Litigation Alert: Washington Supreme Court Clears Up Ambiguity on "Holder" versus "Owner" of Secured Notes

The Washington Supreme Court, sitting en banc, affirmed in Brown v. Washington State Department of Commerce the Department of Commerce’s denial of a mediation request under the Foreclosure Fairness Act (FFA) made by a borrower who defaulted on her home loan. The mediation request was denied because the beneficiary of the borrower’s deed of trust was the holder of the promissory note (M&T Bank), rather than its owner (Freddie Mac), and M&T Bank was exempt from the FFA mediation requirement. Under the FFA, institutions such as M&T Bank that in the prior year were not beneficiaries of deeds of trust in more than 250 trustee sales of owner-occupied residential homes in Washington are exempt from mediation.

The Washington Supreme Court held that the holder of the promissory note is the beneficiary for the purposes of the mediation exemption statute. The Court further held that a party’s undisputed declaration submitted under penalty of perjury that the party is the holder of the note satisfies the Deed of Trust Act’s proof of beneficiary provisions. This is so, the Court explained, because the legislature intended the beneficiary to be the party that has authority to modify and enforce the promissory note. Finally, the Court held that the FFA was not unconstitutional even though it grants or denies mediation based on whether the note holder was the beneficiary in more than 250 residential foreclosures in Washington in the prior year. The Court reasoned that under the deferential standard of rationality review accorded to economic legislation that does not involve fundamental rights, the Department’s distinction that subjects to mediation only the biggest servicers was not unconstitutional.

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