As a longtime fan of Motown music and former Washington Supreme Court law clerk and now practicing lawyer, it’s hard to resist a mischievous overlap in nomenclature between our highest legal panel and Diana Ross and the Supremes. Once in a while our Court also inspires litigants and court watchers to burst out in song. Perhaps this is such a moment.
The Washington Supreme Court is made up of nine justices with a wide range of legal experience, most of whom have been trial lawyers and judges before being elevated to the state’s highest court. They are individually and collectively respected as smart and hardworking. However, it appears that notwithstanding their varied backgrounds, none of the justices has much experience with the Washington Deed of Trust Act.
I reach this conclusion after reading the recent 9-0 decision of the Court in Washington Federal v. Harvey, No. 90078-7(January 8, 2015). In that case, the Court sided with the unified legions of banks against commercial loan guarantors seeking to avoid liability for loan deficiency judgments after non-judicial foreclosures. In the wake of the “Great Recession,” during which more real estate loans went into default than at any time since the Depression, it became tragically commonplace that foreclosure sales did not yield proceeds sufficient to pay what were once well-secured loans. That resulted in large loan deficiencies, and banks looked to whatever source was available to help them repay loan losses, including to loan guarantors.
In Washington, the Deed of Trust Act bars deficiency judgments except in certain narrow circumstances involving commercial loans. While deficiency actions after trustee’s sales are generally prohibited, RCW 61.24.100(10) provides that a,
“trustee’s sale under a deed of trust securing a commercial loan does not preclude an action to collect or enforce any obligations of a borrower or guarantor if that obligation, or the substantial equivalent of that obligation, was not secured by the deed of trust.” (emphasis added)
In the cases before the Court, the banks used loan documents which said that the foreclosed deeds of trust secured not only the borrowers’ original notes, but also the loan guaranties. It’s not clear if the inclusion of the guaranties in the documents secured was intentional, or if the banks did not contemplate that the Washington Deed of Trust Act seemed to prevent actions against guarantors after a non-judicial foreclosure of the deed of trust, as the language quoted above suggests.
But with the ease of a footnote, the Court dismissed the language quoted above, or added its own additional qualification on the exception, in footnote (2) of that opinion:
“. . . Subsection (10) is clear; it provides clarity about when a deficiency judgment may be brought, but does not protect a guarantor of a commercial loan from deficiency judgments solely because the guarantor’s guaranty is secured by a deed of trust regardless of who granted such deed of trust. Accordingly, here, even if the borrowers’ deeds of trust secured the guarantors’ guaranties, subsection (10) would not preclude deficiency judgments against the guarantors because the guarantors did not grant such deeds of trust.”
Notwithstanding that footnote, there is no such limitation in the language of RCW 61.24.100(10). It refers to a guarantor whose guaranty “was not secured by the deed of trust (foreclosed)”. The Court, in effect, re-writes RCW 61.24.100(10) to read that a,
”trustee’s sale under a deed of trust securing a commercial loan does not preclude an action to collect or enforce any obligations of a borrower or guarantor if that obligation, or the substantial equivalent of that obligation, was not secured by the deed of trust granted by such borrower or guarantor against whom a deficiency action is sought.” (the author’s additional language is in bold)
Without the additional language, the statute would apply to both deeds of trust granted by the borrowers, as in the cases decided by the Court, and deeds of trust granted by the guarantors. Without that language, there is no basis for making the critical distinction made by the unanimous Court!
The Court pointed to no evidence in other portions of RCW 61.24 or the legislative history to suggest that it is only when the guarantor is the “grantor” under the deed of trust foreclosed that the guarantor is then protected against a deficiency judgment. In effect, the Court decided the entire case on a limitation to the prohibition on deficiency actions which is not mentioned in the statute.
After reading the opinion, I’m sure bankers across Washington started singing that old Supremes hit, “I Hear a Symphony,” while those unfortunate guarantors were shaking their heads and humming, “You Keep Me Hanging On”.