Nonjudicial Foreclosures and the Guarantors Who Got Away...
The Stokes Lawrence Financial Services attorneys circulate bulletins about new developments in the law that affect creditor remedies. This week, the Washington Court of Appeals issued a decision bearing on the ability to recover against guarantors following a nonjudicial foreclosure.
On December 3, 2013, the Court of Appeals held that liability for a deficiency under a guarantee was extinguished by a nonjudicial foreclosure. Lenders considering foreclosure should re-examine the underlying deed of trust and other loan documents to determine whether the definition of "related documents" encompasses guarantees among the obligations secured by the deed of trust. If this is the case, the lender should proceed by judicial foreclosure to preserve a deficiency claim against the guarantors.
The Court of Appeal's decision, First Citizens Bank & Trust Company v. Cornerstone Homes & Development LLC et al., arose from personal guarantees of construction deeds of trust, where the deeds of trust appear to have been LaserPro forms. The definition of "Related Documents" in the deeds of trust encompassed guarantees. On this basis, the Court concluded that the deeds of trust secured performance of the guarantee.
Pursuant to RCW 61.24.100, guarantors of commercial loans are generally subject to claims for deficiencies following nonjudicial foreclosures, unless the guarantee was secured by the foreclosed deed of trust. The Deed of Trust Act provides under RCW 61.24.100(10) that "[a] trustee's sale under a deed of trust securing a commercial loan does not preclude an action to collect or enforce any obligation of a borrower or guarantor if that obligation, or the substantial equivalent of that obligation, was not secured by the deed of trust." As the guarantees in question were secured by the deed of trust, the court held that the anti-deficiency provisions of the Deed of Trust Act prohibited a deficiency judgment against the guarantors.
In construing the loan documents, the Court noted that the deed of trust and guarantee were drafted by Venture Bank, the original lender. Identical language quoted by the Court appears in LaserPro documents, prior to a change occurring in at least some LaserPro forms in 2012. But the broader notion that all obligations referenced under the Related Documents paragraph are foreclosed following nonjudicial foreclosure raises an additional troubling specter. The same language encompasses environmental agreements, which a lender wants to have survive foreclosure. Whether that indemnity does, in fact, survive is open to debate.
In preparing security instruments in light of the First-Citizens decision, less may be more. The obligations which should be secured by the deed of trust are the payment obligations under the Promissory Note and the covenants contained in the Business Loan Agreement. Beyond that, other security instruments will provide their own enforcement mechanisms, and cross-default provisions commonly contained in Business Loan Agreements should provide adequate grounds to foreclose if necessary. A secured lender is well protected by typical loan documentation without needing the guarantees to be secured by the deed of trust.
First-Citizens requires lenders and their counsel to inject additional steps into the evaluation of remedies: (a) is the guarantee secured by the deed of trust? (b) if so, is there a solvent guarantor? (c) if so, is the likely deficiency worth having to endure the 12 month redemption period following a judicial foreclosure? A nonjudicial foreclosure should only be undertaken after this analysis is complete.