Commercial Lending Law in Washington

Commercial

Lending Law

in Washington

by Brian D. Hulse

Revised

September 2009

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COMMERCIAL LENDING LAW

IN WASHINGTON

Brian D. Hulse

Davis Wright Tremaine LLP

1201 Third Avenue, Suite 2200

Seattle, Washington 98101

(206) 622

3150

[email protected]

A slightly condense

d and edited version of this guide appears as the Washington chapter in the

book

Commercial Lending Law: A State-

State Guide

published by the American Bar

Association in 2009.

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TABLE OF CONTENTS

Page

INTRODUCTION...............................................................................................................

II.

BASIC LEGAL STRUCTURE...........................................................................................

Statutory Law

– The Revised Code of Washington................................................... 1

Administrative Law....................................................................................................

Local Law...................................................................................................................

Courts.........................................................................................................................

III.

AUTHORITY TO DO BUSINESS AND TAXATION .....................................................

Required Qualification to Do Business; Trade Names ..............................................

Licensing Requirements and Regulation of Fin

ancing..............................................

Taxation......................................................................................................................

Business and Occupation (“B&O”) Tax ..............................................................

2. Retail Sales Tax and Use Tax ..............................................................................5

Real Estate Excise Tax.........................................................................................

Property Taxes .....................................................................................................

IV.

INTEREST AND USURY; PROMISSORY NOTES ........................................................

Compound Interest.....................................................................................................

Usury..........................................................................................................................

Business Purpose

Exception.................................................................................

Usury Limit Where Exception Does Not Apply..................................................

Treatment of Additional Fees and Charges..........................................................

Acceleration ...............................................................................................................

Demand N

otes............................................................................................................

Place of Payment........................................................................................................

TYPES OF BORROWERS............................................................................................... 10

Corporations, Etc......................................................................................................10

Partnerships..............................................................................................................10

Limit

ed Liability Companies ...................................................................................11

Proprietorships and Individuals................................................................................ 12

Community Property Laws; Registered Domestic Partnerships........................12

Property Held in Joint Tenancy With

Right of Survivorship.............................15

3. Property Exempt from Claims of General Creditors..........................................15

Age of Majority..................................................................................................15

Trusts and Estates.....................................................................................................16

VI.

REAL

ESTATE LENDING..............................................................................................17

Property Rights.........................................................................................................17

Leases.......................................................................................................................17

Condominiums ......................................................................................................... 18

Types of Real Property Security Instruments ..........................................................18

Deeds of Trust....................................................................................................18

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Mortgages...........................................................................................................20

3. Real Estate Contracts .........................................................................................20

Formalities of Deeds of Trust and Mortgages.......................................................... 21

ssignments of Leases and Rents............................................................................21

Property Insurance....................................................................................................22

Recordation and Acknowledgments......................................................................... 22

Recordation ........................................................................................................22

Torrens System...................................................................................................22

Notary Acknowledgments..................................................................................23

Recording Fees...................................................................................................23

Priority Issues...........................................................................................................23

Future Advances................................................................................................

.23

Modificat

ion of Deeds of Trust and Mortgages.................................................24

3. Purchase Money Priority....................................................................................24

4. Priority of Options to Purchase..........................................................................25

Equitable Subrogation........................................................................................25

6. Subordination Agreements.................................................................................25

Title Insurance.......................................................................................................... 25

Prepayment...............................................................................................................26

Due on Sale or Encumbrance Clauses; Transfer of the Mortgaged Property;

Assumption Agreements .......................................................................................... 26

Cancellation of Deeds of Trust and Mortgages........................................................27

Assignments of Deeds of Trust and Mortgages....................................................... 27

Default and Foreclosure Remedies ..........................................................................27

In General...........................................................................................................27

2. Nonjudicial Foreclosure of Deeds of Trust........................................................29

3. Judicial Foreclosure of Mortgages and Deeds of Trust......................................35

Forfeiture of Real Estate Contra

cts....................................................................37

Deeds in Lieu of Foreclosure.............................................................................38

Past Due Rents Collected After Foreclosure......................................................40

Mortgagee in Possession Status .........................................................................40

Envir

onmental Indemnities...................................................................................... 40

Construction Liens ................................................................................................... 40

Homestead................................................................................................................42

Leasehold Financing ................................................................................................43

Tenant in Common Ownership and Partition........................................................... 44

Multiple Mortgagees................................................................................................44

Real Estate Collateral in Multiple States..................................................................45

Dragnet Clauses........................................................................................................46

VII.

PERSONAL PROPERTY LENDING..............................................................................46

UCC Revised Article 9.............................................................................................46

Security Interests Excluded From Article 9............................................................. 47

Insurance Policies...............................................................................................47

Titled Vehicles (Including Manufact

ured Homes).............................................48

3. Property of Governmental Entities.....................................................................48

Judgments...........................................................................................................48

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Priority Versus Statutory Lienholders...................................................................... 49

UCC Filing and Sea

rching ....................................................................................... 50

Taxation of Foreclosure Sales.................................................................................. 50

Miscellaneous........................................................................................................... 50

VIII.

EQUIPMENT LEASING.................................................................................................. 51

IX.

GUARANTIES AND SURETYSHIP .............................................................................. 51

Waivers of Suretyship Defenses .............................................................................. 51

Guaranties.................................................................................................................51

Other Suretyship Situations...................................................................................... 52

Reimbursement, Subrogation and Contribution Rights ...........................................53

RECEIVERSHIP/ASSIGNMENT FOR BENEFIT OF CREDITORS ............................ 53

XI. LENDING ON INDIAN LAND OR TO INDIAN TRIBES OR CORPORATIONS...... 54

XII.

OTHER LAWS OF INTEREST .......................................................................................54

Recovery of Attorneys’ Fees.................................................................................... 54

Fraudulent Transfer Law.......................................................................................... 55

Environmental Laws and Regulations......................................................................55

Exclusion of Punitive Damages ...............................................................................56

Statute of Frauds ......................................................................................................56

Credit Agreements..............................................................................................57

2. Guaranties, Etc...................................................................................................58

Statutes of Limitation............................................................................................... 58

Choice of La

w Provisions........................................................................................58

Forum and Venue Selection Provisions................................................................... 59

Arbitration Agreements............................................................................................ 59

Jury Trial Waivers....................................................................................................59

Duty of Good Faith;

Deemed Insecurity Provisions................................................ 59

Powers of Attorney...................................................................................................60

Unauthorized Practice of Law..................................................................................60

Subordination Agreements.......................................................................................61

Marshaling

of Collateral........................................................................................... 61

Loan Commitments.................................................................................................. 62

Confession of Judgment........................................................................................... 62

Insider Loans............................................................................................................ 62

Enforcement of Foreign Judgments ......................................................................... 63

Judgments From Other States ............................................................................63

Judgments From Foreign Countries...................................................................63

Participation Agreements......................................................................................... 64

XIII.

CONCLUSION................................................................................................................. 64

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COMMERCIAL LENDING LAW IN WASHINGTON

INTRODUCTION

This guide is intended to introduce lenders and lawyers to the general outline of the laws

of the State of Washington that govern commercial lending, commercial real estate finance,

equipment

leasing and related areas. It does not deal with issues related specifically to consumer

lending and finance, although certain issues and statutes related to those topics may be

mentioned. Relatively detailed treatment is given to real estate lending issues because the law in

the area is more state-specific than the law in the areas of personal property-secured lending and

equipment leasing.

This guide assumes a basic working knowledge of financing transactions generally. It is,

by nature, general in sc

ope and meant as a brief overview of the subjects discussed. It should not

be relied upon in a specific transaction without legal advice tailored to that transaction.

II.

BASIC LEGAL STRUCTURE

Statutory Law

–

The Revised Code of Washington

The general law o

f Washington is found in the state Constitution and in the Revised Code

of Washington (“RCW”). The RCW is divided into 91 Titles. Titles of particular interest to

commercial lenders include the following:

Enforcement of Judgments

Special Proceedings

and Actions (including receivership and replevin)

Probate and Trust Law

19 Business Regulations – Miscellaneous (including statute of frauds,

fraudulent transfers, interest and usury, and consumer protection)

23B

Washington Business Corporation Act

Partnerships (including limited liability companies)

Domestic Relations (including community property law)

Banks and Trust Companies

Miscellaneous Loan Agencies

Mutual Savings Banks

Savings and Loan Associations

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Motor Vehicles

Liens (numerous statutory liens)

Mortgages, Deeds of Trust and Real Estate Contracts

62A

Uniform Commercial Code

Personal Property

Real Property and Conveyances

Recording, Registration and Legal Publication

Excise Taxes

The full text of the RCW is available without charge on the state’s website at

http://apps.leg.wa.gov/rcw/

Administrative Law

A number of state agencies have authority to promulgate regulations. They include the

Department of Financial Institutions, the Department of Insurance, the Department of Ecology,

and the Department of Revenue. Administrative regulations are first published in the

Washington State Register and are periodically consolidated in the Washington Administrative

Code (the “WAC”). The full text of the WAC is available without charge at

http://apps.leg.wa.gov/wac/

Local Law

Washington has 39 counties, each with its own ordinances.

Courts

The courts of primary jurisdiction in Washington are the superior courts of each county.

In addition, each county has local district courts, municipal courts and small claims courts. The

vast majority of actions by lenders to enforce repayment of commercial loans are brought in the

superior courts. Judicial foreclosures of real property security instruments are almost always

brought in the superior courts, as are actions for appointment of receivers.

The Washington Court of Appeals is the intermediate appellate court. It has three

departments, which sit in Seattle, Tacoma and Spokane. The Washington Supreme Court is the

state’s highest court. It sits in the state capital, Olympia.

The federal courts in Washington are the United States District Court for the Western

District of Washington and the United States District Court for the Eastern District of

Washingto

n. Washington is part of the Ninth Circuit Court of Appeals.

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III.

AUTHORITY TO DO BUSINESS AND TAXATION

Required Qualification to Do Business; Trade Names

Foreign corporations are prohibited from transacting business in Washington unless they

properly qualify to do so. RCW 23B.15.010 sets out various examples of activities that do

not

constitute transacting business in the state in this context. They include:

Making loans or creating or acquiring evidences of debt, mortgages, or liens

on real or personal prop

erty, or recording same;

Securing or collecting debts or enforcing mortgages and security interests in

property securing the debts;

Owning, without more, real or personal property;

Conducting an isolated transaction that is completed within thirty days and

that is not one in the course of repeated transactions of a like nature;

Transacting business in interstate commerce;

Maintaining or defending any action or suit or any administrative or

arbitration proceeding, or effecting the settlement thereof or the settlement of

claims or disputes;

Maintaining bank accounts, share accounts in savings and loan associations,

custodian or agency arrangements with a bank or trust company, or stock or

bond brokerage accounts;

Selling through independent contrac

tors;

Soliciting or procuring orders, whether by mail or through employees or

agents or otherwise, where the orders require acceptance outside the state

before becoming binding contracts and where the contracts do not involve any

local performance other t

han delivery and installation; and

Owning and controlling a subsidiary corporation incorporated in or

transacting business within the state.

Limited liability companies, limited partnerships and limited liability partnerships

organized under the laws of jurisdictions other than the State of Washington are subject to

similar, but not identical, requirements under RCW 25.15.350 (limited liability companies),

RCW 25.10.540 (limited partnerships) and RCW 25.05.565 (limited liability partnerships). The

statut

e describing activities of a foreign limited liability partnership that do not constitute

transacting business in Washington provides that “ownership in this state of income-

producing

real property or tangible personal property, other than [certain limited types of property],

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constitutes transacting business in this state.” RCW 25.05.565(2). There are no requirements for

a general partnership organized under the laws of a jurisdiction other than Washington to obtain

a certificate of authority or otherwise

qualify to transact business in the state.

To qualify to transact business in Washington, a foreign entity must make appropriate

filings with the Washington Secretary of State, maintain a registered office in Washington (often

with a professional corporate services company), and designate a registered agent for service of

process in the state.

Individuals and all types of entities are required to register trade names under RCW

chapter

19.80.

Licensing Requirements and Regulation of Financing

As a general rule, non-Washington based lenders and equipment lessors are not required

to obtain licenses in order to engage in permissible commercial lending and leasing activities in

Washington. There are certain exceptions and certain regulatory statutes of which le

nders should

be aware, including the following:

Nondepository lenders participating in the U.S. Small Business

Administration 7(a) loan guaranty program must be licensed under RCW

chapter 31.40.

Check cashers and sellers that are not financial institutions must be

licensed under RCW chapter 31.45. Licensees that make loans of $500 or

less for 31 days or less must have a special small loan endorsement to their

licenses. This endorsement is obtained by lenders commonly referred to

as “payday lenders.”

Insur

ance premium financers must be licensed under RCW chapter 48.56.

The Consumer Loan Act (RCW chapter 31.04) contains licensing

requirements applicable to consumer lenders other than banks, savings

institutions and credit unions.

Financial institutions are subject to regulation under RCW titles 30 (banks

and trust companies), 32 (mutual savings banks) and 33 (savings and loan

associations).

Credit unions are regulated under RCW chapter 31.12.

Nondepository agricultural lenders participating in the farmers hom

administration loan guaranty program are regulated by the Washington

Department of Financial Institutions pursuant to RCW chapter 31.25.

Residential mortgage brokers must be licensed under RCW chapter

19.146.

Retail installment sales of goods and services are regulated under RCW

chapter 63.14.

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RCW chapters 19.148 and 19.149 require certain disclosures by servicers

and lenders of real estate loans secured by one to four family properties.

Taxation

The principal Washington state taxes that out

state len

ders and equipment lessors must

be concerned with are the business and occupation tax (the “B&O Tax”), the retail sales tax, the

real estate excise tax and the property tax. The application of these taxes to particular lenders or

lessors is complex and should be considered in the context of a lender’s or lessor’s specific

circumstances. Washington does not have a net income tax or a mortgage recording tax.

For information about the priority of tax liens as against other liens and security interests,

see S

ection VII.C below.

Business and Occupation (“B&O”) Tax

The B&O Tax is a gross receipts tax and is generally in an amount of one and one-

half

percent of the taxpayer’s gross income. It is provided for in RCW chapter 82.04.

Special regulations for the B&O Tax as it relates to financial institutions are set out in

WAC

458-20-

146 and

14601.

Amounts derived from interest received on loans primarily secured by first mortgages or

trust deeds on nontransient residential properties are not subject to the B&O Tax. RCW

82.04.4292. In this context, the term “nontransient residential properties” includes one to four

family properties, apartments, long-term senior living facilities and construction loans for

residential properties. Department of Revenue Excise Tax Advisory 460.04.146 (issued July 17,

1974);

Washington State Department of Revenue v. Security Pacific Bank of Washington

National Association, 109 Wash. App. 795, 38 P.3d 354 (2002). The Security Pacific Bank case

also held that interest on a mortgage warehouse loan to a mortgage lender is eligible for the

exemption to the extent the loan is secured by mortgage loans that are in turn secured by first

mortgages or deeds of trust on nontransient residential properties.

Id.

Retail Sales Tax and Use Tax

The combined state and local retail sales tax provided for in RCW chapter 82.08 varies

by locality, but is generally between seven and nine percent of the taxable sales price. The term

“retail” sales tax is something of a misnomer because the tax applies to many services and other

transactions that are not retail sales in the common sense of the word. Sales tax is not generally

payable on interest income, but is often payable on lease payments under equipment leases.

WAC 458-20-211. RCW chapter 82.08 contains a number of exemptions from the sales tax.

There is no exemption for foreclosure sales under Article 9 of the Uniform Commercial Code, so

the tax generally must be paid on such sales unless one of the other exemptions applies. One

exemption that may apply to some Article 9 foreclosure sales is the “casual or isolated sale”

exemption of RCW 82.08.0251, if the seller is not otherwise engaged in a business activity

taxable under the B&O Tax.

See

WAC 458-20-106. However, while that exemption may

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excus

e the seller from the duty of collecting the sales tax, it does not excuse the buyer from any

applicable obligation to pay the compensating use tax described below. RCW 82.08.0251.

Washington’s retail sales tax, which is collected by the seller, is a trust fund tax. RCW

82.08.050. Therefore, an Article 9 security interest in a borrower’s accounts receivable does not

attach to the portion of the account that represents the sales tax and asset

based lenders should be

careful to exclude sales tax from the class of eligible receivables against which they will make

advances.

Washington also has a compensating use tax, which applies to the use in the state of

certain items on which sales tax has not been paid. It is provided for in RCW chapter 82.12.

Real Esta

te Excise Tax

Washington has a real estate excise tax, which is payable upon any sale of real estate and

upon the sale of a controlling interest in a corporation, limited liability company, partnership or

other entity owing real estate in Washington. RCW 82.45.010 and WAC chapter 458-61A. The

state rate is 1.28% of the “selling price.” RCW 82.45.060. Local jurisdictions can impose

additional amounts and the aggregate amount of the state and local tax can exceed 2% of the

selling price.

The tax is the obligation of the seller and may be enforced by a lien on the property.

RCW 82.45.070 and .080. It is payable at the time of the sale. RCW 82.45.100(1). In order to

record a deed, a real estate excise tax affidavit providing the details of the sale and t

he amount of

the tax must be filed with the deed. As a result, the purchase price of real estate is public

information. The form of the affidavit can be obtained from the Washington Department of

Revenue’s website at

www.dor.wa.gov.

The tax is not payable upon, among other things: (a) the recording of a deed of trust or

mortgage; (b) foreclosure of a deed of trust or mortgage or forfeiture of a real estate contract; or

(c)

a deed in lieu of such a foreclosure or forfeiture. RCW 82.45.010(3)(h) and (i); WAC 458-

61A

-208.

The amount of any recourse debt on the transferred property assumed by the transferee is

included in the selling price on which the real estate excise tax is calculated. WAC 458-

61A

103(1). However, the tax “does not apply to transfers of real property subject to an underlying

debt when the grantor has no personal liability for the debt and receives no other consideration

for the transfer.” WAC 458

61A

103(2).

The real estate excise tax does not apply to the conveyance of property by a trustee or

debtor in possession under a confirmed chapter 11 or chapter 12 bankruptcy plan. WAC 458-

61A

-207(1). Nor does it apply to the typical judicial or nonjudicial foreclosure sale, deed in lieu

of foreclosure, real estate contract forfeiture, or transfer of foreclosed property from a loan

servicer to the owner of the foreclosed loan. WAC 458-

61A

-208. However, where a deed in

lieu of foreclosure is given on a junior lien mortgage or deed of trust, the tax is payable on the

outstanding principal amoun

t of any senior lien that is not satisfied by the deed. WAC 458

61A

208(3)(d)(iii).

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Property Taxes

Washington imposes property taxes on both real and personal property pursuant to RCW

title 84. The lien for real property taxes attaches to the taxed prope

rty as of January

1 of the year

immediately prior to the year in which the taxes are payable. RCW 84.60.020. The attachment

of the lien for personal property taxes is provided for in RCW 84.60.020 and RCW 84.56.070. It

has priority over all UCC Article 9 security interests in the taxed property. RCW 84.60.010.

Real property tax bills are generally mailed to the taxpayer in January or early February of each

year and are payable in two equal installments, which become delinquent if not paid by April 30

and October 31 of the same year. RCW 84.56.020. However, if the first installment is not paid

by April 30, both installments become delinquent.

Id.

IV.

INTEREST AND USURY; PROMISSORY NOTES

Compound Interest

Compound interest is disfavored under Washington law and will not be permitted in the

absence of an express agreement. Goodwin v. Northwestern Mutual Life Insurance Company

196 Wash. 391, 402

03, 83 P.2d 231 (1938).

Usury

Business Purpose Exception

Usury is generally not a major concern for commercial lenders in Washington.

Washington’s usury statute is contained in RCW chapter 19.52. It provides that the defense of

usury may not be pled “if the transaction was primarily for agricultural, commercial, investment,

or business purposes” but that the usury limits do apply to a “consumer transaction” of any

amount. RCW 19.52.080

. “Consumer transaction” is defined in that section to mean a

transaction “primarily for personal, family, or household purposes.” A consumer transaction,

even if it is very large in amount, is subject to the usury limitation

. A lender is entitled to rely

on the borrower’s representations as to the use of the borrowed funds unless it has notice that the

representations are false. Castronuevo v. General Acceptance Corporation, 79 Wash. App. 747,

751-52, 905 P.2d 387 (1995); The Revocable Trust of Harold Strand v. Wel-Co. Group, Inc.,

120 Wash. App. 828, 835, 86 P.3d 818 (2004). In order to take advantage of the business

purpose exception, commercial loan documents should contain

a representation along the lines of

the following:

“[Borrower] represents and warrants to [Lender] that the loan or extension of

credit provided for herein is made exclusively for agricultural, commercial,

Although RCW 19.52.080 is not, by its terms applicable to limited liability companies, it is made applicable to

them by RCW 1.16.080.

The usury limit can be applicable to a loan of millions of dollars where, for example, the loan is for the purpose of

constructing or buying a yacht or an aircraft for personal use or for the purpose of paying a marital dissolution

settlement. There is, however, a federal statute that appears to preempt state usury laws for loans secured by

preferred marine mortgages on federally

documented vessels. 46

U.S.C. §

31322(b).

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investment or business purposes and no portion thereof shall be used for any

consumer, personal, family or household purpose.”

A loan is not necessarily a business purpose loan simply because it is made to refinance

all or part of a business purpose loan. McGovern v. Smith, 59 Wash. App. 721, 732, 801 P.2d

250 (1990);

but,

see,

Jansen v. Nu-West, Inc., 102 Wash. App. 432, 440, 6 P.3d 98 (2000) (“If

the purpose of the loan is to pay off a previous loan, the purpose of which was primarily

business, the purpose of the second loan is also primarily business.”). Such a refinancing loan is

especially likely to be held not to be for a business purpose where there is no longer an ongoing

business and the borrower of the refinance loan is using it to discharge his or her personal

liability for the original loan.

