John_Thomas_Small
by John Thomas, Senior Counsel
RCO Legal, P.S.

The Washington Court of Appeals, Division I, held on July 11, 2016 that a borrower’s bankruptcy discharge does not impede the mortgage lien.

In Edmundson v. Bank of America, the Washington Court of Appeals (Division I) held that it is “settled law” that bankruptcy only discharges the borrower’s personal liability from the underlying debt, leaving the security interest or deed of trust in tact.

Background: Borrowers defaulted on their mortgage in November of 2008. The following year, in June 2009, they filed chapter 13 bankruptcy and obtained a discharge of their debts in December 2013. The creditor eventually commenced a non-judicial foreclosure in October 2014. In response, and before the trustee’s foreclosure sale, Borrowers filed suit to restrain the foreclosure and to quiet title to the property arguing that the deed of trust lien was no longer enforceable. The trial court agreed with Borrowers, ruling that the bankruptcy discharge of their personal liability on the note also discharged the deed of trust. The trial court awarded Borrowers their attorney fees.

Holding 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 it unenforceable. The Court observed the plain terms of the deed of trust provide for the remedy of foreclosure in the event the borrower failed to comply with its covenants, including payment on the note.

Conclusion: RCO 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 was very clear: a bankruptcy discharge does not prohibit subsequent foreclosure. RCO has observed another case in Oregon where the trial judge agreed with the borrower who raised a similar argument. The Oregon case is being appealed.

RCO will update you again in the coming weeks when a citation to Edmundson becomes available. In the mean time, the full opinion is available here: Edmundson v. Bank of America

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