Monday, March 31, 2014

FYI: WA App Ct Holds Commercial Guarantors May Be Sued for Deficiency Following Non-Judicial Foreclosure

The Washington Court of Appeals, Division I, recently reversed and remanded the dismissal of a foreclosure deficiency judgment against the guarantors of a commercial loan, holding that the Washington Deeds of Trust Act, codified in RCW 61.24.100, does not preclude an action for a deficiency judgment against guarantors of commercial loans following non-judicial foreclosure. 


A copy of the opinion is available at:


A bank (“Bank”) acquired three commercial loans secured by deeds of trust and guaranteed by the owners and managers of the borrower entities (“Guarantors”).  After the three loans went into default, the Bank conducted a non-judicial foreclosure and sued the Guarantors for a substantial deficiency. 


The trial court granted summary judgment in favor of the Guarantors, ruling that the Washington Deeds of Trust Act prohibited the Bank from seeking a deficiency judgment against the Guarantors, other than for waste and wrongful retention of rents.


As you may recall, the Washington Deeds of Trust Act permits non-judicial foreclosure of deeds of trust when certain requirements are met.  Generally, in Washington non-judicial foreclosures, borrowers relinquish their statutory right to redeem the property up to one year after the foreclosure sale, and in exchange, lenders relinquish their right to seek deficiency judgments following trustee’s sales.  See former RCW 61.24.050 and 61.24.220 (1965).  This provided an alternative to judicial foreclosure. 


The Washington Deeds of Trust Act was subsequently amended to create an exception to the ban against deficiency judgment on obligations secured by a foreclosed deed of trust for commercial loans.


The provision of the Washington Deeds of Trust Act governing deficiency judgments was codified at RCW 61.24.100.  An exception for commercial loans was created which states certain circumstances where deficiency judgments against borrowers, grantors, and guarantors are allowed:


This chapter does not preclude any one or more of the following after a trustee’s sale under a deed of trust securing a commercial loan executed after June 11, 1998:


(a) [provision addressing “waste to the property,” “wrongful retention of any rents, insurance proceeds, or condemnation awards,” etc.]


(b) [provision regarding foreclosures of other deeds of trusts, etc.]


(c) Subject to this section, an action for a deficiency judgment against a guarantor if the guarantor is timely given the notices under RCW 61.24.042.


RCW 61.24.100(3).


In reversing the lower court’s decision, the Appellate Court first determined that the trial court misinterpreted RCW 61.24.100(3)(c) by limiting the scope of a deficiency against a guarantor to waste and wrongful retention of rents.  The language of the statute states “section” and not “subsection.”  Therefore, Appellate Court held that the lower court misinterpreted the statute by considering only subjections (3)(a) and (b), as opposed to RCW 61.24.100 in its entirety.


The Court then considered the Guarantors’ argument that “obligations under a guaranty secured by a deed of trust are extinguished by the nonjudicial foreclosure” pursuant to RCW 61.24.100(10).  Subsection (10) states:


A trustee’s sale under a deed of trust securing a commercial loan does not preclude an action to collect or enforce any obligation of a borrower or guarantor if that obligation, or the substantial equivalent of that obligation, was not secured by the deed of trust.


RCW 61.24.100(10).


In rejecting this argument, the Appellate Court explained that “[subjection (10)] states a permissive rule applicable to situations where the obligation of a borrower or guarantor is not secured by the deed of trust that was foreclosed by a trustee’s sale.  In that situation, the trustee’s sale does not preclude the lender from bringing an action to collect on or enforce a guaranty.”


Put in another way, the Appellate Court explained that only by striking the word “not” from subsection (10) can the otherwise permissive statement of the statute be read as a prohibition as the Guarantors suggest.  The Court declined to omit or add language to the statute, and held it would not infer the inverse of what the statute states is necessarily true.


The Appellate Court also rejected the Guarantor’s reliance on First-Citizens Bank & Trust Co. v. Cornerstone Homes & Development LLC, ____ Wn. App. ___, 314 P.3d 420 (2013), in support of their interpretation of subjection (10) as barring a deficiency action.


In First-Citizens Bank, a deficiency judgment against guarantors of commercial loans was reversed because the court in that action concluded that RCW 61.24.100(10) implied that a bank cannot sue a guarantor for any deficiency remaining after non-judicial foreclosure.  Id. at 425. 


The Appellate Court declined to follow First-Citizens Bank because its narrow interpretation ignores other subsections within the statute, particularly subsection (3)(c), which is at issue in this case.  Moreover, the First-Citizens Bank interpretation requires an inverse reading of subsection (10) by eliminating the word “not,” which this Court declined to do.


The Appellate Court disagreed with the Guarantors’ follow-up argument that subsection (10) permits an action to enforce the guaranties only if the guaranties were not secured by the non-judicially foreclosed deeds of trust.  In doing so, the Court noted that the statute states “if,” not “only if,” and declined to rewrite the statue by adding the word “only” into the analysis to create an indispensable condition precedent.


In sum, the Appellate Court rejected the various interpretation of RCW 61.24.100(10) provided by the Guarantors, and held that the Bank is not precluded from pursuing a deficiency under subsections (3)(a) and (b), or subjection (10).


Additionally, the Appellate Court also rejected Guarantors’ argument that the loan contracts barred an action for deficiency because their guaranties were secured by the foreclosed deeds of trust.


Washington law looks to the intent of the parties when interpreting a contract.  In this case, the deeds of trust at issue used identical language for the relevant provisions: 


PAYMENT AND PERFORMANCE.  Except as otherwise provided in this Deed of trust, Borrower and Grantor shall pay to Lender all indebtedness secured by this Deed of Trust as it becomes due…


FULL PERFORMANCE.  If Borrower and Grantor pay all the Indebtedness when due, and Grantor otherwise performs all the obligations imposed upon Grantor under the Deed of Trust, Lender shall execute and deliver to Trustee a request for full reconveyance…


The Appellate Court held “[t]here is simply no way to read these provisions so that any deed of trust secures the payment and performance obligations of anyone other than the Borrower and Grantor.”  The Court also noted that there is no mention of any obligations of guarantors in the deeds of trust.  Thus, according to the Appellate Court, the guaranties were not secured by the deeds of trust and extinguished by foreclosure.


Finally, the Court denied an award of attorney fees to either party as premature.  Although the guaranties provide for payment of reasonable attorney fees in connection with enforcement of the guarantees, such an award is premature until the “prevailing party” is determined and a fair value hearing conducted. 


Accordingly, the Appellate Court reversed and remanded for further proceedings, vacating the portion of the trial court’s decision concerning enforceability of waiver of anti-deficiency defenses, and denying an award of attorney’s fees as premature. 





Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
(312) 551-9320
(312) 284-4751
(312) 493-0874


Admitted to practice law in Illinois



          McGinnis Wutscher Beiramee LLP





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