Usury Limit Where Exception Does Not Apply

Where the usury limit applies, the maximum rate is “the higher of: (a)

twelve percent per

annum; or (b) four percentage points above the equivalent coupon issue yield (as published by

the Board of Governors of the Federal Reserve System) of the average bill rate for twenty-

six

week treasury bills as determined at the first bill market auction conducted during the calendar

month immediately preceding the later of (i) the establishment of the interest rate by writte

agreement of the parties to the contract, or (ii) any adjustment in the interest rate in the case of a

written agreement permitting an adjustment in the interest rate.” RCW

19.52.020.

In addition to the general rules set forth above, RCW 19.52 contains a number of special

rules and exceptions applicable to particular types of transactions and sets out penalties for

violation of the usury limits.

It is a Class C felony “knowingly to collect any unlawful debt.” RCW 9A.82.045. An

“unlawful debt” includes, among other things, one bearing interest at a rate at least twice the

maximum permitted rate under applicable state or federal law. RCW

9A.82.010(21).

Washington’s usury limit is applicable to a loan made outside the state to a Washington

resident. RCW 19.52.034. It cannot be avoided based upon the location of the lender or a

contractual choice of law provision. Whitaker v. Spiegel, Inc., 95 Wash. 2d 661, 667-68, 623

P.2d 235 (1981).

3. Treatment of Additional Fees and Charges

Washington law does not specify any limitations on the amount of additional fees and

charges that may be assessed in connection with business purpose loans or extensions of credit.

If the usury limit applies, some fees and charges may be treated as interest for purposes

of the usury

law.

See, e.g., Sparkman & McLean Income Fund v. Wald

, 10 Wash. App. 765, 520

P.2d 173 (1974); Aetna Finance Company v. Darwin, 38 Wash. App. 921, 926-27, 691 P.2d 581

(1984). Late charges and default rate interest are not generally treated as interest for such

purposes on the theory that they are under the control of the borrower

Union Bank v. Kruger

, 1

Wash. App. 622, 626, 463 P.2d 273 (1969). However, that is not necessarily the case where they

Presumably, the same theory applies to prepayment charges.

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are agreed to as part of a forbearance arrangement or workout entered into after maturity or

default.

Metro Hauling, Inc. v. Daffern

, 44 Wash. App. 719, 722, 723 P.2d 32 (1986).

Acceleration

Acceleration clauses in promissory notes are enforceable; however, notice to the

borrower is required in order to effect the acceleration even if the note provides for automatic

acceleration upon default. A.A.C. Corporation v Reed, 73 Wash. 2d 612, 615, 440 P.2d 465

(1968). “Acceleration must be made in a clear and unequivocal manner which effectively

apprises the maker that the holder has exercised his right to accelerate the payment.”

Glassmaker v. Ricard

, 23 Wash. App. 35, 38, 593 P.2d 179 (1979).

Although notice of acceleration is required, advance notice of intention to accelerate and

an opportunity to cure are not. Jacobson v. McClanahan, 43 Wash. 2d 751, 754, 264 P.2d 253

(1953).

Demand Notes

In general, a promissory note that is payable upon demand is enforceable according to its

terms under Washington law. Allied Sheet Metal Fabricators, Inc. v. Peoples National Bank of

Washington

, 10 Wash. App. 530, 533

34, 518 P.2d 734 (1974). A pattern of continued financing

under a series of demand notes does not change that.

Id.

Moreover, the general obligation of

good faith implicit in every contract “does not extend to obligate a party to accept a material

change in the terms of its contract”…Nor does it ‘inject substantive terms into the parties’

contract.’” Badgett v. Security State Bank, 116 Wash. 2d 563, 569, 807 P.2d 356 (1991).

“Rather, it requires only that the parties perform in good faith the obligations imposed by their

agreement.”

Id.

“As a matter of law, there cannot be a breach of the duty of good faith when a

party simply stands on its rights to require performance of a contract according to its terms.”

Id.

at 570.

The foregoing rule finds further support in the official comment to Washington’s version

of Uniform Commercial Code §

208, which generally requires parties to act in good faith when

accelerating a debt allowing acceleration at will or when the creditor deems itself insecure. The

comment states that § 1-208 “has no application to demand instruments or obligations whose

very nature permits call at any time with or without reason.”

For a discussion of the application of the statute of limita

tion applicable to demand notes,

see Section

XII.F of this guide.

Place of Payment

Tender of payment on a promissory note must be made at the place of payment specified

in the note. U.S. Bank National Association v. Whitney, 119 Wash. App. 339, 347-48, 81 P.3d

135 (2003). Payment at a separate branch or office of a bank is not effective tender.

Id.

and

RCW 62A.4

-107.

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TYPES OF BORROWERS

Corporations, Etc.

Washington corporations are subject to the Washington Business Corporation Act (RCW

title

23B). That

Act contains separate chapters applicable to foreign corporations.

Specialized types of corporations and business associations are provided for in the

following statutes:

Professional service corporations

–

RCW chapter 18.100

Employee cooperative associat

ions

–

RCW chapter 23.78

Cooperative associations

–

RCW chapter 23.86

Massachusetts trusts

–

RCW chapter 23.90

Various types of nonprofit corporations

–

RCW title 24

It is advisable to obtain a “Certificate of Existence/Authorization” from the Washington

Secretary of State when making a loan to a corporate borrower. Washington law does not

include a concept of corporate “good standing” so it is not technically correct to refer to such a

certificate as a “good standing certificate.”

There is no requirement under Washington law that a corporate seal appear on a

document executed by a corporation. RCW 60.04.105 provides that: “The absence of a

corporate seal on any deed, mortgage, lease, bond or other instrument or contract in writing shall

not affect its

validity, legality or character in any respect.”

The doctrine of ultra vires under which a corporate action can be challenged on the basis

that it is beyond the corporate powers of the corporation is severely limited by RCW

23B.03.040

(for for-profit corporations) and RCW 24.03.040 (for nonprofit corporations). See also Spokane

Concrete Products, Inc. v. U. S. Bank of Washington, N.A., 126 Wash. 2d 269, 277-78, 892 P.2d

98 (1995). Actions may be challenged on the ground that the corporation did not act in

accordance with its governing documents. Hartstene Point Maintenance Association v. Diehl,

95 Wash. App. 339, 345, 979 P.2d 854 (1999).

Partnerships

Three types of partnerships are recognized in Washington: (1) general partnerships;

(2)

limited partners

hips; and (3)

registered limited liability partnerships.

Washington partnerships are subject to the “Partnership” title of the RCW (title 25).

RCW chapter 25.05 is Washington’s version of the Revised Uniform Partnership Act. It

contains the statutory provisions governing general partnerships and limited liability

partnerships. Limited liability partnerships are intended primarily for use by those engaged in

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the practice of the licensed professions; however, they are occasionally used for other business

urposes.

RCW chapter 25.10 is the primary statute governing limited partnerships, although the

very few limited partnerships that were in existence prior to June 6, 1945 are governed by RCW

chapter 25.12.

The statutes governing limited partnerships and limited liability partnerships have

provisions relating to foreign entities of those types doing business in Washington.

It is advisable to obtain a Certificate of Existence/Authorization from the Washington

Secretary of State when making a loan to a borrower that is a limited partnership or limited

liability partnership as well as a certified copy of the Certificate of Limited Partnership.

Partners in a general partnership, as well as general partners in a limited partnership, are

individually liable for partnership debts; however, with certain limited exceptions, a creditor is

generally required to exhaust its recourse against partnership assets before executing on assets of

the general partners. This extra step can be avoided by having the general partners waive the

requirement of exhaustion of the partnership assets or by having them separately guarantee the

debt.

See

RCW 25.05.130(4).

Under a statutory amendment to RCW chapter 25 made in the 2009 legislature, beginning

in January 2010 a limited partnership may elect to become a limited liability limited partnership

(“LLLP”) by including a statement to that effect in its certificate of limited partnership. Status as

an LLLP provides general partners with a shield from liability for obligations of the LLLP.

Limited Liability Companies

Limited liability companies (“LLCs”) are governed by RCW chapter 25.15. A

Washington LLC may be managed either by its members or by one or more managers. RCW

25.15.150. Single

member LLCs are permitted in Washington.

An LLC is formed by filing a Certificate of Formation with the Washington Secretary of

State. RCW 25.15.070. Washington LLCs are required to have a registered office and a

registered agent for service of process in Washington.

Id.

When making a loan to an LLC, it is advisable to obtain a Certificate of

Existence/Authorization from the Washington Secretary of State as well as a certified copy of the

LLC’s Certificate of Formation.

Individual members and managers of an LLC are not liable for its debts unless they have

executed appropriate guaranties or are personally liable in tort. RCW 25.15.125.

There is not an ultra vires statute for limited liability companies comparable to the one

for corporations discussed in Section V.B above. 1B Washington Practice § 70.10 (4

ed.

2008).

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Proprietorships and Individuals

Loans to proprietorships are treated in the same manner as loans to the individual owners

of the business. Trade names are subject to registration with the Washington Secretary of State

pursuant to RCW

chapter 19.80.

Community Property Laws; Registered Domestic Partnerships

General

Lenders must take the effects of the Washington community property laws into

consideration when contemplating making loans to, or accepting personal guaranties from,

marri

ed Washington residents. The community property laws are set out in RCW chapter 26.16.

In 2008, the legislature comprehensively revised the community property statutes (and

many other statutes) to make them applicable to registered domestic partners as well as to

spouses. The changes generally became effective June 12, 2008. Registered domestic

partnerships are provided for in RCW chapter 26.60. They may be entered into by two people

both of whom are at least age 18 and (a) both of whom are of the same sex or (b) at least one of

whom is age 62 or older. RCW 26.60.030. Although, for ease of readability, this guide refers to

spouses, the community property concepts described are equally applicable to registered

domestic partners after June

12, 2008.

ere individuals live as “committed intimate partners,” Washington courts will in

appropriate circumstances divide the partners’ assets in an equitable manner based on the rights

they would have had if they had been married to one another. See, e.g.,

Olver

v. Fowler, 161

Wash.

2d 655, 168 P.3d 348 (2007).

b. Community Liability for Debts

Washington has an equal management community property system. Under

RCW

26.16.030 each spouse has the full authority, acting alone, to enter into debt obligations

binding

and obligating any and all present and future community property that may exist

between husband and wife with the following exceptions:

(i)

Neither spouse may devise or bequeath by will more than

one

half of the community property.

(ii)

Neither spouse may make a gift of community property

without the express or implied consent of the other. This provision can be a trap for unwary

lenders. Because a guaranty of another person’s debt may be a gift of community property, both

spouses should execute, or give their written consent to, guaranties where there is not a clear

benefit to the marital community from the guaranteed debt, if the lender intends to have recourse

to the spouses’ community property. Moreover, a general power of attorney from one spouse to

the other does not authorize a gift of community property unless it expressly contains such

authority. Bryant v. Bryant, 125 Wash. 2d 113, 119, 882 P.2d 169 (1994). In requiring both

spouses to execute such a guaranty, the lender must of course comply with the federal Equal

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Credit Opportunity Act (15 U.S.C. § 1691 et seq.) and Regulation B promulgated thereunder (12

CFR part 202).

(iii)

Neither spouse may sell, convey, or encumber the

community real property without the other spouse joining in the execution of the deed or other

instrument by which the real estate is sold, conveyed, or encumbered, and such deed or other

instrument must be acknowledged by both spouses.

(iv)

Neither spouse may purchase or contract to purchase

community real property without the other spouse joining in the transaction of purchase or in the

execution of the contract to purchase.

(v)

Neither spouse may create a security interest, other than a

purchase money security interest in, or sell, community household goods, furnishings, or

appliances, or a community mobile home unless the other spouse joins in executing the security

agreement or bill of sale, if any.

(vi)

Neither spouse may acquire, purchase, sell, convey, or

encumber the assets, including real estate, or the good will of a business where both spouses

participate in its management without the consent of the other; provided, that where only one

spouse participates in such management the participating spouse may, in the ordinary course of

such business

, acquire, purchase,

sell, convey or encumber the assets, including real estate, or the

goodwill of the business without the consent of the nonparticipating spouse. It is unclear

whether, or to what extent this rule applies to a business conducted in corporate, partnership or

limited liability company form.

See

Washington State Bar Association, Washington Community

Property Deskbook, § 4.6 (3rd ed. 2003); 19 Washington Practice § 12.15 (1997). However, it

has been held that the purchase of all the stock of a corporation is subject to the statute and

requires the consent of both spouses.

Consumers Insurance Company v. Cimoch

, 69 Wash. App.

313, 320

21, 848 P.2d 763 (1993).

A contract signed by one spouse for the benefit of the marital community creates recourse

to all the community assets. If the contract is not for the benefit of the community, there is

recourse only to the signing spouse’s separate property. In the latter situation, there is no

recourse to

any

of the community property. However, there is an extremely strong presumption

of community liability and many transactions that might not generally be thought to provide a

community benefit are deemed to provide such a benefit for this purpose.

See

generally

, Cross,

The Community Property Law in Washington, 61

Wash.

L. Rev.

13, 114-125 (1986). The rule is

different for tort liability, for which a plaintiff has recourse to one-half the community property

for satisfaction of a judgment on a separate tort of one spouse if that spouse’s separate property

is insufficient to satisfy the judgment. de Elche v. Jacobsen, 95 Wash. 2d 237, 622 P.2d 835

(1980);

Keene v. Edie

, 131 Wash.

2d 822, 935 P.2d 588 (1997).

Lenders should be careful about adding words such as “individually” after signatures on

guaranties, promissory notes and other instruments. It has been held that doing so can evidence

an intention not to bind the signer’s marital community and community property even if the

transaction actually benefited the community. Grayson v. Platis, 95 Wash. App. 824, 837, 978

2d 1105 (1999).

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Generally, community property is not available to satisfy the separate debts of either

spouse. There is, however, an exception to that rule for debts incurred prior to the marriage if

the debt is reduced to judgment within three years after the marriage. RCW 26.16.200. This is

to prevent people with no significant assets from shielding their income from creditors’ claims

by marrying and converting their income to community property.

Where one spouse enters into a transaction requiring the joinder of both spouses, the

transaction is voidable rather than void and, unless it is actually rescinded or otherwise avoided,

it may remain effective.

See, e.g.,

Sander v. Wells

, 71 Wash.

2d 25, 28

29, 426 P.2d 481 (1967).

Where the non-joining spouse was aware of the transaction and encouraged it, he or she may be

estopped to rescind or avoid it.

Id.

Other types of conduct by the non-joining spouse may also

result in an estoppel, ratification or authorization having the same effect.

Washington

Com

munity Property Deskbook,

supra

, at §

4.7.

Community and Separate Property Distinguished

“Community property” includes any and all property that either spouse acquires during

the existence of marriage (other than by inheritance or gift or as appreciation of, or earnings on,

separate property). This includes both spouses’ earnings. RCW 26.16.030.

“Separate property” includes any property that was owned by either spouse at the time of

marriage or that was separately given to or inherited by, such spouse during the marriage,

together with appreciation of and earnings on such property. Separate property can become

community property through commingling or by the spouses’ execution of a community property

agreement. RCW 26.16.010 and .020. Also, income produced by substantial labor in managing

separate assets is community property. Marriage of Bernard, 165 Wash. 2d 895, 904, 204 P.3d

907 (2009).

d. Conflict of Laws Issues

Complicated conflict of laws questions relating to marital property issues can arise in

multi

-state credit transactions. Although Washington law is not a model of clarity on these

issues, the more recent cases hold that Washington courts will generally apply the law of the

state of the spouses’ residence when determining the property against which a creditor has

recourse to satisfy a loan or other contract debt regardless of the law otherwise governing the

contract, especially where only one of the spouses is a signatory to the contract.

G.W. Equipment

Leasing, Inc. v. Mt. McKinley Fen

ce Co., Inc.

, 97 Wash. App. 191, 197

98, 982 P.2d 114 (1999);

Colorado National Bank v. Merlino, 35 Wash. App. 610, 620-21, 668 P.2d 1304, rev. den. 100

Wash.

2d 1032 (1983); Potlatch No. 1 Federal Credit Union v. Kennedy, 76 Wash. 2d 806, 813,

459 P.2d 32 (1969). But see Pacific Gamble Robinson Co. v. Lapp, 95 Wash. 2d 341, 622 P.2d

850 (1980) (Colorado law applied to marital property issues in action to recover on contract

entered into while Washington spouses previously lived in Colorado), and Pacific States Cut

Stone Company v. Goble, 70 Wash. 2d 907, 425 P.2d 631 (1967) (Oregon law applied to marital

property issues in action by Oregon creditor to recover on contract entered into in Oregon by

Washington husband).

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Conflict of laws issues also arise in determining what marital property laws apply where

spouses have moved from one state to another during their marriage or where they own property

located in multiple states. Generally, the character of personal property, as separate property,

community property or otherwise, is determined by the law of the state of the spouses’ domicile

at the time of acquisition. Pacific States Cut Stone Company v. Goble, 70 Wash. 2d 907, 910,

425 P.2d 631 (1967). The character of real property, however, is determined by the law of the

state where the property is located. Meng v. Security State Bank of Woodland, 16 Wash. 2d 215,

222, 133 P.2d 293 (1943). Of course, the character of property may be affected by a prenuptial

agreement, community property agreement or similar status of property agreement entered into

by the spouses.

While the natural reaction of many lenders to the complexities of the community property

laws is to require that both spouses become borrowers or guarantors, lenders’ ability to impose

such a requirement is seriously limited by the requirements of the federal Equal Credit

Opportunity Act (15 U.S.C. § 1691 et seq.) and Federal Reserve Board Regulation B thereunder

(12 C.F.R. 202). A discussion of these federal requirements is beyond the scope of th

is guide.

Property Held in Joint Tenancy With Right of Survivorship

Joint tenancy with right of survivorship is addressed in RCW chapter 64.28. Each joint

tenant has a unilateral right to terminate the joint tenancy during his or her lifetime. RCW

64.28.010. Upon the death of one joint tenant, property owned in joint tenancy with right of

survivorship is owned by the surviving joint owner and is not an asset of the probate estate

available for the payment of creditors’ claims in the estate. In re Baxter’s Estate, 68 Wash.

294, 412 P.2d 777 (l966).

One joint tenant with right of survivorship may grant a lien on the property held in joint

tenancy without the joinder of the other joint tenant; however, if the joint tenant who grants the

lien dies before the other joint tenant, the surviving joint tenant takes the property free of the

lien.

Kalk

v. Security Pacific Bank, 126 Wash. 2d 346, 350-52, 894 P.2d 559 (1995). On the

other hand, it appears that foreclosure of the lien during the lifetime of the granting joint tenant

would be effective to deprive the other joint tenant of his or her interest in the property.

Property Exempt from Claims of General Creditors

Certain assets, up to specified values, are exempt from seizure to satisfy the claims of

general unsecured creditors of individuals. These include, by way of example: (a) generally, the

first $125,000 in equity in the homestead (increased from $40,000 by the 2007 legislature); (b)

furniture and personal household items; (c) tools of the trad

e; (d) the proceeds and cash surrender

value of life insurance and annuity contracts; and (e) pension rights and assets held in tax-

deferred retirement plans and accounts. The homestead exemption is provided for in RCW

chapter 6.13 and the personal property exemptions in RCW chapter 6.15. The homestead

exemption is discussed in greater detail in Section VI.R of this guide.

Age of Majority

In general, the age of majority at which a person has the capacity to enter into a binding

contract is 18. RCW 26.28.010 and 26.28.015(4). There are special exceptions for minors

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married to persons over the age of majority and for certain educational loans entered into by

minors over the age of 16.

A person who enters into a contract while under the age of majority generally can

disaffirm the contract within a reasonable time after reaching the age of majority if he or she

restores to the other party all money and property received under the contract that remains within

his or her control at any time after reaching the age of majority. RCW 26.28.030. There are

exceptions to the right to disaffirm where the minor misrepresented his or her age or engaged in

business as an adult, or where the other party “had good reason to believe the minor capable of

contracting.” RCW 2

6.28.040.

Trusts and Estates

Washington’s basic trust statutes are RCW chapters 11.96A through 11.118.

Generally, when a trustee of a trust enters into a loan or other contract, the trustee “may

be held personally liable on the contract, if personal liability is not excluded.” RCW

11.98.110(2). Personal liability is deemed to be excluded by the addition of the words “trustee”

or “as trustee” after the signature or by the transaction of business as trustee under an assumed

name in compliance with RCW chapter 19.80 (similar rules apply to estates and personal

representatives of decedents).

Id.

Therefore, if the lender wants to ensure that a trustee, settlor

of a trust or personal representative of an estate is personally liable for the loan, in addition

obtaining the liability of the trust or estate, it is advisable to have that person execute an

appropriate guaranty in his or her personal capacity. If the trustee, settlor or personal

representative simply signs the promissory note in his or her individual capacity, he or she may

later argue that the signature was as an accommodation party or surety and the lender could be

subjected to unwaived suretyship defenses.

See generally Grayson v. Platis

, 95 Wash. App. 824,

837, 978 P.2d 1105 (1999).

Washingt

on has an unusual statute that provides that the trustee of a trust may not enter

into a “significant nonroutine transaction” in the absence of a “compelling circumstance” (both

terms are defined in the statute) without giving certain notices to the trustors of the trust, if

living, and to certain beneficiaries. RCW 11.100.140. One of the types of nonroutine

transactions described in the statute, which could be argued to apply to certain loan transactions

is:

Any sale, option, lease, or other agreement, binding for a period of ten years or

more, dealing with any interest in real estate other than real estate purchased by

the trustee or a vendor’s interest in a real estate contract, the value of which

constitutes twenty-five percent or more of the net fair market value of trust

principal at the time of the transaction.

RCW 11.100.140(2)(a). When a lender is making a loan secured by trust property that may be

subject to the statute, it is advisable to obtain a certificate from the trustee or trustees stating that

the requirements of the statute have been met. The lender is entitled to rely on such a written

statement unless it has actual knowledge that it is inaccurate. RCW 11.100.140(7).

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Unlike California, Oregon and a number of other states, Washington does not have a

statute generally allowing parties dealing with trustees to rely on a certification of the trustees as

to the identity of the trustees, their powers, nonrevocation of the trust, etc.

