Washington Supreme Court Rules Nonjudicial Foreclosure Not Available Remedy for HELOC-Secured Deeds of Trust

By Raminta A. Rudys, Amit D. Ranade, and Victor J. Roehm III

Decision: Marquez Vargas v. RRA CP Opportunity Trust 1, No. 103735-0 (Wash. Apr. 30, 2026)

On April 30, 2026, the Washington Supreme Court issued a significant opinion holding that (1) a home equity line of credit (HELOC) agreement is not a negotiable instrument under Article 3 of the Uniform Commercial Code (UCC), and (2) a putative beneficiary under Washington’s Deed of Trust Act (DTA) cannot satisfy the statutory prerequisite in RCW 61.24.030(7)(a) for nonjudicial foreclosure of residential property by declaring itself the “holder” of a nonnegotiable instrument such as a HELOC agreement. The practical effect of this decision is that lenders and their assignees seeking to enforce HELOC obligations secured by deeds of trust in Washington may no longer pursue nonjudicial foreclosure through a trustee’s sale. Instead, they must resort to judicial foreclosure or a receivership. Although the ruling addressed only HELOC loans, it could also impact remedies for other types of loans.

Washington’s Deed of Trust Act (DTA) permits nonjudicial foreclosure by trustee’s sale, but only if the trustee first has proof that the beneficiary is the “holder” of the promissory note or other obligation secured by the deed of trust. A sworn declaration by the beneficiary attesting to holder status is sufficient proof.

The Vargas case involved a borrower who obtained a traditional mortgage and a subordinate HELOC from Countrywide Home Loans Inc. in 2005. After default, the HELOC was sold multiple times, eventually landing with RRA CP Opportunity Trust 1 (RRA), which attempted to initiate a nonjudicial foreclosure. As part of the process, RRA declared it was the “holder” of the HELOC agreement. The borrower challenged that designation in federal court, and the federal district court certified two questions to the Washington Supreme Court: (1) whether a HELOC is a negotiable instrument and (2) whether the DTA’s holder requirement can be satisfied by holding a nonnegotiable instrument.

The court held that a HELOC agreement is not a negotiable instrument because it does not contain “an unconditional promise or order to pay a fixed amount of money” as required by the UCC. Unlike a traditional mortgage note, a HELOC is a promise to repay draws taken against a credit limit — the amount owed depends on borrower activity and requires reference to separate documents to determine. The court’s conclusion aligned with the majority of jurisdictions nationwide.

Importantly, the court rejected the conclusion reached by the Nevada Supreme Court in a similar case that a HELOC agreement becomes negotiable once the draw period closes and the principal balance becomes fixed. The Washington Supreme Court determined that it could not follow the Nevada decision because under Washington law, negotiability is determined from the four corners of the instrument at the time it is issued and cannot change after the fact.

The court then held that the term “holder” as used in the DTA means the holder of a negotiable instrument as defined by Article 3 of the UCC. Because a HELOC agreement is not a negotiable instrument, an alleged beneficiary cannot be its “holder” and therefore cannot satisfy the statutory prerequisite for nonjudicial foreclosure.

The court grounded this conclusion in a line of prior decisions — including Bain v. Metropolitan Mortgage Group (2012) and Brown v. Department of Commerce (2015) — in which it had interpreted the DTA’s beneficiary and holder requirements in light of UCC concepts. The court further noted that the legislature’s 2018 amendment to the DTA, which removed reference to “owner” and retained the term “holder,” constituted legislative acquiescence in this interpretation.

Justice Madsen authored a dissent arguing that the DTA is not limited to negotiable instruments and that the term “holder” should be given a broader meaning not controlled by the UCC’s definition. The dissent contended that the DTA provides a statutory scheme for resolving defaulted loans secured by deeds of trust with its own definitions and regulations distinct from the UCC, and that the nonjudicial foreclosure process relies on the contractual “power of sale” clause rather than on the existence of a negotiable instrument.

The dissent also noted that nonjudicial foreclosure, in addition to providing a streamlined remedy for lenders, can also benefit borrowers by providing access to the DTA’s mediation program and anti-deficiency protections.

This decision has several important implications for lenders and servicers:

Judicial proceedings are now required for HELOCs. Lenders holding HELOC obligations secured by deeds of trust in Washington must pursue judicial remedies rather than trustee’s sale. In Washington, two options are available. The first is judicial foreclosure. Depending on the county in which the property is located, judicial foreclosure can be more expensive and time-consuming than trustee’s sale. Judicial foreclosure also involves a statutory redemption period that introduces additional delay and uncertainty. The second option is to seek the appointment of a receiver to market and sell the property free and clear of liens. Litigation over the appointment of a receiver can be expensive and uncertain. If the property needs management or work, a receivership can also be more expensive than a foreclosure sale. Lenders should update servicing projections for affected portfolios accordingly. However, by pursuing judicial remedies, lenders retain the right to pursue a deficiency judgment against the borrower for any remaining balance — a potential upside worth considering. As the dissenting opinion notes, the DTA’s foreclosure mediation program is available only in nonjudicial foreclosure, to which HELOC borrowers will no longer have access, which may affect loss mitigation strategies.

Broader implications beyond HELOCs. Although the question certified to the Supreme Court specifically involved a HELOC loan, the requirement under RCW 61.24.030(7)(a) applies to foreclosure of deed of trust encumbering residential property (defined as four or fewer residential units). Thus, the court’s reasoning could extend to any obligation secured by residential property that does not promise a fixed amount at issuance, including construction loans (where no balance exists until the first advance) and other lines of credit. There is also a possibility that, because a “beneficiary” under the DTA is defined as a “holder,” future decisions could further restrict the ability of a lender to foreclose an obligation if the note does not meet the requirements under the UCC for a negotiable instrument.

Syndicated lending. Vargas compounds the issues raised by Bain v. Metropolitan Mortgage Group (2012), which held that a party must be the holder of the notes to be a beneficiary under the DTA. In syndicated facilities where a Collateral Agent holds the deed of trust but is not the holder of negotiable notes — or where notes do not qualify as negotiable instruments — the ability to pursue nonjudicial foreclosure was already questionable and is now effectively foreclosed, at least for residential properties.

Portfolio review and documentation. Lenders should review existing Washington portfolios to identify affected loans and adjust foreclosure strategies. To avoid the additional legal costs and redemption rights associated with judicial foreclosures, lenders could consider appointment of receiver as an alternate remedy to foreclosure. For new originations, lenders should include a separate negotiable promissory note (stating a fixed principal amount) at closing alongside the HELOC or credit line agreement. Existing note forms may also need modification to comply with Article 3’s negotiability requirements.

Finally, given the increased burden on courts, legislative action to restore nonjudicial foreclosure for nonnegotiable obligations remains a possibility that lenders and industry groups should monitor.

Vargas represents a significant shift in the foreclosure landscape for lenders in Washington — not only for HELOC lenders, but potentially for any lender holding an obligation that does not qualify as a negotiable instrument under Article 3 of the UCC. While lenders retain judicial foreclosure and receivership remedies, the inability to pursue the faster and less expensive nonjudicial foreclosure process will materially affect the economics of default resolution in the state. Lenders should promptly assess the impact on their existing Washington portfolios, adjust their foreclosure procedures and timelines, and update documentation practices for new originations.