On January 8, 2015, in Washington Federal v. Harvey, the Washington Supreme Court affirmed the right of a lender to obtain a deficiency judgment against a commercial guarantor following a nonjudicial foreclosure under the Deeds of Trust Act (DTA) (Nos. 90078-7, 90085-0, (Wash. Jan 8, 2015)).

In a consolidated case, the Court affirmed two Division One Court of Appeals decisions (Washington Federal v. Gentry, 319 P.3d 823 (Wash. Ct. App. 2014) and Washington Federal v. Harvey, 179 Wash. App. 1033 (2014)). In these cases, guarantors on two separate commercial loans, which were secured by deeds of trust, did not grant a separate deed of trust to secure the guaranty.

When the borrowers defaulted on their loans, Washington Federal (the lender in both cases) initiated nonjudicial foreclosure proceedings and sought deficiency judgments against the guarantors. The guarantors argued that under the DTA they are protected from deficiency judgments, citing Section 61.24.100(1) of the Revised Washington Code, "a deficiency judgment shall not be obtained on the obligations secured by a deed of trust against any borrower, grantor, or guarantor after a trustee's sale under that deed of trust."

In both cases the trial courts granted summary judgment for the guarantors and the Court of Appeals reversed that decision, finding that the commercial guarantors were not protected from deficiency judgments under the DTA.

These decisions created a split between Divisions One and Two of Washington Court of Appeals, as a prior Division Two ruling held that in limited circumstances commercial guarantors could be protected from deficiency judgments under the DTA (First-Citizens Bank & Trust Co. v. Cornerstone Homes & Dev., LLC, 314 P.3d 420 (Wash. Ct. App. 2013)).

The Court explained that the DTA provides an inexpensive mechanism for lenders to foreclose on real property collateral through nonjudicial foreclosure. This mechanism gives lenders faster recourse if the loan is not repaid and therefore makes some loans easier for borrowers to obtain. In exchange, the DTA limits the lender's recovery to whatever is recouped from the nonjudicial foreclosure and generally does not allow the lender to pursue a deficiency judgment against the borrower.

To determine whether the protections against deficiency judgments apply to guarantors (as they do to borrowers) the Court looked beyond the general rule of Section 61.24.100(1) of the Revised Washington Statutes to the rest of that section, particularly Subsection 6, which extends the protection from deficiency judgments to guarantors only when:

The Court held that the only way for a guarantor to obtain protection against deficiency judgments under the DTA was to grant a deed of trust on his own property to secure the guaranty, and because neither of these guarantors had done so, they were not protected from deficiency judgments under the DTA.

This case is important because it establishes a clear ruling as to a guarantor's deficiency liability in the event of a nonjudicial foreclosure. Counsel representing commercial guarantors should advise their clients to grant a deed of trust on their own property to secure the guaranty if they wish to take advantage of the protection that the DTA affords against deficiency judgments.