Transfers to a trust established for the benefit of the person making the transfer are void

as against that person’s existing and subsequent creditors. RCW 19.36.020. Curiously, the

Washington Supreme Court has held that, where settlors established a trust for the benefit of

their minor children but retained the right to revoke the trust or remove assets from it and to

revest the assets in themselves, the trust assets could not be reached by the settlors’ creditors

prior to such a revocation or removal. Van Stewart v. Townsend, 176 Wash. 311, 28 P.2d 999

(1934)

. The court’s decision was based on the theory that the trust in question did not satisfy

RCW

19.36.020’s requirement that the transfer be made in trust “for the use of the person

making the same.”

Id.

at 316. The court did not consider that result to be changed by the

existence of the power of revocation or by the fact that no distributions were to be made to the

settlors’ children until after the death of one of the settlors. For a criticism and questioning of

the continued vitality of the Van Stewart case,

see

Andrews, Creditors’ Rights Against

Nonprobate Assets in Washington: Time for Reform, 65

Wash. L. Rev.

73, 115

116 (1990). The

Van Stewart rule may not prevent the trust property from becoming a part of the settlor’s

bankruptcy estate under 11 U.S.C. § 541.

See

IV Scott, The Law of Trusts § 330.12 (4th ed.

1989).

Generally, claims against a decedent’s estate must be filed by the later of (i) four months

after the personal representative publishes the notice required by RCW 11.40.020 or (ii)

thi

rty

days after the personal representative mails notice to the creditor. RCW 11.40.051. There is a

dearth of law in Washington on the treatment of contingent claims (for example, the claim of a

lender under a guaranty where the guaranteed loan is not in

default) in probate proceedings.

Pursuant to RCW 11.56.010, a personal representative generally may not sell, lease or

mortgage real or personal property without an order of the court supervising the probate.

However, if the personal representative has be

en granted nonintervention powers by the court, he

or she may take these actions, among many others, without court order and without notice,

approval or confirmation. RCW 11.68.090.

VI.

REAL ESTATE LENDING

Property Rights

Real property rights in Washington are generally governed by RCW title 58 (Boundaries

and Plats), title 59 (Landlord and Tenant), title 61 (Mortgages, Deeds of Trust and Real Estate

Contracts), title 64 (Real Property and Conveyances) and title 65 (Recording, Registration and

Legal Publicatio

n).

Leases

A lease for a period longer than one year (including any extension options) must be in

writing, signed by the landlord, acknowledged and accepted by the tenant. RCW 64.04.010-

.020. A lease for one year or less must be in writing and signed by the landlord, but need not be

acknowledged. RCW 59.04.010 and 59.18.210. Generally, a lease with a term of two years or

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more, or a memorandum of that lease, must be recorded in the real property records of the county

where the property is located or it will be void as against holders of subsequently recorded

interests in the property. RCW 65.08.060-.070. However, such leases are commonly not

recorded and, if the lessee has possession of the premises, that possession should be effective to

impart constructive notice of the lessee’s rights (at least its right to occupy the property as a

tenant and perhaps other rights such as options to purchase the property).

See

Washington

Real Property Deskbook, § 27.11(1)(d) (1996); III Washington Real Property Des

kbook

41.6(9) (1996);

Scott v. Woolard

, 12 Wash. App. 109, 529 P.2d 30 (1974).

Condominiums

Washington’s condominium law is contained in RCW chapters 64.34 (for condominiums

created after July 1, 1990) and 64.32 (for those created prior to that date).

The two chapters have

different provisions regarding the relative priorities of assessment liens for condominium dues

with respect to the lien of a deed of trust or mortgage.

Compare

RCW 64.34.364

with

RCW

64.32.200.

RCW 64.34.445 imposes certain implied warranties of quality in sales of condominium

units by declarants and “dealers.” A lender foreclosing on a condominium project needs to be

concerned about the ramifications of becoming a dealer when it resells the units and of becoming

a successor declarant.

See

RCW 64.34.020(13) and (14) and 64.34.316. RCW

64.34.316(5)(d)

provides a mechanism for a foreclosing lender to record a document at the time it acquires title to

a condominium project declaring its intention to hold special declarant rights on which it

forecloses “solely for transfer to another person” (

i.e.

, a developer to which it sells its entire

interest in the project). Recording such a declaration limits the lender’s potential liability as

declarant but perhaps not its liability as a dea

ler.

Types of Real Property Security Instruments

Although mortgages and real estate contracts are permitted, the deed of trust is the

preferred form of real property security instrument in Washington. Mortgages are commonly

used for agricultural property, but otherwise, deeds of trust are almost universally used.

Washington has been a lien theory state since the territorial legislature enacted the original

version of RCW 7.28.230 in 1869. Kezner v. Landover Corporation, 87 Wash. App. 458, 463,

942 P.2d 1

003 (1997). As such, a mortgagee is not entitled to possession of the property prior to

a foreclosure sale.

Id.

Deeds of Trust

Deeds of trust are governed by RCW chapter 61.24. The borrower is referred to in the

deed of trust statute as the “grantor” and the lender is referred to as the “beneficiary.” RCW

61.24.005. The deed of trust statute is strictly applied and interpreted in favor of the grantor.

Amaresco Independence Funding, Inc. v. SPS Properties, LLC, 129 Wash. App. 532, 536-37,

119 P.3d 884

(2005).

Except as otherwise provided in RCW chapter 61.24, all Washington laws

relating to mortgages also apply to deeds of trust. RCW 61.24.020.

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Trustee Under Deed of Trust

The title insurance company insuring the transaction is generally named as the t

rustee

under the deed of trust, although certain other classes of persons and entities are also permitted to

act as trustee by RCW 61.24.010. In order to foreclose nonjudicially, the trustee must have a

street address in Washington. RCW 61.24.030(6). The beneficiary of the deed of trust may not

also be the trustee, except in cases where an agency of the United States government is the

beneficiary. RCW 61.24.020. The trustee need not formally accept appointment as trustee and,

unless the deed of trust is foreclosed, the trustee is not generally paid a fee except a small fee for

reconveying the deed of trust when it has been satisfied. The beneficiary may replace the trustee

without the consent or signature of the trustee. RCW 61.24.010(2). If the deed of trust is

foreclosed, the beneficiary typically replaces the trustee with the lawyer handling the foreclosure

or with a foreclosure service company.

Cox v. Helenius, 103 Wash. 2d 383, 693 P.2d 683 (1985), the court held that the

trustee is a fiduciary for both parties to the deed of trust but that its responsibilities are “less

extensive than those of trustees in other fiduciary settings.”

. at 389. Where a lawyer for the

beneficiary acts as trustee and an “actual” conflict arises between the gran

tor and the beneficiary,

the lawyer should resign from one of the two roles.

. at 390. An agreement by which the

beneficiary agrees to indemnify the trustee against claims arising out of the trustee’s actions is

not

per se a breach of the trustee’s fiduciary duty, but it does require “heightened judicial

scrutiny of any claims of breach of fiduciary duty.” Meyers Way Development Limited

Partnership v. University Savings Bank, 80 Wash. App. 655, 666, 910 P.2d 1308 (1996).

The

fiduciary duty standard imposed by Cox v. Helenius has been changed to a good faith standard

by a 2009 amendment to RCW 61.24.010. Subsections (3) and (4) of that statute now provide:

(3)

The trustee or successor trustee shall have no fiduciary duty or

fiduciary obligation to the grantor or other persons having an interest in the

property subject to the deed of trust.

(4)

The trustee or successor trustee has a duty of good faith to

borrower, beneficiary, and grantor.

It remains to be seen the extent to which that change will affec

t the substantive obligations of the

trustee as set out in

Cox v. Helenius.

Nonagricultural Use

Deeds of trust should not be used on property that is principally used for agricultural

purposes (

i.e.

, “if it is used in an operation that produces crops, livestock, or aquatic goods”).

RCW 61.24.030(2). However, if a deed of trust is used on an agricultural property, it still creates

a valid lien and can be foreclosed judicially as a mortgage. RCW 61.24.020 and .030(2). To be

foreclosed nonjudicially, a Washington deed of trust must contain a statement that the “property

is not used principally for agricultural purposes” and that statement must be true either on the

date the deed of trust is granted, on the date it is amended to include that statement, or on the

date of the foreclosure sale. RCW 61.24.030(2). In the absence of such a provision, the deed of

trust cannot be foreclosed nonjudicially but, instead must be foreclosed as a mortgage in a

judicial foreclosure action. RCW 61.24.

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No definitive law exists on whether, or under what circumstances, timberland is

considered to be agricultural in nature. In a different context, the court in Rainier National Bank

v. Security State Bank, 59 Wash. App. 161, 796 P.2d 443 (1990) held that growing Christmas

tree

s are “farm products” under Article 9 of the Uniform Commercial Code notwithstanding their

relatively long growing cycle and the fact that they are not harvested annually. The court in that

case rejected contentions that the trees were “fixtures” or “inve

ntory” under Article 9 and did not

explicitly consider the possibility that they might be “timber.” that “standing timber” is

excluded from the definition of “farm products” under the current version of Article 9, which

took effect in 2001 (see RCW 62A.9A-102(a)(34)); however, “standing timber” is not defined.

The version of Article 9 in effect when the Rainier National Bank case was decided did not

exclude standing timber from the definition of farm products. Lenders on ordinary timberland in

Washingt

on (including replanted timberland) generally use deeds of trust containing a standard

non-agricultural use clause. For additional detail on this issue,

see

Kaplan

et al., Washington

Secured Transactions Under Revised Article 9 of the UCC, chapter 7.8 (2005 ed.). See, also,

RCW

7.48.35 (appears to treat “agricultural activities on farmland” and “forest practices” as

distinct and separate categories for purposes of nuisance actions); RCW 36.70.A.030(2) (portion

of Growth Management Act that defines “agricultural land” to include land primarily devoted to

the commercial production of Christmas tress that are not subject to certain excise taxes on forest

land); RCW 84.33.100 (definitions relating to timber and forest lands for property tax purposes);

State v. Christensen, 18 Wash.2d 7, 22, 137 P.2d 512 (1943) (quoting dictionary definition of

“agriculture” that includes “forestry”).

Master Form Deeds of Trust

Washington has a statute permitting a lender to record a master form deed of trust which

sets forth st

andard terms and to incorporate those standard terms into individual loan transactions

by having the borrower execute a short form deed of trust incorporating the terms of the master

form by reference. RCW 65.08.160. This procedure is very little used.

2. M

ortgages

Mortgages are provided for in RCW chapter 61.12. They may only be foreclosed through

the judicial foreclosure process, which generally entails a one-year redemption period.

Mortgages are used almost exclusively for financing agricultural property for which a deed of

trust is not appropriate.

Real Estate Contracts

Real estate contracts, which are provided for in RCW chapter 61.30, are not a

recommended form of real property security in Washington. They are rarely used except in

seller financing of agricultural property, which cannot otherwise be foreclosed upon

nonjudicially. A vendor’s interest in a real estate contract has components of both real and

personal property and a security interest in it must be perfected both by filing a financing

atement in accordance with Article 9 of the Uniform Commercial Code and by recording an

appropriate form of real property security instrument.

See

IV Washington Real Property

Deskbook

48.9(1)(a);

Freeborn v. Seattle Trust & Savings Bank

, 94 Wash.

2d 336

, 343

44, 617

P.2d 424 (1980). The status of the vendee’s interest as real or personal property is less clear.

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See

IV Washington Real Property Deskbook § 48.4(1) (1996). A prudent creditor taking a

security interest in the vendee’s interest will also both file a financing statement and record an

appropriate real estate security instrument, preferably a deed of trust.

Because real estate contracts are rarely encountered in commercial financing transactions,

they are not discussed at length in this guide. More detailed treatment can be found in 18

Washington Practice § 21 (2d ed. 2004) and III Washington Real Property Deskbook chapter 45

(1996).

Formalities of Deeds of Trust and Mortgages

A deed of trust or mortgage must be in writing, executed by the party to be bound and

acknowledged, although it may be effective between the parties even if it is not acknowledged.

RCW 64.04.020 and 65.08.070. Certain formal requisites for a deed of trust are set out in

RCW

61.24.010

-.030. A sample form of mortgage is provided in RCW 61.12.020. A mortgage

or deed of trust is valid even if it does not state the amount of the debt secured. Spedden v.

Sykes

, 51 Wash. 267, 273, 98 Pac. 752 (1908).

Assignments of Leases and Rents

In 1969, the legislature amended RCW 7.28.230 to make assignments of rents effective

prior to completion of a foreclosure. Before those amendments, an assignment of rents in a

mortgage was ineffective. See, e.g., State of Washington ex rel. Gardner J. Gwinn, Inc. v.

Superior Court, 170 Wash. 463, 16 P.2d 831 (1932). For a detailed treatment of the assignment

of rents statute and its history, see 18

Washington Practice §

18.5-§ 18.7 (2d ed. 2004).

After the 1989 amendment of RCW 7.28.230, it is clear that an assignment of rents is

“perfected” upon recording and no further act (such as appointment of a receiver) is necessary in

order to protect the assignment against avoidance in a bankruptcy of the borrower due to lack of

perfection. RCW

7.28.230(3);

In re Park at Dash Point, L.P., 985 F.2d 1008 (9th Cir. 1993).

The deed of trust statute contains limitations on a lender’s ability to collect the rents from

small residential rental properties. It provides:

The beneficiary shall not enforce or attempt to enforce an assignment of

rents by demanding or collecting rent from a tenant occupying property consisting

solely of a single-family residence, or a condominium, cooperative, or other

dwelling unit in a multiplex or other building containing fewer than five

residential units, without first giving the tenant either a court order authorizing

payment of rent to the beneficiary or a written consent by the tenant’s landlord to

the payment. It is a defense to an eviction based on nonpayment of rent that the

tenant paid the rent due to the beneficiary pursua

nt to a court order or a landlord’s

written consent.

RCW 61.24.140. This statute does not appear to affect the creditor’s rights under a mortgage or

a real estate contract.

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Property Insurance

RCW

48.27.010 and .020 prohibit a lender from requiring casualty insurance in an

amount in excess of the replacement cost of the property regardless of the amount of the loan.

WAC 284

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010 specifies the forms of lender’s loss payable and mortgagee clauses that

may be used in Washington.

RCW 48.30.015 and the insurance commissioner’s regulations referred to in that statute

impose several strict time limits within which insurers must acknowledge receipt of, investigate

and affirm or deny coverage under insurance policies. Failure to comply with those

requirements can subject the insurer to an award of three times the actual damages. RCW

48.30.015(2).

Recordation and Acknowledgments

Recordation

To be effective against subsequent purchasers or mortgagees in good faith and for a

valuable consideration, a mortgage, deed of trust or real estate contract must be recorded in the

county where the property is located. RCW 65.08.070. Under the recording statute, the holder

of a recorded security instrument takes subject to any prior encumbrance of which that holder

has either actual or constructive notice. Kim v. Lee, 145 Wash. 2d 79, 86, 43 P.3d 1222 (2001).

Therefore, the holder’s recorded security instrument is junior to any prior unrecorded

encumbrance if the holder has actual knowledge of it and is junior to any prior re

corded

encumbrance regardless of whether the holder has actual knowledge of it. Because

Washington’s “race notice” recording statute gives priority to an earlier unrecorded lien if the

holder of the later lien has notice of it, parties should not rely on recording order alone to set the

priority of instruments recorded substantially concurrently, but should record an instrument

clearly subordinating the intended junior instrument to the intended senior one. For an example

of litigation arising out of a failure to take that approach, see Richards v. Lawing, 175 Wash.

544, 550, 27 P.2d 730 (1933).

See also 18

Washington Practice

18.21 (2009).

RCW 65.08.030 provides that an instrument that has been recorded imparts notice of its

contents despite any defects or irregularities in its execution or acknowledgment.

See

In re

Smith

, 93 Wash. App. 282, 288

289, 968 P.2d 904 (1998).

Washington has very strict statutory requirements for the formatting of documents to be

recorded. RCW 65.04.045-.047. The key requirements are set out in Exhibit A to this guide.

Documents that do not comply with these requirements can be refused for recording by the

recording office.

Torrens System

Washington has a Torrens land registration system, which is provided for in RCW

chapt

er 65.12. An extremely small amount of land in the state is registered under the Torrens

system. Mortgages and deeds of trust on Torrens-registered lands must be registered in the

Torrens system and foreclosed as provided in the Torrens statute. It is not clear that a deed of

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trust on such land can be foreclosed using the normal nonjudicial deed of trust foreclosure

procedures of RCW chapter 61.24. The Torrens statute contains a provision for withdrawing

registered lands from the Torrens system. RCW 65.12.230

et seq.

Notary Acknowledgments

All recorded documents must be acknowledged by a notary public or other appropriate

official. RCW chapter 64.08 sets out the Washington law regarding acknowledgment of

recorded documents. Acknowledgments in Washington are almost always taken before notaries

public, although certain other officials are empowered to take them.

See

RCW 42.44.130-.150

and RCW 64.08.010 and .090. An acknowledgment form that substantially complies with the

applicable form of acknowledgment set out in RCW 64.08.060 (individual form) and .070

(corporate form) is sufficient. For entities other than corporations, the certificate form set out in

RCW 64.08.070 is generally used with appropriate modifications to reflect the type and structure

f the relevant entity.

Acknowledgments taken outside the state are acceptable, but only if they meet the

minimum requirements of RCW 42.44.090(1) and (2). The provisions for acknowledgments

taken outside the state are set forth in RCW 42.44.090(2) and RCW 64.08.020 and .040. It is

generally preferable to use the Washington forms of acknowledgment for documents to be

recorded in Washington.

Recording Fees

Washington has relatively nominal recording fees. Although fees vary somewhat from

county to county, as of July 26, 2009, a typical recording fee for a deed of trust is sixty-

three

dollars for the first page and one dollar for each additional page. Washington has no recording

tax, mortgage tax, stamp tax or similar tax on recording of deeds of trust or m

ortgages.

Priority Issues

1. Future Advances

Washington has a very broad and lender-favorable priority statute for future advances.

RCW

60.04.226. It provides:

Except as otherwise provided in RCW 60.04.061 [relating to construction

liens for work or material deliveries begun prior to recording of the

mortgage or deed of trust] or 60.04.221 [relating to the “stop notice” law

described below], any mortgage or deed of trust shall be prior to all liens,

mortgages, deeds of trust, and other encumbrances which have not been

recorded prior to the recording of the mortgage or deed of trust to the

extent of all sums secured by the mortgage or deed of trust regardless of

when the same are disbursed or whether the disbursements are obligatory.

On its face, this statute appears clearly to allow a mortgage or deed of trust to remain

prior to subsequent mortgages, deeds of trust and other liens even as to non-obligatory future

advances made after the recording of the subsequent lien. However, a decision of the Ninth

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Circui

t Court of Appeals raises the possibility that the priority scheme set out in the statute may

apply only where the junior lien is a mechanic’s or material supplier’s lien under RCW chapter

60.04. In re Stanton, 303 F.3d 939 (9th Cir. 2002). The case raised, but declined to decide, the

issue. One leading Washington authority has described this aspect of the

Stanton

decision as

“incomprehensible” given the clear language of the statute. 27 Washington Practice § 3.47 fn.7

(2008 pocket part).

Prior to the enactment of the statute’s predecessor in 1973, obligatory advances that the

lender was required to make under the loan documents had priority over subsequently recorded

liens, but optional advances that the lender was not required to make were junior to su

bsequent

liens of which the lender had notice. John M. Keltch, Inc. v. Don Hoyt, Inc., 4 Wash. App. 580,

583-

84, 483 P.2d 135 (1971).

If the distinction between obligatory advances and optional advances remains relevant for

some purposes, lenders should be aware that there is authority in Washington for the proposition

that fairly typical conditions to disbursement contained in loan documents may be held to have

given the lender such broad discretion that they thereby “rendered the advances optional rather

than obligatory for the purpose of determining the priority of liens.” National Bank of

Washington v. Equity Investors, 81 Wash. 2d 886, 899, 506 P.2d 20 (1973). The Washington

Supreme Court has also held that a senior lender’s advance of funds to complete construction on

the mortgaged property pursuant to an optional remedies provision of the mortgage where the

lender had knowledge of a junior mortgage on the property resulted in subordination of the

senior mortgage to the junior mortgage to the extent of the advances to complete construction.

Elmendorf

Anthony Company v. Dunn

, 10 Wash.

2d 29, 116 P.2d 253 (1941). The court so ruled

despite evidence that the completion of construction increased the value of the property by more

than the amount of the advances.

Id.

at 10 Wash. 2d 33. The court did, however, state that

payment of taxes by the senior lender pursuant to a typical mortgage provision allowing it to pay

taxes would not result in subordination of its lien.

Id.

at 10 Wash.

2d 43.

The history of the enactment of the predecessor statute to RCW 60.04.226 and of the

future advance issue in Washington up to its enactment is set out in Note, Mechanics’ Liens:

The “Stop Notice” Comes to Washington

, 49 Wash. L. Rev. 685 (1974).

Modification of Deeds

of Trust and Mortgages

A lender that enters into a modification of its deed of trust or mortgage runs the risk of

having its lien subordinated to the lien of an otherwise junior encumbrance on the property if and

to the extent that the modification is materially prejudicial to the interests of the junior

lienholder.

Kim v. Lee

, 145 Wash.

2d 79, 89-

90, 43 P.3d 1222 (2001).

Purchase Money Priority

Washington’s law on the priority of purchase money mortgages and deeds of trust derives

from a handful of early cases. Generally, a purchase money mortgage or deed of trust will take

priority as a lien on the purchased property over an earlier judgment lien against the purchaser or

over a simultaneous non-purchase money mortgage or deed of trust. Bisbee v. Carey, 17 Wash.

224, 49 Pac. 220 (1897); Skeel v. Christenson, 17 Wash. 649, 50 Pac. 466 (1897); 1

Washington

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Practice

§ 12.5 (4th ed. 1997). However, if the non-purchase money instrument is recorded first

and the recorded documents do not sufficiently state the intended order of priority, the non-

purchase money instrument can take priority. Bank of Gresham v. Johnson, 143 Wash. 24, 254

Pac. 464 (1927).

Priority of Options to Purchase

An option to purchase real estate, whether it is in a lease or in a separate agreement, has

priority over subsequently-recorded interests in the property. Crowley v. Byrne, 71 Wash. 444,

129 Pac. 113 (1912).

See

also,

Spokane School District No. 81 v. Parzybok

, 96 Wash.

