Beal Bank, SSB v. Sarich

¶1 This case asks us to determine whether the nonjudicial foreclosure of a senior lienholder’s deed of trust under the deeds of trust act, chapter 61.24 RCW, precludes an action on the promissory note by a nonforeclosing holder of a junior deed of trust to recover on a debt previously secured by a junior deed of trust on the same property. The trial judge ruled in the affirmative based on Washington Mutual Savings Bank v. United States, 115 Wn.2d 52, 793 P.2d 969, 800 P.2d 1124 (1990), and granted summary judgment for the debtors Steven and Kay Sarich. We granted Beal Bank’s motion to transfer its appeal from the Court of Appeals. We reverse the trial judge’s grant of summary judgment and hold, under Washington law, that the “foreclosure” of a senior deed of trust does not extinguish the debt/obligation of any junior lienholder or otherwise preclude an action to recover that debt.

C. Johnson, J.

FACTUAL AND PROCEDURAL HISTORY

¶2 Steven and Kay Sarich signed three deeds of trust using the same property for security. The property is a condominium located in Seattle. The Sariches signed a first deed of trust on the condominium to Washington Mutual Bank, which was recorded on July 29, 2001. On September 26, 2001, the Sariches signed a second deed of trust using the condominium for security after they signed and delivered to U.S. Bank a commercial promissory note in the amount of $344,600.79. On September 24, 2002, the Sariches granted a third deed of trust on the same condominium after Mr. Sarich and Joe Cashman executed and delivered to U.S. Bank their continuation of a commercial promissory note in the amount of $420,000.00.

¶3 On September 24, 2003, U.S. Bank assigned both commercial promissory notes, as well as assigning the second and third deeds of trust, to Beal Bank. Beal Bank is now the holder of both notes, which remain due and owing. (The Sariches defaulted on paying all of the notes/obligations against the property.)

¶4 On April 25, 2005, Beal Bank filed a complaint for default on the promissory notes and to judicially foreclose on the deeds of trust in King County Superior Court. Beal Bank amended its complaint to exclude the request for foreclosure and sought relief to collect as an unsecured party upon the promissory notes through the personal assets of the Sariches and Mr. Cashman.

¶5 On July 25, 2005, the trustee for Washington Mutual’s first deed of trust sent a notice of default of the Washington Mutual debt, which at that date was $1,581,303.29. Washington Mutual then proceeded under chapter 61.24 RCW to nonjudicially foreclose on its first deed of trust. The property sold at the trustee’s sale on January 6, 2006, for the sum of $1,648,630.00. Beal Bank did not participate as a bidder in the trustee’s sale.

¶6 Beal Bank filed a motion for summary judgment on April 26, 2006, seeking judgment against the Sariches and Mr. Cashman on the promissory notes. In response, the Sariches asserted that their obligation to pay the promissory notes was extinguished as soon as Washington Mutual nonjudicially foreclosed its senior lien. Mr. Cashman responded with the same argument. The trial judge denied Beal Bank’s summary judgment motion.

¶7 On August 11, 2006, the Sariches filed a motion for summary judgment seeking dismissal of Beal Bank’s amended complaint based on the effect of the nonjudicial foreclosure of Washington Mutual. Mr. Cashman joined the motion by argument held on September 8, 2006. The trial judge granted the Sariches’ summary judgment motion and dismissed all claims by Beal Bank against the Sariches and Mr. Cashman.

¶8 Beal Bank timely filed its notice of appeal on October 6, 2006. On March 23, 2007, we granted Beal Bank’s motion to transfer its appeal from the Court of Appeals.

ISSUE

¶9 Whether the nonjudicial foreclosure of a senior lienholder’s deed of trust under the deeds of trust act, chapter 61.24 RCW, precludes an action by a nonforeclosing holder of a junior deed of trust to recover on a debt secured by a junior deed of trust on the same property.

ANALYSIS

Standard of Review

¶10 We review issues of statutory interpretation de novo. Cerrillo v. Esparza, 158 Wn.2d 194, 199, 142 P.3d 155 (2006). We also review summary judgment orders de novo and perform the same inquiry as the trial court. Owen v. Burlington N. Santa Fe R.R., 153 Wn.2d 780, 787, 108 P.3d 1220 (2005); Hisle v. Todd Pac. Shipyards Corp., 151 Wn.2d 853, 860, 93 P.3d 108 (2004).

Deeds of Trust Act and Washington Case Law

¶11 Chapter 61.24 RCW governs Washington’s use of deeds of trust. The relevant statute, RCW 61.24.100(1), provides:

Except to the extent permitted in this section for deeds of trust securing commercial loans, a deficiency judgment shall not be obtained on the obligations secured by a deed of trust against any borrower, grantor, or guarantor after a trustee’s sale under that deed of trust.

(Emphasis added.)

