In January 2022, a Washington appellate court reaffirmed a regulation connected to real estate foreclosures and the statute of limitations following a discharge of bankruptcy. The regulation is that a bankruptcy court does not automatically raise the six-year statute of limitations associated with trust foreclosure.

The outcome of this case is important because Washington state as well as federal courts have not ruled consistently on the issue. In 2016, a Washington court even made a similar finding. In a case that sided with secured creditors, the court noted that the court’s reading of previous cases is erroneous.

The Law Behind the Case

A property loan includes a promissory note whereby a debtor promises to repay a creditor and a deed of trust whereby a debtor grants a lender a security interest in the debtor’s property. Promissory notes can be either demand or installment notes. Installment notes are often payable on a monthly basis and mature at a later date, while demand notes are immediately due on execution. This case involves installment notes.

Promissory notes as well as deeds of trust are subject to a six-year statute of limitations in Washington. Installment notes have two individual six-year limitation periods. The first period applies to each payment and commences on the day it becomes overdue, while the second applies to total debts and commences on a note’s maturity date. 

If a borrower is late or misses payments, loan documents routinely grant the lender a choice to declare a default and accelerate a loan. Acceleration results in an entire debt immediately becoming due and triggers the statute of limitations for remaining payments. Landers, however, must take affirmative steps that inform borrowers that debts have been accelerated. 

How the Case Arose

The Kurtzes acquired a home with a note secured by a deed of trust. The property was subject to yearly assessments by the Cooper Creek’s association of homeowners. The Kurtzes separated and left the property and stopped paying the note and later the homeowners association dues. The wife entered Chapter 7 bankruptcy while the husband filed for bankruptcy later. In both bankruptcy filings, the Kurtzes included the note in their debt schedules, but did not claim the home as an exempt asset. Both Kurtes stated they intended to surrender the property. 

The Kurtzes received bankruptcy discharges in 201. The husband received his discharge later. Consequently, the personal liability for the note was extinguished without lender payment. The lender did not declare a default or accelerate the note despite bankruptcy filings.

When debtors receive bankruptcy discharges, they escape personal liability associated with debts from before the bankruptcy. The deed of trust lien remains connected to the property, though. A deed of trust holder’s right to foreclosure on collateral property lasts past bankruptcy.

In 2018, the homeowners association started a foreclosure action against the property in relation to unpaid assessments. The next year, the lender started its own foreclosure and provided the homeowners association with a trustee’s notice of sale. The homeowners association filed suit for quiet title. In the quiet title matter, the trial court granted summary judgment for the homeowners association because the bankruptcy discharge happened six years before the foreclosure action began. Relying on the Edmundson case, which had similar discharge and foreclosure timelines, the trial court found that the statute of limitations began on the date of the last payment that was due before the bankruptcy discharge.

The Court of Appeals reversed the matter and connected the trial court’s mistake to certain federal court rulings that misinterpreted Edmundson. No default was declared and no acceleration of the debt occurred. The deed of transfer as a result remained enforceable for an installment payment whose statute of limitations did not expire. 

The Importance of the Case

Both state and federal courts have contradicted each other when analyzing the statute of limitations involving foreclosure. The court in question has noted this conflict and explained that the federal courts misinterpreted the previous case as finding that a bankruptcy discharge automatically speeds up the deed of trust’s statute of limitations. The court honed in on several cases and ruled against their holdings. Deeds of trust lenders connected to borrowers in bankruptcy will greet the case as a confirmation their lien stays enforceable provided the debt does not mature or accelerate. It remains uncertain if homeowners’ associations will appeal to the Washington Supreme Court. What also remains uncertain is how federal courts will view this decision. 

California and Promissory Notes

Most deeds of trust in California include a power of sale clause that permits lenders to foreclose on a deed of trust without being obligated to initiate a lawsuit. Additionally, lawsuits against borrowers might be required if a lender is interested in pursuing a deficiency judgment. The case of Robin v. Crowell also highlighted that a foreclosing lender might be obligated to pursue a lawsuit against holders of inferior liens before these liens can be extinguished. The Robin case reviewed three potential limitation periods for pursuing an action on a promissory note secured by a deed of trust. In California, a 60-year timeframe exists for liens, a four-year limitation exists for written contracts, and a six-year period is necessary for notes payable. Robin also featured holders of a first deed of a trust who initiated legal action against a borrower in relation to an underlying promissory note involved with a foreclosure. Ultimately, an appellate court in this case found that a claim to extinguish a second deed was prohibited due to time. The appellate court also commented that the 60-year window of time for liens only applies to efforts to enforce these measures by power of sale and does not apply to legal actions to enforce.

Obtain the Assistance of a Bankruptcy Attorney

Bankruptcy involves a complex area of law, and a skilled attorney can help navigate this process. If you or a loved one needs the assistance of a bankruptcy lawyer, do not hesitate to contact Attorney Melanie Tavare today to schedule a free case evaluation.