Washington Supreme Court Limits the Use of Non-Judicial Foreclosures

Last week, the Washington Supreme Court in Vargas v. RRA CP Opportunity Trust 1 determined that a lender could not employ the non-judicial foreclosure procedures set out in Washington's Deed of Trust Act because the obligation secured by the deed of trust was not a negotiable instrument. Although the court was only addressing certified questions concerning a home equity line of credit (HELOC) secured by residential property, its reasoning could apply to other secured obligations, including commercial loans. Prompt legislative action may be necessary to restore lenders' ability to pursue non-judicial foreclosures. Absent such a fix, lenders may be forced to pursue judicial foreclosures, which would impose additional costs on them and the courts while exposing borrowers to the risk of deficiency judgments.

Background

In 2005, Gabriel Marquez Vargas signed a HELOC agreement secured by a deed of trust on his house. The HELOC agreement was indorsed in blank and included language indicating it was a line of credit available over a specified draw period.

Vargas defaulted on the HELOC agreement. The trustee under the deed of trust served Vargas with a notice of default and a notice of trustee's sale. Vargas then filed an action in federal district court seeking to enjoin the non-judicial foreclosure sale and recover damages.

The district court certified two questions to the Washington Supreme Court:

(1) Whether a typical HELOC agreement that has a closed draw period and specified maturity date is a negotiable instrument under Article 3 of Washington's Uniform Commercial Code? If the Court answers this question in the affirmative, it need not address the remaining question. Alternatively, the Court may choose to answer only the latter question.

(2) Whether an alleged beneficiary under the Deed of Trust Act satisfies the requirement to show that it is "the holder of any promissory note or other obligation secured by the deed of trust," [RCW] 61.24.030(7)(a), by executing a declaration under penalty of perjury attesting that it is the holder of a HELOC agreement?

In an opinion dated April 30, 2026, the Washington Supreme Court answered both questions.

A HELOC Is Not a Negotiable Instrument

Addressing the first question, the court held that the HELOC agreement at issue was not a negotiable instrument.

Under Washington law, a negotiable instrument is an unconditional promise or order to pay a fixed amount of money, with or without interest or other charges described in the promise or order, payable to bearer or to order, payable on demand or at a definite time, and containing no additional undertakings other than those very limited ones permitted by statute.

The court concluded that the HELOC agreement failed this test because it was not a promise to pay a "fixed amount of money." The amount that Vargas might owe depended on whether, and to what extent, he drew on the line of credit. From the face of the agreement, it was impossible to determine the amount that might be borrowed and therefore the amount that Vargas would be required to repay.

The court contrasted a typical HELOC agreement with what it described as a "traditional mortgage note," in which a borrower promises to repay a fixed principal amount advanced to the borrower. According to the court, a typical HELOC agreement does not specify the amount that will be borrowed.

We therefore hold, in line with the majority viewpoint, that a HELOC agreement as defined in the certified question is not a negotiable instrument. Under Washington law, determining negotiability requires examining the specific terms of the instrument at the time it was issued. The fact that an agreement provides that the principal will become fixed at a future date fails to satisfy the "fixed amount of money" requirement.

Only the Holder of a Negotiable Instrument Can Deliver Required Declarations

Because the HELOC in Vargas was secured by residential property, the Deed of Trust Act required the beneficiary to execute a declaration stating that it was the "holder" of the obligation secured by the deed of trust. The Washington Supreme Court determined that the lender could not make such a declaration because, in the court's view, there is no such thing as a "holder" of a nonnegotiable instrument.

Although the Deed of Trust Act does not define "holder," the Uniform Commercial Code defines the term, with respect to negotiable instruments, as referring to the person in possession of a negotiable instrument payable either to bearer or to an identified person who is in possession. The court concluded that the same meaning should apply in the Deed of Trust Act. Because the HELOC agreement was not a negotiable instrument, it could not have a "holder" within the meaning of the statute.

As applied to Vargas, this reasoning meant that the lender could not certify that it was the holder of the obligation secured by the deed of trust—a prerequisite to initiating a non-judicial foreclosure on residential property of up to four units.

Potential Implications of the Decision

The court's reasoning could have significant implications for lenders and other beneficiaries of deeds of trust.

First, the decision strongly suggests that lenders cannot use a non-judicial foreclosure to enforce a HELOC secured by residential property. That conclusion follows directly from the court's answers to the certified questions, which involved precisely that type of loan.

Second, borrowers may attempt to extend the court's reasoning to other types of residential loans. Many loan instruments contain provisions that could arguably render them nonnegotiable. For example, a note that incorporates by reference provisions contained in a separate loan agreement might be argued to fall outside the definition of a negotiable instrument.

Third, borrowers may contend that the court's reasoning applies not only to residential loans but also to commercial loans. Although the court focused primarily on provisions of the Deed of Trust Act that apply specifically to residential property, it stated that a "holder" under the Act means the holder of a negotiable instrument governed by Article 3 of the Uniform Commercial Code. If that interpretation were applied generally, it could mean that only the holder of a negotiable instrument may qualify as the "beneficiary" of a deed of trust because the Act defines "beneficiary" as "the holder of the instrument or document evidencing the obligations secured by the deed of trust, excluding persons holding the same as security for a different obligation."

If lenders lack authority to pursue non-judicial foreclosures under the Deed of Trust Act, they may be required to resort to judicial foreclosures instead. A lender that proceeds with a non-judicial foreclosure without statutory authority may face liability for damages, in addition to injunctive and other equitable relief. It remains to be seen how trustees under deeds of trust will apply the ruling in the case and whether title companies will insure title after a non-judicial foreclosure without proof that the obligations secured by the deed of trust were evidenced by a negotiable instrument meeting the strict requirements of the Uniform Commercial Code.

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Hugh McCullough is a partner in the litigation group in the Seattle office of DWT. Brian D. Hulse and Mike Tarantino are counsel in the real estate group, also in the Seattle office of DWT. If you have any questions about this suit or need assistance, please contact the authors or another member of our litigation and real estate teams. To stay informed, sign up for our alerts.