Lenders May Foreclose a Deed of Trust Without Accelerating the Underlying Debt

img_gavelMoney_540x360Debt Acceleration Generally

Commercial and residential loan documents typically give the lender the option of accelerating the debt following an event of default.  In other words, if the borrower fails to pay, or if some other event of default occurs, and that default continues uncured for a specified amount of time, then the lender may declare the entire loan balance immediately due and payable.  In that event, the borrower must immediately repay the entire loan amount.  Unless the lender agrees, the borrower may not simply continue to make monthly or other periodic partial payments.

Foreclosure Does Not Require Acceleration

In 4518 S. 256th, LLC v. Karen L. Gibbon, P.S., 195 Wn. App. 423, 382 P.3d 1 (2016), the Washington Court of Appeals clarified that a lender is not required to accelerate the debt in order to foreclose under the Washington Deed of Trust Act, Chapter 61.24 RCW.  The lender may instead choose complete the foreclosure process based solely on past-due amounts.  The Court of Appeals also clarified that a lender will not be deemed to have accelerated the debt simply by using the statutory Notice of Trustee’s Sale form.  Under RCW 61.24.040(1)(f), that statutory form provides that if the foreclosure sale is less than 11 days away, the debtor may stop the foreclosure sale by paying all principal, interest, fees, and costs owing under the note (which is the amount that would be due if the lender had accelerated the debt).

Statute of Limitations Issues

Interestingly, in 4518 S. 256th, LLC v. Karen L. Gibbon, P.S., the debtor argued that the lender had accelerated the debt – something the debtor usually wants to avoid.  The reason was that the lender abandoned its first foreclosure sale and then waited more than six years before starting a second foreclosure process.  So if the lender had accelerated the debt in connection with the first foreclosure sale, then Washington’s six-year statute of limitations for written contracts under RCW 4.16.040 would have run, the lender’s second foreclosure action would have been barred, and the underlying debt would have extinguished.  Instead, the lender was able to foreclose on all of the payments that became due within the six-year period prior to the second notice of trustee’s sale.

If you have questions regarding commercial leasing, please contact Jonathan Moore or another attorney in MPBA’s Real Estate Department.