Luu v. Newrez, LLC
| Decision Date | 12 April 2022 |
| Docket Number | 1 CA-CV 21-0007 |
| Citation | 68 Arizona Cases Digest 7,510 P.3d 496 |
| Parties | Deenise LUU, et al., Plaintiffs/Appellants, v. NEWREZ, LLC, et al., Defendants/Appellees. |
| Court | Arizona Court of Appeals |
Parker Schwartz PLLC, Phoenix, By Lawrence D. Hirsch, Counsel for Plaintiffs/Appellants
Akerman LLP, Los Angeles CA, By Brenda Radmacher, Counsel for Defendants/Appellees
¶1 In this opinion we address the interplay between a bankruptcy discharge of a debt and a lender's ability to foreclose on a deed of trust securing the debt. We hold that a bankruptcy discharge does not commence the limitations period on the lender's ability to foreclose, nor does a bankruptcy discharge trigger an optional acceleration clause, which is exercisable only at the lender's discretion. We also conclude that the nature and extent of a security interest is a matter of state law, and thus Arizona law controls the resolution of this issue.
¶2 In December 2005, Keith Nguyen signed a promissory note for $62,300, secured by a second position deed of trust on improved real property ("Property"), which Deenise Luu co-owned. The note was payable in monthly installments with the balance due January 1, 2031. NewRez, LLC dba Shellpoint Mortgage Servicing ("NewRez") is the servicer of the deed of trust and Mortgage Electronic Registration Systems, Inc. ("MERS") is the beneficiary.
¶3 Sometime in 2011, Nguyen stopped making payments on the note. The deed of trust stated that the lender could accelerate the note "upon the occurrence of a default or anytime thereafter," with "notice if required by law." Neither NewRez, nor its predecessors-in-interest, nor any other authorized party took any affirmative action to accelerate the note, despite Nguyen's default.
¶4 In August 2011, Nguyen and Luu (collectively, "Owners") filed a Chapter 7 bankruptcy and received a discharge three months later from the U.S. Bankruptcy Court of the District of Arizona. The bankruptcy proceeding closed in January 2013. In 2020, Owners sent demands to NewRez and MERS (collectively, "Lender") requesting release of the lien on the Property. When Lender declined, Owners filed a complaint in the superior court, alleging that Lender was attempting to retain a lien interest after the statute of limitations had run. Owners sought an order quieting title and confirming the invalidity of Lender's lien.
¶5 Lender moved to dismiss, arguing that a bankruptcy discharge does not trigger the statute of limitations because a discharge does not automatically accelerate a debt. In response, Owners primarily relied on purportedly favorable decisions arising under Washington state law and asked the superior court to adopt Washington's "rule" that a bankruptcy discharge commences the limitations period for in rem remedies. Owners also urged the court to follow two unpublished decisions from the Ninth Circuit Court of Appeals holding that the statute of limitations begins on the date of the last installment due before the bankruptcy discharge.
¶6 The superior court concluded that a bankruptcy discharge does not start the running of the statute of limitations because it does not operate as a maturation of the note. The court therefore dismissed the complaint because, as a matter of law, Owners did not establish that Lender failed to act within the limitations period such that Lender no longer held a valid lien. Owners appealed, and we have jurisdiction under A.R.S. § 12-120.21(A)(1).
¶7 Owners argue the superior court erred in dismissing their complaint based on their position that, under Washington state law and Ninth Circuit unpublished decisions, a bankruptcy discharge operates as a maturation of the note and thus Lender can no longer foreclose on the Property. Lender counters that because a bankruptcy discharge does not change the note's date of maturity under Arizona law, the discharge cannot affect the statute of limitations.
¶8 We review the dismissal of a complaint under Arizona Rule of Civil Procedure 12(b)(6) de novo. Coleman v. City of Mesa , 230 Ariz. 352, 355, ¶ 7, 284 P.3d 863, 866 (2012). Generally, we consider only the complaint and its well-pled factual allegations and assume the truth of those allegations. Cullen v. Auto-Owners Ins. Co. , 218 Ariz. 417, 419, ¶ 7, 189 P.3d 344, 346 (2008). In this case, we also consider the deed of trust, attached to the complaint, because such an exhibit is not outside the pleading. Coleman , 230 Ariz. at 356, ¶ 9, 284 P.3d at 867. When a cause of action accrues is a legal question, which we also review de novo. Mertola, LLC v. Santos , 244 Ariz. 488, 490, ¶ 8, 422 P.3d 1028, 1030 (2018).
