Commercial Guarantors are Still on the Hook Even After Non-Judicial Foreclosure, Says Division I

commercial-guarantorsThe Division I Court of Appeals recently split with Division II and held that a lender retains the right to pursue a deficiency action against commercial guarantors after nonjudicially foreclosing on deeds of trust securing the underlying loans. Washington Fed. v. Gentry, — P.3d —, 2014 WL 627817, (Wash. Ct. App. Feb. 18, 2014). In doing so, the court rejected the holding of a nearly identical case decided three months prior, First Citizens Bank v. Cornerstone Homes.

Both cases arose after a lender nonjudicially foreclosed on deeds of trust securing commercial loans and later brought deficiency actions against the guarantors. The standard-form loan documents at issue contained nearly identical language. The decisions turned on the interpretation of the same provision of the Washington Deeds of Trust Act:

“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) (emphasis added).

As the reader may recall from an earlier post, Cornerstone held that this provision bars a deficiency action where the deed of trust also secures the guaranty. Washington Federal, however, reached the opposite conclusion. The court noted that the statute’s language is permissive, not prohibitive, and therefore concluded that commercial lenders are not categorically barred from pursuing a deficiency action against guarantors, even if the deed of trust secures the guaranty. As to the loan and security documents at issue, the court also pointed out that Cornerstone failed to take into account whose (not just which) obligations the deeds of trust secured, noting that they only secured the borrower’s performance. Accordingly, the court allowed the lender to pursue a deficiency action against the guarantors.

Ultimately, it will be up to the Washington Supreme Court to resolve the conflict. Until then, commercial lenders should evaluate whether judicial foreclosure may be a safer choice of remedy if they want to retain the right to pursue a deficiency against the guarantor. Lenders should also review their existing loan documents and, if necessary, consider modification. On the other hand, guarantors may still be able to seek relief under Cornerstone, but Division I just narrowed their chances of success.

If you have any questions about deficiency actions or non-judicial foreclosure proceedings, please contact Nate Somers or any of the real estate attorneys at MPBA.