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 the lender agreed to release certain real property from its deed of trust and the borrower agreed to grant a new deed of trust on the same property for the benefit of another lender. After entering into that agreement, the borrower granted the new deed of trust to the other lender, but the first lender never released the old deed of trust. Things went south and a fight over priority ensued. The district court held that the entry into the loan modification agreement had the immediate effect of releasing the real property from the old deed of trust and granting the new deed of trust, putting the other lender in first position.

The Idaho Supreme Court concluded that the district court had erred. The Idaho Supreme Court’s opinion sets forth two alternative reasons for that conclusion.

The simplest reason was that the Court read the loan modification agreement and concluded that it contemplated “further action” in the form of creation of the new deed of trust and the execution of a release. Id. at *10. The Court noted that the agreement itself did not create the new deed of trust, which was drafted and signed by the borrower at a later date, and it did not serve to release any property from the existing deed of trust.

But the Court did not stop there. Instead, the Court went out of its way to set forth an alternate reason for finding error at the district court, namely that Idaho Code section 45-108 does not apply to deeds of trust. It is a mystery why the Court did this, when a simple reading of the loan modification agreement settled the issues in the case. In fact, 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 in dispute, and Idaho Code section 45-108 has nothing to say about the release of collateral.

To fully understand the implications of the Court’s ruling, 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 its analysis: “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.” I.C. § 45-108. The district court apparently viewed this language as authority for the proposition that a contract can create a lien and, by implication, that a contract can release a lien.

But Idaho Code section 45-108 does much more than that. It also says that a contractual lien can validly secure a future advance (money disbursed after the lien is created). This is important when a lender distributes loan proceeds over time, as in the case of a construction loan or a revolving line of credit, and when a lender finds itself needing to advance additional funds to pay the taxes on, or otherwise protect the value of, the collateral. The remainder of Idaho Code section 45-108, not quoted by the Court, goes on to say when the priority of a future advance will relate back to the date of the recording of the instrument creating the lien. It also helpfully clarifies that the instrument creating the lien does not need to “specify, describe or limit” the future advances “as to purpose, nature, time, or amount.” And, finally, 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 that Idaho Code section 45-108 does not apply to deeds of trust, 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, in reaching this conclusion, the Court does not mention the fact that Idaho Code section 45-108 does not just apply to “liens.” By virtue of its last sentence, it also applies to “contracts of mortgage.” Presumably, that last sentence was added to cover something other than just liens; otherwise its words are 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 options available to the beneficiary is to foreclose the deed of trust 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 to a deed of trust. The validity and priority of future advances is obviously a critical issue with both types of security instruments, and deeds of trust are far more common than mortgages. Lenders will surely want to petition the legislature to remedy this situation.