Washington lenders have long relied on non-judicial trustee sales as the primary (and less expensive) mechanism for resolving defaulted home loans. For decades, courts and lenders considered home equity lines of credit (HELOCs) secured by deeds of trust as eligible for non-judicial foreclosure just like any other residential mortgage. This changed on April 30, when the Washington Supreme Court in Marquez Vargas v. RRA CP Opportunity Trust 1 held that (i) a lender may only foreclose non-judicially if the underlying loan is evidenced by a negotiable instrument and (ii) a HELOC is not a negotiable instrument under the Washington UCC.
In Marquez Vargas, the plaintiff borrower financed a home purchase with an 80/20 loan, including a HELOC secured by a deed of trust. After the borrower defaulted, the trustee began a non-judicial foreclosure and recorded a Notice of Sale with the lender declaring itself the “holder” of the HELOC obligation. The Washington Supreme Court held that the lender was not a “holder” because (i) a lender is only a “holder” when the agreement it is seeking to enforce is a “negotiable instrument” under the UCC, and (ii) the HELOC at issue was not a negotiable instrument under the Washington UCC because it lacked an unconditional promise to pay a fixed amount of money—the principal depended on how much the borrower drew. As a result, the lender could not foreclose non-judicially on the HELOC.
Marquez Vargas poses potentially significant and immediate problems for Washington lenders. The definition of “negotiable instruments” under the UCC is limited. At a minimum, most HELOCs are apparently no longer eligible for non-judicial foreclosures. More broadly, the decision suggests that any loan obligation (whether a residential or commercial loan) that is not evidenced by a “negotiable instrument” may be similarly impaired. This may include deeds of trust securing guaranties, loans that are evidenced by a credit agreement without a promissory note, and potentially many standard promissory notes that do not meet the technical definition of a negotiable instrument.
We will monitor the effects of this new decision, including any potential legislative fixes or resulting litigation from the Supreme Court’s decision.
This article is provided for informational purposes only—it does not constitute legal advice and does not create an attorney-client relationship between the firm and the reader. Readers should consult legal counsel before taking action relating to the subject matter of this article.
