Related Documents – Problem Solved

Commercial lenders rejoice!  The Washington State Supreme Court has solved the “Related Documents” problem that has plagued lenders foreclosing commercial debts nonjudicially under the Deed of Trust Act, chapter 61.24 RCW.  Briefly summarized, the “Related Documents” problem arose when a borrower granted a deed of trust in real property that could be read as securing the borrower’s promissory note and “Related Documents,” where “Related Documents” was defined to include personal guaranties of the same debt.  Borrowers and guarantors argued, with some success in lower courts, that foreclosure of such a deed of trust eliminated the borrower’s liability for the debt and a guarantor’s liability for the deficiency (with certain narrow exceptions in the law) because both liabilities were secured by the deed of trust.  Courts who agreed with this argument left lenders unable to collect from the loan guarantor after the lender had foreclosed on property pledged by the borrower.  The Supreme Court recently resolved this issue in Wash. Fed. v. Harvey, No. 90078–7 (en banc) by holding that a guarantor is only protected from guaranty liability if the guarantor granted a deed of trust to secure the obligation, and that deed of trust was foreclosed.  Foreclosure of a deed of trust granted by the borrower does not eliminate a guarantor’s deficiency liability.

Author:  Hilary Mohr