Rights after a Foreclosure Sale

A lot of foreclosure related cases are making their way through the courts right now,. The latest appellate decision concerns what rights a foreclosed upon borrower retains after a foreclosure sale. In general the right to stop the sale must be exercised prior to the sale taking place, and will often require the payment of a bond that the borrower may or may not be able to afford. However, rights to claim money damages generally survive the sale. The nature of the loan, residential or commercial, also affect these rights
The decision in Frizzell v. Murray was issued this week by the Supreme Court of Washington. The court decided that the borrower waived her right to have the sale enjoined by not filing the bond ordered by the court. However, the court left open the question of whether the Plaintiff retained a right to damages. This right was dependent on whether the loan was commercial or residential. The court did make clear that a lender merely labeling a loan “commercial”, when the borrower resides on the property, doesn’t necessarily make it so.

Is Your Loan Guaranty Worth the Paper it is Printed On?

Maybe not, under a case issued yesterday by the Washington Division II Court of Appeals. The case is First Citizens Bank v. Cornerstone Homes & Development and Daniel L. Allison and Jeanne Allison, No. 43619-1-II. Cornerstone Homes was a developer and had taken out several loans, secured by various parcels of real property. The Allisons were the principals of Cornerstone and had signed a blanket personal guaranty prior to the issuance of the loans. First Citizens Bank was the successor in interest to the original lender, who had been shut down by the FDIC.

It is very common in a commercial setting or when the borrower is a entity to have someone involved sign a personal guaranty. Since Washington is a non deficiency state, a borrower is not liable for any deficiency after a nonjudicial foreclosure. The idea of personal guaranties is to provide some recourse to a lender who nonjudicially forecloses, but does not receive the full amount of the loan at the foreclosure sale. The problem for the bank in the First Citizens case was that the Deeds of Trust contained language stating that they were “[g]iven to secure (A) Payment of the indebtedness and (B) performance of ANY AND ALL OBLIGATIONS under the note, THE RELATED DOCUMENTS, and the deeds of trust.” “Related Documents” was defined to include guaranties. The guaranty itself also included the “related documents” language, and defined the term to include deeds of trust.

The court held that because of this language, the anti deficiency statute (RCW 61.24.100) applied. This statue categorically prohibits a deficiency judgment against any borrower or guarantor following a nonjudicial foreclosure, except for certain exceptions in the case of commercial loans. One such exception is that a deficiency can be obtained against a guarantor if that obligation was not secured by the deed of trust. Because of the above noted language in both the guaranty and the Deed of Trust, the court found that the guaranty WAS secured by the deed of trust. Therefore, no deficiency was available.

The problematic language in this case, or very similar language, is not uncommon in commercial guaranties and deeds of trust that I have reviewed in my practice. The legislature has imposed a lot of new requirements for residential nonjudicial foreclosures in the last few years, but has not addressed commercial foreclosures. My guess is that after this case, we will be seeing a lot more judicial foreclosures on commercial loans, an added expense and burden to lenders. Since the deficiency in Cornerstone was over four million dollars, I also imagine the case will be appealed to the Washington Supreme Court.

Here is a link to the full decision: http://www.courts.wa.gov/opinions/pdf/D2%2043619-1-II%20Published%20Opinion.pdf