In a decision announced this week, Division I of the Washington State Court of Appeals held that a lender who has non judicially foreclosed on a deed of trust securing a commercial loan retains the right under Washington law to thereafter pursue an action for any deficiency against the loan’s guarantor. Washington Federal v. Gentry Division I considered, and rejected, the analysis of the identical issue by Division II of the court of appeals in the recent case of First Citizens Bank v. Cornerstone Homes, in which Division II held that the reference to “related documents” in stock Deed of Trust forms showed that the Deed of Trust actually secured the guaranties as well as the principal obligation (thus destroying any right to seek a deficiency judgment after a non judicial foreclosure).

Given the reliance of most financial institutions on use of stock forms (most often LaserPro forms, which have been found to have problems), the issues flagged in Washington Federal and First Citizens will arise in thousands of foreclosure and related cases throughout Washington, creating continued uncertainty for lenders, borrowers, and guarantors of construction and other commercial loans. Now, with a conflict between the divisions, it is up to the Supreme Court to review the issue. We hope to have some clarity by the end of the year.