Lenders frequently use a combination of deeds of trust and guaranties to secure commercial loans. Once a default occurs, and the borrower fails to cure, lenders often directly pursue a nonjudicial foreclosure as their first legal action to avoid litigation. But under a recent case, lenders may not want to be so quick to follow this traditional path if there is a guarantor with assets to pursue. Double-check (no, triple-check) to make sure that the deed of trust does not also include language that it secures the guaranty in addition to the loan debt. If it does have such language and you nonjudicially foreclose, you will lose your ability to pursue a deficiency judgment against the guarantor.
Division II of the Washington Court of Appeals has recently interpreted the state’s antideficiency statute as prohibiting deficiency judgments against a guarantor after a trustee’s sale if the foreclosed deed of trust secured the guaranty. You can read the court of appeals’ analysis at First-Citizens Bank & Trust Co. v. Cornerstone Homes & Development, LLC, 314 P.3d 420 (2013).
What does this mean for lenders? Two things. First, before pursuing a nonjudicial foreclosure, review the language in the deed of trust to determine whether the deed of trust also secures the guaranty. This will allow you to plan accordingly without accidentally relinquishing your right to pursue a guarantor after foreclosure. Second, to keep options open, revise your Washington forms so that the deeds of trust don’t secure the guaranty.
UPDATE: A new Division I case just came out that rejected First Citizens. Please read our recent blog discussing this matter here.