was operating the property as a rental unit,
as he had for the preceding two years: indeed, he has never resided
permanently in the townhouse. In addition, the eighteen month
rental period prior to sale in Anderson, which followed a seven
year occupation of the property as a residential dwelling, does not
compare to the seven year rental arrangement managed by Ranieri.
At the time of the trust indenture, Ranieri operated the townhouse
as a rental unit, generating income and tax deductions, and he
continued to do so throughout his ownership of the property. We
conclude that the townhouse is commercial in nature.
Ranieri also contends that Chunkapura does not require that
the borrower reside in the property. We addressed this argument
recently in First Western Fed. Sav. Bank v. Lence (Mont. 1992) , 839
P.2d 1277, 49 St.Rep. 857. In Lence, the borrower purchased a
condominium at Crystal Lake and secured the loan with a deed of
trust. His primary residence was in Whitefish, although from 1977
to 1985, he spent the summer months at the condominium; he also
rented it out intermittently in 1990. Lence defaulted and the
lender instituted judicial foreclosure proceedings, seeking a
deficiency judgment. Lence, 839 P.2d at 1278.
In allowing a deficiency judgment against Lence, we first
focused on Lence's admission that the condominium was not his
primary residence. Under Montana law, a person has only one legal
residence, and we concluded that the Chunka~uraprotection against
deficiency judgments applies solely to that one legal residence.
We also distinguishedthe nature of Lence's summer condominium from
the residential properties in Chunkaoura and Anderson, which were
purchased and utilized as the families1 primary residence. We
stated:
We conclude that the condominium at issue here, never
intended or occupied as Lence's primary residence, does
not qualify for the limitation on deficiency judgments
established in Chunkapura and Anderson. To accept
Lence's argument would pervert the limited nature of the
Chunka~uraexception; it would allow a person to avoid
the possibility of deficiency judgment on virtually
unlimited numbers of properties by merely ensuring that
each property was a residential unit and without regard
to whether the property was ever intended or used as a
personal, primary residence. Indeed, under Lence I s
interpretation of Anderson, it would not be necessary
that the borrower ever occupy the properties, so long as
they were occupied by someone. Such results were not
contemplated or intended by Chunka~uraand Anderson. ..
w ,P.2d
839 at 1280. Thus, we rejected in Lence Ranieri's
argument that Chunka~ura applies if renters, rather than the
borrower, occupy the property. Our decision in Lence requires that
the property secured by the trust deed be the borrower's actual,
personal, primary residence.
As in Lence, the townhouse was never Ranieri's actual,
personal, primary residence. Ranieri admits that the townhouse was
not his primary residence; even during the times of separation from
his wife, he considered his real estate office his primary
residence. Even though Ranieri has claimed a continuing intent to
move into the townhouse, this intent did not materialize, Ranieri
has spent, at the most, one month at the townhouse over the seven
year span. As such, pursuant to Lence, the Chunka~uraexception
does not apply.
In sum, the Chunkapura exception is limited to single family
residential property occupied by the borrower as his or her primary
legal residence. the
As discussed, Ranieri has not ltoccupiedtl
property, as required by our decision in Lence. Further, the
townhouse is commercial, not residential, property in Ranierils
hands. Thus, Ranieri is not eligible for the Chunkapura protection
from a deficiency judgment. We hold that the ~istrictCourt did
not err in concluding that Midfirst was entitled to a deficiency
judgment after judicial foreclosure of Ranieri's trust indenture.
Did the District Court err in determining that Midfirst Bank
could cancel nonjudicial foreclosure proceedings prior to the
trustee's sale and elect to foreclose judicially?
The District Court concluded that no provision in the Small
Tract Financing Act prohibited Midfirst from canceling nonjudicial
foreclosure and initiating judicial foreclosure proceedings against
Ranieri. Ranieri contends that because Midfirst initiated
nonjudicial foreclosure proceedings under the Small Tract F i n a n c i n g
Act, it elected its remedy and could not thereafter cancel those
proceedings and begin judicial foreclosure proceedings.
Ranieri bases his argument primarily on § 71-3-315, MCA, which
reads in pertinent part:
Notice -
sale -
payment. A trust deed be foreclosed
by advertisement and sale in the manner hereinafter
provided: . ..
(3) On the date and at the time and place designated in
the notice of sale, the trustee or his attorney shall
sell the property at public auction to the highest
bidder. . ..
