The Division II Court of Appeals recently decided that the Washington Deeds of Trust Act prohibited a lender from obtaining a deficiency judgment against a commercial guarantor where the guaranty was secured by nonjudicially foreclosed deeds of trust. First-Citizens Bank & Trust Co. v. Cornerstone Homes & Development, LLC, __ Wn. App. __, 314 P.3d 420 (2013). The holding has broad implications for both commercial lenders and guarantors, as the loan and security documents at issue mirrored industry-standard forms.
The facts of the case are straightforward. A commercial developer, Daniel Allison, along with his spouse, signed a commercial guaranty. The bank subsequently made several loans to the Allisons’ development company, each secured by a deed of trust. The development company defaulted. After the bank nonjudicially foreclosed on the properties secured by the deeds of trust, the bank sued the Allisons as commercial guarantors and obtained a $4,240,424.11 deficiency judgment.
On appeal, the Allisons contended that the Washington Deeds of Trust Act barred the bank’s deficiency judgment. The language of the Allisons’ guaranty stated that it encompassed all other “related” documents “executed in connection with the indebtedness” then or in the future. Likewise, the deeds of trust stated that they secured the “related” documents and defined the term “related” documents “to include any guaranties . . . whether now or hereafter existing, executed in connection with the indebtedness.” The court found that the plain language of the deeds of trust provided that they secured the Allisons’ guaranties.
The court then turned to the Washington Deeds of Trust Act, which generally prohibits deficiency judgments against any borrower or guarantor following nonjudicial foreclosure. Under an exception for commercial loans, however, “A trustee’s sale under a deed of trust securing a commercial loan does not preclude an action to . . . enforce an obligation of a . . . guarantor if that obligation . . . was not secured by the deed of trust.” RCW 61.24.100(10). Consequently, the court held that where the commercial guaranty is secured by the deed of trust, as it was for the Allisons, the commercial guarantor exception does not apply, and the Act will bar a lender from pursuing a deficiency against the guarantor. This was good news for the Allisons.
Given that the loan and security documents at issue were commonly-used forms, this decision presents significant risk to lenders and a potential windfall to commercial loan guarantors. Lenders should review their existing loan documents and consider modifications if necessary. Guarantors may be able to avail themselves of this decision to avoid liability under similar loan documents. If you have any questions regarding these or other real estate matters, please contact Nate Somers or another MPBA attorney.