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Could Your Loan be at Risk?

Posted By USFN, Monday, October 21, 2019
Updated: Tuesday, October 15, 2019



by Janaya L. Carter, Esq.

The Wolf Firm
USFN Member (CA, ID, OR, WA)

 

Although the Northwest traditionally trails behind the rest of the country on many legal issues, statute of limitations defenses (and for that matter offenses) have firmly arrived in the State of Washington. It is becoming more common to see borrowers in Washington seek quiet title judgments under RCW 7.28.300 based on a statute of limitations argument.

Promissory Notes, as written contracts, are subject to a six-year statute of limitations under Washington’s RCW 4.16.040.  The statute requires action upon a written contract to be commenced within six years of one of several events depending on the type of note and the conduct of the parties.   Washington courts have ruled the limitations period begins to run on an installment note when each installment becomes due. Herzog v. Herzog, 23 Wash.2d 382, 388, 161 P.2d 142 (1945). “But if an obligation that is to be paid in installments is accelerated, the entire remaining balance becomes due and the statute of limitations is triggered for all installments that had not previously become due.” 4518 S. 256th, LLC v. Gibbon, 195 Wash. App. 423, 434-35, 382 P.3d 1 (2016). The courts have clarified that in order for note acceleration to occur, the holder of the note must act “in a clear and unequivocal manner which effectively apprises the maker that the holder has exercised his right to accelerate the payment date.” Glassmaker v. Ricard, 23 Wash. App. 35, 38, 593 P.2d 179 (1979). Thus, “[s]ome affirmative action is required; some action by which the holder of the note makes known to the payors that he intends to declare the whole debt due.” Weinberg v. Naher, 51 Wash. 591, 594, 99 P. 736 (1909).

Traditionally, challenges by borrowers have focused on whether acceleration has occurred or whether the lender was attempting to collect installment payments falling outside of the statute of limitations.  At least initially, the pathway to successfully defending a statute of limitations case for the client seemed clear as a question of establishing readily discernable facts.  Even in circumstances where a question arose as to whether the statute of limitations had run, lenders could make arguments in favor of tolling, for abandonment of the acceleration through dismissal of the action or discontinuance, or for de-acceleration of the debt. 

Recently the well-worn trail has become overgrown and less discernable as Washington trial and appellate courts, as well as the 9th Circuit Court of Appeals, have changed the landscape with respect to statute of limitations arguments.  In cases where the borrower has received a bankruptcy discharge and failed to submit installment payments to the lender following that discharge within the following six years, there is a chance that a court will bar the enforcement of the lender’s deed of trust or expunge it from the title record as time-barred.

Of particular note and concern are the cases of Edmundson v. Bank of America, NA, 194 Wash.App. 920, 931, 378 P3d 272 (2016), Silvers v. U.S. Bank Nat. Ass’n, 2015 WL 5024173 (W.D. Wash. Aug. 25, 2015),  and most recently Hernandez v. Franklin Credit Mgmt. Corp., No. C19-0207-JCC, 2019 U.S. Dist. LEXIS 136543 (W.D. Wash. Aug. 13, 2019), U.S. Bank NA v. Kendall, 2019 Wash. App. LEXIS 1704, at *4, 2019 WL 2750171 (Wash. Ct. App. 2019) (noting that although a deed of trust's lien is not discharged in bankruptcy, the limitations period for an enforcement action "accrues and begins to run when the last payment was due" prior to discharge), and Jarvis v. Fannie Mae, Case No. C16-5194-RBL, 2017 U.S. Dist. LEXIS 62102 at *6 (W.D. Wash. 2017), aff'd mem., 726 Fed. App'x. 666 (9th Cir. 2018) ("The final six-year period to foreclose runs from the time the final installment becomes due . . . [which] may occur upon the last installment due before discharge of the borrower's personal liability on the associated note").

In Edmundson, the Court of Appeals held that the borrowers’ bankruptcy discharge, which terminated their personal liability under the promissory note, triggered the statute of limitations within which the lender was entitled to foreclose.   The Court reasoned that since the borrowers no longer owed payments after the discharge order released their personal liability, the statute of limitations was triggered by the payment before the discharge.  Id.  This ruling was reinforced by Courts in Silvers and Jarvis. In Silvers, the Court ruled that the right to enforce the Deed of Trust began to run from the last time any payment on the Note was due and the borrowers remained personally liable.   The borrowers were liable through the payment just before their January 25, 2010 discharge, causing the statute of limitations to begin running on January 1, 2010. In Jarvis, brought as a quiet title action by the borrowers, the Court entered summary judgment in favor of the borrowers, ruling that under RCW 7.28.300, the borrowers were entitled to quiet title because their discharge triggered the statute of limitations.  The Court noted that “[t]he [bankruptcy] discharge … alert[s] the lender that the limitations period to foreclose on a property held as security has commenced” and that “[t]he last payment owed commences the final six-year period to enforce a deed of trust securing a loan.”

In each of the above cases, borrowers had ceased to make regular payments prior to their bankruptcy discharge and made no payments to the lender thereafter.  Under common understanding, lenders could foreclose on the security instrument, but would be precluded from obtaining any personal judgment against the borrowers. 

But what of the scenarios in which a borrower continues to make installment payments after their bankruptcy discharge, and the loan is never escalated into a default status by the lender or its servicing agent.  Recent changes to RCW 4.16.270 provide some measurable comfort concerning loans in this scenario by codifying the common law.  The statute reads:

 

when payment has been or shall be made upon any existing contract prior to its applicable limitation period having expired, whether the contract is a bill of exchange, promissory note, bond, or other evidence of indebtedness, if the payment is made after it is due, the limitation period shall restart from the time the most recent payment was made. Any payment on the contract made after the limitation period has expired shall not restart, revive, or extend the limitation period.

 

RCW 4.16.270.  As this change to the law is very recent, there is no published case at this time interpreting the result of payment post-discharge by a borrower and its relative effect in resetting or restarting the statute of limitations clock. The question of whether a statute of limitations has run continues to be complex and fact intensive.  Each loan scenario is unique, and courts may take a hard line on the discharge and statute of limitations questions set forth above. 

To ameliorate their risk, it is critical for lenders to institute a process identifying loans that have been in bankruptcy to determine if a discharge was granted.  Once identified, lenders should work with local counsel to determine if possible tolling events have occurred, identify a deadline, and develop strategies for initiating foreclosure.  Certain events in the history of a loan, such as loss mitigation efforts may be helpful in defeating a challenge to the loan on a statute of limitations basis.  For example, in Thacker v. Bank of N.Y. Mellon, No. 18-5562 RJB, 2019 U.S. Dist. LEXIS 40734 (W.D. Wash. Mar. 13, 2019), the court ruled that the borrower’s certification in connection with his applications for loan modification was a written acknowledgement of the debt, did not evidence an intent to not pay it, and effectively restarted the statute of limitations, avoiding a loss on the loan.  Lastly, there may be additional western states besides Washington where the statute of limitations is similarly codified and possibly more restrictively interpreted by the courts. Lenders will want to consider identifying those States and assessing post-discharge loans to identify risk associated with the 9th Circuit’s ruling in Jarvis.

 

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