BECU v. Burns: Banks Can Sue First, Foreclose Later.

Does entry of a judgment on a promissory note extinguish the lien of a security interest in real property that secures that note?  No, says Division 1 of the Washington Court of Appeals.

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.

Tax Foreclosures: Creditors Can Claim Surplus Tax Sale Proceeds, But it’s Tricky

King CountyCreditors read this:  Next week King County will be foreclosing hundreds of real property parcels, all at once.  The case is captioned In re Foreclosure of Real Property Tax Liens for Taxes Owed 2008 – 2011, King County Superior Court, Cause No. 11-2-19469-8 SEA.  Many of these parcels will sell for more than the tax owed, meaning there will be surplus funds.  There is opportunity here for judgment creditors to claim the surplus.  In doing so, don’t make the mistake that your lien automatically attaches to the surplus funds.  While this may be the case with nonjudicial foreclosures under RCW 61.24.080, where liens eliminated by the foreclosure attach to the surplus proceeds in the same order they once attached to the real property, IT IS NOT the case under the real property tax foreclosure statute, RCW 84.64.080.  This statute provides that the real property owner receives the surplus funds, and there is no provision for other lienholders.  See RCW 84.64.080 (stating, “the excess shall be refunded …, on application therefor, to the record owner of the property”).    A judgment creditor, regardless of how junior his judgment lien is, can get paid, and can even jump ahead of senior judgment lienors simply by being the first in time to serve a writ of garnishment on the County.  Timing is key.  The creditor must serve the writ after the tax sale (so the County will answer the writ stating that surplus funds exist, if any, and are owed to the property owner), but before the funds are paid to the debtor/real property owner, and of course, before a competing creditor serves his writ of garnishment on the County.