What happens to junior title interests after a foreclosure in Washington

Most legal practitioners, and many non-practitioners in the real estate industry, are aware of the legal proposition that a foreclosure eliminates junior interests.  Courts cite the proposition as black-letter law.  See Beal Bank, SSB v. Sarich, 161 Wn.2d 544, 548, 167 P.3d 555, 557 (2007); Worden v. Smith, 178 Wn. App. 309, 319–20, 314 P.3d 1125, 1130 (2013). 

What is often not discussed is the mechanics behind the legal proposition. The Deed of Trust Act (“DTA”), for example, does not explicitly say junior interests are extinguished by a trustee sale of a senior deed of trust.  Rather, it reaches that proposition through the mechanics of contract and the statute.

In a deed of trust instrument, the owner conveys his interest to the trustee with the power of sale.  If the owner’s ownership interest was free and clear of encumbrances, the trustee holds a power of sale over clear title. The owner can create subsequent interests of any type, e.g. liens, covenants that run-with-the-land, co-ownership interests, new ownership interests, etc.; however, the interest held by the trustee with the power of sale does not change; it remains clear. 

If there is a default on the secured obligation, the trustee exercises the power of sale. There is a public auction and the winning bidder receives a trustee’s deed.  Under the DTA, the trustee’s deed conveys to the winning bidder the clear title interest that was originally given by the owner to the trustee. RCW 61.24.050.  It follows that all interests subsequently created by the owner are effectively eliminated under the DTA.  If, after giving the deed of trust, the owner created an easement in favor of his neighbor, or gave another mortgage, or even transferred the property outright to another, those subsequent interests are eliminated. So, the elimination of junior interests is not by explicit language in the statute or caselaw, but rather the mechanics of the power of sale.

Those who deal in encumbered properties and / or secured obligations, and are unaware of the consequences of a foreclosure, can benefit from the advice and advocacy of experienced Washington counsel.