Limitations of Personal Guarantees of Commercial Real Estate Loans

Two recent opinions from Division II of the Washington Court of Appeals addressed and limited lenders’ rights to enforce personal guarantee provisions given in connection with commercial deeds of trusts.

In First Citizens Bank & Trust Company v. Reikow, et al., __ Wn.App. __, 313 P.3d 1208 (2013), the Court upheld the trial court’s ruling that the lender could not enforce a deficiency judgment against a guarantor where the lender’s creditor’s bid was less than the “Fair Value” as defined in RCW 61.23.005.  In Washington, lenders have rights to seek deficiency judgment on commercial loans against borrowers following a non-judicial foreclosure when the “fair value” of the property sold is measured against the outstanding indebtedness.  In this case, the lender’s bid at the trustee’s sale was $5,215,000 against a total claimed indebtedness of $7,168,710.00.  When the lender sued the guarantor for the difference as a deficiency, the guarantor argued that the lender should be held to certain valuations made in IRS Statements as well as the appraised value, both of which exceeded the amount of the indebtedness.  The Court denied the lender’s position that the guarantor had waived the right to a valuation hearing and granted summary judgment on the amount of the debt, but set a Fair Value Hearing to determine the amount, if any, of a deficiency.  At that hearing, the Court held that, based on the lender’s own statements to the IRS, as well as opinions of the bank’s appraiser, the Fair Value of the Property was actually $650,000.00 in excess of the debt.  Thus, the lender was not entitled to maintain a deficiency action against the guarantors.

In a second case involving the same Plaintiff lender, First Citizens Bank & Trust Company sued a guarantor for a deficiency judgment following a non-judicial foreclosure of a deed of trust.  First Citizens Bank & Trust Company v. Reikow, et al., __ Wn.App. __, 313 P.3d 420 (2013).  The trial court granted the lender’s claim and awarded attorneys’ fees in a pre-trial motion.  However, the judgment was overturned by Division II of the Court of Appeals.  The lender’s claim failed because the original lender used the borrower’s deed of trust to secure the guaranty.  As a result, the guarantor successfully defended the lender’s claims based on an express statutory provision of RCW 61.24.100 (10) that provides “A trustee’s sale under a deed of trust securing 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.”  (Emphasis added).  In this case the lender could have maintained its claim against the guarantor by either (a) careful drafting of the loan documents to eliminate any linkage between the guarantee and the deed of trust, or (b) foreclosing the real property judicially instead of by a non-judicial trustee’s sale. But, by linking the guaranty to the deed of trust, the lender lost the right to sue for the deficiency following a non-judicial foreclosure.

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