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Commercial Loans and Guaranty Issues

Washington Courts Divided on Whether Deed of Trust Act Allows Deficiency Judgment Against Guarantor of Commercial Loan When the Deed of Trust Secures the "Loan Documents," Which Are Defined to Include the Guaranty

On July 9, 2014, the Washington Supreme Court accepted review of several cases to resolve a conflict between Division I and Division II of the Washington Court of Appeals.

The issue to be decided is whether the Washington Deed of Trust Act, which expressly allows deficiency judgments against guarantors on commercial loans, nonetheless prohibits such deficiency judgments where the loan documents state that the guaranty is secured by the deed of trust.

In December 2013, Division II of the Washington Court of Appeals ruled that where a deed of trust secures the personal guaranty, the lender on a commercial loan is not entitled to a deficiency judgment against the guarantor.

Although there is no reason for a deed of trust to secure a guaranty, as is common, the deed of trust stated it secured the "Indebtedness" as well as performance of all obligations under the "Note [and] the Related Documents."

The term "Related Documents" was defined to include the guarantees. Thus, the court held the deed of trust secured the guarantees.

The court then turned to RCW 61.24.100, holding that it prohibits deficiency judgments, except as provided in subsection (10).

Subsection (10) provides: "A trustee's sale under a deed of trust securing a commercial loan does not preclude an action to ... enforce any obligation of a ... guarantor if that obligation ... was not secured by the deed of trust."

In February 2014, Division I of the Washington Court of Appeals addressed the same issue and reached the opposite result.

Division I disagreed with Division II's interpretation of the statute, holding subsection 3(c) of RCW 61.24.100 allows deficiency judgments and its subsection (10) does not change that fact.

The issue will now be resolved by the state Supreme Court, likely sometime next year.

In the meantime, as there is no reason for the deed of trust to secure the guaranty, loan documents should be revised to indicate the guaranty is not secured by the deed of trust.

The cases are Wash. Fed. v. Gentry, 179 Wn.App. 470 (2014), and First Citizens v. Cornerstone, 178 Wn.App. 207 (2013).

If you have questions about these issues, please contact Anne DeVoe Lawler at
(206) 292 -1994 or alawler@jbsl.com.

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