Applicability of the Homestead Exemption to Commercial Guarantors

         In Washington a guarantor of a commercial obligation is potentially liable for any deficiency balance remaining due on that obligation following the non-judicial foreclosure of a deed of trust securing the obligation.  However, that liability is limited where the subject real property was granted specifically to secure the guarantor’s obligations under the guaranty, either directly or through a cross-collateralization provision in the loan documents. 

        If the property is the guarantor’s principal residence, the guarantor is also entitled to receive payment of the homestead exemption (up to $125,000) from the sale proceeds, prior to application of the proceeds to the obligation secured.  This raises particular difficulties where there is limited equity in the property or the beneficiary purchases the property with a credit bid in lieu of cash.  If the beneficiary credit bids, then the beneficiary will still be require to pay the guarantor the homestead amount upon sale.

        Although the definition of a homestead generally can include unimproved or unoccupied land, the deficiency statute, RCW 61.24.040, limits the homestead exemption in this context to the guarantor’s principal residence.  However, it does not address whether or how the homestead can be abandoned, which is typically determined by RCW 6.13.050.  Although the reasonable interpretation is that the homestead can be abandoned, the uncertainty frequently discourages beneficiaries from foreclosing for fear of a post-sale determination that the homestead remains.

        That concern was somewhat eased this year following the decision of Division 3 of the Court of Appeals of Washington in In re Trustee’s Sale of Real Property of Brown, 161 Wash.App. 412 (2011).  In Brown the beneficiary asserted that the guarantors abandoned the homestead by (i) vacating the property for more than six months prior to the sale, (ii) terminating utility services to the property, (iii) leasing and occupying another property, (iv) obtaining drivers’ licenses in another state, (v) registering their vehicles in another state, and (vi) claiming domicile in another state.  The guarantors argued they were simply on an extended vacation.  Although the guarantors occupied the property as their principal residence at the time they executed the subject deed of trust, the Court ruled that the guarantors had abandoned the property as provided for under RCW 6.13.050, and were no longer entitled to payment of their homestead exemption under RCW 61.24.100. 

        The Brown ruling establishes clear guidance for a beneficiary to assert that the homestead has been abandoned, to include relevant factors.  However, the determination of a homestead is fluid, and can be reclaimed by a guarantor.  If you are considering foreclosure of a deed of trust involving property that was previously the principal residence of a guarantor, we can discuss strategies for establishing abandonment prior to the non-judicial foreclosure of a deed of trust.