On January 18, 2021, the Washington Court of Appeals in Copper Creek (Marysville) Homeowners Ass’n v. Kurtz reaffirmed an important rule related to real property 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 deed of trust foreclosure. Copper Creek is important because Washington state and federal courts have not applied this rule consistently since 2016, when the Court of Appeals made the same finding in Edmundson v. Bank of America. In a victory for secured creditors, the Copper Creek court sorted through the conflicting opinions to explain why the federal courts’ interpretation of Edmundson
Sidebar: A typical real property loan consists of (1) a promissory note where the debtor promises to repay the debt, and (2) a deed of trust where 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. An installment note is usually payable monthly and matures a later date. A demand note is due immediately upon its execution. Copper Creek addressed installment notes and is the focus here.
Promissory notes and deeds of trust are subject to Washington’s six-year statute of limitations. Installment notes have two separate six-year limitations periods. The first applies to each payment and begins on the day it becomes overdue; the second applies to the entire debt and begins on the note’s maturity date.
When a borrower misses a payment or enters bankruptcy, most loan documents give the lender the option to declare a default and accelerate the loan. Acceleration makes the entire debt immediately due and triggers the statute of limitations for all remaining payments, but the lender must take some affirmative action that clearly notifies the borrower that the debt has been accelerated.
Copper Creek Facts
In Copper Creek, Stephanie and Shawn Kurtz bought a home with a note secured by a deed of trust (“DOT”) in 2007. The property was subject to annual assessments imposed by the Copper Creek Homeowners Association (the “HOA”). The Kurtzes separated and vacated the property in 2008, and stopped paying the note around 2009 and the HOA dues in 2010. Stephanie entered Chapter 7 bankruptcy in 2010 and Shawn filed in 2011. In their respective bankruptcies, the Kurtzes included the note and DOT in their debt schedules, did not claim the home as exempt property, and stated their intent to surrender the property.
Stephanie received her bankruptcy discharge 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 a default or accelerate the note debt despite the bankruptcy filings.
Sidebar: When a debtor receives a bankruptcy discharge, they are relieved of personal liability for pre-bankruptcy debts, such as a promissory note. The deed of trust lien, however, remains attached to the debtor’s property. The general rule (with exceptions not discussed here) is that a deed of trust holder’s right to foreclose on the collateral property survives the bankruptcy.
In 2018, the HOA began a judicial foreclosure action against the property for unpaid assessments. In 2019, the lender (Selene/Wilmington, “SW”) began its own foreclosure and served the HOA with a trustee’s notice of sale. The HOA responded by filing suit for quiet title against SW. In the quiet title case, the trial court granted summary judgment for the HOA because the Kurtzes’ bankruptcy discharge occurred more than six years before SW began its foreclosure. Citing Edmundson—which had nearly identical bankruptcy discharge and foreclosure timelines—the trial court ruled that the statute of limitations for the DOT automatically began on the date of the last payment due before the Kurtzes’ bankruptcy discharge. SW appealed.
The Importance of Debt Acceleration, or Lack Thereof
The Court of Appeals reversed for SW and traced the trial court’s error to certain federal court opinions that misread the Edmundson ruling. SW did not declare a default or accelerate the debt. Therefore, the DOT remained enforceable for any installment payment whose statute of limitations had not expired. For example, if the Kurtzes stopped paying the note beginning with the payment due January 1, 2009, that payment became uncollectable under the DOT on January 2, 2015. Each month, SW’s DOT lien will shrink by the monthly payment amount that becomes uncollectable when its statute of limitations expires.
Why Copper Creek Matters
State and federal courts have seemingly contradicted each other when interpreting the statute of limitations for foreclosures since Edmundson. The Court of Appeals acknowledged this conflict and set the record straight in Copper Creek, explaining that the federal court cases misinterpreted Edmundson as holding that a bankruptcy discharge automatically accelerates the deed of trust’s statute of limitations. Copper Creek singled out Jarvis v. Fed. Nat’l Mortg. Ass’n, and Hernandez v. Franklin Credit Mgmt. Corp., and expressly disavowed their holdings and any case that follows them. Copper Creek emphasized that both cases relied solely on Edmundson (also from the Court of Appeals) as the basis for their “erroneous” holdings.
Deed of trust lenders involved with a borrower in bankruptcy will welcome Copper Creek as confirmation that their lien remains enforceable as long as the debt has not matured or been accelerated. It is unclear if the HOA will appeal to the Washington Supreme Court. Also unclear is how federal courts will view Copper Creek, given that Jarvis remains good law and was affirmed by the Ninth Circuit in 2018 in an unpublished opinion.