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Accrual of Debt Action Upon Borrower Bankruptcy Discharge

James Phillips

Accrual of Debt Action Upon Borrower Bankruptcy Discharge

  • May 9, 2023

The Colorado Supreme Court (2023CO17) in the case of US Bank NA v. Silvernagel addressed when the statute of limitations accrues on a debt where a borrower with a mortgage loan secured by a deed of trust on the borrower’s property is discharged in bankruptcy.  The borrower had a second mortgage loan on his property secured by a deed of trust.  The loan required monthly installment payments and was not due until 2036.  The deed of trust contained a clause giving the lender the right to accelerate upon default by the borrower.  In 2012, the borrower obtained a Chapter 7 bankruptcy discharge.  Before obtaining the discharge, the borrower had stopped making payments on the mortgage loan.  He made no payments after obtaining the discharge.  The bankruptcy discharge order preserved the right of lien holders to enforce their rights against the borrower’s property after bankruptcy.  The lender did nothing to indicate its intention to accelerate the debt until it threatened foreclosure in 2019, triggering the borrower to file a declaratory judgment action seeking to prevent enforcement of the deed of trust.

The district court dismissed the borrower’s case on the basis that the lender had never accelerated the debt.  The court of appeals reversed the district court.  The court of appeals held that the balance of the mortgage loan became due on the date of the bankruptcy discharge, requiring the lender to bring its action within 6 years of the discharge pursuant to the statute of limitations for debts.  The court of appeals opinion was thinly reasoned, relying almost entirely on a Washington court of appeals decision.  The court of appeals did not analyze the effect of bankruptcy discharge on the nature of the debt or the fact that the bankruptcy discharge only precludes in personam claims against the debtor while leaving intact in rem claims.

The Colorado Supreme Court in a unanimous opinion overturned the court of appeals, holding that a borrower’s bankruptcy discharge does not cause the statute of limitations to accrue on the mortgage lender’s claim to enforce the underlying debt through the security agreement.  The supreme court first went through a lengthy explanation of statute of limitations accrual in the context of installment contracts and the effect of acceleration on the accrual date.  The court explained that acceleration requires a “clear, unequivocal affirmative act” by the lender showing an intent to accelerate.  Until the lender accelerates, a new cause of action accrues on each missed installment payment due under the loan.  Upon acceleration, the entire debt becomes due and the lender’s cause of action accrues.  The supreme court explained that the lender in this case had done nothing to accelerate and that the borrower’s obtaining a discharge in bankruptcy was not an action by the lender to accelerate.  The supreme court criticized the court of appeals’ contrary analysis, explaining that “by allowing [the borrower] to unilaterally accelerate the due date of his payments through bankruptcy, the division effectively grafted a new provision onto the contract.”  The supreme court also reasoned that the bankruptcy discharge did not eliminate in rem remedies such as repossession through foreclosure because the discharge only eliminated in personam remedies.  Finally, the supreme court recognized that a lender might not even be able to foreclose upon a borrower’s bankruptcy because borrowers could stay current on their mortgage loans and that “[i]f a claim automatically accrues at bankruptcy, as the division held, lenders would be able to foreclose on a home even if payments are up to date.”  The supreme court sought to avoid this “perverse” outcome with its decision.