Summary
The Washington Supreme Court issued an opinion on April 30, 2026, that deprives Washington state lenders of the right to nonjudicially foreclose residential-secured loans unless those loans are evidenced by a negotiable instrument—i.e., a promissory note with only basic payment terms that comports with RCW 62A.3-104.
The court further held that HELOCs and other types of multiple advance (e.g. construction loans) and revolving loans cannot qualify for nonjudicial foreclosure even if evidenced by a promissory note because such a promissory note cannot qualify as a “negotiable instrument” as a matter of law.
Vargas v. RRA CP Opportunity Trust 1, et al. involved a HELOC evidenced by a loan agreement that had been originated by Countrywide and assigned several times before RRA CP Opportunity Trust 1 (RRA) became the owner of the obligation. The court reached its conclusion that only real estate-secured negotiable instruments can be “held” by a beneficiary of a residential deed of trust for purposes of the Deed of Trust Act, even though the relevant statute does not use the term “negotiable instrument” and, in fact, references a beneficiary’s status as the “holder” of a promissory note “or other obligation.”
The Supreme Court’s decision has wide-ranging implications for the enforcement of loans secured by residential real estate of four units or less and invites litigation as to the nonjudicial foreclosure of all types of real estate collateral. Read further for a comprehensive update on the developments stemming from this decision.
The Washington Supreme Court issued an opinion on April 30, 2026, that deprives Washington state lenders of the right to nonjudicially foreclose residential-secured loans unless those loans are evidenced by a negotiable instrument—i.e., a promissory note with only basic payment terms that comports with RCW 62A.3-104.
The court further held that HELOCs and other types of multiple advance (e.g., construction loans) and revolving loans cannot qualify for nonjudicial foreclosure even if evidenced by a promissory note because such a promissory note cannot qualify as a “negotiable instrument” as a matter of law. The ruling may also prevent lenders from nonjudicially foreclosing traditional single advance residential mortgage loans to the extent the promissory notes evidencing those loans contain collateral-related covenants beyond an undertaking or power to give, maintain or protect collateral to secure payment, incorporate the terms of other loan documents, or otherwise fall outside the bounds of a “negotiable instrument” as defined by RCW 62A.3-104.
Notably, the statute at issue in the opinion, RCW 61.24.030(7)(a), requires that “for residential real property of up to four units, before the notice of trustee’s sale is recorded, transmitted, or served, the trustee shall have proof that the beneficiary is the holder of any promissory note or other obligation secured by the deed of trust” and is not expressly limited to consumer loans. As a result, the decision may prohibit the nonjudicial foreclosure of commercial loans secured by such residential real estate to the same degree as consumer loans that are not evidenced by a negotiable instrument.
Vargas v. RRA CP Opportunity Trust 1, et al. involved a HELOC evidenced by a loan agreement that had been originated by Countrywide and assigned several times before RRA CP Opportunity Trust 1 (RRA) became the owner of the obligation. RRA’s servicer commenced the nonjudicial foreclosure of the defaulted HELOC and submitted a beneficiary declaration to its trustee declaring that RRA was the “holder” of the HELOC agreement as required by RCW 61.24.030(7) in connection with the nonjudicial foreclosure of residential real estate of four units or less. The borrower challenged the validity of the beneficiary declaration, arguing that a lender cannot be the “holder” of anything other than a negotiable instrument, and the HELOC loan agreement did not qualify as a negotiable instrument.
The court ruled in favor of the borrower and agreed that the reference to “holder” in RCW 61.24.030(7) requires the beneficiary to be the “holder” of a negotiable instrument as defined in UCC Article 3, and RRA did not qualify because neither revolving loans, nor loans evidenced by loan agreements, can qualify as negotiable instruments. As a result, the court ruled that RRA could not satisfy the statutory prerequisites for nonjudicially foreclosing the deed of trust securing the HELOC and could only enforce the deed of trust judicially, in part relying on what it concluded was the legislature’s “clear purpose” in enacting RCW 61.24.030(7)(a) “to ensure the party with the authority to enforce and modify the note is the party engaging in mediation and foreclosure”—i.e., a right provided to homeowners under certain circumstances under the Deed of Trust Act.
The court reached its conclusion that only real estate-secured negotiable instruments can be “held” by a beneficiary of a residential deed of trust for purposes of the Deed of Trust Act, even though the relevant statute does not use the term “negotiable instrument” and, in fact, references a beneficiary’s status as the “holder” of a promissory note “or other obligation.” The court did not explain why the legislature would reference other obligations if only residential real estate-secured negotiable instruments qualified for nonjudicial foreclosure. The court also disregarded the fact that the Deed of Trust Act uses the term “holder” in other contexts and expressly contemplates the nonjudicial foreclosure of “obligations” rather than “promissory notes” or “instruments.”
The Supreme Court’s decision has wide-ranging implications for the enforcement of loans secured by residential real estate of four units or less and invites litigation as to the nonjudicial foreclosure of all types of real estate collateral. As the decision stands now, residential HELOCs and residential construction loans cannot be foreclosed nonjudicially. Nor can any residential real estate-secured loan evidenced by a loan agreement rather than a promissory note. Even residential real estate-secured loans evidenced by promissory notes may be barred from nonjudicial foreclosure if those promissory notes do not qualify as negotiable instruments.1
The alternatives to nonjudicial foreclosure are problematic to both lenders and borrowers. The judicial foreclosure process is expensive, time consuming, and cumbersome. It can take months to get from the commencement of a lawsuit to the consummation of a sheriff’s sale, and the successful bidder generally receives possession but does not receive actual title to the real estate until the redemption period runs.
The parties to the Supreme Court case may move for reconsideration under applicable court rules. If a motion for reconsideration is not filed by the applicable deadline, or is unsuccessful, key constituencies will need to approach the Legislature about enacting a legislative fix. Unless and until the Supreme Court reconsiders its decision or a legislative fix is enacted, real estate-secured lenders should review their loan documentation for negotiability, evaluate whether future loans should be documented with negotiable instruments, and evaluate the alternatives to nonjudicial foreclosure when enforcing residential real estate-secured loans. The Ballard Spahr Bankruptcy, Creditors’ Rights, and Restructuring Team and Mortgage Banking Team are ready to assist real estate-secured lenders in navigating these developments.
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