The Washington Supreme Court’s recent decision in Washington Federal vs. Harvey confirmed what was believed true: guarantors of commercial loans may be liable for a deficiency after non-judicial foreclosure of a trust deed. Lenders are often faced with Collateral Shortfalls in a default situation. This is especially true when the value of collateral after non-judicial foreclosure creates a deficiency. In such situations, lenders may find themselves seeking to recover from guarantors as well.
In order to recover deficiency from a solvent guarantor a number of factors must be met. First, the guaranty must be on a commercial loan. Second, foreclosure of the trust deed must be non-judicial. Third, notice that the lender will seek to recover a deficiency from the guarantor must be timely given. Finally, the trust deed securing the loan must be upon real property not owned by the guarantor. Thus, a deficiency can be recovered from a guarantor when the guarantor executes a personal guaranty on a commercial loan secured by a trust deed granted on the real property of another.
This result holds guarantors accountable on a personal guaranty on a commercial loan. If a personal guaranty is not secured by an interest in real property of the guarantor, then what could the guarantor be guaranteeing other than the obligation to pay? It is also a reminder that a personal guaranty should never be entered into lightly. While this result will be burdensome to those who seek to engage in investment, we can help. Both lenders and borrowers should seek legal counsel to ensure sufficient securitization or protection from personal liability.
If you have specific questions regarding how this recent decision will affect your current investments, please feel free to contact our Creditor’s Rights and Bankruptcy attorneys.