A recent case shows the potential for interplay between the law of mortgages and bankruptcy.

In that case, Piedmont Capital Mgmt. v. McElfish, No. B316372 (Cal. Ct. App. Aug. 24, 2023), the borrower purchased a home in 2006, acquiring a first deed of trust from one lender, and a home equity line of credit (HELOC) from a second. For convenience, in mortgage parlance, the first loan constitutes the first (or senior) mortgage, while the HELOC constitutes a second mortgage. The HELOC had a 30-year maturity (2036). It also gave the lender the option to accelerate the loan and ask for all past due amounts, which was renewed as each successive month’s payment became due.

The buyer began to experience financial difficulty a few years later, and in or around 2011 and 2012, he stopped paying on the first mortgage and the HELOC, respectively. The holder of the first mortgage foreclosed in 2012, apparently by trustee’s sale. The HELOC was unsatisfied by the sale.

Had the homeowner chosen to file Chapter 7 bankruptcy after the first lender foreclosed, the debt owed to the HELOC lender likely could have been discharged. Again, this is because the collateral was gone. The HELOC was a classic unsecured debt. The homeowner could still likely do so, even after the Court of Appeal’s intervention, because bankruptcy is federal law, and is a different statutory scheme which answers to a different sovereign, i.e., the Federal government.

Instead, the homeowner embarked on four years of litigation, which included the Court of Appeal. The trial court held that 1) the four-year statute of limitations for written contracts applied, 2) that the homeowner had made his last payment in or about 2012, and that therefore, 3) the 2019 lawsuit was time-barred.

Enter the Court of Appeal, which reviewed the HELOC agreement. That Court decided that each monthly payment that came due constituted not only an opportunity to pay the regular monthly amount, but each successive monthly failure to pay gave the HELOC lender the option to accelerate the loan (the “acceleration clause”) and ask for all past due amounts. Because the contract called for monthly payments until 2036, and each successive month gave the HELOC lender the option to invoke the acceleration clause, the lender’s time to seek all past due payment was not even close to running out. There was no bar of the statute of limitations, for amounts that could be demanded up until 2036.

Consumer bankruptcy (“Chapter 7”) has as its goal the liquidation of unsecured debt. The moment that the borrower’s home was foreclosed and taken by the holder of the first mortgage, the security (collateral) for the HELOC was gone. The HELOC  became an unsecured debt. A Chapter 7 could have discharged (cancelled) the debt.

As of the time of the Court of Appeal’s decision, the homeowner still owed the HELOC payments. Effective bankruptcy counsel could, however, show him another option that could protect his remaining estate.



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