Does the identity of the “beneficiary” in the actual deed of trust instrument even matter in Washington?

I recently encountered a situation where the parties were contemplating a secured transaction – a note secured by a deed of trust against Washington commercial realty – and the question raised was how to designate the beneficiary in the deed of trust (the parties’ objective was probate avoidance and, without going into detail, there were complexities associated with the intended distribution).

The answer is an un-intuitive one – it probably does not matter.  We can glean this from the wealth of Washington Deed of Trust Act (“DTA”) caselaw that followed the foreclosure crisis. 

We know from the Washington Supreme Court’s two seminal financial crisis cases on the subject, Bain v. Metro. Mortg. Grp., Inc., 175 Wn.2d 83 (2012) and Brown v. Dep't of Commerce, 184 Wn.2d 509 (2015) that (1) parties cannot alter the DTA by contract, and (2) the “beneficiary” under a deed of trust, as defined by the DTA without room for alteration, is the “holder” of the note.  And “holder,” according to the Court, means “holder” per Washington’s Uniform Commercial Code (“UCC”) governing negotiable instruments.

Subsequently, courts were quick to acknowledge that defining the deed of trust “beneficiary” as the UCC “holder” of the note aligned with the long-recognized Washington proposition that a security instrument automatically “follows” the note it secures.  See McAfee v. Select Portfolio Servicing, Inc., 193 Wn. App. 220, 228 (2016); Deutsche Bank Nat'l Tr. Co. v. Slotke, 192 Wn. App. 166, 177 (2016); See also Cummings v. Nw. Tr. Servs. of Wash., No. 74264-7-I, 2016 Wash. App. LEXIS 2886 (bank’s possession of the note, and not any purported deed of trust designation or assignment, gave bank the power to foreclose.)

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There was a practical reason for these holdings that litigators in the “trenches” during the foreclosure crisis will likely recall.  Lots of bad loans had deeds of trust that identified MERS as the “beneficiary” (Bain held MERS was an invalid beneficiary).  Or, the “beneficiary” in the deed of trust was the company that originated the loan but was now defunct and could not execute a deed of trust assignment to the current note holder.  The courts were flooded with cases where distressed homeowners argued the note had been “split” from the deed of trust rendering the foreclosure unlawful.  The judicial proposition that a Washington deed of trust (regardless of who it identifies as “beneficiary”) automatically follows the UCC note “holder,” was an easy way to prevent the impending chaos.

For those structuring secured transactions, or enforcing defaults of obligations secured by a deed of trust, it is important to look-beyond the parties’ identification of the “beneficiary” in the instrument, or in an assignment.  If a dispute over the identity of the DTA “beneficiary” arises, almost certainly a Washington court will be guided by the UCC, not the agreement of the parties.