For years, “first in time, first in right” priority
for all future advances seemed certain in Washington state. Enter
the Washington Supreme Court's decision
in Commencement Bank v. Epic Solutions,
Inc.,1 which precipitated an unwelcomed return
to the common law and its attending risks respecting priority for
future advances. But to the relief of lenders, years of certainty
were followed by just months of uncertainty, as
the Washington legislature responded quickly last year to override
the Supreme Court's decision in Commencement
Bank and thereby fortify a future of certainty for future
advances in Washington state.
A future advance clause in a mortgage or deed of trust provides
security for a lender's future advance of loan proceeds to a
borrower. But not all future advance clauses are created equal. One
distinction among the group is whether the lender
is obligated to make certain advances of loan
proceeds in the future or whether the lender may, at
its option, advance loan proceeds to the borrower at
a future date. In Washington, the first in time, first in right
principle governs mortgage lien priority. Meaning, the first party
to obtain a mortgage lien, either under a mortgage or a deed of
trust, has first priority over subsequent mortgagors in a
foreclosure proceeding.2 However, under Washington
common law, if a mortgage or deed of trust
secures optional future advances, then any such
future advance by the lender will be subordinate to an encumbrance
that intervenes the initial grant of mortgage or deed of trust to
the lender, and the lender's future advance of loan proceeds,
but only if the lender made the optional future advance with actual
knowledge of the intervening encumbrance.3
Section 60.04.226 of the Revised Code of Washington (RCW) abrogates
the distinction between obligatory and optional future advances
with respect to lien priority.4 For decades,
lenders and lawyers in Washington understood, with apparent
certainty, that RCW 60.04.226 applied to all loans, and that a
valid future advance clause in a mortgage or deed of trust would
effectively secure the priority of a future advance of loan
proceeds against an intervening encumbrance (with the exception of
certain statutorily described instances regarding construction
financing and mechanics' and materialmen's liens). This
long-held understanding was vitiated by the Supreme Court in June
2022 when it held in Commencement Bank that RCW
60.04.226 only abrogates the distinction between obligatory and
optional future advance clauses in the construction
context.5 The Supreme Court's decision
breathed life into the obligatory/optional distinction for future
advances in the context of any non-construction loan and it
introduced uncertainty for non-construction loans and increased
costs for lines of credit.6
The Washington legislature issued an immediate response in early
2023 by introducing House Bill 1420 to make clear that the common
law principle of first in time, first in right applies to all loans
in Washington, not just construction loans. The bill added new
section RCW 61.12.190 (which became effective July 23, 2023) to
Washington's foreclosure of mortgages and liens statutes, to
make clear that all sums secured by a mortgage or deed of trust
have priority to all subsequently recorded encumbrances (with the
few specific exceptions enumerated in Washington's
mechanics' and materialmen's liens statutes codified in
RCW 60.04), regardless of when the secured sums are disbursed or
whether the disbursements are obligatory or
optional.7
The understanding that lenders and lawyers have labored under for
decades, that both obligatory and optional future advance clauses
alike secure priority for future advances, has now been restored by
legislative action. What is more, the first in time, first in right
principle is now more broadly established by statute, and lenders
no longer have to rely on Washington courts for common law
interpretations where there is a dispute regarding lien priorities
for future advances.8
Footnotes
1. (In re EM Property Holdings, LLC), 199 Wash.2d 725, 511 P.3d 1258 (2022).
2. See, e.g., Hollenbeck v. City of Seattle, 136 Wash. 508, 240 P. 916 (1925).
3. Commencement Bank, 199 Wn.2d at 739.
4. Id. at 199 Wash. 2d 731-32, 511 P.3d 1262.
5. Id. at 199 Wash. 2d 731-37, 511 P.3d 1261-65.
6. See Washington Committee Report Concerning Lien Priority of Mortgages and Deeds of Trust, 2023 WA H.B. 1420 (NS) (Jan. 1, 2023).
7. Washington Final Bill Report, 2023 Regular Session, House Bill 1420.
8. See Washington Committee Report Concerning Lien Priority of Mortgages and Deeds of Trust, 2023 WA H.B. 1420 (NS) (March 13, 2023).
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