The Supreme Court of the State of Washington recently concluded that, under Washington’s Deed of Trust Act (“WDTA”), guarantors of commercial loans whose own property has not been foreclosed are not protected from deficiency judgments after the borrower’s property has been nonjudicially foreclosed.
A copy of the Court’s opinion is available at: http://www.courts.wa.gov/opinions/index.cfm?fa=opinions.showOpinion&filename=900787MAJ.
Under the WDTA, a lender has the option of pursuing a judicial or nonjudicial foreclosure. Subject to a few exceptions, however, if the lender pursues a nonjudicial foreclosure, the lender’s recovery is limited to what is recouped from the foreclosure.
This case is a consolidation of two different cases with nearly identical facts. In both cases, unrelated limited liability companies borrowed money from the same bank. The loans were secured with deeds of trust encumbering property of the LLCs. In addition, individuals affiliated with the LLCs guaranteed the loans but did not grant a separate deed of trust to secure the guaranty.
Subsequently, the FDIC assigned the bank’s interest in the loans, the deeds of trust and the guaranties to a new bank. The new bank initiated nonjudicial foreclosure proceedings and had the properties sold by a trustee. The new bank was the successful purchaser at the sales and then sought the deficiency amount from the individual guarantors. The trial court granted the individuals’ motions for summary judgment, but the Court of Appeals reversed.
The Washington Supreme Court held that the WDTA did not protect the guarantors from deficiency judgments because the guarantors had not secured their guaranties by granting deeds of trust and, even if they had, the foreclosed properties were not properties of the guarantors.
The Washington Supreme Court carefully analyzed the language of the WDTA to conclude that the exceptions to the WDTA that protect against deficiency judgments did not apply to the personal guarantors in these cases. Under the WDTA, “a deficiency judgment shall not be obtained on the obligations secured by a deed of trust against any borrower, grantor, or guarantor after a trustee’s sale under that deed of trust.” RCW 61.24.100(1).
The Court interpreted the exceptions contained in the WDTA to conclude “the [W]DTA extends protection from deficiency judgments – with some exceptions – to a guarantor who grants a deed of trust to secure its guaranty of a commercial loan when the property burdened by the guarantor’s deed of trust is nonjudicially foreclosed.”
The Court further held that “a guarantor of a commercial loan must secure its guaranty by granting a deed of trust in order to be protected from deficiency judgments when the property burdened by its deed of trust is nonjudicially foreclosed.”
The Court held that the guarantors were not protected from deficiency judgments under the WDTA for two reasons: they did not secure their guaranties by granting deeds of trust, and the foreclosed properties were not the properties of the guarantors, but instead the properties of the LLCs that had granted deeds of trusts.
Because the guarantors were not protected from deficiency judgments, the Washington Supreme Court concluded that the new bank could seek deficiency judgments against the guarantors.
Ralph T. Wutscher
McGinnis Wutscher LLP
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