Since its establishment in 1965, the Washington Deed of Trust Act (DTA) has faced many legal challenges.  Over the decades, the Washington State Supreme Court (the Court) has shaped and reshaped the applicability of nonjudicial foreclosures in Washington and offered interpretations of the language used in the DTA and the procedures that language mandates.  On April 30, 2026, the Court again heard a challenge to application of the DTA. This time, the Court was asked whether for the procedures within the DTA can be used to enforce notes that are not negotiable.  Specifically, whether a lender could non-judicially foreclose a line of credit with no promise to pay a fixed amount.

Gabriel Marquez Vargas had both a home loan and a home equity line of credit taken out against his home.  When he defaulted on his loans, North Star Trustee – under the direction of RRA CP Opportunity Trust – moved forward with non-judicial foreclosure proceedings.  While the Court determined that a foreclosure on the home loan was appropriate, it determined that the foreclosure on the HELOC was not.  The Court determined that the DTA requires that the beneficiary be the “holder” of the note, and that the DTA mandates one can only be a “holder” if the note secured by the deed of trust is a negotiable instrument.  The Court held that because a HELOC note is not a negotiable instrument under the UCC definitions, a holder of a HELOC note cannot be a holder under the DTA and thus cannot be a beneficiary to a non-judicial foreclosure. 

The Court held that a negotiable instrument under the definition of the Uniform Commercial Code (UCC) requires “[a]n unconditional promise or order to pay a fixed amount of money, with our without interest or other charges described in the promise or order[.]”  It then applied the UCC  definition of “holder” (“[t]he person in possession of a negotiable instrument that is payable either to bearer or to an identified person that is the person in possession”) to the DTA.  According to the Court, the DTA requires the beneficiary to be the holder of a negotiable instrument.  The Court did not address what the language in the DTA also allowing for enforcement of “other instruments” might now mean.

Key points from the ruling:

First, the HELOC agreement is nonnegotiable.  To be “negotiable,” an instrument must contain 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.”  RCW 62A.3-104(a) The HELOC agreement at issue here provides that the borrower may request loans up to a stated credit limit- but it does not state the amount actually advanced to the borrower.  Marquez Vargas’ HELOC agreement – like all HELOCs and revolving lines of credit of this sort – therefore “flunks the negotiability test”.  It is not a negotiable instrument.

The Court then held that, because the HELOC is a nonnegotiable instrument, RRA cannot be the holder.  The “holder” can only execute a declaration stating that was the holder of the obligation secured by the deed of trust.  Therefore, nonjudicial foreclosures are not permitted “because it cannot truthfully prove what RCW 61.24.030(7)(a) requires an alleged beneficiary who seeks nonjudicial foreclosure to prove: that it is the ‘holder’ of the HELOC agreement that is secured by the deed of trust upon which it seeks to foreclose.” 

It is believed that this decision will not only affect HELOC foreclosures, but other foreclosures involving nonnegotiable financial instruments.

In response, the defendants filed a motion for reconsideration with the Court.  Financial institutions joined together to file an amicus brief with the Court supporting this motion, including the Community Bankers of Washington (state-chartered financial institutions), the Washington Bankers Association (state and federally chartered financial institutions) and the GoWest Credit Union Association.  Their filing takes up several issues that the Court decision impacts, including “whether the Court’s opinion imperils nonjudicial foreclosures with respect to all resident and commercial loans, not just home equity lines of credit secured by negotiable instruments.”  (Amicus filing III (3)).  The amicus also raises the issue of whether the Legislature intended to limit the DTA to only negotiable instruments by using the word “holder” in the statute.  As someone who worked with lawmakers on this specific issue since 2018, I can plainly state they did not.

The amicus raises several key issues for the Court to consider.  One is the impact the Court’s ruling will have on borrowers in default.  Forcing these cases to judicial actions will most certainly cause harm to homeowners.  Unlike nonjudicial foreclosures, which allow for mediation and negotiated economic resolutions (cash for keys, for example), judicial foreclosures could result in deficiency judgments against the borrower, and prevent the borrower from working through mediation as established through the Foreclosure Fairness Act.  Additionally, this decision puts a significant burden on our clogged court systems, an issue the Court has raised before the Washington Legislature.  The filing also argues that the Court’s decision will have a broad impact on the nonjudicial foreclosure process, affecting financial instruments beyond just the HELOC.  The sponsors of the amicus argue that the Court should consider its broad ruling even as the question before the Court was a very narrow one addressing only HELOC.

The amicus was filed May 28, 2026.

Even as we await the Court’s response to the motion for reconsideration, there are already actions being taken by financial institutions and other stakeholders.  We are meeting as a coalition to determine what legislative options will be available if the Court rules against the motion for reconsideration.  The legislative “fix” won’t be too difficult; the dissenting opinion of the Court outlines how the statute could be clarified.  Stakeholders are already discussing how best to apply the Uniform Commercial Code and whether the term “holder” needs to be modified in some way – again.  The challenge will not be how to fix the statute; the challenge will be what the homeowner advocates will consider.  Solutions must include not only ensuring borrowers have access to nonjudicial foreclosure options but also ensure that any fix will not overburden the court systems with new, judicial cases that were previously resolved through nonjudicial foreclosure and mediation.

The UTA will work this issue heavily in the coming months.  We are already part of the financial institutions/stakeholder coalition which is meeting with lawmakers.  We are also part of the legal discussion for the reconsideration before the Court and supported the efforts to file the amicus.  Even if we are successful in passing legislation, the bill won’t be final until well into 2027.  UTA will keep its members in the loop as the Washington Supreme Court issues its decision on the motion for reconsideration, and regarding negotiations for a potential legislative fix.