Daily Development for Monday, March 12, 2007
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri

MORTGAGES; DEFICIENCY; ANTI=3DDEFICIENCY LAWS; SOLD OUT JUNIORS: What are the rights of a sold out junior to seek a deficiency following a Washington senior deed of trust private  foreclosure, where Washington law states that there can be no deficiency judgment following ass private foreclosure?  Beal Bank v. Sarich, King Count Sup. Ct. No. 05-2-11440-1 SEA (9/27/06) appeal No. 5890270

This case compels a determination of an issue left unresolved by the Washington Supreme Court when it decided Washington Mutual Savings Bank. v. U.S., 793 P.2d 969 (Wash. 1990) clarified upon denial of reconsideration 800 P.2d 1190.  

In Washington Mutual, a junior lienholder bought property at a private foreclosure sale conducted by a senior deed of trust lienholder.   The IRS, a third lienholder, sought to redeem from the sale pursuant to its federal law redemption right.  There was a disagreement about the price that the IRS should pay.  Applicable law provided that the IRS would have to include claims of a junior lienholder purchasing at the foreclosure from which it redeems to the extent that such liens are satisfied by the sale.  The law also provided that claims for which the junior lienholder has a deficiency claim would not be included as claims satisfied by the sale.

The Washington Supreme Court ruled that the junior lienholder had no right to collect a deficiency amount unresolved after it purchased at the senior foreclosure sale because Washington law in general prohibits the collection of a deficiency following a private foreclosure under a deed of trust.  The courts language in its original opinion was very sweeping and devoid of any complex reasoning:

We hold here that [no deficiency judgment] may be obtained by a nonforeclosing junior lienor following a nonjudicial foreclosure sale.  There is simply no statutory authority for allowing such a judgment following a nonjudicial, or deed of trust, foreclosure.  Indeed, the tiel to RCW 61.24.100, part of the deeds of trust act, states flatly that deficiency decree precluded in foreclosure under this chapter.We decline to create an exception to this statutory bar by judicial fiat.

Despite this broad statement, a concurring opinion attempted to reserve the issue of a junior seeking to sue on the note following the foreclosure of its lien.  Later, in denying reconsideration, the whole court commented:We do not herein address the matter of a junior deed of trust holder's continued right to sue the debtor on the promissory note because it is not before us

Thus, Washington lawyers were left to puzzle out the difference between a suit on the note when ones lien has been sold out by a prior foreclosure sale, and a deficiency judgment. 

In the instant case, Beal Bank held a junior lien on a valuable condominium property.  The lien secured a commercial debt.  The senior lienholder foreclosed, and Beal, which had a pending foreclosure action to collect on its lien, amended its complaint to make that suit a claim on the note.  Beal elected not to purchase the property at the foreclosure sale.   In the brief of the borrowers counsel, there is lots of ad hominem arguing about the equities of the parties, but it appears that the court pretty much viewed its decision as based upon the law.  It granted summary judgment for the borrower on the strength of the ruling in Washington Mutual, apparently viewing the suit on the note as effectively a deficiency claim, and thus barred by the holding of that case.

The case is now pending before the Washington Court of Appeals, and one of the parties suggested that the case might be interesting fodder for mortgage mavens on DIRT to chew upon.

Comment 1: To a certain extent, the fundamental problem here is the position of the Washington Supreme Court in Washington Mutual that it would not look behind the language of its foreclosure statute to identify the relevant policy considerations, interpreting the statute consistent with those considerations.  Courts in California, Alaska, and Arizona, at least, in myriad decisions involving many aspects of anti-deficiency schemes, have reworked the statutory language to make the law into what the court believed the legislature meant, as opposed to what it might actually have said.  In California, in particular, a number of lawyers and legal commentators have made a very fat living trying to explain and predict the courts efforts in this regard. 

Perhaps mindful of that history, the Washington court held simply that the statute says no deficiency and thats what it means.  In that case, the issue, due to the way the case came up, focussed directly on whether a action termed an action for a deficiency might be available.   The statute, it held, was clear on that point.

But the Washington Mutual case did nothing to explain its suggestion that there might be a difference between a pure deficiency judgment and an action on the note following the destruction of ones security at a prior lien foreclosure.

Comment 2: We should differentiate claims made by a junior who joins in the senior sale at a judicial foreclosure.  Where the junior seeks a judgement in the seniors foreclosure, then clearly any unsatisfied balance remaining after application of foreclosure proceeds is a deficiency.  But in a senior deed of trust foreclosure the junior typically cannot join in the foreclosure.   At best, it can seek to impose an equitable lien on the surplus proceeds, perhaps garnishing them in the hands of the foreclosing trustee.  Beal Bank did not do that in this case. 

Comment 3: Unlike California, Washington does not have a one form of action rule compelling a lender to foreclose rather than to sue on a note.  Consequently, Beal Bank, in fact, could have sued on the note directly at any time prior to the seniors foreclosure, and even have obtained a judgment.  As, in such instance, Beal Bank would have been waiving its right to foreclose its lien, it would be difficult to characterize such judgment as one for a deficiency. 

Why should we characterize Beal Banks claim any differently where it elects to sue on the note following the non-judicial senior foreclosure? 

Comment 3: The reason that we may be compelled to make such characterization is that the same xargument could have been made about Washington Mutuals right to sue on the note in the precedent case.  As a practical matter, there was no law that said that Washington Mutual was precluded from suing on its note despite the fact that it had purchased the property securing that note at a prior foreclosure that had wiped out Washington Mutuals lien.  Was the Washington Supreme Court admitting that such a lawsuit would be distinct from a deficiency?  It is difficult to read the Washington Mutual case as based so completely on semantics.  But there is no reason in the statutes to differentiate the situation of a junior who buys at the seniors foreclosure and later pursues and action on the note  and one who does not buy at the senior foreclosure and wishes to pursue such an action.  

In short, the Washington courts should rework Washington Mutual and explain what difference exists, if any, between the collection rights of  a junior who buys at a senior foreclosure sale and one who doesnt.  In the editors view, there is no difference and either part should be free to sue on the note, and the statute should not bar such suit.  To the editor it is immaterial whether we should characterize such as suit as a deficiency, since the real purpose of the Washington statute barring deficiencies following non judicial foreclosures is to limit the rights of the foreclosing senior. 

The editor is taking this position in order to stir up some righteous indignation among other DIRT commentators so we can get some sense of the policies at work here.  The position is a work in progress.D  What say you, DIRT mavens?

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