WASHINGTON FEDERAL, a federally chartered savings association, Appellant,
KENDALL GENTRY and NANCY GENTRY, individually and the marital community comprised thereof, Respondents.
The Deeds of Trust Act generally prohibits an action for a deficiency judgment against a guarantor of a loan following a trustee's sale under a deed of trust securing that loan. But exceptions to this general rule apply to a guarantor of certain commercial loans.
In this action, Washington Federal seeks a deficiency judgment against Kendall Gentry and Nancy Gentry. They executed guaranties of payment for commercial loans to three borrowers that they control. Based on its reading of RCW 61.24.100, the trial court granted the Gentrys' motion for summary judgment of dismissal of this action. Because the trial court erred both in its interpretation of this statute and its application of the statute to relevant loan documents, we reverse and remand for further proceedings.
Kendall Gentry owned and/or managed three entities: Blackburn Southeast LLC, Landed Gentry Development Inc., and Gentry Family Investments LLC.
In 2005, Blackburn Southeast LLC obtained a commercial loan for $2, 550, 000 from Horizon Bank. This loan was evidenced by a promissory note that was secured by a May 1, 2006 deed of trust on property located on Little Mountain Road in Mount Vernon (the "Little Mountain Deed of Trust").
In April 2009, Landed Gentry Development Inc. obtained a commercial loan for $3, 574, 847.74 from Horizon Bank. This loan was evidenced by a promissory note that was also secured by the Little Mountain Deed of Trust and a May 1, 2006 deed of trust on property located on East Blackburn Road in Mount Vernon (the "Blackburn Road Deed of Trust").
In September 2009, Gentry Family Investments LLC obtained a commercial loan for $1, 127, 832.73 from Horizon Bank. This loan was evidenced by a promissory note that was also secured by the Little Mountain Deed of Trust.
In sum, the Little Mountain Deed of Trust secured all three commercial loans. The Blackburn Road Deed of Trust secured only the Landed Gentry Development Inc. commercial loan.
Kendall and Nancy Gentry each executed commercial guaranties of payment for all three loans.
In January 2010, the three notes matured. The three borrowers failed to pay these notes at maturity. Likewise, the Gentrys did not honor their guaranties.
Horizon Bank failed. In April 2010, the Federal Deposit Insurance Corporation, as receiver for Horizon, assigned that bank's interests in the three notes, the deeds of trust, and the guaranties to Washington Federal.
In April 2011, the trustees, under the deeds of trust then held by Washington Federal, conducted sales based on the defaults by the three borrowers. The bank was the successful bidder for both properties at these sales. The bank did not credit bid the full amount of the debt at these sales. Thus, a substantial deficiency allegedly remains.
In March 2012, the bank commenced this action against the Gentrys to enforce their guaranties and to obtain a deficiency judgment against them due to the shortfall arising from the trustees' sales.
The Gentrys moved for summary judgment. They argued that the Deeds of Trust Act prohibited the bank from seeking a deficiency judgment against them. The bank opposed the motion and also moved for summary judgment, arguing that it was entitled to a deficiency judgment against the Gentrys.
The trial court granted the Gentrys' motion for summary judgment, denied the bank's motion, and dismissed this action with prejudice.
The bank appeals.
THE DEEDS OF TRUST ACT
The threshold issue is whether and how a beneficiary under a deed of trust who elects not to foreclose the deed of trust as a mortgage may obtain a deficiency judgment against guarantors under the Deeds of Trust Act.
This court reviews de novo summary judgment orders and engages in the same inquiry as the trial court. Summary judgment is appropriate when there is no genuine issue of material fact, and the moving party is entitled to a judgment as a matter of law.
Statutory construction is a question of law. This court's objective is to determine the Legislature's intent. "Where the language of a statute is clear, legislative intent is derived from the language of the statute alone." "The 'plain meaning' of a statutory provision is to be discerned from the ordinary meaning of the language at issue, as well as from the context of the statute in which that provision is found, the related provisions, and the statutory scheme as a whole."
RCW 61.24.100 addresses when actions for deficiency judgments may be brought when a deed of trust is not foreclosed as a mortgage. A "deficiency judgment" exists where a money judgment for a debt exceeds the value of the security for that debt at the foreclosure sale.
In 1965, the Legislature enacted the Deeds of Trust Act, which permitted nonjudicial foreclosure of deeds of trust when certain requirements were met. Citing an early law review article by a well-recognized authority on the act, Division Three of this court observed that the Legislature designed this act "to avoid time-consuming judicial foreclosure proceedings and to save substantial time and money to both the buyer and the lender." The act was designed to supplement the then existing foreclosure proceedings to better meet the needs of modern real estate financing.
Our supreme court has explained that "[r]eading the entirety of [the act] in the context of the mortgage laws and the history of deed of trust legislation, it is apparent that there was contemplated a quid pro quo between lenders and borrowers."
Specifically, borrowers relinquished the statutory right to redeem the property up to one year after a foreclosure sale. The relinquishment of this right allowed lenders to obtain title to the property sold at a trustee's sale more quickly than in a judicial foreclosure. Lenders were then able to sell the property and apply the sales proceeds to the debt.
In exchange for this advantage, lenders relinquished the right to seek deficiency judgments following trustees' sales. Thus, the real property security was the sole means for the lender to satisfy the debt.
Notwithstanding these provisions, the act expressly provided that lenders retained the right to foreclose deeds of trust as mortgages. If lenders elected that option, the provisions of the act did not apply.
The provision of the act governing deficiency judgments has been codified at RCW 61.24.100 from the act's inception. When first enacted in 1965, this provision banned any deficiency judgment on the obligation secured by the foreclosed deed of trust:
Foreclosure, as in this chapter provided, shall satisfy the obligation secured by the deed of trust foreclosed, regardless of the sale price or fair value, and no deficiency decree or other judgment shall thereafter be obtained on such obligation.
In 1990, the Legislature amended this provision by creating an exception to the ban against any deficiency judgment on the obligation secured by the foreclosed deed of trust. It did so by adding the following emphasized language to the former version of the statute:
Foreclosure, as in this chapter provided, shall satisfy the obligation secured by the deed of trust foreclosed, regardless of the sale price or fair value, and no deficiency decree or other judgment shall thereafter be obtained on such obligation, except that if such obligation was not incurred primarily for personal, family, or household purposes, such foreclosure shall not preclude any judicial or nonjudicial foreclosure of any other deeds of trust, mortgages, security agreements, or other security interests or liens covering any real or personal property granted to secure such obligation.
In 1998, the Legislature again amended this provision. This time, however, the revisions were more extensive. The Legislature rewrote the entire statute, which was then codified into twelve subsections. Presumably, these amendments were made to better meet the evolving needs of commercial borrowers and lenders in real estate financing. As of this writing, there have been no further amendments to this portion of the act.
In the current version of the act, the general bar against deficiency judgments remains. But the Legislature created an exception for certain loans that it described as "commercial." This term is a substitute for the former "obligation ... not incurred primarily for personal, family, or household purposes." That provision no longer appears in the act. Such "commercial loans" are limited to those executed after June 11, 1998, the effective date of the 1998 amendments to this section.
This legislative history illustrates the evolution of this part of the act over time. Deficiency judgments for deeds of trust that are not foreclosed as mortgages have generally and consistently been prohibited since enactment of the act in 1965. The Legislature enacted limited exceptions to this prohibition in 1990 and 1998. Among the limited exceptions enacted in 1998 are those applicable to guarantors of certain commercial loans.
RCW 61.24.100(1) states the current general rule regarding deficiency judgments following trustees' sales under deeds of trust. For these ...