August 2, 2016
by John Thomas
RCO Legal, P.S. – USFN Member (Alaska, Oregon, Washington)
The Washington Court of Appeals recently held that it is “settled law” that bankruptcy only discharges a borrower’s personal liability from the underlying debt, leaving the security interest or deed of trust intact. [Edmundson v. Bank of America, No. 74016-4-1 (Wash. Ct. App. July 11, 2016)].
Background: Borrowers defaulted on their mortgage in November of 2008. The following year, in June 2009, they filed a chapter 13 bankruptcy petition and obtained a discharge of their debts in December 2013. The creditor eventually commenced a nonjudicial foreclosure in October 2014. In response, and before the trustee’s foreclosure sale, the borrowers filed suit to restrain the foreclosure and to quiet title to the property, asserting that the deed of trust lien was no longer enforceable. The trial court agreed with the borrowers, ruling that the bankruptcy discharge of their personal liability on the note also discharged the deed of trust. The trial court awarded the borrowers their attorney fees.
On Appeal: The Washington Court of Appeals reversed the trial court’s decision as error, recognizing that the bankruptcy discharge did not affect the right to foreclose the lien or render the lien unenforceable. The appellate court observed that the plain terms of the deed of trust provide for the remedy of foreclosure in the event that the borrowers fail to comply with its covenants, including payment on the note.
Conclusion: This author’s firm has observed an increase in arguments by borrowers that a bankruptcy discharge bars enforcement of the deed of trust and essentially grants a free house to discharged borrowers. While this was never an accurate representation of the law, the Washington Court of Appeals has made it very clear: a bankruptcy discharge does not prohibit subsequent foreclosure. In Oregon, there is another case where the trial judge agreed with the borrower who raised a similar argument; that case is being appealed.
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