ACMA Summary - 2023 - Washington

• Year: 2023

WASHINGTON FORM SECURITY INSTRUMENT USED: Although mortgages and real estate contracts may be used, deeds of trust are the preferred form of security instrument for encumbering real property collateral in Washington. There is an exception for property used principally for agricultural purposes (see RCW § 61.24.030(2) for definition of “agricultural purposes”). While a deed of trust may be used to encumber agricultural property, if the instrument encumbers property used principally for agricultural purposes on both the date the deed of trust is granted and the date of foreclosure it must be foreclosed judicially. RCW § 61.24.030. Accordingly, most lenders use mortgages to encumber agricultural property. A deed of trust granted on agricultural property still creates a valid lien, but it must be foreclosed judicially RCW § 61.24.020. RECORDING REQUIREMENTS: A deed of trust, mortgage or real estate contract must be in writing executed by the party to be bound and acknowledged, although the same may be valid between the parties if not acknowledged. RCW § 64.04.020. To be recordable, the first page of a deed of trust (or mortgage) must contain the name of the document that fully evidences what it represents (e.g., security agreement, fixture filing, etc., if those elements are a part of the document), the names of the grantor and grantee, an abbreviated legal description, a reference to the page or exhibit on which the complete legal description is contained and the assessor’s property tax parcel numbers. RCW § 65.04 should be consulted for additional strict formatting requirements of recorded instruments which include no notations of any kind within the one-inch margins of the document to be recorded Washington historically had a Torrens land registration system subject to the Torrens Registration Act (RCW § 65.12). Very few properties were or continue to be registered under this system, and if applicable it compelled an enforcement procedure different from the typical procedure outlined in RCW § 61.24 and related statutes. However, in June of 2022, the Torrens Act was repealed and a multi-step process was enacted to remove registered property from that system and enroll it in the State’s standard recording system. HB 1376.SL All documents to be recorded in Washington are required to be acknowledged. RCW § 64.08 contains the forms of notarial acknowledgments. Note that under RCW § 64.08.060 and 64.08.070, an alternative notary “short form” as specified in RCW § 42.45.140 is also permissible. Washington has adopted the Revised Uniform Law on Notarial Acts (RCW § 42.45). STATUTES TO BE WAIVED: We are unaware of any statutes that should or in fact could effectively be waived at the inception of a mortgage loan transaction. Indeed, Washington case law casts doubt on a party’s ability to waive statutory requirements of the Washington Deed of Trust Act, see Schroeder v. Excelsior Mgmt Grp., LLC et. al., 177 Wn2d 94, 297 P.3d 677 (2013). After default, in the workout agreement context, the mortgagor’s redemption rights may be waived if supported by proper consideration. RCW § 6.23.020. UNUSUAL TREATMENT OF STANDARD PROVISIONS: Lender Statute of Frauds. Washington has a statute of frauds, which gives lenders protection against alleged oral agreements to extend credit, provided that the lender has provided the borrower substantially the following conspicuous, written notice “simultaneously with or before a credit agreement is made”: ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT, OR TO FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON LAW. The notice must be in type that is bold face, capitalized, underlined or otherwise set out from surrounding written materials so that it is conspicuous. RCW §§ 19.36.100 - .140. Inclusion of the notice is recommended in notes, deeds of trust and other documents that could be deemed to be agreements regarding credit. Casualty Insurance Cap. RCW § 48.27.010 prohibits a lender from requiring casualty insurance in excess of the replacement cost (less depreciation) of the property (regardless of the loan amount) determined as of the effective date of the policy or any renewal thereof. Dragnet Clauses. A deed of trust may be used in Washington to secure additional and protective advances. However, care must be taken in inadvertently securing obligations that are intended to be unsecured (and thus unsatisfied by the foreclosure of the deed of trust) due to the operation of the deficiency protections of the Washington Deed of Trust Act (“DTA”). See RCW § 61.24. In a case interpreting a deed of trust that purported to “secure” all loan documents (including a guaranty), the Washington Supreme Court has held that guarantors of commercial loans whose own property has not been foreclosed on are not protected from deficiency judgments under the DTA, RCW § 61.24, after the borrower’s property has been non-judicially foreclosed. Federal v. Harvey/ Washington Federal v. Gentry, 182 Wn.2d 335 (2015). Given the narrow facts of this case, Washington lenders still generally provide in the guaranty and the deed of trust that the guaranty is not secured. Separate Environmental Indemnity. Under RCW § 61.24.100(10), obligations or the “substantial equivalent of those obligations that are not secured by the deed of trust will survive a nonjudicial trustee’s sale. It is common in Washington for lenders to utilize a separate, unsecured “environmental indemnity” to attempt to preserve those indemnity obligations following a non-judicial foreclosure. Under the statute referenced above, for this strategy to succeed it is advisable to establish in the related loan documentation that none of the provisions of the deed of trust purport to secure those environmental indemnities or contain representations or covenants that are their “substantial equivalent.” Some lenders want the benefit of the collateral to secure the borrower’s obligations to reimburse the lender for costs associated with the environmental indemnity and so attempt to bifurcate the obligations into secured and unsecured portions. We are unaware of case law construing either approach. Assignment of Leases and Rents. It is customary for Washington real estate lenders to incorporate an assignment of leases and rents into the deed of trust, although a separate stand-alone instrument is also acceptable. An assignment of “unpaid rents and profits of real property intended as security” is immediately perfected upon recording and no further act is required to protect the assignment from avoidance in bankruptcy due to absence of perfection. RCW § 7.28.230. Any such lien shall when recorded, be deemed specific, perfected and choate. RCW § 7.28.230 (3). Thus, care should be taken in characterizing assignments of rents in Washington as absolute assignments if the lender seeks to obtain the benefit of immediate perfection under RCW § 7.28.230. Definition of Beneficiary. The DTA defines the “beneficiary” of a deed of trust as “[t]he holder of the instrument or document evidencing the obligations secured by the deed of trust, excluding persons holding the same as security for a different obligation” RCW § 61.24.005. The beneficiary foreclosing a deed of trust, including appointing a trustee to proceed with a nonjudicial foreclosure of the deed of trust, must be the actual holder of the promissory note or other instrument or document that evidences the obligations secured by the deed of trust. The DTA does not expressly provide for the holder of the instrument or document evidencing the obligations secured by the deed of trust to appoint an agent, an indenture trustee, a nominee or any other representative to act as beneficiary. The decision of the Washington Supreme Court in Bain v. Metropolitan Mortgage Group, Inc., et al., 175 Wn.2d 83, 285 P.3d 34 (2012), created some uncertainty as to the ability to foreclose or otherwise enforce a Washington deed of trust if the deed of trust names as beneficiary an agent, an indenture trustee, a nominee or any other representative or person other than the actual holder or holders of the instruments or documents evidencing the obligations secured by the deed of trust. In Bain, the Supreme Court responded to a question certified to it by the United States District Court for the Western District of Washington as to whether Mortgage Electronic Registration Systems, Inc. (“MERS”) was a lawful beneficiary under two deeds of trust where MERS was named as beneficiary but never held the notes that evidenced the obligations secured by the deeds of trust. The Supreme Court stated that only the actual holder of the promissory note or other instrument evidencing the obligations secured by a deed of trust may be a beneficiary with the power to appoint a trustee to proceed with a nonjudicial foreclosure on real property, and concluded that MERS was an ineligible beneficiary under the DTA if it never held the promissory notes or other debt instruments that were secured by the deeds of trust in question. Although the Supreme Court stated that nothing in its opinion should be construed to suggest that an agent cannot represent the holder of a note, at least for some purposes, it found that on the record before it MERS was not a beneficiary by contract or under agency principles. The Supreme Court stated that nothing in its opinion should be interpreted as preventing the parties from proceeding with judicial foreclosures. However, the Supreme Court also stated that it did not consider that issue, which must await a proper case. Accordingly, if a deed of trust identifies the beneficiary as an agent or nominee for lenders and is not the holder of the promissory notes or other instruments or documents evidencing the obligations secured by the deed of trust, then consideration should be given to naming as beneficiary or beneficiaries, in the Washington deed of trust, either the holders of such promissory...