¶9 Arizona has a six-year statute of limitation for a debt action based on a written contract. A.R.S. § 12-548(A)(1). The limitations period to execute on a deed of trust is the same one that applies to the underlying promissory note. A.R.S. § 33-816 (); see also De Anza Land & Leisure Corp. v. Raineri , 137 Ariz. 262, 266, 669 P.2d 1339, 1343 (App. 1983).
¶10 A bankruptcy discharge extinguishes the debtor's personal liability, thereby barring a lender from an action in personam against the debtor. See Diaz v. BBVA USA , 252 Ariz. 436, 949–50, ¶ 15, 504 P.3d 945 (App. 2022) ; see also Shaffer v. Heitner , 433 U.S. 186, 199, 97 S.Ct. 2569, 53 L.Ed.2d 683 (1977) (). "But a bankruptcy discharge does not extinguish a lien or other security agreement associated with the underlying obligation or bar an in rem suit to enforce it." Diaz , 252 Ariz. at ––––, at ¶ 15, 504 P.3d at 950 ; see also Shaffer , 433 U.S. at 199, 97 S.Ct. 2569 (). Thus, a bankruptcy discharge does not preclude an action to foreclose on a deed of trust. Stewart v. Underwood , 146 Ariz. 145, 146, 148, 704 P.2d 275, 276, 278 (App. 1985) ; see also In re Garske , 287 B.R. 537, 542 (B.A.P. 9th Cir. 2002) ().
¶11 "[T]he statute of limitations on a home equity line of credit with a defined maturity date ‘commences on the due date of each matured but unpaid installment ....’ " Webster Bank NA v. Mutka , 250 Ariz. 498, 499, ¶ 1, 481 P.3d 1173, 1174 (App. 2021) (citation omitted). In contrast, when an installment contract (like the one here) contains an optional acceleration clause, the limitations period for unmatured future installments "commences on the date the creditor exercises the optional acceleration clause." Navy Fed. Credit Union v. Jones , 187 Ariz. 493, 494, 930 P.2d 1007, 1008 (App. 1996) ; Webster Bank NA , 250 Ariz. at 500, ¶ 9, 481 P.3d at 1175 ; see also Diaz , 252 Ariz. at ––––, at ¶¶ 11–12, 504 P.3d at 949 (). Accordingly, absent acceleration, "a secured lender has until the maturity of the note or deed of trust to exercise his remedies in enforcing his secured interest." Diaz , 252 Ariz. at ––––, at ¶ 20, 504 P.3d at 951.
¶12 Owners argue that a bankruptcy discharge acts as a maturation of the note and thus triggers the statute of limitations. As this court previously concluded, however, "a valid pre-bankruptcy lien that is not avoided during the bankruptcy proceedings survives those proceedings unaffected ." Stewart , 146 Ariz. at 146, 704 P.2d at 276 (emphasis added); see also Diaz , 252 Ariz. at ––––, at ¶ 19, 504 P.3d at 950–51. Owners’ bankruptcy discharge did not alter the terms of the promissory note or deed of trust, and Lender maintains its right to enforce its security interest. See Diaz , 252 Ariz. at ––––, at ¶ 16, 504 P.3d at 950 ().
¶13 Nyguen's promissory note matures on January 1, 2031. The 2011 bankruptcy discharge did not extinguish the debt; it simply barred Lender from recovering against Nyguen personally. The debt remains, and so does Lender's security interest in the Property. And because the bankruptcy discharge did not affect Lender's ability to foreclose, it did not change the note's maturation date.
¶14 Owners argue that because the bankruptcy discharge relieved them of all future payments on the note after the discharge, the Lender's power to accelerate the debt became irrelevant because no future payment obligations existed to accelerate. And at oral argument before this court, Owners’ counsel stressed that a debt is not due unless it is personally enforceable against the debtor. But this position conflates the existence of a debt with its enforceability . As noted, a debtor's bankruptcy discharge does not eliminate the debtor's debts. See Stewart , 146 Ariz. at 148, 704 P.2d at 278 ; Diaz , 252 Ariz. ––––, at ¶¶ 15–16, 504 P.3d at 949–50. Instead, a bankruptcy discharge "operates as an injunction" preventing lenders from taking...
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