2d 95, 96

97, 633 P.2d 1324 (1981). Therefore, a lender taking a deed of trust or other security instrument

junior to an option to purchase the property runs the risk of having its lien eliminated by exercise

of the option, although it should be able to claim a lien on the proceeds of the sale under the

option.

Equ

itable Subrogation

Washington has adopted the doctrine of equitable subrogation, by which a refinancing

lender, whose loan proceeds are used to pay off an earlier deed of trust, mortgage or other lien,

can take the priority of the paid off lien ahead of existing junior liens. Kim v. Lee, 145 Wash.

79, 89, 43 P.3d 1222 (2001). The refinancing lender can be entitled to equitable subrogation

regardless of its actual or constructive knowledge of the junior lien. Bank of America, N.A. v.

Prestance Corp.

, 1

60 Wash.

2d 560, 160 P.3d 17 (2007). Oddly, the Washington Supreme Court

has stated that this result may not apply to protect the refinancing lender’s title insurance

company.

Kim v. Lee

, 145 Wash.

2d 79, 91-

92, 43 P.3d 1222 (2001).

Subordination Agreeme

nts

For a discussion of subordination agreements, see Section

XII.N of this guide.

Title Insurance

Institutional lenders universally obtain title insurance on deeds of trust and mortgages on

commercial property in Washington. The ALTA policy forms and endorsements are available.

Title companies will generally issue the 2006, the 1992 or the 1970 policy form, but prefer to

issue the 2006 or the 1992 form. Many endorsement forms follow the numbering scheme used

for California Land Title Association endorsement forms. A wide variety of endorsements is

available in the state. There are no significant regulatory restrictions on title insurers’ ability to

issue endorsements and title companies are often willing to make manuscripted changes in

endorsement form

s or to create special endorsements to address an unusual situation.

Construction lenders frequently obtain an “intervening liens” endorsement (sometimes

referred to as a “Seattle” endorsement), which protects the lender in certain situations in which it

stops funding a construction loan due to the borrower’s failure to meet conditions to

disbursement or where the loan proceeds are insufficient to complete the project. The

intervening liens endorsement is not commonly recognized outside the State of Washin

gton.

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The survey exception is typically deleted from lenders’ policies without a current survey

being required.

It is advisable for the lender to obtain a subdivision endorsement (often identified as

CLTA form 116.7) insuring that the encumbered property constitutes a legal parcel that can be

conveyed legally under the Washington subdivision statute, RCW chapter 58.17. If it is not a

legal parcel, the deed of trust or mortgage cannot legally be foreclosed prior to a proper

subdivision making the encumbered property a legal parcel because, unlike some other states’

subdivision laws, the Washington statute does not include an exception for foreclosures.

See

RCW 58.17.040.

RCW 48.30.015’s time limits for responding to claims and its triple damages penalty for

violations apply to title insurers as well as other types of insurers.

See

WAC 284-30-310 and

discussion in Section VI.G. of this guide.

Prepayment

Washington follows the “perfect tender in time” rule, which holds that prepayment of a

promissory note for a stated term is not permitted unless the note so provides or the holder

otherwise consents. McCausland v. Bankers Life Insurance Company of Nebraska, 110

Wash.

2d 716, 723-24, 757 P.2d 941 (1988); George v. Fowler, 96 Wash. App. 187, 978 P.2d

565 (1999). For a prepayment fee or premium provision to be enforceable upon prepayment

resulting from a default and acceleration of the debt, it must expressly provide that it is

applicable in that situation. Rodgers v. Rainier National Bank, 111 Wash. 2d 232, 237-38, 757

P.2d 976 (1988).

Due on Sale or Encumbrance Clauses; Transfer of the Mortgaged Property;

Assumption Agreements

To the extent the federal Garn-St. Germain Depository Institutions Act of 1982 (the

“Garn Act”), 12 U.S.C. Section 1701j-3 et seq. does not preempt the field and mandate

enforceability of “due on sale” or “due on encumbrance” clauses, the enforcement of such

clauses will be limited by certain Washington cases holding that the lender must demonstrate that

enforcement is necessary to protect the lender against impairment of its collateral or against an

increased risk of default.

See,

e.g., Bellingham First Federal Savings & Loan Association v.

Garrison

, 87 Wash. 2d. 437, 553 P.2d 1090 (1976). Prior to the Garn Act, the Washington

Supreme Court held that a provision in a mortgage allowing the lender to increase the interest

rate as a result of the transfer of the mortgaged property by the borrower is enforceable absent

duress, misrepresentation, overreaching or other inequitable circumstances. Miller v. Pacific

First Federal Savings and Loan Association,

86 Wash.2d 401, 405

-06, 545 P.2d 546 (1976). An

absolute prohibition on sale of the property combined with an absolute prohibition on

prepayment may be an unenforceable restraint on alienation unless the lender can show that

enforcement is necessary in order to protect its security. Terry v. Born, 24 Wash. App. 652, 604

P.2d 504 (1979).

Where the owner of an encumbered property transfers the property to a transferee who

agrees with the transferor to assume liability for a loan secured by the property, the lender is

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entitled to enforce that agreement and can obtain a deficiency judgment against the transferee

even if the lender is not a party to the agreement and even if there are intervening grantees who

have not assumed the loan. Citizens Savings & Loan Society v. Chapman, 173 Wash. 539, 545-

46, 24 P.2d 63 (1933). The assumption agreement need not necessarily be an agreement signed

by the assuming transferee. See, e.g., Federal National Mortgage Association v. Carrington, 60

Wash.

2d 410, 416, 374 P.2d 153 (1962) (assumption provided for in deed signed only by seller);

Hargis v. Hargis, 160 Wash. 594, 598-99, 295 Pac. 742 (1931) (oral agreement to assume

enforced).

See Section

IX.C of this guide for a discussion of the suretyship issues that may arise

in such transfer situations.

Cancellation of Deeds of Trust and Mortgages

When the debt secured by a deed of trust is paid, the beneficiary of the deed of trust

executes a request for full reconveyance of the deed of trust and delivers it to the trustee. The

trustee then executes and records a full reconveyance. To cancel a mortgage after the debt is

paid, the mortgagee must record a satisfaction of mortgage. RCW 61.16.020 provides the

mech

anics for the mortgagee to record an acknowledgment of satisfaction of a mortgage and

RCW 61.16.030 provides the mortgagor with a right to damages and attorneys’ fees if the

mortgagee fails to acknowledge satisfaction within sixty days after request by the mortgagor. If

a deed of trust or mortgage is mistakenly released of record, a court should reinstate it if there is

no prejudice to a third party.

U.S. Bank National Association v. Oliverio

, 109 Wash. App. 68, 33

P.3d 1104 (2001).

Assignments of Deeds

of Trust and Mortgages

Assignments of deeds of trust, mortgages and real estate contracts must be recorded in

order to be effective against third parties. RCW 65.08.060(3) and 65.08.070. Recording an

assignment of a mortgage is not, by itself, considered notice of the assignment to the mortgagor

or its heirs or representatives for purposes of invalidating payments made to the prior mortgagee.

RCW

65.08.120. RCW chapter 61.16 provides for assignment of mortgages by means of a

signed and acknowledged written instrument. An assignment of a mortgage or deed of trust and

the debt it secures is effective between the parties even without recording or endorsement of the

related promissory note. In re United Home Loans, Inc., 71 B.R. 885, 889-91 (W.D. Wash.

1987). However, for maximum protection against claims of third parties, the original note

should be appropriately indorsed and delivered to the assignee and the assignment should be

recorded.

Default and Foreclosure Remedies

In General

Types of Foreclosure Pr

oceedings

Washington law permits both judicial and non-judicial foreclosure of deeds of trust.

Only judicial foreclosure is permitted for mortgages. A special statutory procedure is available

for forfeiture of real estate contracts. The beneficiary of a deed of trust, which has a choice of

the judicial or nonjudicial foreclosure procedure, will almost always decide to foreclose

nonjudicially unless it wants to obtain a deficiency judgment against the borrower or against a

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guarantor in a situation not per

mitted in connection with a nonjudicial foreclosure. Where a deed

of trust is foreclosed nonjudicially, there is no right of redemption after the foreclosure sale.

RCW 61.24.050. If, however, it is foreclosed judicially, the same redemption rights apply as

would apply in a mortgage foreclosure.

See

Section VI.O.3 below.

Either a nonjudicial foreclosure or a judicial foreclosure is likely to take a minimum of

approximately five months to complete absent any resistance from the borrower or other parties.

If there is resistance, the process can take much longer. In the case of judicial foreclosure, an

eight or twelve

month redemption period almost always follows the foreclosure sale.

Receivers

It is common for a receiver to be appointed to take possession of commercial real estate

securing a defaulted loan.

See

Section X below for a discussion of Washington’s receivership

law.

Effect of Foreclosure on Junior Leases

Washington law is not well developed on the issue of the effect of foreclosure on a junior

lease. It is not entirely clear that a creditor foreclosing a mortgage or deed of trust has the option

of leaving leases that are junior to the lien of the mortgage or deed of trust undisturbed by the

foreclosure. It is possible that the result could be different in a judicial foreclosure than in a

nonjudicial foreclosure.

In the context of a judicial foreclosure, the court in Virges v. Gregory Company,

Incorporated

, 97 Wash. 333, 166 Pac. 610 (1917) raised the possibility that a foreclosure might

automat

ically terminate junior leases, but did not decide the question.

See

III Washington Real

Property Deskbook § 46.14(10)(d) (1996). It did hold that no such automatic termination would

occur prior to the end of the statutory redemption period.

. and RCW 6.23.110(1). At least

one commentator has predicted that, if the issue were presented, the Washington courts would

follow the so-called “New York rule,” which permits a foreclosing lender to pick and choose

which subordinate leases it will terminate. Co

mment, The Effect of a Mortgage Foreclosure on a

Lease Executed Subsequent to the Mortgage, 17 Wash. L. Rev. 37 (1942). In a judicial

foreclosure, the lender should not join tenants it does not want to foreclose out as defendants in

the foreclosure action and it should request that the court explicitly provide in the decree of

foreclosure which junior leases will be foreclosed out and which will not.

In the case of a nonjudicial foreclosure, there is language in the deed of trust statute

providing that a junior lease will be foreclosed out and terminated only if the tenant is formally

given the notice of trustee’s sale.

See

RCW 61.24.040(1)(b), (7) and (9) and .060. However, the

express language of the statute relates only to tenants whose leases (or memoranda thereof) are

of record and to certain residential tenants. It could be argued that other tenants’ leases are

foreclosed out even if the tenants are not given formal notice of the nonjudicial foreclosure.

See

generally

Washington Real Property De

skbook §

48.10(6)(b) (1996).

The lender should carefully consider which leases are important to the project and should

be made senior to the mortgage or deed of trust or made the subject of a subordination,

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nondisturbance and attornment agreement providing that the lease will remain in effect after

foreclosure and that the tenant will attorn to the purchaser at the foreclosure sale.

Tenant Security Deposits

A transferee of a property does not have an obligation to return a commercial tenant’s

security deposit paid to a predecessor owner of the property. Mullendore Theatres, Inc. v.

Growth Realty Investors Co., 39 Wash. App. 64, 66, 691 P.2d 970 (1984). Presumably, this

would apply to a foreclosing lender. The case did not address the tenant’s right to offset a

security deposit against rent owing to the transferee for periods following the transfer.

Residential landlords are required to deposit tenant security deposits in a trust account.

RCW 59.18.270 and 59.20.170. The statute also requires a landlord transferring the property to

transfer the security deposits to the transferee and establishes the priority of the tenants’ claims

to those funds.

Id.

Omitted Junior Lienholders

Where a foreclosing secured creditor mistakenly omits a junior lienholder from

foreclosure, it can “reforeclose” to name the junior lienholder and foreclose out its interest in the

property.

U.S. Bank of Washington v. Hursey

, 116 Wash.

2d 522, 526, 806 P.2d 245 (1991).

Nonjudicial Foreclosure of Deeds of Trust

a. Procedure and Timeli

ne for Foreclosure

RCW 61.24.030-.045 provides a series of notices that must be given in order to complete

a nonjudicial foreclosure. Completing the procedure specified in the statute typically requires a

minimum of approximately five months. Further, the sale may not be held less than 190 days

after the date of default. RCW 61.24.040(8).

In addition to mailing the notices to the specified recipients by first-class and certified or

registered mail, certain of the notices must be posted on the property (o

r served on its occupants),

recorded and published twice in a legal newspaper in the county or counties where the property

is located.

The sale must be held on a Friday (or if Friday is a legal holiday on the following

Monday) between the hours of 9:00 a.m. and 4:00 p.m. at “any designated public place” in the

county or counties where the property is located. RCW 61.24.040(5); RCW 6.21.050(1). The

sale may be postponed by the trustee for up to a total of 120 days. RCW

61.24.040(6).

The purchaser at the sale is entitled to possession of the property 20 days after the sale.

RCW

61.24.060. However, pursuant to a 2009 amendment, a tenant or subtenant in possession

of residential real property (defined in RCW 61.24.005(13) to mean “property consisting solely

of a single-family residence, a residential condominium unit, or a residential cooperative unit”)

at the time of a trustee’s sale is entitled to 60 days’ notice to vacate.

See

Senate Bill 5810 § 4

(2009). That requirement is effectively superseded by the requirement under federal law that

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residential tenants be given a 90 day notice to vacate under § 702 of the Protecting Tenants at

Foreclosure Act of 2009, Pub. L. No. 110

26 (2009).

One

Action and Antideficiency Statutes

(i)

In General.

Washington has “one-action” and “antideficiency” rules. The one-action rule is set forth

primarily in RCW 61.12.120, which prohibits judicial foreclosure of a mortgage or deed of trust

while any other action for the same debt is pending or is being executed upon and in RCW

61.24.030(4), which states that one of the prerequisites to exercise of the trustee’s power of

nonjudicial sale under a deed of trust is that:

. . . no action commenced by the beneficiary of the deed of trust is

now pending to seek satisfaction of an obligation secured by the deed of

trust in any court by reason of the grantor’s default on the obligation

secured: PROVIDED, That (a) the seeking of the appointment of a

receiver shall not constitute an action for purposes of this chapter; and

(b)

if a receiver is appointed, the grantor shall be entitled to any rents or

profits derived from property subject to a homestead as defined in

RCW

6.13.010. If the deed of trust was granted to secure a commercial

loan, this subsection shall not apply to actions brought to enforce any

other lien or security interest granted to secure the obligation secured by

the deed of trust being foreclosed;

American Federal Savings & Loan Association of Tacoma v. McCaffrey, 107 Wash. 2d 181,

189, 728 P.2d 155 (1986), the Washington Supreme Court stated in dicta that a judicial

foreclosure is permissible after completion of a suit on the note secured by a mortgage or deed of

trust and does not violate the one action rule:

The mortgagee may sue and obtain a judgment upon the notes and enforce

it by levy upon any property of the debtor. If the judgment is not satisfied

in this manner, the mortgagee still can foreclose on the mortgaged

property to collect the balance. Alternatively, the mortgagee may

foreclose on the mortgaged property and obtain a deficiency

judgment….Concurrent actions to obtain execution of a judgment and

foreclose on the mortgaged property are prohibited.

Id.

The court in Hanna v. Kasson, 26 Wash. 568, 571-72, 67 Pac. 271 (1901) held to the same

effect. The same procedure is permitted in the nonjudicial foreclosure context. RCW

61.24.100(2).

The antideficiency rule applicable to nonjudicial deed of trust foreclosures is set forth in

RCW

61.24.100, which provides in pertinent part:

Except to the extent permitted in this section for deeds of trust securing

commercial loans [“commercial loan” is defined in RCW 61.24.005(7) to

mean a loan that “is not made primarily for personal, family or household

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purposes”] a deficiency judgment shall not be obtained on the obliga

tions

secured by a deed of trust against any borrower, grantor, or guarantor after

a trustee’s sale under that deed of trust.

(ii)

Cross

Collateralization Risks.

Because of the deficiency waiver aspect of Washington’s deed of trust statute, lenders

must be very cautious about using “dragnet” or cross-collateralization clauses in Washington

deeds of trust. Take the example of a bank making a home loan to a borrower who also has a

credit card and a commercial real estate loan secured by an apartment building from the same

bank. If the deed of trust securing the home loan were to state that it secures all obligations

owed to the bank and the bank were to foreclose it nonjudicially, the effect would be to satisfy

all obligations owing on all three debts and to preclude foreclosure of the bank’s lien on the

apartment building (the provisions of RCW 61.24.100(3)(b) permitting foreclosure on other

security would not apply in this example because the foreclosed deed of trust did not secure a

commercial loan).

(iii)

Exceptions

to Antideficiency Rule.

Several rather complex exceptions to the antideficiency rule are set forth in RCW

61.24.100, which was amended substantially in 1998 to add the exceptions. Most of them apply

only to deeds of trust securing commercial loans. The statute does not explicitly address the

situation where the deed of trust secures both commercial and non

commercial loans and there is

no reported case law dealing with that situation. The exceptions include:

(A)

Waste and Wrongful Retention of Funds. Claims against

the borrower or grantor for damages for waste to the property committed after the deed of trust

was granted or for wrongful retention of rents, insurance proceeds or condemnation awards by

the borrower or grantor that are otherwise owed to the beneficiary. This exception applies only

to deeds of trust securing commercial loans and does not apply to any property that is occupied

by the borrower as his or her principal residence on the date of the trustee’s sale. Any action

under this provision must be brought within one year after the date of the trustee’s sale under the

deed of trust (or in the case of multiple trustee’s sales on deeds of trust securing the same

obligation, the latest of those sales). RCW 61.24.100(4). The one-year period is tolled by the

period of any relevant stay in bankruptcy or other insolvency proceedings.

Id.

(B)

Other Collateral. Judicial or nonjudicial foreclosure on

any other real or personal property security for the obligations secured by the deed of trust that

was the subject of the nonjudicial trustee’s sale, but only if that deed of trust secured a

commercial loan. RCW

61.24.100(3)(b).

(C)

Guarantors.

An action for a deficiency judgment against a

guarantor. Such an action is subject to the same one-year statute of limitation that applies to

A similar, but not identical exception existed under case law prior to the 1998 amendments to RCW

61.24.100.

Donovick v. Seattle-First National Bank, 111 Wash. 2d 413,757 P.2d 1378 (1988). The continued effect of the

Donovick

case after these amendments on situations that are not within the express scope of the exception in

RCW

61.24.100(3)(b) is unclear.

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actions for waste or wrongful retention of funds described in paragraph (A) above. However,

this exception applies only to deeds of trust securing commercial loans and there are some

important further limitations on the right to

deficiency judgments against guarantors:

Fair Value Limitation. The guarantor has the right to have

the court or other adjudicator determine the “fair value” of the property (and of any other

previously sold collateral securing the same debt) and to have the deficiency calculated on the

basis of the greater of that fair value or the amount bid at the trustee’s sale. RCW 61.24.100(5).

Secured Guaranties. A deficiency judgment is

not

available against a guarantor that is the grantor of a deed of trust to s

ecure the guaranty except to

the extent of any waste or wrongful retention of funds as described in paragraph (A) above.

RCW 61.24.100(6).

Homestead Right re Guaranties Secured by Principal

Residence.

If the guaranty is secured by a deed of trust on the guarantor’s principal residence,

the guarantor is entitled to be paid an amount equal to the homestead exemption provided for in

RCW 6.13.030 “from the bid at the foreclosure sale.” RCW 61.24.100(6). How this provision

would be applied in the case of a credit bid by the foreclosing creditor is not specified in the

statute and has not been determined by case law.

Notices to Guarantor. The guarantor must be given the

notices specified in RCW 61.24.042.

(D)

Unsecured Indemnities and Other Unsecured

Obligations.

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 is not barred by a nonjudicial trustee’s sale. RCW 61.24.100(10). This provision probably

makes it possible to recover on an unsecured environmental indemnity after a nonjudicial

foreclosure of the related deed of trust so long as the substantial equivalent of the indemnity was

not secured by the deed of trust. Although some lenders use secured environmental indemnities

on properties in Washington, unsecured indemnities are more common. Of course, one

disadvantage of using an unsecured indemnity is that, if the lender incurs costs reimbursable

under the indemnity prior to a foreclosure sale, the borrower’s obligation to reimburse those

costs is not secured and cannot be added to the lender’s credit bid at a nonjudicial trustee’s sale.

The lender should be able to enforce a properly drafted unsecured indemnity after a nonju

dicial

foreclosure of a deed of trust securing a commercial loan.

Because of the “substantial

equivalent” language in the statute, a lender using an unsecured environmental indemnity should

ensure that no substantially equivalent environmental obligations are contained in the deed of

trust or in other loan documents secured by the deed of trust. Where an unsecured indemnity is

used, the loan documents should clearly state that, notwithstanding anything to the contrary, no

obligation set out in the indemnity agreement, and no substantial equivalent of any such

obligation, shall be secured by the deed of trust. That should prevent, for example, a situation in

which a general indemnity provision or general provision requiring compliance with applicable

Oddly, the RCW 61.24.100(10) exception is, by its terms, applicable only to commercial loans; however, there is

nothing in the basic antideficiency rule of RCW 61.24.100(1) that would limit the enforceability of obligations

not

secured by a deed of trust securing a non

commercial loan after nonjudicial foreclosure of that deed of trust.

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laws

might be deemed to be the substantial equivalent of the indemnity obligations that are

meant to be unsecured.

(E)

Guarantors’ Subrogation Rights. The deed of trust statute

does not impair the right of a guarantor against which a deficiency judgment has been

obtained

from enforcing any right of reimbursement that guarantor may have against the borrower. RCW

61.24.100(11). This provision is applicable to deeds of trust securing non-commercial loans as

well as commercial loans. The statute does not address the question of whether the lender can

take a security interest in the guarantor’s reimbursement rights and then enforce them against the

borrower.