[Emphasis added.]
He concedes that the permissive "mayw in the introductory language
gives the trustee the option of foreclosing by advertisement and
sale; he contends, however, that once that option is chosen, the
word lrsha1l1' subsection (3) requires that the trustee complete
in
the trustee's sale and all other procedures of nonjudicial
foreclosure.
A straightforward reading of the statute mandates our
in
conclusion that the term qtshallll subsection ( 3 ) , and throughout
the remainder of 5 71-1-315, MCA, merely describes the requisite
procedures a trustee must follow if a sale is held. Here, the
trustee's sale was not held; thus, those requirements are not
applicable. The Small Tract Financing Act does not contain any
provision prohibiting a trustee from canceling a noticed sale.
Ranieri bases his next argument on 5 71-1-312, MCA, which
allows the trustee to cancel nonjudicial foreclosure proceedings
when the debtor pays the entire amount in arrears. He argues that
because this statute describes a situation in which a trustee's
sale may be canceled, a trustee cannot cancel a sale for any other
reason. Ranieri claims that because he did not pay the arrearage,
Midfirst cannot cancel the sale. Again, Ranieri misinterprets the
statute and the purposes behind it.
10
Section 71-1-312, MCA, represents one of the distinguishing
factors of n o n j u d i c i a l foreclosure. Under traditional mortgage
law, payment of the entire balance of the loan is required to halt
foreclosure proceedings once instituted. With nonjudicial
foreclosure, payment of only the amount in arrears reinstates the
trust indenture. See Dietrich, David S . , The Morttana Judicial altd NOIE-
Judicial Foreclosure Sale: Analysis and Suggestions for R f r , 49 MONT .L .REV.
eom 285 ,
294-297. Section 71-1-312, MCA, merely codifies this unique aspect
of trust indentures.
~anieri'sinterpretation of the Act would preclude a trustee
from canceling a sale if the debtor paid off the entire obligation
or if the lender chose for whatever reason to release the debtor
from the obligation. The "quid pro quo" which supported the
enactment of the Small Tract Financing Act did not include this
concession by borrowers; R a n i e r i ' s i n t e r p r e t a t i o n would restrict
trustees and burden borrowers to an extent not contemplated by the
legislature. See Chunka~ura,734 P.2d at 1210; Dietrich, p. 295.
Finally, Ranieri contends that the legal doctrine of l'election
of remediesT1 bars Midfirst's subsequent judicial foreclosure.
Ranieri argues that by sending out the notice for the trustee's
sale, Midfirst waived its remedy of judicial foreclosure.
As a legal doctrine, election of remedies is the exercise of
a choice of an alternative and inconsistent right or course of
action. Massett v . Anaconda Copper Co. (1981), 193 Mont. 131, 136,
630 P.2d 736, 739. It is well settled in Montana that an election
exists only when a remedy is pursued to a final conclusion. State
ex. re1 Crowley v. District Court (l939), 108 Mont. 89, 96, 88 P.2d
23, 2 6 ; Glacier Campground v. Wild Rivers, Inc. (1978), 182 Mont.
389, 401, 597 P.2d 689, 695.
Here, although Midfirst sent notice of the trustee's sale, it
did not pursue this remedy to its final conclusion. As such,
Midfirst's initiation of nonjudicial foreclosure proceedings, later
abandoned, did not constitute an election of remedies that
precluded judicial foreclosure proceedings.
We conclude that the District Court did not err in concluding
that Midfirst could cancel nonjudicial foreclosure proceedings
prior to the trustee's sale and proceed with judicial foreclosure.
Af finned
We concur:
March 18, 1993
CERTIFICATE OF SERVICE
I hereby certify that the following order was sent by United States mail, prepaid, to the
following named:
Carl A. Hatch
SMALL, HATCH, DOUBEK & PYFER
Livery Square
39 Neil Avenue
Helena, MT 59601
MARK E. NOENNXNG
Attorney at Law
324 Hart-Albin Building
BiIlings, MT 591.01
Bruce R. McGinnis, Tax Counsel
Department of Revenue
Mitchell Building
Helena, MT 59620
Bernard F. Hubley
Attorney at Law
6915 Bristol Lane
Bozeman, MT 59715
ED SMITH
CLERK OF THE SUPREME COURT
STATE OF MONTANA