¶12 The Sariches argue that the trial judge correctly dismissed Beal Bank’s claims, relying on our decision in Washington Mutual, 115 Wn.2d 52. Specifically, the Sariches contend that Washington Mutual stands for the proposition that a “nonjudicial foreclosure eliminates the ability of any lien-holder, including non-foreclosing junior lienholders, to sue the debtor for a deficiency.” Br. of Resp’t at 10.

¶13 Conversely, Beal Bank argues the trial judge erred by reasoning a nonjudicial foreclosure sale bars an action to recover any debt that was secured against the property whether or not the creditor purchased the collateral at the trustee’s sale. Beal Bank asks us to rule that a nonjudicial foreclosure does not extinguish a junior nonforeclosing party’s right to sue on the independent obligation of the debtors.

¶14 We turn to the plain language of the relevant portion of RCW 61.24.100 and find the right of nonforeclosing junior lienholders and creditors is simply not implicated. To accept the Sariches’ argument would render a result whereby all liens attached to security would be automatically extinguished upon foreclosure. We find nothing in the statutory scheme supporting this conclusion. While foreclosure eliminates the security of a junior lienholder, the debts and obligations owed to that nonforeclosing junior lienholder are not affected by foreclosure under the statutes.

¶15 Further, both the trial judge and the Sariches have misinterpreted our decision in Washington Mutual. In Washington Mutual, we decided a question certified to us by the Ninth Circuit Court of Appeals to enable the Ninth Circuit to interpret a federal regulation relating to the redemption rights of the Internal Revenue Service (IRS). The question certified by the federal court was: “ Tn Washington, may a nonforeclosing junior lienor who purchases property at a nonjudicial foreclosure sale sue for a deficiency under Washington law, and, if so, what is the manner of computing the deficiency?’ ” Wash. Mut., 115 Wn.2d at 55.

¶16 While the certified question in Washington Mutual suggested the court was deciding the rights of a purchasing junior lienholder, the underlying issue centered on the rights of the IRS to “redeem” the property foreclosed on, pursuant to an act of Congress. Under 28 U.S.C. § 2410 and 26 U.S.C. § 7425, the IRS is granted certain rights to a debtor’s property in a foreclosure action. Our statute dealing with nonjudicial foreclosures contains no similar right to redeem. Further, the ultimate determination in Washington Mutual centered on how much the IRS was required to pay to redeem the property. The IRS argued that the amount bid at foreclosure was the correct amount. Washington Mutual argued, in the alternative, that the IRS was required to pay either the fair market value or the combined debt against the property, which included the foreclosure sale price plus the amount due on the unpaid junior lienholder debt.

¶17 Applying redemption principles, we held that to redeem the property, the IRS was required to pay the combined total of both notes against the property. Hence, Washington Mutual does not stand for the principle that a junior note is extinguished; Washington Mutual supports the opposite conclusion that the obligation owed to a junior lienholder continues after a trustee’s sale.

¶18 In Justice Guy’s concurrence to Washington Mutual, it was made clear that where a junior deed of trust holder does not foreclose, that junior deed of trust holder is not precluded from suing under the note. Wash. Mut., 115 Wn.2d at 60 (Guy, J., concurring). Later, in clarifying the opinion, we narrowed our holding by adding: “We do not herein address the matter of a junior deed of trust holder’s continued right to sue the debtor on the promissory note because it is not before us.” Wash. Mut., 115 Wn.2d at 59. Hence, the Washington Mutual case has no bearing on the present case and expressly did not address the issue before us now.

¶19 Here, Beal Bank is not a purchaser of the property at a nonjudicial foreclosure sale but seeks to enforce its rights under the separate promissory notes. Because Washington Mutual, as the senior lienholder, elected to pursue its rights to a nonjudicial foreclosure, Washington Mutual’s action does not preclude a junior lienholder (here, Beal Bank) from seeking its legal recourse. Put another way, while Beal Bank’s rights in the collateral are extinguished by Washington Mutual’s trustee’s sale, the underlying promise by the Sariches and Mr. Cashman to pay Beal Bank on the two notes continues via the promissory notes, although the promissory notes are now unsecured as a result of that trustee’s sale.

¶20 Accordingly, we reverse the trial judge’s grant of summary judgment to the Sariches and hold the nonjudicial foreclosure of a senior lienholder’s deed of trust under RCW 61.24.100(1) of the deeds of trust act does not preclude an action by a nonforeclosing holder of a junior deed of trust to recover on a debt secured by a junior deed of trust on the same property.

ATTORNEY FEES

¶21 One of the promissory notes provides for award of attorney fees and costs to the prevailing party. Because we reverse the trial judge’s grant of summary judgment, we reverse the trial judge’s award of attorney fees and costs to the Sariches and Mr. Cashman and we remand the matter to the trial court for further proceedings consistent with this opinion.

Alexander, C.J., and Madsen, Bridge, Chambers, Owens, Fairhurst, and J.M. Johnson, JJ., concur.