(F)

Miscellaneous Exceptions. Additional exceptions to the

antideficiency rule have been recognized in case law. Meyers Way Development Limited

Partnership v. University Savings Bank, 80 Wash. App. 655, 910 P.2d 1308 (1996) (nonjudicial

trustee’s sale did not preclude action to recover a deficiency judgment for conversion of a

portion of the encumbered property from third parties who were not obligors of the debt secured

by the deed of trust); Glenham v. Palzer, 58 Wash. App. 294, 792 P.2d 551 (1990) (nonjudicial

trustee’s sale did not preclude fraud action against non-obligors who induced beneficiaries to

enter into

loan transaction secured by the deed of trust even though beneficiaries made full credit

bid at trustee’s sale);

Carter v. Derwinski

987 F.2d 611 (9th Cir. 1993) (Veterans Administration

retains right of indemnity under federal regulation against grantor/borrower of VA-

guaranteed

loan despite release of deficiency liability under state foreclosure law).

Right to Cure Defaults

RCW 61.24.090 allows various parties the right to cure defaults on obligations secured

by a deed of trust, reinstate the obligatio

ns and cause a cancellation of the nonjudicial foreclosure

sale. The cure may be made any time prior to 11 days before the scheduled date of the trustee’s

sale or any continuance thereof and without regard to any acceleration of the loan balance. As a

sult of this provision, a lender with a borrower who repeatedly defaults and reinstates can be

certain of permanently accelerating the loan only if it uses the judicial foreclosure process.

The reinstatement of some types of obligations under the statute m

ay be problematic. For

example, it is not uncommon for certain types of lenders to enter into an interest rate swap with

the borrower and to secure the swap obligations with the deed of trust securing the loan. Where

such an interest rate swap is terminated due to a default, it may not be practical or fair to reinstate

the swap. For an analysis of this issue under comparable provisions of California law,

see

Harvey, Securing Derivatives Obligations With California Real Estate, 3 Hastings Business Law

Jou

rnal

251, 262

66 (2007).

Restraint of Trustee’s Sale

RCW 61.24.130 provides the procedure for seeking to restrain a nonjudicial trustee’s

sale. The party seeking to restrain the sale is required to pay to the clerk of the court every thirty

days the principal, interest and reserves coming due or, if the default consists of failure to pay an

obligation that is then fully payable by its terms, the interest accruing monthly at the nondefault

rate. RCW 61.24.130(1). In the case of a commercial loan, failure to obtain an injunction

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restraining the sale results in a waiver of all defenses to the underlying debt, but not of all

defenses based on irregularities at the sale itself.

CHD, Inc. v. Boyles

, 138 Wash. App. 131, 139,

157 P.3d 415 (2007).

It is unclear whether a money damages claim by a borrower that

unsuccessfully attempts to obtain an injunction could prevail at an ultimate trial on its claim yet

be barred from obtaining relief as a result of having failed to obtain an injunction. Brown v.

Household

Realty Corporation

, 146 Wash. App. 157, 189 P.3d 233 (2008).

Irregularities in Trustee’s Sale; Post

-Sale Matters

Despite the requirement that the lender strictly comply with the provisions of the deed of

trust statute, “a plaintiff must show prejudice before a court will set aside a trustee sale” for

irregularities. Amaresco Independence Funding, Inc. v. SPS Properties, LLC, 129 Wash. App.

532, 536-

37, 119 P.3d 884 (2005).

RCW

61.24.040(6) provides that the trustee’s deed “shall recite the facts showing th

at the

sale was conducted in compliance with all of the requirements of this chapter and of the deed of

trust, which recital shall be prima facie evidence of such compliance and conclusive evidence

thereof in favor of bona fide purchasers and encumbrances for value” except for holders of liens

or interests who were not given the required foreclosure notices.

RCW 61.24.050 mandates that a trustee deliver the trustee’s deed to the purchaser

“absent a procedural irregularity that voids the sale.” Udall v. T.D. Escrow Services, Inc., 159

Wash.

2d 903, 909, 154 P.3d 882 (2007). Examples of irregularities sufficient to void the sale

include sales in violation of the automatic stay in bankruptcy and a nonjudicial trustee’s sale held

while a lawsuit is pending on the obligation secured by the deed of trust.

Id.

at 911.

Insufficiency of the price paid at the sale is not enough to void the sale. Steward v. Good, 51

Wash. App. 509, 514, 754 P.2d 150 (1988). This is true even if the low price results from a

clerica

l error by the creditor or its agent in accidentally bidding a lower amount at the sale than it

intended.

Udall v. T.D. Escrow Services, Inc.,

supra

, at 159 Wash.

2d 914-15.

Once the trustee’s deed has been delivered to the purchaser, the grantor no longe

r has any

interest in the property. RCW 61.24.050. If the grantor files for bankruptcy after delivery of the

deed to the purchaser, the property is not property of the bankruptcy estate even if the purchaser

has not recorded the deed when the bankruptcy is filed. In re Bell, 386 B.R. 282, 292 (W.D.

Wash. 2008).

Multiple Properties/Counties

Where a loan is secured by multiple properties located in Washington, it is permissible to

encumber all of them with a single deed of trust even if they are located in

different counties and

are not contiguous to one another. Queen City Savings & Loan Association v. Mannhalt, 111

Wash.

2d 503, 760 P.2d 350 (1988); 27 Washington Practice § 3.65 (1998). The trustee may

hold a single trustee’s sale under such a deed of trust in any one of the counties in which one or

more of the properties is located.

Id.

A similar approach applies in the case of mortgages and

judicial foreclosure.

See

Section VI.O.3.f of this guide

Somewhat different rules apply to a non-commercial loan secured by owner-occupied residential real property

pursuant to a 2009 amendment to the deed of trust statute.

See

Senate Bill 5810 § 6 (2009).

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Junior Liens in Nonjudicial Foreclosure

A junior lie

nholder does not have an obligation to mitigate its damages when a senior lien

is foreclosed by bidding at the senior lienholder’s foreclosure sale and capturing any excess

value that may exist over the balance owed to the senior lienholder.

Metropolitan

Mortgage &

Securities Co., Inc. v. Becker

, 64 Wash. App. 626, 631, 825 P. 2d 360 (1992).

The nonjudicial foreclosure of a senior deed of trust does not preclude an action by a

nonforeclosing holder of a junior deed of trust to recover on a debt secured by

that junior deed of

trust.

Beal Bank, SSB v. Sarich

, 161 Wash.

2d 544, 550, 167 P.3d 555 (2007).

Judicial Foreclosure of Mortgages and Deeds of Trust

Mortgages can only be foreclosed judicially. RCW 61.12.040. A deed of trust can be

foreclosed judicially if the lender wants to obtain a deficiency judgment not permitted after a

nonjudicial sale. RCW 61.24.100(8). RCW 61.12.120 contains the one-action rule applicable to

judicial foreclosures, which precludes a separate action on the secured debt while t

he foreclosure

is proceeding. However, such actions are permitted before the foreclosure if they are completed

prior to the commencement of the foreclosure. American Federal Savings & Loan Association

of Tacoma v. McCaffrey

, 107 Wash.

2d 181, 189, 728 P.

2d 155 (1986).

Right of Redemption

Washington has a complex statutory right of redemption for mortgages and judicially

foreclosed deeds of trust. RCW chapter 6.23. A good description of Washington’s “scramble”

redemption system, which is very similar to California’s, is given in Capital Investment

Corporation of Washington v. King County

, 112 Wash. App. 216, 221

22, 47 P.3d 161 (2002).

The debtor is permitted to redeem the property for up to one year after confirmation of

the sale. In the case of nonagricultural property as to which the creditor has waived its right to a

deficiency, the redemption period is eight months. RCW 6.23.020. There is no redemption

The Beal Bank court declined explicitly to overrule Washington Mutual Savings Bank v. United States, 115

Wash.

2d 52, 793 P.2d 969 (1990), opinion clarified at 800 P.2d 1380 (1990), an odd and much-criticized case

involving some unusual facts, in which the Washington Supreme Court appeared to hold that the nonjudicial

foreclosure of a senior deed of trust operates to satisfy not only the debt secured by the foreclosed deed of trust, but

also the debt secured by all junior liens on the property. However, the Beal Bank case appears to undercut any

remaining authority the Washington Mutual case may have had. In its initial opinion, the court in the

Washing

ton

Mutual

case stated: “We do not deem it necessary to determine how a deficiency judgment should be measured in

this case since we hold here that none may be obtained by a nonforeclosing junior lienor following a nonjudicial, or

deed of trust, foreclosure [which, in this case, was of a senior lien].” 793 P.2d at 792. Subsequently, the court filed

a “clarification” of the ruling which added the following sentence to the majority opinion: “We do not herein

address the matter of a junior deed of trust hold

er’s continued right to sue the debtor on the promissory note because

it is not before us.” 800 P.2d 1124. The court did not explain how it considered suing for a deficiency to be

different from suing on the promissory note in the context of a foreclosed out junior lienholder, so the clarification

further confused the situation. The case did not address the effect of a waiver by the junior lienholder of its security

prior to the foreclosure of the senior deed of trust. For critiques of the Washington Mu

tual

case,

see

, Rights of

Washington Junior Lienors in Nonjudicial Foreclosure, 67 Wash. L. Rev. 235 (1992); and 18 Washington Practice

19.17 (2004).

See also

DeYoung v. Cenex Ltd.

, 100 Wash. App. 885, 894

95, 1 P.3d 587 (2000) (junior lienholder

forec

losed out in judicial foreclosure is not precluded from suing on debt as a result of redeeming).

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period for nonagricultural improved property that has been abandoned for six months or more

wher

e the lender does not seek a deficiency judgment. RCW 61.12.093-.095. The redemption

period may be extended in certain circumstances.

See

RCW 6.23.030(2) (six-month extension

for failure to give notice of expiration of redemption period), RCW 6.23.040(1) (60-

day

extension(s) for successive redemptions), RCW 6.23.090(2) (extension where verified statement

of rents, profits, and expenses is requested).

The redemption price is the amount of the successful bid at the foreclosure sale plus

interest thereon at the rate provided in the judgment and certain other amounts as provided in

RCW

6.23.020(2).

The purchaser at the foreclosure sale is entitled to possession of the property during the

redemption period unless the property is a homestead or is used for farming purposes. RCW

6.23.110(3) and (4). Tenants under unexpired leases may remain in possession during the

redemption period, but the purchaser is entitled to the rent under the lease. RCW 6.23.110(1).

Until the redemption period has run, it is generally not feasible to sell the property or to

make non

trivial improvements.

Redemption rights may not effectively be waived in the mortgage or deed of trust, but

may be waived after a default has occurred. Batten v. Fallgren, 2 Wash. App. 360, 362, 467

P.2d 8

82 (1970). A mortgagor or redemptioner may transfer the right of redemption, but only by

means of a deed sufficiently conveying both the redemption right and the grantor’s underlying

interest in the property that gave rise to the redemption right.

Fideli

ty Mutual Savings Bank v.

Mark

, 112 Wash. 2d 47, 52-53, 767 P.2d 1382 (1989); Capital Investment Corp. of Washington

v. King County, 112 Wash. App. 216, 47 P.3d 161 (2002). As illustrated by the

Capital

Investment

case, great care must be taken in structu

ring and documenting transfers of redemption

rights in order to make them effective.

Although federal law generally governs loans made by agencies of the federal

government, it has been held that Washington’s redemption provisions apply to judicial

foreclo

sures by the federal government on Washington property as a matter of federal common

law. United States v. Ellis, 714 F.2d 953 (9th Cir. 1983). However, this result may have been

called into question by later developments, at least as to some branches of the federal

government. See United States v. Einum

, 992 F.2d 761 (7th Cir. 1993).

Right to Cure Defaults

RCW

61.12.130 allows the defendant in a judicial foreclosure to obtain a stay of the

foreclosure by paying into court the principal and interest then due, with costs. However, where

the principal balance has been accelerated, the entire principal balance is deemed to be due and

this statute cannot be used to undo the acceleration. Knisell v. Brunet, 60 Wash. 610, 613, 111

Pac. 894 (1910); 18

Washingt

on Practice §

19.1 (2d ed. 2004).

Effect of Foreclosure on Junior Leases

See Section VI.O.1.c of this guide for a discussion of the effect of a judicial foreclosure

on leases subordinate to the foreclosed deed of trust or mortgage.

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Upset Price

An upset price procedure is available under RCW 61.12.060. If the court finds that

procedure to be appropriate, it can determine the “fair value of the property” and require that the

fair value be credited against the debt notwithstanding a lower successful bid at the foreclosure

sale. “Fair value” has been defined as the amount that a competitive bidder would consider to be

a “fair bid at the time of sale under normal conditions.” National Bank of Washington v. Equity

Investors

, 81 Wash. 2d 886, 926, 506 P.2d 20 (1973). The court can set an upset price at any

time up to the time of the hearing on confirmation of the foreclosure sale. Before the court can

set an upset price, it must determine that an upset price is appropriate “based upon economic

conditions or peculiarities of the mortgaged property” and a finding that “there will be no true

competitive bidding.” American Federal Savings & Loan Association of Tacoma v. McCaffrey

107 Wash.

2d 181, 187-

88, 728 P.2d 155 (1986).

Jury Trial

Foreclosure of a real or personal property lien is an equitable action for which the trial

court has discretion whether to allow a jury trial. Puget Sound National Bank of Tacoma v.

Olsen

, 174 Wash. 200, 202

203, 24 P.2d 613 (1933).

Environmental Indemnities, Etc.

A lender foreclosing judicially should consider whether the judgment and decree of

foreclosure should expressly provide that any environmental indemnity or other indemnity will

survive the foreclosure, especially if the indemnity is secured by the mortgage or deed of trus

Absent such a provision, the loan obligations may be merged into the judgment and not be

separately enforceable later. See generally Woodcraft Construction, Inc. v. Hamilton, 56 Wash.

App. 885, 888, 786 P.2d 307 (1990)

g. Multiple Properties/Counties

A single mortgage or deed of trust covering multiple parcels of property cannot be

foreclosed piecemeal in separate judicial foreclosure actions and a mortgagee that forecloses on

only a part of the property will be deemed to have waived its right to foreclose on the remainder.

Tacoma Savings Bank & Trust Company v. Safety Investment Company, 123 Wash. 481, 212

Pac. 726 (1923) and cases cited therein. However, multiple mortgages or deeds of trust securing

the same debt can be foreclosed individually without waiver of the right to foreclose on the

others. Id.

When one or more mortgages or deeds of trust securing the same debt cover properties in

more than one county, all the properties may be foreclosed upon in a single judicial foreclosure

action in one of the counties, even if the properties are not contiguous. RCW 61.12.040;

Commercial National Bank of Seattle v. Johnson

, 16 Wash. 536, 544, 48 Pac. 267 (1897).

Forfeiture of Real Estate Contracts

The procedure for forfeiture of real estate contracts is set out in RCW 61.30. Because

real estate contracts are no longer widely used, they are not discussed in detail in this guide.

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Deeds in Lieu of Foreclosure

Deeds in lieu of foreclosure given after a default are common in Washington; however,

there are sever

al pitfalls of which the creditor accepting such a deed should be aware.

Junior Liens

A deed in lieu of foreclosure does not have the effect of eliminating junior liens.

Therefore, senior lenders usually prefer to foreclose rather than to accept a deed in lieu if there

are junior liens on the property. If the lender accepts a deed in lieu knowing of junior liens, it

may be argued that the lender accepted the property subject to the junior liens and does not have

the right later to foreclose them out.

See

generally Restatement (Third) of Property (Mortgages)

§ 8.5 (1997). However, Washington law does not support such an outcome, at least in the

absence of evidence that such was the intention of the parties. See Gill v. Strouf, 5 Wash.

426, 105 P.2d 829 (1940);

Altabet

v. Monroe Methodist Church, 54 Wash. App. 695, 777 P.2d

544 (1989).

Merger Issues

There is a risk that a court may merge the lender’s deed of trust or mortgage into the

newly acquired fee title; however, because merger is a question of intent, this risk can be

minimized by appropriate drafting. See U.S. Bank of Washington v. Hursey, 116 Wash. 2d 522,

528 n.2, 806 P.2d 245 (1991); Altabet v. Monroe Methodist Church, 54 Wash. App. 695, 777

P.2d 544 (1989). The lender accepting a deed in li

eu generally will want to keep its lien in effect

so that it can be foreclosed later if necessary due to undiscovered junior liens. Title insurance

companies will often issue a non

merger endorsement insuring the continued validity of the deed

of trust or

mortgage after a deed in lieu.

Redemption Rights

One early case held that, where a mortgagee takes a deed in lieu of foreclosure and there

is a junior lien on the property, the junior lienholder has a right to redeem the property from the

grantee of the deed in lieu even if the junior mortgage is not recorded. Malm v. Griffith, 109

Wash. 30, 186 Pac. 647 (1919).

Recharacterization as a Mortgage

A mortgagee accepting a deed in lieu should be cautious in entering into a deed in lieu

transaction with features that suggest the continued existence of a creditor-debtor relationship

between the parties that could lead a court to recharacterize the deed as a mortgage rather than as

an effective transfer of fee title. See, e.g., Pittwood v. Spokane Savings & Loan S

ociety

, 141

Wash. 229, 251 Pac. 283 (1926); Johnson v. National Bank of Commerce, 65 Wash. 261, 118

Pac. 21 (1911); Swarm v. Boggs, 12 Wash. 246, 40 Pac. 941 (1895). Such factors, no one of

which is determinative, include the giving of an option to repurchase, a lease back of the

property, a property value that greatly exceeds the secured debt, and continued payment of costs

of the property by the grantor after the transfer.

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For a case in which the court did hold that a “deed in lieu” (actually a transfer of pledged

corporate stock to the secured creditor) was ineffective as an absolute transfer and that the

creditor

-debtor relationship continued, see Collins v. Denny Clay Co., 41 Wash. 136, 82 Pac.

1012 (1905). In that case, the value of the collateral transferred greatly exceeded the secured

debt, there was an option to repurchase the collateral, and there was a provision in the agreement

that, if the transferor did not exercise the option to repurchase, the promissory note would

continue in effect.

A contention that a deed in lieu should be treated as a mortgage must be proved by clear

and convincing evidence.

Pittwood, supra

, at 141 Wash. 233.

Liability for Deficiency

At least one case has held that a lender cannot take a deed in lieu of foreclosure and

maintain the personal liability of the borrower for the debt because such a procedure is a

circumvention of the antideficiency provisions of the deed of trust statute. Thompson v. Smith

58 Wash. App. 361, 793 P.2d 449 (1990). But see Altabet, supra, for a contrary view. Both

cases dealt with situations in which the documents executed by the parties did not clearly address

the borrower’s liability for the debt after delivery of the deed. Further, Thompson v. Smith

involved a situation where the cr

editor took a deed in lieu from the current owner of the property

and later sought to obtain a judgment against the original obligor on the debt, who had

previously transferred the property. The court held that the creditor “essentially carried out a

nonj

udicial foreclosure without having to follow the procedures of RCW 61.24” and held that the

obligor was entitled to the protection of the antideficiency law. Thompson v. Smith, 58 Wash.

App. at 366.

RCW 61.24.100(7) provides that a beneficiary’s acceptance of a deed in lieu of

foreclosure securing a commercial loan exonerates guarantors of the loan from liability on the

loan except to the extent they otherwise agree as part of the deed in lieu transaction.

Impairment of Subrogation Rights

MGIC Financial Corporation v. Briggs Company, 24 Wash. App. 1, 600 P.2d 573

(1979), involved a beneficiary that took a deed in lieu of foreclosure of some, but not all, of the

parcels encumbered by a deed of trust and released its borrower from liability on the secured

deb

t. It later tried to foreclose out the interest of a transferee of a parcel that was not conveyed

by the deed in lieu. The court held that the beneficiary had impaired the subrogation rights of the

transferee by releasing the original borrower and thereby discharged the lien of the deed of trust

on the transferred parcel.

Real Estate Excise Tax

As discussed in Section III.C.3 above, Washington’s real estate excise tax is generally not

payable on a deed in lieu of foreclosure to the extent that the consideration for the deed consists

of forgiveness of the debt secured by the property conveyed. RCW 82.45.010(3). However,

where a deed in lieu of foreclosure is given on a junior lien mortgage or deed of trust, the tax is

payable on the outstanding principal amount of any senior lien that is not satisfied by the deed.

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WAC 458-

61A

-208(3)(d)(iii). That tax can be avoided by foreclosing the junior lien rather than

taking a deed in lieu. WAC 458

61A

208(4).

Past Due Rents Collected After Foreclosure

Where rents from tenants are past due and uncollected at the time of a foreclosure sale,

the buyer at the foreclosure sale is entitled to collect them rather than the foreclosed out former

owner regardless of whether the rents are mentioned specifically in the foreclosure documents.

Kezner v. Landover Corporation, 87 Wash. App. 458, 466-67, 942 P.2d 1003 (1997). The same

should be true in the case of a deed in lieu of foreclosure under the reasoning of the

Kezner

case.

Mortgagee in Possession Status

A lender is not entitled to possession of the property prior to completion of a foreclosure

of its deed of trust or mortgage. RCW 7.28.230(1). If it takes possession prior to a foreclosure

sale, it may become subject to liability for certain torts under concepts of premises liability.

Coleman v. Hoffman, 115 Wash. App. 853, 64 P.3d 65 (2003). Merely collecting the rent from

the property does not make the lender a mortgagee in possession with such liability.

Id.

at 115

Wash. App. 863.

An older case held a mortgagee in possession liable for rent to the borrower. Howard v.

Edgren

, 62 Wash. 2d 884, 385 P.2d 41 (1963). That result should not occur today, at least if the

lender has an assignment of the rents of the property, because RCW 7.28.230 was amended in

1969 to vali

date such assignments.

There is a more complete discussion of Washington law on mortgagees in possession in

Washington Practice

§ 18.7 (2d ed. 2004).

Environmental Indemnities

Although some lenders use secured environmental indemnities on properties in

Washington, unsecured indemnities are more common. The lender should be able to enforce a

properly drafted unsecured indemnity after a nonjudicial foreclosure of a deed of trust securing a

commercial loan because a “trustee’s sale under a deed of trust s

ecuring 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.”

RCW

61.24.100(10). Because of the “substantial equivalent” language in the statute, a lender

using an unsecured environmental indemnity should ensure that no similar environmental

obligations are contained in the deed of trust or in other loan documents secured by the deed of

trust.

