It is standard practice in Washington for commercial lenders to take a separate guaranty from their borrower’s members/shareholders when they lend to the entity. This way the lender may pursue a deficiency – if there is one – against the guarantor(s) after the nonjudicial foreclosure. An exception to Washington’s anti-deficiency statute, RCW 61.24.100(10) allows this. The Washington State Court of Appeals recently declined to enforce a guaranty under the anti-deficiency statute because the deed of trust secured obligations arising under “Related Documents” in addition to the payment of the note. The deed of trust’s definition of “Related Documents” included “guaranties … whether no or hereafter existing, executed in connection with the indebtedness.” The nonjudicial foreclosure extinguished the guaranty under the anti-deficiency statute because it was a “Related Document” secured by the deed of trust. The case is First-Citizens Bank & Trust Company v. Cornerstone Homes & Development, LLC, et al., No 43619-1-II (Dec. 3, 2013).
Yesterday the Washington Supreme Court issued its case in the Certified Question of Bain v. Metropolitan Mortgage.
Here’s the Opinion.
The primary issue before the court was whether MERS can be a lawful beneficiary on a deed of trust, with the power to appoint trustees under the Washington Deed of Trust Act when it does not actually hold the promissory notes that secures the deed of trust.
The court held that only the actual holder of the promissory note evidencing the debt may be a beneficiary with the power to appoint a trustee to foreclose. Or, as the court put it, “if MERS does not hold the note, it is not a lawful beneficiary.”
The court declined to answer what the legal effect is, if any, of a foreclosure, when MERS did foreclose as the beneficiary.
Our gut is that what is in the past is in the past, unless a borrower can prove fraud, or actual damages, based on Brown v. Household Realty, 146 Wn. App. 157, 189 P.3d
233 (2008) (holding that where the grantor of a deed of trust fails to invoke the remedies provided by the deed of trust act (ch. 61.24 RCW) before the deed is foreclosed in a trustee’s sale, the grantor waives claims based on the underlying obligation secured by the deed). But see RCW 61.24.127 which narrows Brown to some extent.
Here’s the opinion in Niday v. GMAC Mortgage, LLC.
Washington’s version of this case, Bain v. Metropolitan Mortgage, MERS, et al. is pending with the Washington Supreme Court.
We’ll post it when it comes out.
In BECU v. Burns, Boeing Employees’ Credit Union won judgment on a second position promissory note. When the first position lender foreclosed, there were surplus funds available after the trustee’s sale. The Superior Court said those funds belonged to the Burns. BECU appealed.
The issue in Burns was whether BECU received the surplus funds as a second position lienholder, or whether the homestead exemption allowed Burns to take the homestead amount, $125,000, ahead of BECU. In other words, by opting to sue on the note, and get judgment, did BECU give up its status as a consensual lienholder (who would be superior to the owner’s homestead exemption), and become an ordinary judgment lienholder (who is inferior to the homestead exemption)? No, says the Court of Appeals.
Burns also answers a different question, that TEP thinks is far more important. The question is this: May I obtain judgment on a promissory note, levy upon other non-secured assets (to satisfy the judgment), and then later foreclose on the deed of trust, nonjudicially? The answer is Yes!
In American Federal Savings & Loan v. McCaffrey, 107 Wn.2d 181, 728 P.2d 155 (1986), the Washington Supreme Court said:
“In transactions involving both notes and mortgages, the notes represent the debts, the mortgages security for payment of the debts. Either may be the basis of an action. The mortgagee may sue and obtain a judgment upon the notes and enforce it by levy upon any property of the debtor. If the judgment is not satisfied in this manner, the mortgagee still can foreclose on the mortgaged property to collect the balance.” (Emphasis added.)
Absent in the McCaffrey opinion is any explanation as to whether the “still can foreclose” language is limited to judicial foreclosures (a judgment holder can always judicially foreclose on his lien) or whether one can later nonjudicially foreclose on the mortgage lien.
Burns answers that question, albeit in dicta. According to the Burns case, a noteholder can sue, win judgment, levy on other assets, and then nonjudicially foreclose on the collateral.
It will be interesting to see how many banks take this route – sue first, foreclose later. If they do, we may see a lot of borrowers who can afford their mortgage thinking twice about simply letting the property go to foreclosure.
Divorce attorneys do this all the time. They document a property settlement between divorcing spouses by agreeing to award the real property to one spouse, and specifying in the decree that the other spouse shall receive a portion of the proceeds when the real property sells. Here’s the problem – does this create a lien for an amount that is “to be determined later?” And is it fair to other judgment creditors to have to contend with this nebulous moving target?
The Washington Supreme answered yes in Bank of America v. Owens, 173 Wn.2d 40, __ P.3d __ (2011). In this case Bank of America won a prejudgment attachment lien against Owens (arising from a defaulted promissory note). This attachment lien was against all of Owens’s King County real property. But this occurred after Owens’s former spouse, Treiger, had recorded his and Owens’s divorce decree which awarded Treiger an interest in one-half the sale proceeds of one particular parcel. Relying on Swanson v. Graham, 27 Wn.2d 590, 597, 179 P.2d 288 (1947) (“In order to create a statutory lien, there must be a judgment for a specific amount.”), Bank of America argued that Treiger’s lien interest was invalid because it was not for a sum certain – i.e. it was not a “statutory lien.” The Washington Supreme Court agreed the decree was not a statutory lien, but still awarded Treiger priority over the Bank, by allowing Treiger an “equitable lien.” In other words, Treiger was first in time, thus fairness dictated that Treiger’s interest trumped the Bank’s.
Here’s the takeaway: The Owens case expressly provides that in order to have an equitable lien, the particular real property must be adequately described in the decree. Recite the legal description and tax parcel number in the decree, and refer to the real property’s vesting deed in the recording cover sheet.
The answer is this: “A judgment against the owner of a homestead shall become a lien on the value of the homestead property in excess of the homestead exemption from the time the judgment creditor records the judgment.” See RCW 6.13.090 (Currently, the homestead exemption is $125,000.) If the judgment is not recorded, then it is not a lien on the homestead. If you’re not dealing with homestead property, then mere entry of the judgment on the court’s docket is sufficient for it to be a lien on the real property. See RCW 4.56.190, .200. Remember, a judgment in one county is not a lien on real property in another county until the judgment is “transferred” to the other county.
Which brings us to the next point: What if the judgment is in one county, but
the real property is in another county? You must abstract the judgment to the new county. An “abstract” is a piece of paper you obtain from the court clerk, and file it in the court to which you are transferring the judgment. Once transferred to the new court, the judgment gets a new case number, and is a lien on the judgment-debtor’s non-homestead real property in that new county. Any efforts to collect on the judgment in the transferee county must be done under the new cause number. And again, if the homestead is in the transferee county, you must also record the judgment with the Auditor/Recorder in the new county.
Attached here is a fabulously written appellate brief by our former colleagues at Graham & Dunn that dissects the judgment lien statutes. The case is Fisher Broadcasting v. Squirrels Nest II, LLC. In this case, Fisher Broadcasting won judgment against a contractor, who sold his rental condo to third-party buyers. The judgment was entered on the court’s docket just two days before the sale closed – meaning the title company, Old Republic, missed the judgment. The sale closed with Fisher’s lien on title. Old Republic tried to avoid the lien for the insured-buyers, arguing they took free of the lien because they had no way of knowing about it before the sale. The court agreed with Fisher Broadcasting and upheld the lien. The unpublished opinion (affirming Fisher’s summary judgment) is here.