The Supreme Court of Washington has upheld a lender’s right to pursue a deficiency judgment against a guarantor following a nonjudicial foreclosure of collateral under Washington’s Deed of Trust Act (the “Act”).[1]  The court’s decision settles a split of opinion at the appellate court level regarding whether nonjudicial foreclosure extinguishes guaranties purportedly secured by the foreclosed deed of trust on the borrower’s property and clarifies the extent to which guarantors of commercial loans are protected from deficiency judgments under the Act after nonjudicial foreclosure. 

The court’s opinion addresses two consolidated appeals, each bearing substantially similar facts.  In both Washington Federal v. Harvey and Washington Federal v. Gentry, Washington Federal, as successor to Horizon Bank’s interest in multiple commercial loans, sued the personal guarantors of the loans in order to recover deficiency judgments following default and nonjudicial foreclosure of the real property collateral securing the various facilities.  Notably, in both cases, the personal guarantors did not grant separate deeds of trust securing their respective guaranties. 

The trial courts in Harvey and Gentry granted the guarantors’ motions for summary judgment based on the argument that the guaranties were included in the definition of the obligations secured by the borrowers’ deeds of trust and consequently were extinguished upon nonjudicial foreclosure.  The Court of Appeals in each case reversed.  Namely, in Gentry, the Division One Court of Appeals held the fact that a guaranty is secured by the borrower’s deed of trust does not automatically bar enforcement of the guaranty upon nonjudicial foreclosure.[2]  However, the Division Two Court of Appeals had previously reached the opposite conclusion in a case similarly involving a situation where the deed of trust forms utilized by the lender arguably secured the personal guaranty by virtue of the definition of “Related Documents” in the deed of trust.[3]

Settling the split in opinion, the Washington Supreme Court affirmed the appellate court decisions in Harvey and Gentry.  In reaching this decision, the court first focused its attention on RCW 61.24.100(3)(c), which broadly permits an action for a deficiency judgment against a guarantor of a commercial loan “[s]ubject to this section . . . if the guarantor is timely given the notices under RCW 61.24.042.”  The court applied this statute in conjunction with RCW 61.24.100(6), which provides that “[a] guarantor granting a deed of trust to secure its guaranty of a commercial loan shall be subject to a deficiency judgment following a trustee’s sale under that deed of trust only to the extent stated in subsection (3)(a)(i) of this section [pertaining to circumstances involving wrongful retention of rents and waste].”

Reading these two exceptions together, the court stated that a guarantor of a commercial loan must secure its guaranty by granting a deed of trust in order to be protected from deficiency judgments when the property burdened by its deed of trust is nonjudicially foreclosed.  Applying this rule, the court held that Washington Federal was permitted to bring deficiency judgments against the guarantors under the Act because they did not secure their guaranties by granting deeds of trust, and the foreclosed properties were not properties of the guarantors.

The result reached by the court is undoubtedly a benefit to Washington lenders.  The rule articulated by the court provides bright-line authority for lenders to enforce deficiency judgments against guarantors of commercial loans following nonjudicial foreclosure in all but the narrow circumstance in which the guarantor granted the foreclosed deed of trust on his or her own property to secure the guaranty.  Indeed, while it is not germane to the holding, the court applied this rule in footnote two of the opinion to dismiss the issue addressed at the appellate court level regarding whether the deed of trust forms secured the guaranties. 

In the footnote, the court interpreted RCW 61.24.100(10), which permits an action against a guarantor following a nonjudicial foreclosure of a deed of trust when the guaranty is not secured by the deed of trust.  The court explained that this subsection “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.”  This reasoning shuts down the argument that guaranties identified within the definition of the loan documents secured by the deed of trust are extinguished upon nonjudicial foreclosure, as long as the underlying foreclosure was not on a deed of trust granted by the guarantor.

Additional Contacts:

James Gradel, 206.359.8401

Scott Borth, 206.359.8403

Danielle Githens, 206.359.6335

Chian Wu, 206.359.6232

Kris Yoshizawa, 206.359.8076