Construction Liens

Mechanic’s and material supplier’s liens are provided for in RCW chapter 60.04. The

lien can be claimed by “any person furnishing labor, professional services, materials, or

equipment for the improvement of real property.” RCW 60.04.021. The term “professional

services”, as used in the lien law, covers only “surveying, establishing or marking the boundaries

of, preparing maps, plans, or specifications for, or inspecting, testing or otherwise performing

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any other architectural or engineering services for the improvement of real property.”

RCW

60.04.011(13).

A claim of lien must be filed within 90 days after the lien claimant ceases to furnish

labor, professional services, materials or equipment to the project in order to perfect the li

en.

RCW

60.04.091. The lien expires if the lien claimant does not file an action to foreclose it

within eight months after the lien is recorded and serve the owner of the property within 90 days

after filing the action. RCW 60.04.141. If the lien claimant fails to prosecute such an action to

judgment within two years, the court may dismiss it for want of prosecution; however the two

year period is tolled by the filing of bankruptcy by the owner. RCW 60.04.141.

Generally, construction liens are prior to any deed of trust, mortgage or other lien

recorded after “the time of commencement of labor or professional services or first delivery of

materials or equipment by the lien claimant.” RCW 60.04.061. The priority of construction

liens securing different

types of lien claims is set out in RCW

60.04.181.

The prevailing party in a lien foreclosure action is entitled to an award of its attorneys’

fees. RCW

60.04.181(3).

Certain claimants of liens for professional services, materials or equipment who do not

ontract directly with the owner must give a preclaim notice as provided in RCW

60.04.031.

RCW 60.04.255 requires that “real property lenders” give certain informational materials

prepared by the state Department of Labor and Industries “to all persons obtaining loans, the

proceeds of which are to be used for residential construction or residential repair or remodeling.”

Apparently, the materials are contained in Department of Labor and Industries publication no.

F625

-017-000. While the statute appears to be directed at consumer loans on single family

properties, it could be argued that it applies to construction loans on multifamily projects,

condominium projects or multiple homes in a subdivision. Subsection (3) expressly provides

that no cause of action

may lie against a lender arising from the provisions of the statute.

RCW

60.04.221 contains Washington’s “stop notice” law. It permits a lien claimant to

give a construction lender a notice that the lien claimant has not been timely paid. The lender is

then required to withhold from draws under the construction loan the amount claimed to be due

in the notice. The stop notice procedure does not apply if there is a payment bond of fifty

percent or more of the amount of the construction financing.

Washingt

on, unlike California and some other states, does not have a statutory form of

lien waiver/release. It does have a statute requiring that, upon demand of the owner or the

person making payment, a lien claimant “shall immediately prepare and execute a release of all

lien rights for which payment has been made, and deliver the release to the person making

payment.” RCW 60.04.071.

Provisions for bonding over construction liens are set forth in RCW

60.04.161.

Washington’s lien law does not apply to federal or state property.

See

Washington

Real Property Deskbook §

65.2(1) (1996).

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A party that fails properly to perfect or pursue its lien rights may still be able to recover

from a construction lender on an unjust enrichment theory under certain circumstances.

See

e.g.,

Town Concrete Pipe of Washington, Inc. v. Redford, 43 Wash. App. 493, 717 P.2d 1384

(1986);

Irwin Concrete, Inc. v. Sun Coast Properties, Inc., 33 Wash. App. 190, 653 P.2d 1331

(1982). The lender is particularly at risk of such a claim where it actively encouraged the work

during a default situation or foreclosed on a completed project without having fully advanced the

construction loan

Westview Investments, Ltd. v. U.S. Bank National Association, 133 Wash. App. 835,

138 P.3d 638 (2006), the court held that payments received by a contractor from an owner are

subject to an express trust in favor of subcontractors and the contractor’s bank cannot offset

against funds in the contractor’s account to apply to the bank’s loan to the contractor if it has

actual knowledge of the trust nature of the funds or “knowledge sufficient to necessitate inquiry

concerning the sums.”

Homestead

Washington’s homestead law is set forth in Article 19, Section 1 of the state constitution

and in RCW chapter 6.13. The amount of the homestead exemption is generally $125,000

(although different amounts apply in certain specialized situations). RCW 6.13.030. That

amount was increased from $40,000 by the legislature in 2007. Spouses cannot double the

amount of the hom

estead exemption by claiming homestead rights in the same property, but they

may be able to do so by occupying separate properties as homesteads.

See

RCW 6.13.020; 1

Washington Practice §

12.12 (4th ed. 1997).

The homestead exemption applies to real or personal property that the owner uses as a

residence without the need to file a declaration of homestead. RCW 6.13.010 and .040(1). To

claim the exemption with respect to property that is not occupied as the owner’s residence, it is

necessary to file or deliver a declaration of homestead as provided in RCW 6.13.040 and

6.15.060.

Certain types of debts with respect to which the homestead exemption cannot be claimed

are set out in RCW 6.13.080. Generally, the homestead exemption cannot be claimed as against

a secured creditor holding a deed of trust, mortgage or security agreement on the homestead

property (whether a first lien or a junior lien). RCW 6.13.080(2); Felton v. Citizens Federal

Savings and Loan Association of Seattle, 101 Wash. 2d 416, 679 P.2d 928 (1984);

Household

Finance Industrial Loan Company v. Upton, 102 Wash. App. 220, 6 P.3d 1231 (2000). A

notable exception is contained in RCW 61.24.100(6), which provides that: “If the deed of trust

[securing a guaranty of a commercial loan] encumbers the guarantor’s principal residence, the

guarantor shall be entitled to receive an amount up to the homestead exemption set forth in RCW

6.13.030, without regard to the effect of RCW 6.13.080(2), from the bid at the foreclosure or

trustee’s sale accepted by the sheriff or trustee prior to the application of the bid to the

guarantor’s obligation.” The statute does not address the issue of how it would be applied in a

situation in which the beneficiary of the foreclosed deed of trust buys the property at the

trustee’s

sale by credit bidding its secured debt.

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In the case of a judicial foreclosure, the owner is allowed to stay in the homestead

property until the expiration of the redemption period “without accounting for issues or for value

of occupation.” RCW

6.23.110(4).

Superior court judgments generally become liens on real property of the judgment debtor

located in the same county as the court with priority as of the date the court enters the judgment.

RCW 4.56.200. However, the judgment creditor must take the extra step of recording the

judgment in the real estate records in order for the judgment lien to attach to the excess value of

homestead property over and above the amount of the homestead exemption. RCW 6.13.090.

For a discussion of some of the i

ntricacies of this rule,

see In re DeLavern

, 337 B.R. 239 (Bankr.

W.D. Wash. 2005).

Research has not revealed any Washington law on the question of whether the homestead

exemption can be waived in advance by contract with a creditor. One general treatise, which

does not deal with Washington law specifically, states:

Although there is authority to the contrary, it has been held that

homestead rights may generally be waived by a proper person.

Waiver may generally be done in a deed or mortgage.

40 Am.. Jr. 2d Homestead § 179 (2008). However, a Washington court could hold that

homestead rights are not waivable or are only waivable after default, as is the case with waivers

of redemption rights in judicial foreclosure.

See Section

VI.O.3.a of this guide.

Lea

sehold Financing

Washington has little law specific to the situation in which a lender’s collateral is the

lessee’s interest under a ground lease or other lease. Generally, a deed of trust is the preferred

security instrument for encumbering a leasehold i

nterest.

A deed of trust or mortgage on a leasehold should clearly state that it encumbers the

leasehold. In National Bank of Commerce v. Fountain, 9 Wash. App. 721, 514 P.2d 188 (1973),

the court held that a mortgage executed by a farmer was effective to encumber only the

mortgagor’s five

eighths remainder interest in the property and was not effective to encumber his

interest as lessee under a 40-year land lease of the entire property because the mortgage did not

expressly refer to the lease.

Washington

courts have enforced so-called “subordinated fee” leasehold financing

transactions (

i.e.

, loans in which only the lessee of the property is personally obligated on the

loan, but both the lessee and the lessor encumber their interests in the property to secure the

loan).

See Seattle

First National Bank v. Hart

, 19 Wash. App. 71, 573 P.2d 827 (1978). In such

transactions, the loan to the lessee is deemed sufficient consideration to support the grant of a

lien on the lessor’s interest and no separate consideration needs to flow to the lessor.

Id.

at 19

Wash. App. 73. The Washington Supreme Court has held that a lessor in such transactions that

benefits directly from the loan (

e.g.,

by improvement of its property with the proceeds of the

loan) is not a guarantor or surety with respect to either the lender or the ground lessee. Honey v.

Davis

, 131 Wash. 2d 212, 930 P.2d 908 (1996). As a result, the Lessor may not be entitled to a

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guarantor’s common law rights of reimbursement, subrogation, etc. and should consider seeking

similar rights by contract.

Tenant in Common Ownership and Partition

Lenders on properties owned by multiple owners as tenants in common are often

concerned about the effect on the loan of an attempt by the tenants in common to partition the

property into separately owned parcels. See, e.g., Standard & Poor’s U.S. CMBS Legal and

Structured Finance Criteria p. 17 (2003). Some lenders’ loan documents require a complete or

partial waiver of the right of partition. An agreement never to partition a property is

unenforceable under Washington law. Schultheis v. Schultheis, 36 Wash. App. 588, 590, 675

P.2d 634 (1984). However, an agreement to “limit the right to partition for a reasonable or

specific amount of time” is enforceable.

Id.

Further, if the parties agree never to partition a

property, rather than finding the agreement void, a court should determine a reasonable term for

the agreement and enforce it for that period.

Id.

at 591.

Washington’s partition statute is RCW chapter 7.52, which has not been amended since

territorial times. Generally, there is a preference for the property to be physically partitioned in

kind rather than for it to be sold and the proceeds divided unless a physical partition in kind

“cannot be made without great

prejudice to the owners.” RCW 7.52.080.

Among the features of Washington partition law that may be of interest to lenders are the

following:

1. The costs of the partition action can take priority over preexisting liens on the

property. RCW 7.52.030 and .220.

2. When there is a lien on the interest of fewer than all the tenants in common, after

partition that lien will attach only to the share of the property allocated to the tenants in common

whose interest in the property was encumbered by the lien. RC

W 7.52.030.

3. There is a marshaling provision, which allows the court: (a) to require the holder

of a lien on the property to be partitioned, or any part of that property, to first exhaust its other

collateral before a distribution of the proceeds of the

partition; or (b) to “order a just deduction to

be made from the amount of the lien on the property on account [of the other collateral].” RCW

7.52.230.

4. Where the partition is by means of sale of the property, referees appointed by the

court sell the property by public auction “in the manner required for the sale of real property on

execution.” RCW 7.52.270. There is a procedure for a lienholder to credit bid its debt at a

partition sale. RCW 7.52.390. The referees are allowed to sell the property on credit and take

security for the unpaid portion of the purchase price in the names of the parties entitled to share

in the proceeds of the partition. RCW 7.52.290 and .420.

Multiple Mortgagees

Where a deed of trust or mortgage secures multiple promissory notes held by different

parties, the holders of the notes are entitled to share pro rata in the proceeds of the mortgaged

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property in the absence of an agreement among them to the contrary. Robbins v. Wilson Creek

State Bank

, 5 Wash.

2d 584, 595-

96, 105

P.2d 1107 (1940). When one of the holders realizes on

the common collateral, that holder takes the collateral or its proceeds in trust for the other

holders.

Id.

Real Estate Collateral in Multiple States

It is common in commercial financings for mortgages or deeds of trust on properties in

more than one state to secure a single debt. Washington has very little law on such

arrangements, although an early case allowed judicial foreclosure of a Washington mortgage

after the creditor foreclosed a California mortgage securing the same debt and obtained a

deficiency judgment from the California court. Widmann v. Hammack, 110 Wash. 77, 187 Pac.

1091 (1920). In such situations, the lender must carefully consider the laws of all the relevant

states, especially any applicable one-action and antideficiency laws, in order to structure a

realization strategy that maximizes its recovery on the debt and avoids foreclosing on part of its

collateral in a way that could bar it from later realizing on other collateral.

Where properties in multiple states secure a single debt, a question may arise as to

whether Washington’s one-action rules (RCW 61.24.030(4) and RCW 61.12.120) preclude

simultaneous prosecution of foreclosure actions in Washington and one or more other stat

es.

The nonjudicial foreclosure statute expressly permits foreclosure of other liens securing

the same debt during or after a nonjudicial foreclosure on a Washington property. RCW

61.24.030(4) and .100(3)(b).

One treatise, in discussing RCW 61.12.120, the judicial foreclosure statute, states:

“Statutes of this sort arguably should be interpreted to prohibit only the concurrent prosecution

of a foreclosure action and an action for a judgment on the debt, rather than barring the

simultaneous prosecution of foreclosure actions, particularly those in different states.” 2

Madison, Dwyer and Bender, The Law of Real Estate Financing § 12:102 fn.8 (rev. ed. 2008).

That treatise goes on to state:

. . . there is authority requiring that mortgagees include all the

mortgaged property in the same foreclosure action or be held to

have waived the mortgage lien on the remaining property.

See,

e.g., Dooly v. Eastman, 28 Wash. 564, 68 P. 1039 (1902). These

cases tend to stem from one-action rule jurisdictions and in any

event may be distinguishable where the mortgaged property is

located in other states, as opposed to the same jurisdiction, and

therefore unsuited for resolution in a single judicial foreclosure

action.

Id.

at fn.9. See also Tacoma Savings Bank & Trust Company. v. Safety Investment Company

123 Wash. 481, 212 Pac 726 (1923) (distinguishing Dooly v. Eastman and allowing two separate

mortgages securing a common debt to be foreclosed separately).

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Dragnet Clauses

Washington has little law on the enforceability of dragnet clauses (

i.e.

, a clause in a deed

of trust or mortgage providing that all past, present and future debts owing to the secured creditor

are secured by the security instrument). In Carey v. Herrick, 146 Wash. 283, 263 Pac. 190

(1928), the Washington Supreme Court enforced a dragnet clause. Although that case was

decided under Idaho law, the court did not look to binding Idaho precedent in reaching its

conclusion, but instead relied on general law to enforce the clause.

Id.

at 146 Wash. 297.

The

refore, it could be expected that the court would have reached the same result had the case

been decided under Washington law.

In order to avoid an argument that a dragnet clause is enforceable, it is advisable that a

lender describe the types of obligations intended to be covered by it as specifically as possible.

For example, the clause could state that it is intended to extend to the types of debts that courts in

other states have often held not to have been intended to be included within the meaning of short,

broadly

-worded dragnet clauses. These might include, for example: (a) specific existing

obligations intended to be secured; (b) obligations that are different in type or character from

those specifically identified; (c) obligations that are separately secured; (d) obligations incurred

by way of guaranty or suretyship; (e) obligations on which the debtor is obligated with other

parties; (f) obligations that do not refer to the security instrument; and (g) obligations originally

owed to third parties and later acquired by the secured creditor. See generally Nelson and

Whitman,

Real Estate Finance Law § 12.8 (5

ed. 2007). However, as discussed in greater

detail in Section VI.D.2.b(ii) of this guide, an overly broad dragnet clause in a deed of trust can

create problems for the lender under Washington’s anti

deficiency laws.

Where the collateral is personal property rather than real estate, Article 9 of the Uniform

Commercial Code broadly authorizes dragnet clauses. See RCW 62A.9A-204(c) and officia

comment

5 thereto.

VII.

PERSONAL PROPERTY LENDING

UCC Revised Article 9

Washington adopted Revised Article 9 of the Uniform Commercial Code (“UCC”) with

the uniform effective date of July 1, 2001. It is codified at RCW chapter 62A.9A.

The Washington comments to Revised Article 9 prepared by the Washington State Bar

Association’s Uniform Commercial Code Committee contain a section-by-section description of

areas in which Revised Article 9 as adopted in Washington differs from the official text of

Revised Article 9. Those comments (which do not discuss all the variations) are available at

www.wsba.org/lawyers/groups/businesslaw/businesslaw2000ucc.htm

. Washington omitted a

number of the consumer protection provisions contained in the official text. Some of the other

variations that are relevant to commercial lenders are:

1. Transfers by the State of Washington and its political subdivisions are excluded

from the coverage of Article 9. RCW 62A.9A

109(d)(14).

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2. The official version of RCW 62A.9A-309(2) provides for automatic perfection

without filing of assignments of accounts or payment intangibles which do not constitute a

“significant” part of the assignor’s accounts or payment intangibles. The Washington version

sets an objective threshold of $50,000 or ten percent of the assignor’s total outstanding accounts

or payment intangibles.

RCW 62A.9A

333(b) provides that: “A possessory lien on goods has priority over

a security interest in the goods only if the lien is created by a statute that expressly so p

rovides.”

The official text has the opposite rule – the possessory lien has priority unless it is created by a

statute that provides otherwise.

4. RCW 62A.9A-406(f) and (j) of the official text have been omitted so as to

preserve existing Washington statutes that expressly prohibit, or require governmental approval

for, transfers of accounts or chattel paper (

e.g.

, RCW 67.70.100, which requires court approval to

assign lottery winnings).

5. RCW 62A.9A-602 and -624 vary from the official text in that they e

xcept

secondary obligors from certain prohibitions on waivers of rights under certain provisions of

Article 9.

6. Washington omits subsection 9-615(f) of the official text, an upset price

procedure, which would allow a debtor to challenge the sufficiency o

f the sale price obtained in a

private foreclosure sale at which the purchaser was the secured party or its affiliate or a

guarantor, even though the secured party proves that the sale was commercially reasonable.

Security Interests Excluded From Article 9

Insurance Policies

Washington has adopted Revised Article 9’s provision excluding transfers of interests in

or claims under insurance policies from the coverage of Article 9 (with the usual exception of

certain assignments of health

care insurance receiva

bles). RCW

62A.9

109(d)(8).

The law regarding assignments for security purposes of interests in or claims under

policies of insurance that are not covered by Article 9 is not well-developed in Washington;

however, Washington statutory and decisional law generally recognizes the validity and

enforceability of written assignments for security purposes of such interests or claims under

policies of life insurance.

See

RCW 48.18.360; Massachusetts Mutual Life Insurance Company

v. Bank of California, N.A., 187 Wash. 565, 570, 60 P.2d 675 (1936); Seattle Association of

Credit Men v. Bank of California, National Association, 177 Wash. 130, 138-39, 30 P.2d 972

(1934).

It is advisable in taking a security interest in an insurance policy or its proceeds to

observe the following procedure to the extent feasible: (a) review and comply with any

assignment provisions set forth in the policy; (b) have the owner of the policy and each

beneficiary sign an appropriate form of security, assignment and pledge agreement; (c) obt

ain the

written acknowledgment of the insurer to the grant of the security interest, agreement to pay the

proceeds of the policy to the secured party, and acknowledgment that it is not aware of any prior

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assignments of the policy or its proceeds (many insurers have their own forms, which they insist

on using); and (d) take possession of the original policy.

Titled Vehicles (Including Manufactured Homes)

Washington’s certificate of title laws are contained in RCW chapter 46.12 (relating to

motor vehicles) and RCW chapter 88.02 (relating to boats). The specific provisions of those

statutes governing perfection of security interests in titled goods by notation on the certificate of

title are RCW 46.12.095 and .103 and RCW 88.02.070. A security interest in tit

led vehicles held

for sale or lease in the inventory of a dealer or lessor is perfected by filing a financing statement

rather than by notation on the certificate of title. RCW 62A.9A

311(d).

Trailers used on public roads are subject to certificate of title laws, but heavy equipment

not operated on roads is typically not titled. Manufactured homes are titled vehicles even though

they are of a design such that they are intended to be permanently attached to real estate. Once

they are so attached, the titl

e may be “eliminated” pursuant to RCW chapter 65.20 and thereafter,

a lien can be taken on them only by means appropriate to taking a lien on other real property. A

real estate lender can insure that title elimination has occurred and the home has been

corporated into the real property by obtaining an ALTA form 7 endorsement to its lender’s title

insurance policy. Until title is so eliminated, the manufactured home “is not…real property in

any form, including fixture law.” RCW 65.20.030. The definitio

n of “manufactured home” used

in the uniform version of Revised Article 9 Section 9-102(53) has been replaced in Washington

by a reference to the definition of “mobile home” or “manufactured home” contained in RCW

46.04.302.

See

RCW 62A.9A

102(53).

Federa

lly

-documented vessels are not subject to state certificate of title laws. RCW

88.02.070(2).

3. Property of Governmental Entities

Transfers by the State of Washington or a governmental unit of the state are excluded

from Article 9 of the UCC by a nonuniform provision. RCW 62A.9A

109(d)(14).

Judgments

Washington has little law on the subject of the assignment of judgments for security

purposes. Such assignments are excluded from the coverage of Article 9 of the UCC by RCW

62A.9A

-109(d)(9). There is a statute providing that any assignment of a judgment must be

acknowledged and must be filed with the clerk of the county where the judgment is recorded.

RCW 4.56.090. In order to provide the maximum possible notice, a party taking a security

interest in a judgment should follow the requirements of that statute, file a financing statement

with the Department of Licensing and, if the judgment affects title to real property, record the

assignment in the real property records. While the financing statement is not effective to perfect

the security interest under Article 9, it does provide additional public notice.

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Priority Versus Statutory Lienholders

Washington law provides for a number of statutory liens. These include, by way of

example, landlords’ liens, mechanics’ and material suppliers’ liens, crop liens, timber liens,

attorneys’ liens, real estate brokers’ liens, liens for transportation and storage, and liens on dies,

forms, molds and patterns. Many, but not all, such liens are provided for in RCW title 60.

As noted above, Washington’s variation of UCC Revised Article 9 Section 333(b)

provides that certain possessory statutory liens securing “an obligation for services or materials

furnished with respect to goods” are senior in priority to Article 9 security interests only if the

statute creating the lien expressly so provides. The priority of nonpossessory statutory liens

other than judgment liens and agricultural liens is not addressed in Article 9.

Landlords’ liens on a tenant’s personal property located at the leased premises are

provided for in RCW 60.72. Generally, they secure a maximum of two months’ rent.

