by Cara J. Richter, Esq.
The Wolf Firm, A Law Corporation
USFN Member (CA, ID, OR, WA)

This summer, the Washington Court of Appeals was called upon to once again interpret the impact of a bankruptcy discharge on a bank’s ability to enforce a deed of trust under Washington state law. Luv v. W. Coast Servicing, Inc., No. 81991-7-I, 2021 Wash. App. LEXIS 1924 (Ct. App. Aug. 2, 2021).  Prior to Luv, the Court had dealt a potentially catastrophic blow to the mortgage servicing industry when it found that the six-year statutory limitation period for enforcement of a deed of trust is triggered by a bankruptcy discharge where the underlying note is payable in installments.^[1] Edmundson v. Bank of America, 194 Wn. App. 920, 378 P.3d 272 (2016).  The Edmundson Court reasoned to the extent a bankruptcy discharge operates to render payments under the note and deed of trust no longer due and owing, the installment payments following a discharge would no longer continue to accrue.  194 Wn. App. at 931.  This interpretation of Washington state law is critical because contrary to traditional bankruptcy jurisprudence, it suggests a deed of trust lien is in fact affected by a discharge and does not simply ride through. ^[2]

The borrower in Luv received a Chapter 7 discharge on March 11, 2009.  Luv, LEXIS 1924, at *2.  After the bank commenced a non-judicial foreclosure in 2018, the borrower sought to quiet title on the grounds that the six-year statute of limitations on enforcement of the deed of trust had expired. Id. at *2-3.  On summary judgment, the trial court ruled in favor of the borrower finding that the limitations period had in fact run. Id. at *3.  The lender appealed the ruling and asked the Court of Appeals to reject its line of reasoning in Edmundson. Id. at *8.  It argued Edmundson had no basis in state law; rather the Court relied on a non-authoritative federal court case. Id. 

Not only that, the federal court case itself was contradicted by black letter bankruptcy law as its foundation arose from the erroneous notion that a bankruptcy discharge operates to eliminate or accelerate a secured debt. Id.  In its decision, the Luv Court refused to reject its reasoning in Edmundson pointing to prior cases from the Washington Supreme Court supporting its rationale.  Id. at *8-9.  The Luv Court contended,“Edmundson cannot be read to stand for the proposition that bankruptcy discharge eliminates or accelerates the debt; rather, discharge triggers the statutory limitation period during which a creditor may enforce the deed of trust.” Id. at *9.  This was an important distinction because prior cases interpreting Edmundson suggested the Court had artificially accelerated the loan after discharge.  

Arguing from a public policy standpoint, the lender also urged the Court to depart from Edmundson because it maintained the ruling would chill secured lending in Washington. Id. at *10. The Luv Court was not persuaded by this argument as it pointed out a voluntary payment made by the borrower following a discharge would stop the limitations period from running.^[3] Id.  Indeed, the Court found the borrower’s public policy assessment against allowing enforcement actions to extend in perpetuity more persuasive. Id.  Most notably, the Court stated “[p]ublic policy disfavors allowing homeowners to indefinitely face the specter of foreclosure following bankruptcy discharge. Id. at *11.  The Court’s final analysis in Luv is significant as it helps dispel any confusion as to whether some of the Edmundson ruling was mere dicta. Id. at *9 (“See In re Plastino, 69 Bankr. Ct. Dec. (LRP) 177 (Bankr. W.D. Wash. Dec. 29, 2020); In re Griffith, No. 18 Bankr. Ct. Nov. (TWD) (Bankr. W.D. Wash. Nov. 2, 2020); Hernandez v. Franklin Credit Mgmt. Corp., No. C19-0207-JCC, 2019 U.S. Dist. LEXIS 136543, 2019 WL 3804138 (W.D. Wash. Aug. 13, 2019”).

Although the Luv decision is unpublished, the aftermath of Edmundson seems to have taken shape.   Unless the state legislature votes to change the law, Edmundson, however rough, is the current terrain in Washington. ^[4]   

Copyright © 2021 USFN. All rights reserved.

Fall 2021 USFN Report