Misery Loves Company: Post-Foreclosure Guarantor Liability
On January 8, 2015, the Washington State Supreme Court resolved a conflict between the state’s Court of Appeals regarding deficiency judgments and guarantor liability following a nonjudicial foreclosure of the borrower’s real property. It is now clear under Washington law that a guarantor of a commercial loan may be liable for deficiency judgments following a nonjudicial foreclosure as long as they were not the grantor of the Deed of Trust.
In the first case, First-Citizens Bank & Trust Company v. Cornerstone Homes & Development, LLC et al., a lender foreclosed nonjudicially on the borrower’s real property before attempting to seek a deficiency judgment from the guarantor. Generally, a nonjudicial foreclosure prohibits a lender from pursuing a deficiency judgment against the borrower. Division Two of the Court of Appeals held that Washington’s anti-deficiency statute, RCW 61.24.100, extended to the guarantor and precluded a deficiency judgment against the guarantor because the guaranty was secured by the foreclosed Deed of Trust. See "Nonjudicial Foreclosures and the Guarantors Who Got Away..." for a more complete discussion of this decision.
On nearly identical facts, in Washington Federal v. Gentry, Division One of the Court of Appeals held exactly the opposite, reasoning that guaranties were not obligations secured by the Deed of Trust. Accordingly, a lender could obtain a deficiency judgment against the guarantor. See "Guaranteed Confusion on Guarantor Liability" for a more complete discussion of this decision.
On January 8, 2015, the Washington Supreme Court decided the consolidated case Washington Federal v. Harvey, which resolved this conflict. The Court avoided the issue as to whether the guaranties were secured by the Deeds of Trust, holding instead that the result turned on the identity of the grantor in foreclosed-upon Deed of Trust. If the guarantor granted the Deed of Trust, the lender waived its right to a judgment against the guarantor. Where the borrower, rather than the guarantor, granted the Deed of Trust, the lender waived its right to a judgment only as to the borrower. The guarantor still remained liable for the deficiency.
This case provides important clarity for lenders during foreclosure, but also important considerations for lenders preparing loan documents. After a year of uncertainty, lenders now have a bright-line rule, knowing they can pursue a nonjudicial foreclosure and preserve their right to a subsequent deficiency action where the grantor and the guarantor are not the same. However, where the grantor and guarantor are the same party, lenders should consider a judicial foreclosure where a solvent guarantor exists, as deficiency judgments can be obtained against grantors in a judicial foreclosure.
In preparing loan documents, lenders should be cognizant of who provides the real property collateral. Where a financially strong guarantor grants a Deed of Trust to secure the loan and also executes a guaranty, the guaranty may be of less practical value than initially thought because of the necessity of proceeding by judicial foreclosure, with its 12-month redemption period, in order to preserve the deficiency claim.
Lenders should also take some comfort in the recent trend of Washington Supreme Court decisions. After years of decidedly pro-borrower decisions, the Court has issued a trifecta of more moderate decisions, including Harvey on guarantor liability, Frias on limiting causes of action for wrongful foreclosure, and Frizzell on the steps a borrower must take to restrain a sale.
If you have questions about this decision or remedies against collateral, contact one of the attorneys in our Financial Services Group.