RCW

60.72.010. They have priority as of the effective date of the lease. Paris American

Corporation v. McCausland, 52 Wash. App. 434, 439, 759 P.2d 1210 (1988). Landlords’ liens

are strictly construed against the landlord. Id. RCW

62A.9

-109(d)(1) provides that UCC

Revised Article

9 does not apply to landlords’ liens other than agricultural liens.

RCW 60.24 provides liens on timber and related products in favor of various parties

involved in the timber and lumber industries. Those liens are prior to UCC security interests and

various other liens pursuant to RCW 60.24.038 and In re Brazier Forest Products, Inc., 106

Wash.

2d 588, 724 P.2d 970 (1986). They are particularly troublesome liens for holders of

security interests in timber because they do not require possession by the lienholder and they are

filed at the county level.

A discussion of agricultural liens under Washington law is beyond the scope of this

guide; however, a detailed treatment of the subject is provided in Section 7.7 of Kaplan, et al.,

Washington Secured Transactions Under Revised Article 9 of the Uniform Commercial Code

(2005 ed.). Washington statutes provide for various liens related to farming activities.

See

, e.g.,

RCW

15.08.090 (lien for disinfection of horticultural products), RCW 15.44.090 (lien of state

dairy products commission), RCW 16.04.060 (lien on trespassing animals), RCW 16.57.223

(lien for livestock branding inspection), RCW 22.09.371 (depositor liens), RCW 60.11 (crop

liens), RCW 60.13 (processor and preparer liens), RCW 60.16 (labor liens on orchards and

orchard lands), RCW 60.52 (liens for services of sires) and RCW 60.56 (agister and trainer

liens). However, not all of those liens qualify as “agricultural liens” as that term is used in

Article 9 of the Uniform Commercial Code. RCW

62A.9A

102(5).

There is a lien to secure Washington’s personal property tax. RCW 84.60.010. It takes

priority over all Article

9 liens on the property taxed.

Washington’s retail sales tax, which is collected by the seller, is a trust fund tax. RCW

82.08.050. Therefore, an Article 9 security interest in a borrower’s accounts receivable does not

attach to the portion of the

account that represents the sales tax and asset

based lenders should be

careful to exclude sales taxes from the class of eligible receivables against which they will make

advances.

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Pursuant to RCW 60.68.015, federal tax liens and other federal liens are to be filed in the

appropriate county real estate records as to real property and with the Washington Department of

Licensing as to personal property. Although perfected security interests in a bank account can

take priority over a federal tax lien, the federal tax lien has priority over the depository bank’s

unexercised right of setoff.

Peoples National Bank of Washington v. United States,

777 F.2d 459

(1985).

UCC Filing and Searching

UCC

1 financing statements are filed with the Uniform Commercial Code

Division of the

Washington Department of Licensing (with the usual exceptions for fixture filings, timber to be

cut and filings relating to as-extracted collateral, each of which are filed at the county level).

RCW 62A.9A-501. Detailed information about filing requirements, fees, etc. is available on the

Department of Licensing’s website at

www.dol.wa.gov.

The Washington Supreme Court has upheld a contractual limitation of liability in a UCC

lien search service provider’s contract limiting its liability

for a defective search to the search fee

charged to its customer even where the customer relied on the defective search and made a loan

secured by collateral subject to a prior lien that was not shown in the search report.

Puget Sound

Financial, L.L.C. v. Unisearch, Inc., 146 Wash. 2d 428, 47 P.3d 540 (2002). In that case, the

court upheld a clause in the search firm’s invoices limiting its liability to the $25 search fee.

Taxation of Foreclosure Sales

For information about Washington taxes that may be applicable to Article 9 foreclosure

sales, see Section III.C above.

Miscellaneous

Several Washington cases on personal property lending issues are worthy of note.

Security Interest in Partnership Voting and Management Rights.

Casey v. Chapman,

123

Wash. App. 670, 98 P.3d 1246 (2004) indicates that a creditor intending to take a security

interest in a partnership interest that will allow the purchaser of that interest in an Article 9 sale

to have the debtor’s voting and management rights in the partnership (r

ather than just the interest

in partnership profits) must be extremely careful and thorough in making that clear in the

security documents and in obtaining the consent of the other partners even if the secured creditor

is also a partner or former partner i

n the partnership.

After

-Acquired Property. The court in Paulman v. Gateway Venture Partners III, L.P.,

163 F.3d 570, 578 (9

Cir. 1998) held that, under Washington law, a security interest in

“inventory” and “accounts receivable” presumptively includes

after

acquired property even if the

documents do not expressly so provide, subject to rebuttal by evidence that the parties intended

otherwise. It based its decision on the fact that these types of collateral are constantly turning

over and no creditor could reasonably agree to be secured only by the debtor’s current inventory

and accounts.

Id.

at 579.

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Commercially Reasonable Time for Sale of Collateral. One Washington court found that

a secured party that waited eight months from repossession of a piece of farm equipment to sell

the collateral failed to prove that the delay was commercially reasonable and, on that basis,

denied the creditor a deficiency judgment. Empire South, Inc. v. Repp, 51 Wash. App. 868, 756

P.2d 745 (1988). It did so even though

the delay was over the winter and the debtors at one point

requested a 30-day delay in the sale.

Id.

at 51 Wash. App. 872. The case highlights the need for

a foreclosing secured creditor to be able to prove the commercial reasonableness of its sale of

llateral.

VIII.

EQUIPMENT LEASING

Washington has adopted Article 2A of the UCC. RCW chapter 62A.2A. The

Washington variations from the uniform text are collected in the state variations volume of the

Uniform Commercial Code Reporting Service

There are specific statutes governing consumer leases (RCW 63.10) and lease purchase

agreements (RCW

63.19).

IX.

GUARANTIES AND SURETYSHIP

Waivers of Suretyship Defenses

Waivers of suretyship defenses in guaranties are generally enforced in Washington.

See,

e.g., Warren v. Wa

shington Trust Bank

, 92 Wash.

2d 381, 598 P.2d 701 (1979);

Fruehauf Trailer

Company of Canada Limited v. Chandler, 67 Wash. 2d 704, 409 P.2d 651 (1966); Franco v.

Peoples National Bank of Washington, 39 Wash. App. 381, 693 P.2d 200 (1984). Without such

waiver, guarantors and other sureties have a wide range of defenses, as is the case in all states.

Guaranties

A guaranty must be supported by consideration, although there need not be independent

consideration flowing to the guarantor and the consideration to the principal obligor is sufficient

consideration for the guaranty. Union Bank v. Kruger, 1 Wash. App. 622, 463 P.2d 273 (1969).

However, the consideration must be contemporaneous with or subsequent to the execution and

delivery of the guaranty.

Cow

les Publishing Company v. McMann, 25 Wash. 2d 736, 172 P.2d

235 (1946). Washington cases have held guaranties to fail for lack of consideration.

See,

e.g.,

Universal C.I.T. Credit Corporation v. DeLisle

, 47 Wash.

2d 318, 287 P.2d 302 (1955).

Pursuant to

RCW 23B.03.020(2)(h), unless the articles of incorporation expressly provide

otherwise, a Washington corporation has the power to make guaranties of the obligations of

others if the guaranty “may reasonably be expected to benefit, directly or indirectly, t

guarantor corporation.” The statute also provides that “the decision of the board of directors that

the guaranty may reasonably be expected to benefit, directly or indirectly, the guarantor

corporation shall be binding in respect to the issue of benefit to the guarantor corporation.”

Washington law does not contain such specific provisions regarding guaranties by other types of

entities.

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Where a guarantor guarantees only a limited portion of the principal obligor’s debt,

unless the guaranty specifies the rate of interest applicable to the guarantor’s obligation, it will

bear interest at the legal rate rather than at the rate borne by the guaranteed promissory note or

other obligation.

Seattle

-First National Bank v. West Coast Rubber, Inc., 41 Wash. App. 604,

608-

09, 705 P.2d 800 (1985).

Where a borrower owes multiple debts to a lender, one of which is guaranteed, the lender

generally is not obligated to apply payments made by the borrower first to the guaranteed debt,

although there are some exceptions to that rule. Warren v. Washington Trust Bank, 92 Wash.

381, 598 P.2d 701 (1979).

A continuing guaranty is revoked as to subsequent advances by notice of the death of the

guarantor, unless there is an express provision to the contrary. Exchange National Bank of

Spokane v. Hunt

, 75 Wash. 513, 516, 135 Pac. 224 (1913).

Other Suretyship Situations

A party agreeing to be liable for a loan, but that does not actually receive the loan

proceeds or otherwise receive the direct benefit of the loan, should sign a guaranty rather than

simply signing the promissory note as a purported primary obligor. Otherwise, such a party,

even if that party receives an indirect benefit from the transaction, can be characterized as an

accommodation party or surety and may be allowed to take advantage of various suretyship

defenses, which are not typically waived in promissory notes. See Plein v. Lackey

, 149 Wash.

214, 67 P.3d 1061 (2003). See also Uniform Commercial Code § 3-419 and 3-605 (RCW

62A.3

-419 and 3-605). Alternatively, if the note is secured by a deed of trust, if such a party

signs the note rather than a guaranty, it may argue that it is a borrower rather than a guarantor

and is therefore not subject to a deficiency judgment after a nonjudicial foreclosure pursuant to

RCW 61.24.100.

Where a third party assumes the borrower’s obligations on a loan, the creditor has

“definite and specific notice” of the assumption, and the creditor consents to the assumption, the

original debtor may become merely a surety for the debt with the panoply of defenses generally

available to sureties. Hemenway v. Miller, 116 Wash. 2d 725, 728-29, 807 P.2d 863 (1991).

Such assumptions usually occur in connection with a transfer of the collateral for a loan. In

Hemenway

, the buyer of a business executed a promissory note to the seller for a portion of the

purchase price. The note was secured by assets of the business. The buyer later sold the

business and the collateral to a third party, who assumed liability on the note. When the se

cond

buyer defaulted on the loan, the original buyer defended against the original seller’s claim on the

note on the basis that the original seller had allowed the perfection of its security interest to lapse

and had thereby unjustifiably impaired the collateral giving the original buyer a defense to

payment of the note under UCC § 3-606. The lesson of the

Hemenway

case is that, when a

lender becomes aware that its collateral has been transferred in violation of the provisions of the

loan documents, it should either proceed to enforce its remedies for default immediately or enter

into an assumption agreement under which the original borrower agrees to remain fully,

Some older cases do not seem to require the consent of the creditor in order for the original primary obligor to

become a mere surety.

See e.g. Gillman v. P

urdy

, 167 Wash. 659, 9 P.2d 1092 (1932).

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unconditionally and primarily liable for the loan and waives all suretyship defenses that mig

otherwise be available to it. Such waivers are enforceable under the principles discussed in

Section

IX.A above. See, e.g.

Century 21 Products, Inc. v. Glacier Sales, 129 Wash. 2d 406,

413, 918 P.2d 168 (1996). As a result, it is not entitled to be subrogated to the rights of the

creditor if its interest in the property is foreclosed out.

Id.

at 222. However, it should be

possible to obtain equivalent rights by contract at the time the loan is entered into.

Reimbursement, Subrogation and Contributi

on Rights

A guarantor who pays a guaranteed obligation is entitled to reimbursement by the

borrower and is entitled to be subrogated to the rights of the lender against the borrower,

including its collateral. McAllister v. Pier 67, Inc., 1 Wash. App. 978, 985-86, 465 P.2d 678

(1970). See also National Bank of Washington v. Equity Investors, 86 Wash. 2d 545, 556, 546

P.2d 440 (1976). Similar concepts apply in other types of suretyship situations. See generally

Reliance Insurance Co. v. U.S. Bank of Washi

ngton, N.A.,

143 F.3d 502 (9

Cir. 1998) (applying

Washington law).

Absent an effective waiver of that defense in the guaranty, if the lender releases collateral

of the borrower for the guaranteed debt, the guarantor’s liability on the guaranty may be

dis

charged. See Warren v. Washington Trust Bank, 92 Wash. 2d 381, 390, 597 P.2d 1353

(1979).

Where multiple owners of a corporation or other entity guarantee the entity’s debt, they

should seriously consider entering into a contribution agreement providing for how they will

share the liability on the guaranty among themselves if they are called upon to pay it. In the

absence of such an agreement, the guarantors are liable for contribution among themselves on an

equal per capita basis and not pro rata according to their ownership interests in the entity.

Brill v.

Swanson

, 36 Wash. App. 396, 674 P.2d 211 (1984);

Brooke v. Boyd

, 80 Wash. 213, 141 Pac. 357

(1914). That is often not the result the guarantors would expect or want. Such contribution

agreements should also address the mechanics of enforcement of contribution obligations, the

effect of the insolvency of one or more of the guarantors, the rate of interest on contribution

obligations and whether the guarantor enforcing the contribution obligations is

entitled to recover

attorneys’ fees and other costs. Absent such an agreement, the guarantor seeking contribution is

entitled to interest at the legal rate and is not entitled to recover attorneys’ fees and costs.

Appleford v. Snake River Mining, Milling & Smelting Company, 122 Wash. 11, 210 Pac. 26

(1922).

RECEIVERSHIP/ASSIGNMENT FOR BENEFIT OF CREDITORS

Washington’s general receivership statute is set forth in RCW chapter

7.60. Appointment

of a receiver is a common procedure in the case of defaults on real estate loans and is specifically

contemplated by RCW 7.60.025. In 2004, Washington’s legislature completely revised and

greatly expanded the state’s receivership statute. The revised statute has many features

comparable to the federal bankruptcy law, including in some cases an automatic stay (RCW

7.60.110) and the power to sell receivership property free and clear of liens (RCW 7.60.260).

Some of these provisions are arguably subject to challenge on the basis of federal preemption as

were some earlier state insolvency statutes.

See,

e.g.,

Armour Company v. Becker, 167 Wash.

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245, 252, 9 P.2d 63 (1932). A receiver under the state statute may have more latitude to sell

assets free and clear of liens than is available to a trustee or debtor in possession under the

federal bankruptcy law.

The statute provides both for general receivers, which take possession and control of all

or substantially all of a person or entity’s property, and custodial receivers, which take charge of

limited property or are not

given authority to liquidate property. RCW 7.60.015.

The court in In re Sundance Corp., 149 B.R. 641 (Bankr. E.D. Wash. 1993), considered

at length the liability of a court-appointed receiver for environmental contamination of property

in the receiver’s c

ontrol under various common law and statutory theories.

The 2004 legislature also extensively revised Washington’s little-used assignment for

benefit of creditors statute, RCW chapter 7.08. Under that statute, an assignee for benefit of

creditors is appointed as a receiver subject to the provisions of the receivership statute upon the

filing of a petition with the superior court and the assignment does not become effective until

that petition is filed. RCW 7.08.030(3).

XI.

LENDING ON INDIAN LAND OR TO INDIAN

TRIBES OR CORPORATIONS.

Lending on Indian land presents unique challenges under federal and tribal law. The

bankruptcy court for the Eastern District of Washington addressed a number of the relevant

issues (including the relationship of the Washington rea

l estate recording system and the separate

recording system maintained by the federal Bureau of Indian Affairs) in In re Emerald Outdoor

Advertising, L.L.C., 300 B.R. 775 (Bankr. E.D. Wash. 2003),

affirmed

444 F.3d 1077 (9th Cir.

2006).

Indian Tribes and certain related entities generally have immunity from suit in state

courts. In Wright v. Colville Tribal Enterprise Corporation, 159 Wash. 2d 108, 147 P.3d 1275

(2006), the Washington Supreme Court held that “[t]ribal sovereign immunity protects a tribal

corporation owned by a tribe and created under its own laws, absent express waiver of immunity

by the tribe or Congressional abrogation.”

Id.

at 111-112. This is true for tribal governmental

corporations and their subsidiaries even when “conducting a commercial enterprise outside the

reservation.”

Id.

at 114. However, “a tribe may waive the immunity of a tribal enterprise by

incorporating the enterprise under state law, rather than tribal law.”

Id.

at 115.

XII.

OTHER LAWS OF INTEREST

Recovery of Attorneys’ F

ees

Pursuant to RCW 4.84.330, provisions of loan documents, leases or other agreements

requiring one party to pay the other party’s attorneys’ fees and costs to enforce the provisions

thereof will be construed to entitle the prevailing party in any action, whether or not the party

named in the document is the prevailing party, to be awarded its costs and reasonable attorneys’

fees. Attorneys’ fees and costs are awarded to the prevailing party even when the prevailing

party succeeds in invalidating the contract containing the attorneys’ fees provision unless the

parties never intended to form a contract.

Compare

Labriola v. Pollard Group, Inc., 152

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Wash.

2d 828, 839, 100 P.3d 791 (2004)

with

Wallace v. Kuehner, 111 Wash. App. 809, 46 P.3d

823 (2002).

In an appropriate case, a party may be entitled to recover attorneys’ fees for work

performed by its salaried in-house counsel. Metropolitan Mortgage & Securities Co., Inc. v.

Becker

, 64 Wash. App. 626, 631

34, 825 P.2d 360 (1992).

Fraudulent Transfer Law

Washington has adopted the Uniform Fraudulent Transfer Act. It is codified at RCW

chapter 19.40. In most, but not all cases, an action to avoid a fraudulent transfer must be brought

within four years of the date the relevant transfer is made or obligation is incurred. RCW

19.40.091.

Even if a transfer of property is avoided as a fraudulent transfer, if the transferee obtained

a bona fide loan from a good faith lender while in title to the property, the lien securing the loan

will be preserved despite the avoidance of the borrower’s title. Associates Housing Finance v.

Stredwick

, 120 Wash. App. 52, 83 P.3d 1032 (2004).

The enforcement of a security interest in compliance with Article 9 of the Uniform

Commercial Code is not avoidable under the Washington fraudulent transfer statute in the

absence of actual intent to hinder, delay or defraud a creditor. RCW 19.40.081(e). The same

rule applies to proper termination of a lease upon default.

Id.

Similarly, the price paid for

property at a regularly-conducted noncollusive tax foreclosure sale under Washington law is

conclusively deemed to be “reasonably equivalent value” for purposes of the fraudulent transfer

statute so that such a sale may not be invalidated under that statute. In re Samaniego, 224 B.R.

154 (Ba

nkr. E.D. Wash. 1998).

Environmental Laws and Regulations

Washington has extensive laws and regulations governing environmental matters. These

laws and regulations are administered and enforced by the Washington Department of Ecology

(“DOE”). Washington has enacted the Model Toxics Control Act (“MTCA”), which is codified

at RCW chapter 70.105D. Washington’s version of MTCA contains various provisions intended

to protect lenders secured by contaminated property from liability for the contamination. That

accomplished largely by excluding from the definition of “owner or operator” of a property a

“person who, without participating in the management of a facility, holds indicia of ownership

primarily to protect the person’s security interest in the facility.” RCW 70.105D.020(12)(b)(ii).

The act provides that “[h]olding indicia of ownership after foreclosure or its equivalents for

longer than five years shall be considered to be holding the indicia of ownership for purposes

other than primarily to protect a security interest.” RCW 70.105D.020(18). Therefore, if a

lender forecloses on a contaminated property and is unable to sell it within five years, it may be

subject to liability as an owner or operator of the property.

Prior to 2005, Washington’s only statutory environmental lien on real property was a lien

provided for by RCW 70.121.140, which relates to mining and milling of uranium and thorium.

That

lien “has priority over any lien, interest, or other encumbrance previously or thereafter

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recorded or filed concerning any property described in the statement of claim, to the extent

allowed by federal law.”

In 2005, the legislature enacted RCW 70.105D.055. It gives DOE the right to file a lien

against certain real property in the state when DOE incurs environmental remediation costs for

that property. The lien has super-priority over existing mortgage liens on the property in certain

limited circumstances. Some salient features of the lien are:

1. It is generally junior to existing mortgage liens.

2. It can be elevated to a priority senior to that of existing mortgage liens where all

of the following conditions are met:

(a)

The property is “abandoned” within the meaning of the statute, which

means that either (i) ”there has not been significant business activity on the real property for

three years”

(ii)

property taxes on the property are three years in arrears.

(b)

DOE limits the amount of its lien to the “increase in the fair market value

of the real property that is attributable to a remedial actio

n conducted by [DOE].”

(c)

The property is not: (i) owned by a local government or special purpose

district; or (ii) a 1-4 family residential property (unless it is an “illegal drug manufacturing and

storage site”).

3. The increase in value is determined by subtracting the assessed value of the

property for the most recent year prior to the initiation of the remedial action from either the

bona fide purchase price of the property or the appraised value of the property determined by an

appraiser retained by

DOE.

4. Certain advance notices to the owner of the property and to lienholders are

required.

Exclusion of Punitive Damages

Punitive damages are not available in Washington unless specifically authorized by

statute. Dailey v. North Coast Life Insurance Co

mpany

, 129 Wash. 2d 572, 573-74, 919 P.2d

589 (1996). A limited number of statutes provide for some form of enhanced damages, although

they are generally limited in amount. See, e.g., RCW 19.86.090 (triple damages for violation of

Consumer Protection Act) and RCW 4.24.630, RCW 64.12.030 and RCW 79.02.340 (triple

damages for unlawful cutting or removal of trees, crops, minerals, etc).

Statute of Frauds

Washington’s statute of frauds is found in RCW chapter 19.36. Two provisions are of

particular interest

to lenders.

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Credit Agreements

RCW 19.36.110 contains a special statute of frauds applicable to “credit agreements”, which

is intended to protect lenders against claims that there were oral agreements that modified the

written loan documents. “Credit agreement” is defined to mean “an agreement, promise, or

commitment to lend money, to otherwise extend credit, to forbear with respect to the repayment

of any debt or the exercise of any remedy, to modify or amend the terms under which the

creditor has lent money or otherwise extended credit, to release any guarantor or cosigner, or to

make any other financial accommodation pertaining to a debt or other extension of credit.”

RCW 19.36.100.

Where the statute applies, the lender has the benefit of RCW 19.36.110,

which provides:

A credit agreement is not enforceable against the creditor unless the

agreement is in writing and signed by the creditor. The rights and

obligations of the parties to a credit agreement shall be determined solely

from the written agreement, and any prior or contemporaneous oral

agreements between the parties are superseded by, merged into, and may

not vary the credit agreement. Partial performance of a credit agreement

does not remove the agreement from the operation of this section.

