First-Citizens Bank & Trust Co. v. Reikow
First-Citizens Bank & Trust Co. v. Reikow, 313 P.3d 1208 (Wash.App. 2013) An appellate court in Washington has held that despite a broad waiver of antideficiency protections contained in a guarantee, the guarantor was nevertheless protected by the “fair value” limitation on the lender’s right to recover. Though this is a Washington state court decision, not a federal court decision, it is useful because it highlights certain issues relating to liability of persons who GUARANTEE they will pay debts owed by some other person/entity.
Facts: A lender funded a $6.7 million construction loan to a development company. The equity holders execute personal guarantees, which contained waivers stating that the guarantors waived “any and all rights or defenses arising by reason of (A) any ‘one action’ or ‘anti-deficiency’ law or any other law which may prevent Lender from bringing any action, including a claim for deficiency, against Guarantor . . . . “
The lender eventually foreclosed nonjudicially, submitting a successful credit bid for $5.2 million, and then sought to recover the balance due from the guarantors. When the lender moved for summary judgment, the guarantors produced an Internal Revenue Service form filed by the lender, listing the fair market value of the property as $7.8 million. The trial court, on its own motion, ordered a “fair value” hearing and found that the value of the property exceeded the amount due on the loan. The trial court entered judgment for the guarantors, and the lender appealed.
Reasoning: On appeal, the lender argued that the guarantors had waived the Washington “fair value” statute, RCW 61.24.100(3), which states that a guarantor’s deficiency liability is limited to the difference between the outstanding loan balance and the “fair value” of the collateral. The court held that no waiver “would entitle the bank to a larger deficiency judgment than the statute allows.” Further, the court doubted whether the language of the guarantee constituted an adequate waiver: “[T]he broad boilerplate waiver in the guarantees’ fine print could hardly defeat the explicit and specific provisions of [the statute], which plainly aimed to protect guarantors from having their obligations enlarged.”
Comment: Law Professor Dan Schechter, of Loyola Law School, who wrote this analysis, says: I am going to go way out on a limb and predict reversal by the Washington Supreme Court. I know of no authority that says that the protection of the antideficiency statutes can never be waived by a sophisticated guarantor; therefore, if there were an adequate waiver in the guarantees, that waiver should be enforceable. Second, I think that there was a proper waiver in this case. The guarantors waived “any and all rights or defenses arising by reason of (A) any ‘one action’ or ‘anti-deficiency’ law or any other law which may prevent Lender from bringing any action, including a claim for deficiency, against Guarantor . . . . ” The “fair value” statute is unquestionably included within the scope of that sweeping language.
However, whether this opinion is reversed or not, I predict two more outcomes. First, the Washington lending community will soon seek the enactment of a statute comparable to California Civil Code §2856(c), which specifically authorizes the following “safe harbor” waiver:
The guarantor waives all rights and defenses that the guarantor may have because the debtor’s debt is secured by real property. This means, among other things:
(1) The creditor may collect from the guarantor without first foreclosing on any real or personal property collateral pledged by the debtor.
(2) If the creditor forecloses on any real property collateral pledged by the debtor:(A) The amount of the debt may be reduced only by the price for which that collateral is sold at the foreclosure sale, even if the collateral is worth more than the sale price.
(B) The creditor may collect from the guarantor even if the creditor, by foreclosing on the real property collateral, has destroyed any right the guarantor may have to collect from the debtor.This is an unconditional and irrevocable waiver of any rights and defenses the guarantor may have because the debtor’s debt is secured by real property. These rights and defenses include, but are not limited to, any rights or defenses based upon Section 580a, 580b, 580d, or 726 of the Code of Civil Procedure.
Second, I predict that even if no such legislation is enacted in Washington, lenders will now draft guarantees using language similar to the “safe harbor” wording of the California statute.
This case report appeared in the CA State Bar Insolvency Committee e-newsletter of 2/4/14