In a recent decision, the Colorado Supreme Court reversed the Colorado Court of Appeals and held that a discharge in bankruptcy does not trigger the statute of limitations on a claim to foreclose based on a deed of trust. U.S. Bank Nat’l Ass’n v. Silvernagel, — P.3d –, Case No. 21SC836, 2023 WL 3049067 (Colo. Apr. 24, 2023). This decision is welcome news for both borrowers and lenders.
As background, Colorado law generally provides a lender a six-year period to enforce rights set forth in an instrument securing the payment of or evidencing any debt. C.R.S. 13-80-103.5(1)(a). This limitations period would apply to most promissory notes, security agreements, and deeds of trust. (Different time periods apply to demand notes and a claim to foreclose after a judgment on the underlying obligation has been obtained.) The six-year period begins to run when a claim accrues, and a claim under an instrument securing or evidencing any debt accrues on the date the debt becomes due. C.R.S. 13-80-108(4). Where an agreement provides for monthly payments, a separate cause of action accrues each month, and a lender, therefore, can have some claims that have expired and others that are within the six-year statute of limitations or that have not accrued. See Silvernagel, 2023 WL at *3.
The complicating issue in Silvernagel was based on the argument that a discharge obtained in bankruptcy automatically accelerates the accrual of the cause of action for the full amount owed under the security agreement. In bankruptcy, a debtor/borrower generally receives a discharge from personal liability to the lender. The discharge prevents the lender from collecting its claim from the borrower personally. The lender, however, can still collect its claim from the borrower in rem, i.e., by foreclosing on the property. In fact, to save their home, borrowers often use bankruptcy to discharge unsecured obligations to have additional funds available to pay the lender’s claim secured by the deed of trust. In a win-win for the borrower and lender, the borrower voluntarily makes the monthly payments on the secured loan and keeps the property.
With the legal framework now set, we can discuss the Silvernagel decision.
In Silvernagel v. U.S. Bank Nat’l Ass’n, 503 P.3d 165 (Colo. Ct. App. 2021), the Colorado Court of Appeals held that the discharge in bankruptcy of a borrower’s personal liability on a note, in and of itself and notwithstanding that the lender never accelerated the note, was a default that automatically caused the full amount owed to the lender to be due thereby triggering the six-year period to foreclose on the property secured by the deed of trust. According to the Silvernagel Court of Appeals decision, the discharge in bankruptcy, which resulted in the cessation of the borrower’s obligation to make payment on the underlying obligation, was the equivalent of the maturation of the note thereby triggering the statute of limitations. See id., 503 P.3d at 170 -71.
The Colorado Supreme Court correctly reversed the decision of the Court of Appeals. The Supreme Court relied upon settled law that a borrower cannot unilaterally accelerate an obligation under a note or security agreement. See Silvernagel, 2023 WL at *3 (borrower “may not accelerate a payment’s due date unilaterally”). Even when a lender has the option to accelerate, the lender must act affirmatively to accelerate the obligation. As the Supreme Court noted, while the lender could no longer collect the discharged debt from the borrower personally, the borrower could voluntarily pay any debt that was discharged. See id., at *4.
In sum, the Colorado Supreme Court’s decision allows borrowers to keep their homes after they receive a bankruptcy discharge if they choose to continue to pay their obligations to the lender. It avoids what the Colorado Supreme Court called the “perverse result of making it more difficult for individuals in bankruptcy proceedings to keep their homes.” Silvernagel, at * 5. Specifically, if the decision of the Colorado Court of Appeals had stood, lenders would have to foreclose within six years of a bankruptcy discharge; otherwise, the borrower could cease making payments, and the lender would have no remedy.
While the Colorado Supreme Court’s decision in Silvernagal is good news for lenders, lenders need to exercise diligence to ensure the statute of limitations does not run on their time to collect on a loan or enforce a security interest, particularly when bankruptcy intervenes. For example, demand notes have different limitations periods than notes with a monthly payment schedule. And loan documents frequently include acceleration clauses based on a bankruptcy filing. Some acceleration clauses are exercised at the option of the lender, and others are based on the bankruptcy filing itself without any action by the lender. Under different circumstances, a loan can be accelerated, and the statute of limitations can thereby be triggered by a bankruptcy filing itself, even when the lender indicates no intent to accelerate the loan.
If you have any questions about this case or insolvency-related issues generally, contact Peter Cal or your Sherman & Howard attorney.