Washington Supreme Court Prohibits Non-Judicial Foreclosure on HELOCs
In Washington State, when a property owner defaults on a loan secured by a deed of trust, the beneficiary under the deed of trust has many options for enforcement, including, but not limited to, nonjudicial foreclosure, a statutory procedure governed under RCW 61.24 (known as the “Deed of Trust Act” or “DTA”). The DTA enables a beneficiary to pursue foreclosure utilizing the services of a trustee, and to do so without court involvement. Although a streamlined procedure that avoids judicial supervision, the statute also affords borrowers with a host of protections to avoid abuses. The DTA is too complex to cover in detail in this article, but generally, it provides a powerful tool for creditors to enforce collection of their debts.
Creditors with a secured interest in real property in Washington State commonly utilize the DTA to pursue nonjudicial foreclosure of deeds of trust. The case law surrounding the DTA is vast, with numerous cases adjudicating the various ambiguities relating to the statute, including cases that define the term “holder”, cases that define the term “beneficiary”, and even cases that create parameters around how a beneficiary must specifically declare its status with respect to the instrument it seeks to enforce.
Based on this case law, very generally, a party seeking to foreclose on a deed of trust must be the “holder” of the negotiable instrument secured by that deed of trust. The Washington Uniform Commercial Code (“UCC”) defines the holder in such fashion, and in RCW 62A.3-301, goes on to provide that a party entitled to enforce a negotiable instrument is either: (1) the holder of the instrument; (2) a non-holder in possession of the instrument that nonetheless has the rights of a holder; or (3) a person not in possession of the instrument who still has the right to enforce that instrument pursuant to RCW 62A.3-309 or 62A.3-418(d). Beyond that, however, the DTA (as interpreted under vast case law) requires that the foreclosing party actually be the “holder” of the negotiable instrument as defined in the UCC, and not one of the other non-holder parties entitled to enforce the instrument under the UCC.
Most recently, on April 30th, the Washington State Supreme Court ruled in Vargas v. RRA CP Opportunity Trust 1, et al. that beneficiaries seeking to enforce collection on a Home Equity Line of Credit (“HELOC”) cannot do so by way of the DTA. In other words, creditors trying to collect on a HELOC debt cannot avail themselves to nonjudicial foreclosure.
In a nutshell, the Washington Supreme Court indicated that case law has established that RCW 61.24.030(7) and RCW 62A.3-301 together require that a beneficiary seeking to nonjudicially foreclose on a deed of trust must be the holder of the negotiable instrument secured by that deed of trust. A beneficiary enforcing a HELOC agreement, however, does not fit this requirement. Specifically, the Washington Supreme Court made two major determinations in coming to this conclusion:
- A HELOC agreement does not constitute a negotiable instrument because the Washington State Uniform Commercial Code requires that a negotiable instrument require a fixed sum to be repaid. The HELOC agreement, on the other hand, set up a credit limit but did not state the amount actually advanced to the borrowing party. In other words, there was no fixed sum to be repaid. This is rather typical of HELOC agreements, which serve as revolving lines of credit, permitting borrowers to borrow funds on an ongoing basis up to a limit. Since it failed to state a fixed amount due, the HELOC agreement did not meet the standard of negotiability.
- RCW 61.24.030(7) requires a beneficiary seeking nonjudicial foreclosure to prove its status as the “holder” of the negotiable instrument secured by the deed of trust. Since the HELOC agreement fails to meet the elements of a negotiable instrument, the beneficiary cannot meet the requirement of the statute because it cannot be a “holder.”
The decision is significant as it (pun intended) forecloses one of the major enforcement options available to creditors who loan on a line of credit. It also means that there may be an increase in judicial foreclosures because of the ruling.
The attorneys at Beresford Booth have extensive experience with a variety of civil and commercial litigation, including disputes involving creditors and real property. If you need assistance with, or have questions about, any litigation matters, please feel free to contact Beresford Booth at info@beresfordlaw.com or by phone (425) 776-4100.