January 29, 2016
by Wendy Walter
McCarthy & Holthus, LLP
USFN Member (Washington)
Notice of Default in Washington (Leahy v. Quality Loan Service Corp. of Washington) Nonjudicial foreclosure in Washington is a two-notice process. The first notice, called the Notice of Default (NOD), provides a 30-day window for a borrower to payoff, reinstate, or elect mediation. If none of those three things happens, then the second notice (Notice of Trustee’s Sale) is issued to set an actual foreclosure sale. Since the creation of the NOD, beneficiaries foreclosing in Washington have often sought guidance on when, and whether, to issue a new NOD if a sale doesn’t occur.
With all of the state and federal loss mitigation programs, more foreclosures go on hold after the NOD issued — which results in this situation arising more often. The Washington Deed of Trust Act and amendments through the Foreclosure Fairness Act do not provide a clear answer to this question. The Division One Court of Appeals addressed this issue in a published opinion titled Leahy v. Quality Loan Service Corp. of Washington, 2015 Wash. App. LEXIS 1363 (2015).
In Leahy, the trustee had issued an NOD in April 2010, and three subsequent notices of trustee’s sale were issued: the first in 2010, the second in 2011, and the third in 2012. The Leahy property was finally sold under the third notice of trustee’s sale in January 2013, close to three years after the issuance of the original NOD. The court analyzed the statute and concluded that Washington law did not require a new NOD before each new Notice of Trustee’s Sale. The court looked at the legislative purpose of the NOD and concluded that it was to notify the debtor of the amount he owes, and that he is in default.
The Leahy court examined an earlier appellate ruling, Watson v. Northwest Trustee Services, Inc., 180 Wash. App. 8, 321 P.3d 262, review denied, 181 Wash. 2d 1007 (2014). There, the court held that the trustee was required to reissue an NOD when the Notice of Default was issued before the effective date of the Foreclosure Fairness Act (July 22, 2011) and the Notice of Trustee’s Sale had been issued after the Act, on November 8, 2011. The Court of Appeals confirmed that the ruling in Watson was only applicable to the facts of that “gap” foreclosure case because the Foreclosure Fairness Act changed the form of the NOD; therefore, a borrower with a foreclosure sale after the effectiveness of the Act should have the benefits of the additional language (including the invitation to mediation) in the new NOD. Furthermore, those additional protections in the NOD only apply for “owner-occupied residential real property.” The Leahys claimed that they lived in the property from February 2010 until May 2010 while they were renovating it to become a rental property, which was during the window of time that the Notice of Default was issued. However, the court did not find that the Leahys had provided enough evidence to the trial court to support their claim and, therefore, the Watson case was not analogous.
Actual Possession – What does it really mean? (Selkowitz v. Litton Loan Servicing)
Washington’s Nonjudicial Foreclosure statute requires the trustee to have proof that the beneficiary is the owner before it can foreclose a deed of trust. One way in which the trustee satisfies this burden is by having a declaration from the beneficiary that it is the “actual holder” of the note. The foreclosure statute does not define the phrase “actual holder,” nor does it define “owner.” The state Supreme Court, in Brown v. Dept. of Commerce, 2015 Wash. LEXIS 1191 (Oct. 22, 2015), held that the statute is superfluous, inharmonious, and ambiguous, but that the legislature intended to track Article 3 of the UCC in finding that the beneficiary is the holder. [See USFN e-Update Nov./Dec. 2015 Edition, Washington article, “Note Holder can Modify and Enforce the Note,” for a summary of the Brown opinion.]
Taking it a step further, the Division One Court of Appeals in Selkowitz v. Litton Loan Servicing, 2015 Wash. App. LEXIS 2882 (Nov. 23, 2015), analyzed a situation where beneficiary Litton had constructive possession of the note at the time of the execution of the beneficiary declaration. The note was being held by a document custodian and despite the plaintiff-borrower’s claim that constructive possession is not sufficient, the Selkowitz court cites to the Bain and Brown opinions and finds that nothing in these prior cases suggests “that the insertion of the word ‘actual’ was intended to create a departure from the UCC’s definition of ‘holder.’” This ruling is pending a motion to publish.
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Winter 2016 USFN Report