Arizona Court of Appeals, Division Two, holds that bankruptcy discharge of obligation to make payments on a home equity loan does not extinguish bank’s ability to foreclose.

In 2005, a couple executed a note for a home equity line of credit (“HELOC”) secured with a deed of trust on their home.  The deed of trust was for the benefit of the bank extending the HELOC.  Under the terms of the deed of trust, the couple was to make monthly payments, and the deed’s maturity date was set for April 2040.

In 2012, the couple stopped making monthly payments.  Around the same time, the couple filed for bankruptcy.  In those proceedings, the couple’s personal obligation to repay their debt to the bank was discharged.

Eight years after their personal obligation was discharged, the couple filed an action to quiet title in their home.  The couple argued that the six-year statute of limitations for the bank to foreclose on their home began when they missed their first payment, or at least no later than when their obligation was discharged through bankruptcy.  The bank filed a motion to dismiss, arguing that the statute of limitations would only begin to run on the date the deed matured or when it sought to enforce its remedies.  The trial court agreed with the bank and granted the motion to dismiss.  The couple appealed.

On appeal, the Arizona Court of Appeals, Division Two, affirmed.  The court began by rejecting the couple’s argument that the statute of limitations began to run when they missed their first payment.  Based on the Court of Appeals’s recent decision in Webster Bank N.A. v. Mutka, 250 Ariz. 498 (App. 2021) (summarized here by AzApp), the statute of limitations for a bank to seek its remedies only begins to run on future, unmatured installments when the bank seeks to accelerate the debt.  The position asserted by the couple, on the other hand, only applied to unsecured debt, such as credit card debt.  As such, the court found that Webster Bank squarely governed this case and rejected the couple’s argument. 

The couple’s argument that their bankruptcy discharge triggered the statute of limitations or otherwise extinguished the bank’s remedies also failed.  The court acknowledged that it was true that the bankruptcy discharge relieved the risk of an in personam judgment.  However, the discharge did not affect the bank’s ability to enforce the deed in rem.  In other words, while the bankruptcy discharge relieved the couple of their personal obligation to the bank, the bank’s right to security was not extinguished.  Thus, the court held, the bank could enforce the deed of trust through foreclosure, because the bankruptcy discharge only barred enforcement of the debt through a personal obligation of the couple. 

Judge Brearcliffe authored the opinion for the court, joined by Chief Judge Vàsquez and Judge Eppich.