In order to have the benefit of the statutory

protections

, the borrower must be given a

statutorily

prescribed notice as follows:

ORAL AGREEMENTS OR ORAL COMMITMENTS TO

LOAN MONEY, EXTEND CREDIT, OR TO FORBEAR

FROM ENFORCING REPAYMENT OF A DEBT ARE NOT

ENFORCEABL

E UNDER WASHINGTON LAW.

The notice must “be in type that is bold face, capitalized, underlined, or otherwise set out

from surrounding written materials so it is conspicuous.” RCW 19.36.140. For that reason, it is

advisable that it be bolded, capitalized and underlined wherever it appears. The notice need not

be put into every loan document in a transaction, but it must be given simultaneously with or

before a credit agreement is made. RCW 19.36.130. Because the statute does not specify when

a “credit agreement is made”, it is advisable to provide the notice in the earliest possible

communication with the borrower and guarantors. Lenders in Washington commonly put the

notice in all major loan documents and subsequent modifications.

Once the notice is given, it is “effective as to all subsequent credit agreements and

effective against the debtor, and its guarantors, successors, and assigns.” RCW 19.36.130.

These provisions only apply to commercial loans. RCW 19.36.120.

If the lender does not properly invoke the protection of RCW chapter 19.36, the loan

documents may be subjected to the general common law rule that “a contract clause prohibiting

oral modifications is essentially unenforceable because the clause itself is subject to oral

modifications.” Pacific Northwest Group A v. Pizza Blends, Inc., 90 Wash. App. 273, 277-78,

951 P.2d 826 (1998).

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Guaranties, Etc.

RCW 19.36.010(2) provides that “every special promise to answer for the debt” of

another is void unless that promise “or some note or memorandum thereof, be in writing, and

signed by the party to be charged therewith, or by some person thereunto by him lawfully

authorized.” See South Sound National Bank v. Meek, 14 Wash. App. 577, 544 P.2d 25 (1975)

for a summary of cases discussing the extent t

o which this statute applies to guaranties.

Statutes of Limitation

The statute of limitation applicable to promissory notes and other written contracts is six

years. RCW

62A.3

-118 and 4.16.040. For promissory notes that are payable on demand, the

six

yea

r period begins to run on the date of demand. RCW

62A.3

118(b). If no demand is made

on such a note, an action to enforce the note is barred if neither principal nor interest has been

paid for a continuous period of 10 years.

Id.

Prior to 1993, the sta

tute of limitation on a demand

note began to run immediately under former RCW

62A.3

-122. A similar rule appears still to be

effective for demand loans that are not evidenced by a note or other instrument subject to

RCW

62A.3

-118. See, e.g., Wallace v. Ku

ehner

, 111 Wash. App. 809, 818-19, 46 P.3d 823

(2002) and cases cited therein.

The six-year statute also applies to actions on accounts receivable incurred in the

ordinary course of business and to actions for the rents and profits, or for the use and occu

pation,

of real estate. The statute of limitation applicable to oral contracts and most torts is three years.

RCW

4.16.080. Some torts are subject to a two-year statute under RCW 4.16.130(3). As

discussed in Section VI.O.2.b above, there is a one-

year

statute of limitations for actions seeking

a deficiency after nonjudicial foreclosure of a deed of trust (in the limited situations where such

an action is permitted). RCW 61.24.100.

If a lender fails to bring an action or foreclose on its security within

the time permitted by

the statute of limitations, the liens and security interests securing the debt are discharged.

Bingham v. Lechner

, 111 Wash. App. 118, 45 P.3d 562 (2002).

A borrower may raise an otherwise time-barred claim as an affirmative defense to a

lender’s claim on a debt.

Seattle

-First National Bank v. Siebol, 64 Wash. App. 401, 407, 824

P.2d 1252 (1992).

Choice of Law Provisions

As a general rule, Washington courts will honor an express contractual choice of law

provision agreed to by the parties to a contract and apply the substantive law of the chosen

jurisdiction, unless: (1)

Washington law would otherwise apply, the application of the law of the

chosen jurisdiction would be contrary to a fundamental policy of the State of Washington,

and

Washington has a materially greater interest than the chosen jurisdiction in the determination of

the particular issue; or (2) the chosen jurisdiction has no substantial relationship to the parties or

the transaction and there is no other reasonable basis for the parties’ choice. McKee v. AT&T

Corporation

, 164 Wash.

2d 372, 384, 191 P.3d 845 (2008).

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Choice of law covenants apply only to substantive law and do not extend to procedural

matters.

Washington has no statutory or case law specifically addressing the effect of bifurcated

choice of law provisions where, for example, the loan agreement and promissory note are

governed by New York law and the deed of trust on a Washington property is governed by

Washington law. However, Washington courts often c

ite the

Restatement (Second) of Conflict of

Laws

(1971) on conflict of laws issues (see, e.g., McKee, supra, at 164 Wash. 2d 383-85) and

comment e to Section 229 of the Restatement contemplates that a mortgage instrument can be

governed by different law than the underlying debt. The Restatement cites the early Washington

case of Mantle v. Dabney, 47 Wash. 394, 92 Pac. 134 (1907) in that regard. See also Maxwell v.

Ricks

, 285 F. 656 (W.D. Wash. 1923),

aff’d

294 F. 255 (9th Cir. 1923) (holder of note execut

and delivered in California and secured by mortgage on California property allowed to waive

collateral and sue on note in Washington federal court without following security-first doctrine

of California law).

Forum and Venue Selection Provisions

Washington courts will generally enforce forum and venue selection clauses in contracts

at least where they do not violate the public policy of the state, they are timely brought to the

court’s attention, all parties to the action are parties to the contract, and there is not “a good

reason why the agreement should not be enforced.” Dix v. ICT Group, Inc., 160 Wash. 2d 826,

161 P.3d 1016 (2007); Mangham v. Gold Seal Chinchillas, Inc., 69 Wash. 2d 37, 44-45, 416

P.2d 680 (1966).

See

also

RCW 4.12.080.

Arbitration

Agreements

Arbitration agreements are generally enforceable in Washington. The state has adopted

the uniform arbitration act in RCW chapter 7.04A. Mandatory arbitration of certain relatively

small monetary claims that are not subject to an arbitration agreement is provided for in RCW

chapter 7.06. The courts have held that a class action waiver in an arbitration agreement is

substantively unconscionable and unenforceable in certain situations where a class action offers

the only effective avenue of relief (generally in the consumer context). See, e.g., McKee v.

AT&T Corporation

, 164 Wash.

2d 372, 396-

98, 191 P.3d 845 (2008).

Jury Trial Waivers

Washington does not have any law specifically addressing the validity of contractual jury

trial waivers. Washington law relating to jury trial waivers in other contexts is discussed in

Sackett v. Santilli, 101 Wash. App. 128, 5 P.3d 11 (2000).

See

Section VI.O.3.d above for a

discussion of the availability of a jury trial in a foreclosure action.

Duty of Good Fai

th; Deemed Insecurity Provisions

Washington law imposes a duty of good faith and fair dealing on the parties to all

contracts, which “obligates the parties to cooperate with one another so that each may obtain the

full benefit of performance.” Badgett v. Security State Bank, 116 Wash. 2d 563, 569, 807 P.2d

356 (1991). However, that duty does not require a party to “accept a material change in the

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terms of the contract” or “inject substantive terms into the parties’ contract.”

. Therefore, a

lender gene

rally does not have an obligation to accept a workout or restructuring proposal from a

borrower.

Badgett

also held that “a course of dealing does not over-ride express terms in a

contract or add additional obligations.”

Id.

at 572. But see, e.g., Sherman v. Lunsford, 44 Wash.

App. 858, 862

63, 723 P.2d 1176 (1986) (a waiver of contractual rights can occur through course

of performance). In the same vein, Washington courts have held that “a history of providing

financing does not create a duty to provide future financing.”

Seattle

-First National Bank v.

Westwood Lumber, Inc.

, 65 Wash. App. 811, 823, 829 P.2d 1152 (1992). The duty of good faith

and fair dealing applies only where the parties have an existing contract between themselves.

Keystone Land &

Development Company v. Xerox Corporation

, 152 Wash.

2d 171, 177, 94 P.3d

945 (2004). Washington law does not recognize or enforce an agreement to agree or impose an

obligation of good faith in connection with such an agreement.

Id.

at 176.

RCW 62A.1-208 (Washington’s version of Uniform Commercial Code § 1-

208)

addresses contract provisions to the effect that a party can accelerate a debt or take other action if

it deems itself insecure. Under that statute: “A term providing that one party or his successor in

interest may accelerate payment or performance or require collateral or additional collateral ‘at

will’ or ‘when he deems himself insecure’ or in words of similar import shall be construed to

mean that he shall have power to do so only if he in good faith believes that the prospect of

payment or performance is impaired.”

Powers of Attorney

Washington has adopted the Uniform Durable Power of Attorney Act (but with

substantial variations from the uniform text) at RCW chapter 11.94. Powers of attorney gr

anted

between spouses are addressed in RCW 26.16.060-.090. A general power of attorney does not

permit the attorney-

-fact to make gifts of the principal’s property unless it expressly contains

such authority. Bryant v. Bryant, 125 Wash. 2d 113, 119, 882 P.2d 169 (1994). In this regard,

note the discussion in Section V.D.1. of this guide regarding the danger of a guaranty being

construed as a gift.

When a lender accepts a signature under a power of attorney, it should obtain an affidavit

complying with RCW 11.94.020(2) from the attorney-

-fact certifying that the power of

attorney has not been revoked or terminated.

A power of attorney that has been recorded cannot be revoked by any act of the party by

whom it was executed unless the instrument of revocation is also recorded in the same recording

office. RCW 65.08.130.

Lazov v. Black

, 88 Wash.

2d 883, 567 P.2d 233 (1977).

Unauthorized Practice of Law

The selection and preparation of promissory notes and other loan documents constitutes

the practice of law in Washington. Washington State Bar Association v. Great Western Union

Federal Savings and Loan Association, 91 Wash. 2d 48, 55, 586 P.2d 870 (1978).

Notwithstanding that rule, “whether or not a fee is charged, lenders are authorized to prepare the

types of legal documents that are ordinarily incident to their financing activities when lay

employees participating in such document preparation do not exercise any legal discretion.”

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Perkins v. CTX Mortgage Company, 137 Wash. 2d 93, 106, 969 P.2d 93 (1999). However,

“lenders must comply with the standard of care of a practicing attorney when preparing such

documents.”

Washington has a class of non-lawyer “limited practice officers”, who are authorized to

“select, prepare and complete legal documents incident to the closing of real estate and personal

property transactions.” Washington Admission to Practice Rule (“APR”) 12. Limited practice

officers are required to pass a qualifying examination, fulfill continuing education requirements

and meet certain other requirements.

. They are permitted to select, prepare and complete a

limited range of documents using standard forms approved by the state Limited Practice Board.

APR 12(d);

Bishop v. Jefferson Title Company

, 107 Wash. App. 833, 842, 28 P.3

d 802 (2001).

Subordination Agreements

In Washington, subordination agreements are generally enforceable in accordance with

their terms and the courts have even enforced oral subordination agreements. See Skeel v

Christenson

, 17 Wash. 649, 50 Pac. 466 (1897). Also, if multiple, simultaneous instruments

contain adequate statements about the intended order of priority among them, that ordering can

be enforced.

See Bank of Gresham v. Johnson

, 143 Wash. 24, 254 Pac. 464 (1927).

As discussed in greater detail in Section VI.H.1 of this guide, due to the effect of

Washington’s “race notice” recording system, a lender should not rely on recording order alone

to establish the priority of a deed of trust or mortgage over another instrument recorded at

substantially

the same time, but should require an appropriate subordination agreement or other

recorded acknowledgment of priority from the holder of the intended junior lien or interest.

At least where the subordinated creditor is the seller of the common collateral, a

subordination agreement will be construed in favor of the subordinated creditor and the senior

creditor’s “priority rights under a subordination agreement are strictly limited to the express

terms and conditions of the agreement.” Campanella v. Rainier National Bank, 26 Wash. App.

418, 420, 612 P.2d 460 (1980);

Ban

Co Investment Co. v. Loveless

, 22 Wash. App. 122, 134, 587

P.2d 567 (1978). However, Washington courts have sometimes been willing to enforce

agreements by sellers to subordinate to future financing obtained by the buyer even where the

agreement contains no material detail about the terms of the future financing.

See

White &

Bollard, Inc. v. Goodenow, 58 Wash.

2d 180, 185, 361 P.2d 571 (1961).

Marshaling of Collateral

Washington recognizes the equitable doctrine of marshaling under which a secured

creditor having two items of collateral, one of which is subject to a junior lien and one of which

is not, can be required to realize first on the collateral that is not subject to a junior lien. In re

Brazier Forest Products, Inc.,

921 F.2d 221, 223 (9th Cir. 1990). Only a secured or lien creditor

has standing to seek marshaling. Wenatchee Production Credit Association v. Pacific Fruit and

Produce Co., 199 Wash. 651, 659, 92 P.2d 883 (1939). Whether marshaling is granted rests

largely in the discretion of the court and it is appropriate only if other creditors will not be

harmed.

Edward L. Eyre & Co. v. Hirsch

, 36 Wash.

2d 439, 457, 218 P.2d 888 (1950).

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As discussed in greater detail in Section

VI.T of this guide, Washington’s partition statute

includes a marshaling provision. RCW

7.52.230.

Where multiple encumbered properties have been sold by the original mortgagor, a

related equitable doctrine can be applied to require the secured creditor to realize on the

properties in the “inverse order of alienation” (

i.e.

, by foreclosing first on the last property

transferred by the original mortgagor, etc.). Haueter v. Rancich, 39 Wash. App. 328, 331, 693

P.2d 168 (1984).

Loan Commitments

Washington courts will not grant specific performance of a promise to lend money.

Eugster v. City of Spokane

, 118 Wash. App. 383, 76 P.3d 741 (2003).

As noted in Section XII.E.1 above, loan commitments should always contain the statute

of frauds legend described in tha

t Section.

Confession of Judgment

Washington has a statute authorizing confession of judgment either with or without the

prior filing of a lawsuit. RCW chapter 4.60. Washington lenders do not require confessions of

judgment in loan documents as is common

in some of the eastern states.

Insider Loans

Lenders should be wary in making loans to entities that are affiliates of the lender,

especially if the borrower is in financial difficulty at the time of the loan. When an entity

becomes insolvent, third party creditors often look for ways to be paid ahead of insider creditors

and may assert that the insider debt should be subordinated to debts to third party creditors or

should be recharacterized as a capital contribution to the entity. Washington does not h

ave

extensive law on this subject.

In some older cases, Washington courts have upheld secured loans made to a corporation

even though the loans were by its stockholders or directors and even though the loans were made

while the corporation was insolvent.

See

Belcher v. Webb, 176 Wash. 446, 449, 29 P.2d 702

(1934) (stating that such loans “will be subjected to the most rigid scrutiny by the courts”);

Terhune v. Weise

, 132 Wash. 208, 214, 231 Pac. 954 (1925) (citing authority that the insider loan

must be made “honestly and in good faith” and is “subject to severe scrutiny by the courts”). In

the more recent case of Block v. Olympic Health Spa, Inc., 24 Wash. App. 938, 948, 604 P.2d

1317 (1979), the state’s intermediate appellate court expressed doubt that such loans are proper

while the entity is insolvent, but did so without referring to the earlier Supreme Court cases

discussed above.

When a corporate officer or director makes a loan to the corporation, the burden of

proving good faith is on the officer or director because of his or her fiduciary capacity.

Saviano

v. Westport Amusements, Inc.

, 144 Wash. App. 72, 79, 780 P.3d 874 (2008).

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The position of the insider creditor is more tenuous if it documents the loan long after the

funds are advanced or takes collateral for its debt after the time it extends credit.

See

Saviano v.

Westport Amusements, Inc.,

supra; Terhune v. Weise,

supra

, at 132 Wash. 215

-217.

Certain provisions of the fraudulent transfer statute are applied more stringently with

respect to i

nsider creditors than noninsiders.

See, e.g.

, RCW

19.40.041 (b)(1) and 19.40.051(b).

In addition to possible attacks under state law, insider creditors should consider the

possibility of their loans being equitably subordinated to debts to unaffiliated creditors under

federal bankruptcy law.

See

Stoumbos v. Kilimnik, 988 F.2d 949, 958-61 (1993), for a case

appealed from a federal district court sitting in Washington in which an insider debt was

equitably subordinated on that basis.

Enforcement of Foreign

Judgments

Judgments From Other States

Under Washington’s version of the Uniform Enforcement of Foreign Judgments Act,

RCW chapter 6.36, a judgment, decree or order of a court of the United States or of any sister

state that is entitled to full faith and credit under the United States Constitution may be filed in

any superior court of any county in Washington and, in some cases, may be filed in the district

court of any county. RCW 6.36.025. The clerk of court is required to treat the foreign judgment

in the same manner as a judgment of the Washington court in which it is filed.

Id.

A judgment

so filed is subject to the same procedures, defenses, set-offs, counterclaims, cross-

complaints,

and proceedings for reopening, vacating, or stay as a judgment of a

superior court in Washington

and may be enforced or satisfied in the same manner as a Washington judgment.

Id.

2. Judgments From Foreign Countries

Washington has adopted the Uniform Foreign Money

Judgment Recognition Act at RCW

chapter 6.40. Under that act, a judgment of court of competent jurisdiction that is final and

conclusive and enforceable in a foreign country (even though an appeal therefrom is pending or

it is subject to appeal) is conclusive between the parties and is enforceable in Washington in

the

same manner as the judgment of a sister state that is entitled to full faith and credit under the

United States Constitution to the extent that it grants or denies recovery of a sum of money,

except that: (a) a foreign judgment is not conclusive if (i) the judgment was rendered under a

system that does not provide impartial tribunals or procedures compatible with the requirements

of due process of law, (ii) the foreign court did not have personal jurisdiction over the defendant,

or (iii) the foreign court did not have jurisdiction over the subject matter; and (b) a foreign

judgment need not be recognized if (i) the defendant in the proceedings in the foreign court did

not receive notice of the proceedings in sufficient time to enable the defendant to defend, (ii) the

judgment was obtained by fraud; (iii) the claim for relief on which the judgment is based is

repugnant to the public policy of the State of Washington, (iv) the judgment conflicts with

another final and conclusive judgment, (v) the proceeding in the foreign court was contrary to an

agreement between the parties under which the dispute in question was to be settled otherwise

than by proceedings in that court, or (vi) in the case of jurisdiction based only on personal

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service, the foreign court was a seriously inconvenient forum for the trial of the action. RCW

6.40.020 through .040.

Participation Agreements

A participation agreement under which a lender sells a participation interest in a loan is

enforceable against the lender and is not avoidable in the lender’s bankruptcy. In re Columbia

Pacific Mortgage, Inc., 20 B.R. 259 (Bankr. W.D. Wash. 1981). This is true even if the

participant’s interest is not reflected in a public filing in the real estate or personal property

records and the promissory note evidencing the debt is not indorsed and delivered to the

participant.

Id.

at 262. The court further held that these principles extend not only to the loan

itself but also to the collateral for the loan after the selling lender forecloses and t

akes title to that

collateral.

Id.

at 263

-64.

XIII.

CONCLUSION

This material raises numerous and complex issues. It is provided for general background

information only and should not be relied on in specific transactions.

Exhibit A

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EXHIBIT A

Formatting Requirements F

or Recorded Documents

The following formatting requirements for documents to be recorded in the real estate

records are set out in RCW 65.04.045-.047. They can be enforced very strictly by county

recording offices.

Requirements for First Page

When any instrument is presented to a county auditor or recording officer for recording,

the

first

page of the instrument must contain:

A top margin of at least three inches in which nothing may appear

except the “after recording, return to” information, and a o

-inch margin on all four sides in

which nothing may appear (except that an instrument may be recorded if a minor portion of a

notary seal, incidental writing, or minor portion of a signature extends beyond the margins);

b. The top left-hand side of the page must contain the name and

address to which the instrument is to be returned;

The title or titles, or type or types, of the instrument to be recorded

indicating the kind or kinds of documents or transactions contained therein must appear

immediatel

y below the three

inch margin at the top of the page;

d. Reference numbers of documents assigned or released with

reference to the document page number where additional references can be found, if applicable;

The names of the grantor(s) and grantee(s), as defined under

RCW

65.04.015;

An abbreviated legal description of the property (for purposes of

this requirement, “abbreviated legal description of the property” means lot, block, plat, or

section, township, range, and quarter/quarter section, and

reference to the document page number

where the full legal description is included, if applicable); and

g. The assessor’s property tax parcel or account number set forth

separately from the legal description or other text.

Exhibit A

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The information provided on page one of the instrument must be in substantially the

following form and is often provided in the form of a cover sheet attached to the document:

When Recorded Return to:

Document Title(s)

Grantor(s):

Grantee(s):

Abbreviated Legal Descri

ption:

Assessor’s Property Tax Parcel or Account Number:

Reference Numbers of Documents Assigned or Released:

Requirements for All Pages

All pages of the document must be on sheets of paper of a weight and color capable of

producing a legible image that are not larger than fourteen inches long and eight and one-half

inches wide with text printed or written in eight point type or larger. All text within the

document must be of sufficient color and clarity to ensure that when the text is imaged all text is

readable. Further, all pages presented for recording must have at a minimum a one-inch margin

on the top, bottom, and sides of all pages (except that an instrument may be recorded if a minor

portion of a notary seal, incidental writing, or minor portion of a signature extends beyond the

margins), be prepared in ink color capable of being imaged, and have all seals legible and

capable of being imaged. No attachments, except firmly attached bar code or address labels,

may be affixed to the p

ages.

Prohibition of Personal Information

Unless the document is presented for recording by a governmental agency, a document is

not recordable if it contains any of the following: (a) a social security number; (b) a date of birth

identified with a particular person; or (c) the maiden name of a person so as to be identified with

a particular person.

Anchorage

Bellevue

Los Angeles

New York

Portland

San Francisco

Seattle

Shanghai

Washington, D.C.