Ruling best for lenders, borrowers
The Washington State Supreme Court put the promise back in promissory notes last month, and cleaned up a self-made, 17-year-old mess doing so.
In clarifying a 1990 ruling, the justices bolstered the ability of banks to get loaned money back, and possibly – stress possibly – lowered costs for borrowers who paid a slight premium on some loans.
Although the case involved a Seattle condominium, Spokane attorneys Matt Andersen and Nancy Isserlis were the lead attorneys for a Texas bank that held two notes worth a total $764,600.79 against the condo. Trouble was, Beal Bank was in second position to Washington Mutual Bank, which held a first deed of trust worth $1,581,000 when borrowers Steven and Kay Sarich, and Joe Cashman defaulted in 2005.
Beal Bank was also secured by deeds of trust. But, according to King County Superior Court Judge Douglas McBroom, Beal was out of the money when the condo sold in a nonjudicial foreclosure for $1,649,000 in January 2006. Washington Mutual pocketed its security and a $68,000 windfall. Based on the 1990 decision, the King County trial judge ruled Beal had no recourse because its security interest in the property had been wiped out.
No security, no money back despite the promise to pay that is the essence of a promissory obligation. In fact, ruled McBroom, there was no debt once the condo was sold.
Beal appealed. By comparison with the petty pace of a typical lawsuit, the Beal case got to the Supreme Court faster than Bill Gates can get a loan approved on a Honda.
Andersen says that, because of the doubts that have lingered over the 1990 case, the Court of Appeals was willing to boot the case up to Olympia with no interim review. The case progressed so swiftly the Washington Bar Association, which usually files a brief in important cases, did not.
And the judges asked Washington’s financial institutions to consolidate their briefs in support of Beal in order to expedite a decision. They responded with alacrity.
Jim Pishue, chief executive officer of the Washington Bankers Association, says lenders were OK with the 1990 case. The market for second and third loans was relatively unaffected.
The King County ruling was a bombshell. “We were very much in jeopardy of being able to lend to clients,” he says.
The jeopardy was short-lived. The case moved from Judge McBroom, who ruled in September 2006, to oral arguments before the nine Supreme Court justices in May. On Sept. 13, they ruled unanimously for Beal. In the opinion signed by eight justices, they found the trial court had improperly interpreted what was meant to be a very narrow 1990 ruling. Justice Richard Sanders concurred, but also faulted the original case for creating the confusion.
The importance of the ruling is this: If lenders could not collect on a loan once their security was gone, they simply would not make secondary loans on home equity, construction or much of anything else. Credit would become much harder to get, and would come with much higher costs.
“Our communities need that kind of lending,” says John Annaloro, chief executive officer of the Washington Credit Union League.
Subordinate loans of all kinds are part of a balanced portfolio, he says. Wider access should lower costs.
For Beal, says Andersen, the task now is collecting on its notes. The Supreme Court ruling returns the case to King County, which will rehear arguments in November. Presumably, Beal will prevail.
Andersen says he does not know what it will take to make his client whole because the promissory notes were purchased from the original lender, US Bank, probably at a discount.
Matters of security aside, he says the ruling reinforces an old truism. When it comes to a loan, “It’s only as good as the borrower.”