The Washington Supreme Court has confirmed a personal guarantor’s liability to a lender following the lender’s nonjudicial foreclosure of its borrower’s real property collateral.  In Washington Federal v. Harvey/Washington Federal v. Gentry, Nos. 90078-7, 90085-0, slip op. at 2-3 (Wash. Jan. 8, 2015), the Court held that “guarantors of commercial loans whose own property has not been foreclosed” are not “protected from deficiency judgments under the DTA [Washington Deed of Trust Act] after the borrower’s property has been foreclosed.”  In addition to clarifying the general application of Washington’s Deed of Trust Act, the Court’s opinion resolves the specific so-called “Laser Pro” issue that lower courts had previously addressed with conflicting results.

In Harvey and Gentry, Horizon Bank had made loans to Kaydee Gardens 9 LLC and to Blackburn Southeast LLC/Landed Gentry Development, Inc./Gentry Family Investments LLC, respectively.  The Harveys and the Gentrys, as individuals, personally guaranteed repayment of these loans to their respective companies.  The borrowers subsequently defaulted and Washington Federal, as successor to Horizon Bank, foreclosed nonjudicially on its real property collateral.  Washington Federal then sued the Harveys and the Gentrys on their personal guaranties in an effort to recover substantial deficiency judgments.

At the trial-court level, both the Harveys and the Gentrys argued that the Laser Pro form deeds of trust at issue stated that they were “given to secure (a) payment of the Indebtedness and (b) performance of any and all obligations under the Note, the Related Documents, and [the] Deed[s] of Trust.”  The term “Related Documents” was further defined to include any “guaranties…whether now or hereafter existing, executed in connection with the indebtedness.”  Based on this plain language, the Harveys and the Gentrys argued that the deeds of trust in fact secured their personal guaranty obligations.  The Harveys and the Gentrys then argued that the anti-deficiency provision (RCW 61.24.100) of Washington’s Deed of Trust Act provides, in relevant part, that “a deficiency judgment shall not be obtained on the obligations secured by a deed of trust against any borrower, grantor, or guarantor after a [nonjudicial] trustee’s sale under that deed of trust.” (Emphasis added.)  Given the language of the deeds of trust and the statute, the Harveys and the Gentrys asserted that the nonjudicially foreclosed deeds of trust secured their personal guaranties and that this fact triggered the statutory limitation in RCW 61.24.100(10), which, they argued, prohibited a deficiency-judgment action against guarantors whose guaranties are “secured by the deed of trust.”

In both Harvey and Gentry, the trial court granted summary judgment in favor of the personal guarantors, concluding that they had no personal guaranty liability to the bank.  The Washington Court of Appeals (Division I), however, reversed.  Wash. Fed. v. Harvey, 179 Wn. App. 1033 (2014) (unpublished opinion); Wash. Fed. v. Gentry, 179 Wn. App. 470, 319 P.3d 823 (2014).  Significantly, in First-Citizens Bank & Trust Co. v. Cornerstone Homes & Development, LLC, 178 Wn. App. 207, 314 P.3d 420 (2013), the Washington Court of Appeals for Division II had previously reached a conclusion opposite to Division I’s and had granted relief to the personal guarantors based on essentially the same Laser Pro facts and arguments presented in Harvey and Gentry.

In its new opinion, the Washington Supreme Court has resolved the issues presented in Harvey, Gentry, and First-Citizens.  Interestingly, the Court’s relatively brief opinion does not include a detailed analysis of the Laser Pro language and related arguments but instead rests on a more universal reading of Washington’s Deed of Trust Act.  As a threshold principle, the Court first asserts that RCW 61.24.100(3)(c) permits lenders to seek deficiency judgments from guarantors of commercial loans “if the guarantor is timely given…notices.”  The Court then notes that RCW 61.24.100(6) limits a guarantor’s liability for payment of a deficiency to damages for waste and wrongful retention of rents, but only in the case of “[a] guarantor granting a deed of trust to secure its guaranty of a commercial loan.”  In other words, Washington’s Deed of Trust Act “extends protection from deficiency judgments…to a guarantor who grants a deed of trust to secure its guaranty of a commercial loan when the property burdened by the guarantor’s deed of trust is nonjudicially foreclosed.”  Slip op. at 6-7.  In Gentry and Harvey (and also in First-Citizens), however, none of the personal guarantors had secured their guaranties by granting deeds of trust on separate properties and according to the Court, even if they had, the “foreclosed properties were not the properties of the guarantors.  Therefore, the guarantors are not protected from deficiency judgments under the DTA.”  Slip op. at 7.

Consistent with this analysis, the Court disposes of the Laser Pro argument in footnote 2 of its opinion.  RCW 61.24.100(10) provides 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…was not secured by the deed of trust.”  For the Court, this provision “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.”  Accordingly, in the cases before the Court, “even if the borrowers’ deeds of trust secured the guarantors’ guaranties, subsection (10) would not preclude deficiency judgments against the guarantors because the guarantors did not grant such deeds of trust.”  Slip op. at 7 n.2.

The Court’s new opinion provides significant protection to Washington lenders because it confirms that guarantors of commercial loans will essentially remain liable for payment of any deficiency judgment arising after a nonjudicial foreclosure, except in those cases—historically rare—in which the guarantor has separately secured his or her own guaranty by granting the lender a deed of trust on the guarantor’s separate property.