Washington Court of Appeals (re-)explains statute of limitations for trust deeds after bankruptcy discharge | Miller Nash LLP
On January 18, 2021, the Washington Court of Appeals in Copper Creek (Marysville) Owners Ass’n c. Kurtz reaffirmed an important rule related to foreclosures and the statute of limitations after a bankruptcy discharge. The rule is that a bankruptcy discharge, by itself, does not automatically trigger the six-year statute of limitations for a trust foreclosure. copper stream is significant because Washington state and federal courts have not applied this rule consistently since 2016, when the Court of Appeals reached the same conclusion in Edmundson v. Bank of America. In a victory for secured creditors, the copper stream court sorted through the conflicting opinions as to why the federal courts’ interpretation of Edmundson is wrong”.
Lateral bar: A typical home loan consists of (1) a promissory note in which the debtor promises to repay the debt, and (2) a trust deed in which the debtor grants the lender a security interest in the debtor’s property. There are two types of promissory notes, a demand note and an installment note. A remittance note is generally payable monthly and matures at a later date. A sight note is due upon execution. copper stream addressed installment notes and is the focal point here.
Promissory notes and trust deeds are subject to Washington’s six-year statute of limitations. Remittance notes have two separate six-year statutes of limitations. The first applies to each payment and begins on the day it becomes due; the second applies to the entire debt and begins on the maturity date of the note.
When a borrower misses a payment or goes bankrupt, most loan documents give the lender the option of declaring a default and expediting the loan. Acceleration makes the entire debt immediately due and triggers the statute of limitations for all remaining payments, but the lender must take positive action that clearly notifies the borrower that the debt has been accelerated.
copper stream Facts
In copper stream, Stephanie and Shawn Kurtz purchased a home with a rating secured by a deed of trust (“DOT”) in 2007. The property was subject to annual appraisals mandated by the Copper Creek Homeowners Association (the “HOA”). The Kurtzes separated and left the property in 2008, and stopped paying the bill around 2009 and HOA dues in 2010. Stephanie filed for chapter 7 v. chapter 13 bankruptcy in 2010, and Shawn filed for bankruptcy in 2011. In their respective bankruptcies, the Kurtzes included the note and DOT in their debt schedules, did not claim the house as exempt property, and declared their intention to dispose of the property.
Stephanie received her discharge from bankruptcy in June 2010; Shawn received his in July 2011. As a result, their personal liability for the note debt was extinguished without payment to the lender. Importantly, the lender did not declare default or accelerate the debt on the note despite the bankruptcy filings.
Lateral bar: When a debtor receives a bankruptcy discharge, they are released from personal liability for pre-bankruptcy debts, such as a promissory note. However, the privilege of the deed of trust remains attached to the property of the debtor. The general rule (with exceptions not discussed here) is that an act of right by the holder of the trust to seize the collateral survives the bankruptcy.
In 2018, the HOA commenced a legal foreclosure action against the property for unpaid appraisals. In 2019, the lender (Selene/Wilmington, “SW”) initiated its own foreclosure and served the HOA with a notice of sale from the trustee. The HOA responded by filing a silent title suit against SW. In the low-key title case, the trial court granted summary judgment for the HOA because the Kurtz’s bankruptcy release occurred more than six years before SW began its foreclosure. Citing Edmundson— which had nearly identical bankruptcy and foreclosure discharge timelines — the trial court ruled that the statute of limitations for DOT automatically begins on the date of the last payment due before the Kurtzes were released from bankruptcy. SW appealed.
The importance of debt acceleration, or lack thereof
The Court of Appeal ruled in favor of SW and attributed the trial court’s error to certain opinions of the Federal Court which misinterpreted the Edmundson decision. SW has not declared default or accelerated debt. Therefore, DOT remained enforceable for any installment payments whose statute of limitations had not expired. For example, if the Kurtzes stopped paying the bill from the payment due on January 1, 2009, that payment became uncollectible under DOT on January 2, 2015. Each month, SW’s DOT lien will decrease by the amount of the monthly payment. which becomes uncollectible when its limitation period expires.
Why copper stream Questions
State and federal courts have apparently contradicted each other when interpreting the statute of limitations on foreclosures since Edmundson. The Court of Appeal recognized this conflict and set the record straight copper streamexplaining that Federal Court cases have misinterpreted Edmundson as holding that a bankruptcy discharge automatically accelerates the statute of limitations of the trust deed. copper stream distinct Jarvis c. Fed. Nat’l Mortg. Ass’nand Hernández c. Franklin Credit Mgmt. Corp.and have expressly disavowed their holdings and any cases following them. copper stream pointed out that both cases were based solely on Edmundson (also from the Court of Appeal) as the basis for their “erroneous” holdings.
Trust deed lenders involved with a bankrupt borrower will welcome copper stream as confirmation that their lien remains enforceable until the debt is due or accelerated. It is unclear whether the HOA will appeal to the Washington Supreme Court. It’s also unclear how federal courts will consider copper streamgiven that Jarvis remains the good law and has been confirmed by the Ninth Circuit in 2018 in an unpublished notice.