Washington Supreme Court Changes the Foreclosure Playbook

For years, Washington lenders have relied on the Deed of Trust Act’s efficient nonjudicial foreclosure process to enforce real estate collateral. The Washington Supreme Court’s recent decision in Vargas v. RRA CP Opportunity Trust 1 is a reminder that not every loan qualifies for that remedy.

In Vargas, the Court considered whether a home equity line of credit (HELOC) could support a nonjudicial foreclosure under Washington’s Deed of Trust Act. The Court held that the HELOC at issue was not a “negotiable instrument” because it did not contain an unconditional promise to pay a fixed amount of money.

That distinction mattered. The Court further held that the Deed of Trust Act’s “holder” requirement refers to the holder of a negotiable instrument under Article 3 of the Uniform Commercial Code. As a result, a creditor cannot satisfy the statutory beneficiary declaration requirement merely by claiming to hold a nonnegotiable HELOC agreement.

The practical effect is significant: if the underlying debt instrument is not negotiable, the lender is unable to use Washington’s nonjudicial foreclosure process. The debt may still be enforceable, and judicial remedies may still be available such as a judicial foreclosure lawsuit, but the faster and less expensive trustee’s sale process may be off the table.

Why should lenders care?

Because the Court’s reasoning is not necessarily limited to HELOCs. Commentators have already noted that the decision may affect other credit arrangements that do not fit neatly within the UCC’s definition of a “negotiable instrument,” including certain revolving credit facilities, construction loans, and other variable-balance lending products.

Washington lenders should consider reviewing loan documents and foreclosure practices with the decision in mind, particularly when dealing with lines of credit, modified loans, or other instruments that may not qualify as negotiable notes. A foreclosure strategy that worked yesterday may require a different analysis today.

Vargas is problematic for lenders and borrowers. Start with borrowers. Borrower protections built into Washington’s nonjudicial foreclosure system are eliminated. A trustee’s sale is faster and less expensive, but it comes with statutory notice requirements, opportunities to cure defaults, and other procedural safeguards. Those go away if the lender’s only foreclosure option is a judicial foreclosure lawsuit. For lenders, judicial foreclosures are more costly, take more time, and potentially come with more uncertainty in enforcing security interest in real property.

But most immediately, the main practical takeaway is simple: before initiating a trustee’s sale, confirm not only that you hold the debt, but that the debt instrument itself qualifies for the remedy you intend to use. In non-judicial deed of trust foreclosures, this currently means ensuring the debt qualifies as a negotiable instrument per RCW 62A.3-104.

Looking ahead

This may not be the status of the law in Washington for long. A motion for reconsideration has been filed with the Court in Vargas. No decision on that motion has been made yet. Additionally, we will see if the Washington State Legislature takes any steps to change the law in the upcoming legislative session in response to the Vargas decision. So stay tuned.

This article is intended for informational purposes only and does not constitute legal advice.