Click on the above link for a summary of Washington case law from 2013 through April 2014 on topics such as residential and commercial foreclosures, condominium and homeowner associations, construction disputes, easements, adverse possession, residential and commercial landlord-tenant disputes, title insurance, and various other real estate related topics. If you have any questions about these or other legal issues, please do not hesitate to call Zeno Bakalian at 425-822-1511.
In February 2014, the U.S. District Court for the Western District of Washington listed the following factors as relevant when courts consider whether to invalidate a foreclosure sale after the sale occurs:
- whether a violation of the Deeds of Trust Act divested the trustee (who handles the foreclosure) of its authority to conduct the foreclose sale;
- whether the borrower had an adequate opportunity to prevent the foreclosure;
- whether the lender or the trustee caused unfairness or surprise;
- whether the purchaser at the foreclosure sale was on inquiry notice of the procedural irregularities or was truly innocent and would be unfairly harmed if the foreclose sale were voided;
- whether the sale price is grossly inadequate compared to the fair market value; and
- whether the borrower promptly asserted his or her objections after the sale.
Mulachy v. Federal Home Loan Mortgage Corp., 2014 WL 504836, *4 (W.D. Wash. Feb. 2014).
The answer depends on what claim the borrower makes. In a split decision, the Washington State Supreme Court in Frias v. Asset Foreclosure Services, Inc. et al, No. 89343-8 (Wash. Sep. 18, 2014), held (1) a borrower does not have a claim for money damages for purported violations of the Deeds of Trust Act when the foreclosure sale has not taken place yet, but (2) a borrower may, under the right circumstances, have a pre-foreclosure sale claim for money damages under a Consumer Protection Act claim for violations of the Deeds of Trust Act.
Before the Frias decision, courts in Washington were split on this issue. For example, for courts that answered the question “no,” see Vawter v. Quality Loan Service Corp. of Washington, 707 F.Supp.2d 1115 (W.D. Wash. 2010) and McDonald v. OneWest Bank, FSB, 929 F.Supp.2d 1079 (W.D. Wash. March. 2013). More recently, in August 2013 Division 1 of the Washington Court of Appeals answered the question “yes.” In doing so it relied on RCW 61.24.127(1)(c), which says “The failure of the borrower or [deed of trust] grantor to bring a civil action to enjoin a foreclosure sale under this chapter may not be deemed a waiver of a claim for [money] damages asserting: [f]ailure of the trustee to materially comply with the provisions of [Chapter 61.24 RCW, WA’s Deeds of Trust Act].” See Walker v. Quality Loan Service Corp., 176 Wn.App. 294 (Div. 1, Aug. 2013). Recognizing a split in the law, in September 2013 the U.S. District Court for the Western District of Washington certified the issue to the Washington Supreme Court. Frias v. Asset Foreclosure Services, Inc., 2013 WL 6440205 (W.D. Wash, Sept. 2013).
Now that we have the answer, borrowers have even more of an uphill battle in their fight to obtain money damages for foreclosure-related violations if the foreclosure sale has not occurred. Time will tell if the legislature amends the Deeds of Trust Act to expressly provide for a cause of action under the Act for money damages before a foreclosure sale occurs.
So far the answer depends on which division of the Washington Court of Appeals you’re in. In December 2013, Division 2 held a nonjudicial foreclosure of a deed of trust securing a commercial loan wiped out the guarantors’ liability under their guaranty. First-Citizens Bank & Trust Co. v. Cornerstone Homes & Development, LLC, 2013 WL 6237466 (Wn. App. Div. 2). There, the Court focused on the definitions of “indebtedness” and “related documents” in the various loan documents to conclude the deed of trust secured/cross-collateralized the borrower’s promissory note and the guarantors’ guaranty. Citing RCW 61.24.100(10), Division 2 dismissed lender’s deficiency claims against the guarantors, holding lenders can only obtain a deficiency judgment against guarantors if the guaranty was not secured by the deed of trust. Division 1 disagrees. In February 2014, Division 1 interpreted RCW 61.24.100(10) differently, concluding it is a permissive statute. Washington Fed. v. Gentry, 2014 WL 627817 (Wn. App. Div. 1, 2014). In other words, in Gentry the Court held RCW 61.24.100(10) allows deficiency judgments against guarantors following a nonjudicial foreclosure even when the deed of trust secures the promissory note and guaranty. RCW 61.24.100(10) reads: “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, or the substantial equivalent of that obligation, was not secured by the deed of trust.” Stay tuned to see how future courts, potentially the Washington Supreme Court, interprets this statute.
Trustees handling nonjudicial foreclosure sales must handle them fairly and not just follow the dictates of the lender. Klem v. Washington Mut. Bank, 176 Wn.2d 771 (Feb. 2013). The Washington Supreme Court reached this conclusion after a trustee refused to continue the foreclosure sale even though (1) the borrower was under contract to sell the home for more money than what the lender was owed, (2) the lender had an appraisal showing the home was worth four times what lender was owed, (3) borrower had dementia, and (4) postponing the sale would not have harmed the lender. In Klem, the trustee refused to continue the sale because it had a contract with lender that forbid a continuance without lender’s approval. The home sold for $84,000 at the foreclosure sale. Shortly thereafter, the purchaser resold the home for $235,000 ($151,000 profit). The Court held the trustee owed the borrower and the lender a duty of impartiality. By blindly following the lender’s dictates without exercising trustee’s independent discretion, the Court held (1) trustee breached its duty of good faith and duty of impartiality to borrower, and (2) trustee’s conduct was unfair and deceptive under Washington’s Consumer Protection Act (“CPA”). Trustee’s false notarization of a foreclosure notice to expedite the foreclosure sale was held to be unfair and deceptive, satisfying the first three elements of a CPA claim. The Court remanded the case to the trial court to determine the amount of borrower’s monetary damages.