One-Action Rule Does Not Bar Simultaneous U.C.C. Foreclosure and Action to Foreclose on Mortgage and Recover Deficiency Judgment from Guarantors

On February 28, 2022, Justice Elizabeth H. Emerson of the Suffolk County Commercial Division issued a decision in Nebari Natural Resources Credit Fund I, LP v. Speyside Holdings, LLC, 2022 N.Y. Slip Op. 50164(U), holding that New York's one-action rule does not bar a lender from conducting a U.C.C. foreclosure while simultaneously bringing an action to foreclose on a mortgage and recover a deficiency judgment under various "bad boy" guaranties, explaining:

The complaint contains three causes of action: to foreclose the mortgages on the Quarry and Yaphank properties, to foreclose the plaintiff's security interests in the personal property on the Quarry and Yaphank properties, and to recover any deficiency from the individual defendants under the "bad boy" guarantees.

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The defendants' main argument in support of dismissal is that this action violates the one-action rule found in RPAPL 1301, which requires the holder of a note and mortgage to elect one of two alternate remedies: either proceed at law to recover on the note or proceed in equity to foreclose on the mortgage (Gizzi v Hall, 309 AD2d 1140, 1141). RPAPL 1301 embodies the [*2]equitable principle that, once a remedy at law has been resorted to, it must be exercised to exhaustion before a remedy in equity, such as foreclosure, may be sought (Aurora Loan Servs., LLC v Lopa, 88 AD3d 929, 930). The purpose of the statute is to avoid multiple lawsuits to recover the same mortgage debt (Id.).

Contrary to the defendants' contentions, RPAPL 1301 does not bar this action. A disposition of collateral pursuant to UCC article 9 (i.e., the individual defendants' membership interests in the LLCs) is not an action on the note. It is not even a judicial proceeding (see, 1258 Assoc Mezz II LLC v 12E48 Mezz II LLC, Sup Ct, New York County, May 18, 2020, Nervo, J., Index No. 651812/20). Moreover, when a security agreement covers both personal and real property, UCC 9-604 (a) allows the secured party to proceed against the personal property (the membership interests) without prejudicing any of its rights with respect to the real property.

Likewise, a prayer for a deficiency judgment in a foreclosure complaint does not constitute a separate action for a money judgment in violation of the election-of-remedies doctrine (Aurora Loan Servs., LLC v Lopa, supra). RPAPL 1371 (2) permits the plaintiff in a foreclosure action to make a motion in that action for leave to enter a deficiency judgment (Id.). A cause of action for a deficiency judgment is incidental to the principal relief demanded against the mortgagor in a foreclosure action (Id.; see also, LibertyPointe Bank v 7 Waterfront Prop., LLC, 94 AD3d 1061, 1062). Accordingly, the court finds that RPAPL 1301 does not apply.

The attorneys at Schlam Stone & Dolan frequently represent borrowers and lenders in commercial-lending disputes. Contact the Commercial Division Blog Committee at commercialdivisionblog@schlamstone.com if you or a client have questions concerning a lender's rights upon default by a borrower.