by Joe Sakay and Brian Free

Washington courts have issued two recent opinions that may be of interest to lenders:

1. A receiver’s sale does not bar a secured creditor from pursuing a deficiency judgment.

In Umpqua Bank v. Shasta Apartments, LLC, the Washington Court of Appeals, Division Two, confirmed that under Washington’s receivership statute, a secured creditor may obtain a deficiency judgment against a grantor and guarantor after a court-ordered receiver’s sale of the grantor’s property. This decision is a win for lenders, as it confirms that lenders can use general receivers to conduct sales without surrendering their ability to pursue deficiency judgments.

2. Lenders know they cannot take possession of a homeowner’s property before foreclosure. But what constitutes possession and may lead to lender liability?

The Washington Supreme Court decided, in Jordan v. Nationstar Mortgage, LLC, that upon a mortgage default, a lender may not unilaterally change the locks on a homeowner’s property before foreclosure, even if (1) the security documents allow it, (2) the lender gives the homeowner a key, and (3) the lender permits the homeowner to enter the property. This decision is consistent with Washington’s well-settled law that a lender is not permitted to gain possession of property before foreclosure. 

The implications, however, may extend beyond prohibiting a lender from changing locks before foreclosure. The Court explained that a lender gains possession when it is “exercising control” over a property. In Jordan, the unenforceable deed of trust provision permitted the lender to “change locks, replace or board up doors and windows, drain water from pipes, eliminate building or other code violations or dangerous conditions, and have utilities turned on or off.”  Other than changing a lock, the Court did not discuss what specific procedures for securing a property might amount to possession.

In light of this development, we advise lenders to:

• Consider requesting the appointment of a receiver to limit lender liability where it is necessary to enter and secure a property;

• Clearly communicate with borrowers before entering a property, and avoid actions that could be viewed as exercising control of the property;

Review your security instruments regarding the entry of property to ensure their consistency with the Jordan decision.