The Washington Court of Appeals decided Washington Federal Savings and Loan Association v. The McNaughton Group, et al, on February 3, 2014, which held Washington Federal’s line of credit instrument did not encumber monies owed under a certain “latecomer agreement.” The borrower was a real estate developer. It had entered into an agreement with the local water and sewer services district for the construction of certain sewer and water facilities needed for the proposed real estate development. In exchange for the construction of these facilities and conveyance of them to the service district, the service district agreed to charge subsequent owners connection fees and reimburse the borrower a portion of the collected fees.
Washington Federal argued in this case that the security agreement contained within the line of credit instrument secured the reimbursement monies. The language cited in the decision included in the description of the collateral all “right, title, and interest in and to all leases, Rents, and profits of the Property.” This language is similar to many lenders’ trust deeds and line of credit instruments used throughout the Northwest. The Court held this language was not specific enough to adequately secure the reimbursement monies.
Lenders who are issuing new residential or commercial development loans should review their underlying security instruments to determine whether they adequately secure reimbursement monies. If you have any questions regarding this case, please contact a member of the Financial Services Team.