Luu v. New Rez

IN THE
ARIZONA COURT OF APPEALS
DIVISION ONE

DEENISE LUU, et al., Plaintiffs/Appellants,

v.

NEW REZ, LLC, et al., Defendants/Appellees.

No. 1 CA-CV 21-0007
FILED 04-12-2022

Appeal from the Superior Court in Maricopa County
No. CV 2020-054642
The Honorable Sara J. Agne, Judge

AFFIRMED

COUNSEL

Parker Schwartz PLLC, Phoenix
By Lawrence D. Hirsch
Counsel for Plaintiffs/Appellants

Akerman LLP, Los Angeles CA
By Brenda Radmacher
Counsel for Defendants/Appellees
 LUU, et al. v. NEW REZ, et al.
Opinion of the Court

OPINION

Judge Michael J. Brown delivered the opinion of the Court, in which
Presiding Judge Randall M. Howe and Judge Brian Y. Furuya joined.

B R O W N, Judge:

¶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.

BACKGROUND

¶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

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Opinion of the Court

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).

DISCUSSION

¶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 (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 (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. 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 (2018).

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Opinion of the Court

A. Statute of Limitations

¶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 (“[A] trustee’s sale of trust property under
a trust deed shall be made, or any action to foreclose a trust deed . . . shall
be commenced, within the period prescribed by law for the commencement
of an action on the contract secured by the trust deed.”); see also De Anza
Land & Leisure Corp. v. Raineri, 137 Ariz. 262, 266 (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, 61 Ariz. Cases Digest 10, ¶ 15 (App. Jan. 7,
2022); see also Shaffer v. Heitner, 433 U.S. 186, 199 (1977) (noting that an action
in personam “impose[s] a personal obligation on the defendant in favor of
the plaintiff”). “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, 61 Ariz. Cases Digest at ¶ 15; see also
Shaffer, 433 U.S. at 199 (explaining that an action in rem “is limited to the
property that supports jurisdiction and does not impose a personal liability
on the property owner”). Thus, a bankruptcy discharge does not preclude
an action to foreclose on a deed of trust. Stewart v. Underwood, 146 Ariz. 145,
146, 148 (App. 1985); see also In re Garske, 287 B.R. 537, 542 (B.A.P. 9th Cir.
2002) (holding that when a lender has a secured interest in property, the
lender’s in rem remedies survive a bankruptcy discharge, even though the
debtor’s personal liability is extinguished).

¶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 (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 (App. 1996); Webster Bank NA, 250 Ariz. at 500,
¶ 9; see also Diaz, 61 Ariz. Cases Digest at ¶¶ 11–12 (explaining that Navy
Federal Credit Union and Webster Bank apply to secured installment debts
“and that the statute of limitations to enforce the debt does not begin to run
on future, unmatured installments due until the lender accelerates the
debt”). 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, 61 Ariz. Cases Digest at ¶ 20.

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Opinion of the Court

¶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 (emphasis added); see also
Diaz, 61 Ariz. Cases Digest at ¶ 19. 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, 61 Ariz. Cases
Digest at ¶ 16 (holding that while a borrower’s personal obligation is
discharged in bankruptcy, “the deed of trust [the borrower] executed to
secure that personal obligation [is] not extinguished” and the lender
“retains whatever rights arise under the deed of trust in rem[,] . . . including
foreclosure”).

¶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.

B. Acceleration Clause

¶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; Diaz, 61 Ariz.
Cases Digest at ¶¶ 15–16. Instead, a bankruptcy discharge “operates as an
injunction” preventing lenders from taking any action “to collect . . . any
such debt as a personal liability of the debtor.” 11 U.S.C. § 524(a)(2).
Because a bankruptcy discharge does not eliminate the debt under an
installment contract, each installment continues to become due under the
original contract. Though the discharge injunction bars the lender under
that contract from collecting on those installments against the debtor
personally, the installments remain operative to inform the parties’ rights
regarding the use of in rem remedies against the security. As such, a
lender’s acceleration powers are preserved even after a bankruptcy
discharge.

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Opinion of the Court

¶15 Further, Owners’ argument mistakenly assumes that a
discharge can effectively cause an acceleration without any action or notice
to either party thereof. An acceleration clause, however, is only
“exercisable at the lender’s option.” Browne v. Nowlin, 117 Ariz. 73, 75
(1977). To invoke an acceleration clause, the lender “must undertake some
affirmative act to make clear to the debtor it has accelerated the obligation.”
Baseline Fin. Servs. v. Madison, 229 Ariz. 543, 544, ¶ 8 (App. 2012). Such an
act may include demanding full payment before the maturity date or
foreclosing on the property. Andra R. Miller Designs LLC v. US Bank NA, 244
Ariz. 265, 270, ¶ 15 (App. 2018). Nothing under Arizona law indicates that
a bankruptcy discharge is an affirmative act on behalf of the lender that
accelerates the debt or otherwise triggers the statute of limitation. See Diaz,
61 Ariz. Cases Digest at ¶ 20 (“Arizona requires that the lender take
affirmative steps to accelerate the debt to trigger the statute of limitations.”).

¶16 As long as the lender may exercise the acceleration clause, the
statute of limitations does not begin to run until the lender does so. See
Andra R. Miller, 244 Ariz. at 270, ¶ 15; see also Diaz, 61 Ariz. Cases Digest at
¶ 20 (holding that if a lender does not invoke an acceleration clause, “a
secured lender has until the maturity of the note or deed of trust to exercise
his remedies in enforcing his secured interest”). Here, although Owners’
bankruptcy discharge prohibits Lender from accelerating the debt by
demanding full payment from Nguyen personally, the discharge did not
nullify the acceleration clause entirely. Lender retains the right to accelerate
the debt by initiating foreclosure proceedings.

