Priority of Future Advances Under Idaho Deeds of Trust Now in Doubt

In Liberty Bankers Life Insurance Co. v. Witherspoon, No. 41993, 2016 WL 74987 (Idaho Jan. 6, 2016), the Idaho Supreme Court examined a loan modification agreement in which a lender agreed to release real property from its deed of trust and the borrower agreed to grant a new deed of trust on the same property to a new lender. After entering into the agreement, the borrower granted the new deed of trust to the new lender, but the old lender never released the old deed of trust. Things went south and a priority fight ensued. The district court held that the loan modification agreement itself released the real property from the old deed of trust and granted the new deed of trust, putting the new lender in first position.

The Idaho Supreme Court found error. The Idaho Supreme Court’s opinion sets forth two alternative reasons for that conclusion.

The simple reason was that the loan modification agreement contemplated “further action,” namely creating the new deed of trust and executing a release of the old deed of trust. Id. at *10. The Court noted that the new deed of trust was actually drafted and signed by the borrower at a later date.

The Court could have stopped there. Instead, the Court offered a second rationale, that Idaho Code section 45-108 does not apply to deeds of trust. It is a mystery why the Court did this. The creation of the new deed of trust was never in dispute. As noted, the new deed of trust was signed at a later date. It was only the release of property from the old deed of trust that was disputed, and Idaho Code section 45-108 says nothing about releases.

To fully understand the implications, you must know more about Idaho Code section 45-108. The following is the portion of Idaho Code section 45-108 that the Court quoted as being relevant to the case: “A lien may be created by contract, to take immediate effect, as security for the performance of obligations not then in existence, which lien, if not invalid on other grounds, shall be valid as against all persons.” Apparently, the district court read this to say that a contract can create a lien and, by implication, a contract can also release a lien.

But Idaho Code section 45-108 does much more. It also says that a contractual lien can validly secure a future advance, meaning money the lender distributes after the lien is created. This is critical when a lender distributes loan proceeds over time, as in the case of a construction loan or a revolving line of credit. It is also important when a lender must disburse money to pay the taxes on, or otherwise protect the value of, collateral. The remainder of Idaho Code section 45-108, not quoted by the Court, says when the priority of a future advance will relate back to the date of recording the lien. It also clarifies that the lien instrument does not need to “specify, describe or limit” the future advances “as to purpose, nature, time, or amount.” And, the last line of Idaho Code section 45-108 says: “Contracts of mortgage of real property are subject to all the provisions of this section as amended.”

The Court reached its conclusion because another section of Idaho Code defines “lien” as something other than a transfer in trust. As the Court stated:

This is evident from Idaho Code section 45-101, which is part of the same chapter as Idaho Code section 45-108, wherein a lien is defined as “a charge imposed in some mode other than by a transfer in trust upon specific property by which it is made security for the performance of an act.” As stated by the Court in Chavez v. Barrus: “Under Idaho law, a lien is a charge upon property to secure payment of a debt and transfers no title to the property subject to the lien.” In contrast to a lien, a deed of trust “conveys real property to a trustee in trust to secure the performance of an obligation of the grantor or other person named in the deed to a beneficiary.” “When a deed of trust is executed and delivered, the legal title of the property passes to the trustee.” Accordingly, the lien priority rule in Idaho Code section 45-108 does not extend to deeds of trust.

2016 WL 74987, at *10 (citations and brackets omitted).

Remarkably, the Court did not mention that Idaho Code section 45-108 applies not just to “liens,” but also to “contracts of mortgage.” Presumably, that phrase was added to cover something other than just liens; otherwise it is superfluous. The Idaho Supreme Court has long said, and recently repeated, that a deed of trust is “effectively a mortgage.” Sims v. ACI Nw., Inc., 157 Idaho 906, 342 P.3d 618, 623 (2015). Indeed, when an obligation secured by a deed of trust is breached, one of the lender’s options is to foreclose it as a mortgage. See I.C. § 45-1503.

From a public policy standpoint, it is hard to imagine any good reason why the rules concerning future advances would apply to a mortgage, but not a deed of trust. The validity and priority of future advances is important in either case, and deeds of trust are far more common than mortgages. Lenders will surely want to ask the legislature to eliminate the uncertainty created by the Court’s decision.

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