C. Question of State Law

¶17 Owners argue we should follow Washington state law and
two unpublished Ninth Circuit district court decisions to lead us to
conclude that a bankruptcy discharge acts as a maturation of a debt.
Owners also contend that the effect of bankruptcy discharge on a state’s
limitations period is a matter of federal law, and under the supremacy
clause, the superior court was required to follow the two Ninth Circuit
decisions.

¶18 Where a matter concerns the nature and extent of a security
interest—like the applicability of a statute of limitations to a deed of trust—
such issues are determined by state law, not federal bankruptcy law. See In
re Bering Trader, Inc., 944 F.2d 500, 502 (9th Cir. 1991). Nothing indicates
“that Congress intended the bankruptcy discharge to interfere with state
statutes of limitation.” Stewart, 146 Ariz. at 150. And in reviewing matters
of state law, state courts are “not bound by decisions of federal circuit

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Opinion of the Court

courts.” Weatherford ex rel. Michael L. v. State, 206 Ariz. 529, 533, ¶ 9 (2003);
see also In re Bartoni-Corsi Produce, Inc., 130 F.3d 857, 861 (9th Cir. 1997)
(explaining that federal courts interpreting state law issues are “bound by
decisions of the state’s highest court,” and “[i]n the absence of such a
decision, a federal court must predict how the highest state court would
decide the issue using intermediate appellate court decisions, decisions
from other jurisdictions, statutes, treatises, and restatements as guidance”
(citation omitted)). Because the issue at hand concerns both the nature and
extent of an Arizona security interest and the application of Arizona’s
statute of limitations, Arizona state law alone is controlling.

¶19 Moreover, even if federal law were applicable in this case, the
unpublished Ninth Circuit decisions Owners rely on interpreted
Washington state law, not federal law. See In re Hernandez, 820 F. App’x
593, 594 (9th Cir. 2020) (mem. decision) (holding that Washington law
controls the statute of limitations following a bankruptcy discharge and the
bankruptcy court “was not free to ignore” that law); Jarvis v. Fed. Nat’l
Mortg. Ass’n., 726 F. App’x 666, 667 (9th Cir. 2018) (mem. decision) (finding
no reason to “disregard Washington courts’ interpretation of the state
statute of limitations”). And more importantly, a recent Washington Court
of Appeals opinion held that these federal cases misinterpreted Washington
law. See Copper Creek (Marysville) Homeowners Assoc. v. Kurtz, 502 P.3d 865,
873, 875–77, ¶¶ 26, 34–41 (Wash. App. 2022) (holding that both Hernandez
and Jarvis erroneously interpreted Washington law on when the statute of
limitations begins to run on a deed of trust after a bankruptcy discharge).

¶20 Owners argue that because Washington and Arizona have
similar statutory and common law rules related to promissory notes and
deeds of trust, we should adopt Washington’s rule that a bankruptcy
discharge operates as a maturation of the debt. See Edmundson v. Bank of
Am., 378 P.3d 272, 277–78, ¶¶ 39–40 (Wash. App. 2016) (implicitly holding
that a bankruptcy discharge triggers the statute of limitations because
debtors no longer have personal liability under the note). As noted, to the
extent it may have been the rule previously, that no longer appears to be
the case in Washington. Copper Creek, 502 P.3d at 877, ¶ 41 (“Edmundson
does not stand for the proposition that bankruptcy discharge of personal
liability of the debtor accelerates the obligation on an installment note or
commences the statute of limitations on both the outstanding balance of the
note and on enforcement of the [deed of trust].”).

¶21 Indeed, Washington law now seems to track Arizona law:
“the statute of limitations runs on each installment of a promissory note
from the date it is due.” Id. at ¶ 39. Regardless, Arizona law controls

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resolution of the issues presented in this appeal. And in Arizona, a
bankruptcy discharge does not constitute an acceleration of the promissory
note or otherwise commence the six-year statute of limitations.

D. Reaffirmation and Acknowledgment

¶22 Owners argue that Lender should have sought a reaffirmation
or acknowledgment because doing so would place both parties in the same
position as if the bankruptcy discharge had not occurred, and the failure to
do so “has consequences.” A reaffirmation is an agreement by the debtor
to be bound by the terms of a pre-bankruptcy petition contract (debt). In re
Mandrell, 50 B.R. 593, 595 (Bankr. M.D. Tenn. 1985). A signed
acknowledgment of a debt and willingness to pay it removes the applicable
statute of limitations. De Anza Land & Leisure Corp., 137 Ariz. at 266–67.

¶23 Owners, however, have not indicated they would have been
agreeable to either remedy or that they proposed such arrangements to
Lender. Reaffirmation and acknowledgement are devices solely within the
debtor’s purview; they cannot abrogate acceleration and foreclosure, which
are solely within the lender’s discretion. Browne, 117 Ariz. at 75. As such,
that a lender might have considered negotiating other remedies with a
debtor does not eliminate its own ability to exercise the acceleration clause
within the statutory period. Owners have cited no authority, and we can
find none, suggesting that failure to seek a reaffirmation or
acknowledgment may impair a lender’s ability to exercise an optional
acceleration clause before maturation of the promissory note.

E. Attorneys’ Fees

¶24 Both parties request attorneys’ fees incurred on appeal under
A.R.S. § 12-341.01(A). We deny Owners’ request because they have not
prevailed on appeal. In our discretion, we award Lender reasonable fees,
together with taxable costs, subject to compliance with ARCAP 21.

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CONCLUSION

¶25 We affirm the superior court’s order dismissing the
complaint.

AMY M. WOOD • Clerk of the Court
FILED: HB

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