Members of the Colorado Supreme Court appeared wary on Tuesday of the idea that bankruptcy can trigger a six-year window for foreclosure, after which banks are no longer able to take possession of a home — even if decades remain on the mortgage itself.
Beyond the legal and practical concerns behind the "free house" interpretation of bankruptcy, the case before the Supreme Court presented another unusual question.
Did Colorado's Court of Appeals rely on a botched understanding of the law from judges in another state when it endorsed the six-year foreclosure deadline?
Jerome D. Silvernagel and Dan Wu are seeking a court declaration that they hold the title to their Highlands Ranch home because their mortgage company, U.S. Bank National Association, moved to foreclose on the house far beyond their discharge from bankruptcy, after the six-year statute of limitations had allegedly expired.
But members of the Supreme Court questioned Silvernagel and Wu's contention that U.S. Bank was derelict in its duty for not foreclosing sooner, even as the homeowners made no post-bankruptcy payments toward the mortgage.
"Your clients are staying in the house for free," pointed out Chief Justice Brian D. Boatright. "You make it seem like the bank is really taking advantage of them."
The case implicated multiple overlapping concepts within mortgage lending and bankruptcy law. After a person exits bankruptcy, they are longer personally liable for most debts and creditors cannot come after them directly. Mortgage payments are among those, although homeowners can voluntarily continue paying installments.
Separate from the mortgage is the deed of trust on the home itself, which the lender can still foreclose upon. Previous court cases established that the six-year statute of limitations to foreclose typically begins anew with each missed payment up to the due date of the overall mortgage, typically in 30 years.
The question for the Supreme Court was what effect Silvernagel and Wu's bankruptcy had on the commencement of the six-year foreclosure window.
In U.S. Bank's view, the final statute of limitations period would begin in 2036, three decades after Silvernagel and Wu took out their mortgage. Even though the men had not been making payments on the mortgage after coming out of bankruptcy in 2012, U.S. Bank claimed it had reasons for not demanding payment or foreclosing sooner: After the Great Recession, it was prudent to wait until the home was worth more than the money owed for the mortgage.
Silvernagel and Wu countered that exiting bankruptcy meant their mortgage payment schedule was unenforceable and the bank had six years to demand payment, foreclose or forfeit the house.
"I think it's unreasonable for the bank, if it’s expecting to be paid, not to continue to send periodic (demands) to the debtor, and then complain six years later that it hasn’t received any payments," argued attorney William A. Morris for the homeowners.
"Their position is not, 'We didn’t get paid.' It’s, 'We have a right to foreclose,'" said Justice Richard L. Gabriel. "And their position is they had every right to wait until they wouldn’t lose money when they foreclose. What’s wrong with that?"
Silvernagel and Wu previously found a sympathetic audience before the Court of Appeals. After a Douglas County judge agreed with the bank that it could foreclose as late as 2042, a three-judge panel for the appellate court ruled that the act of exiting bankruptcy "accelerates" the mortgage due date and triggers the six-year clock.
The Court of Appeals relied in large part on court decisions from Washington, whose law is similar to Colorado's. However, the panel may have actually been led astray.
In 2016, Washington's Court of Appeals decided Edmundson v. Bank of America, in which the bank moved to foreclose on a couple within one year of exiting bankruptcy. The Court of Appeals ruled that the end of the Edmundsons' responsibility for payments did not affect the bank's ability to foreclose. The court added that the couple "no longer had such liability" on their mortgage after leaving bankruptcy.
However, one year later, then-U.S. District Court Judge Ronald B. Leighton handed down a decision in which the bank, like the one in Silvernagel and Wu's case, had waited more than six years after homeowners exited bankruptcy before demanding payment or foreclosing. In that case, Jarvis v. Federal National Mortgage Association, Leighton interpreted the Edmundson decision to mean exiting bankruptcy "kickstarted the deed of trust's final limitations period."
Judges across multiple states, including Colorado's Court of Appeals, subsequently quoted from Jarvis, believing the six-year window for foreclosure began after homeowners left bankruptcy without making further payments on the mortgage.
After Colorado's appellate panel ruled in favor of Silvernagel and Wu, but before the state Supreme Court could hear arguments, Washington's Court of Appeals stepped in to declare that all of the courts relying on Jarvis were wrong.
"Edmundson did not establish such a rule. No Washington Supreme Court case has established such a rule. It is not the law in Washington," wrote Judge Marlin Appelwick last year. "The federal cases, which are the source of that interpretation of Edmundson, are in error."
U.S. Bank seized on Appelwick's opinion to double down on its own view of the law in Colorado.
"There’s this one outlier that has a very faulty foundation," said attorney Matthew A. Morr, referring to Jarvis.
He argued that it benefited the bank and the homeowner to avoid making a fast decision whether to foreclose as the homeowner exits bankruptcy and re-establishes their credit.
On the other hand, Morris, representing the homeowners, took issue with the notion that his clients wanted a "free house," considering U.S. Bank had deliberately chosen not to assert its rights for years after receiving no payment.
"This decision of the (Colorado) Court of Appeals, in reality, would have very little impact on the bank other than forcing it to enforce its rights in a timely manner," he said.
"What it would force the bank to do is foreclose when they would lose money and it would force your clients out of the house," Gabriel interjected. "It seems everybody loses."
He added that giving homeowners time to resume their lives without immediately facing foreclosure might be the optimal outcome.
"If the law and the policy coincide, doesn’t that make the most sense?"
According to the U.S. Bankruptcy Court for Colorado, last year there were more than 8,500 bankruptcy filings in the state. Although foreclosure rates have decreased nationally since the Great Recession, there has been a slight uptick in the wake of the COVID-19 pandemic.
Justice William W. Hood III was not present for oral arguments, but he will participate in the Supreme Court's decision.
The case is U.S. Bank National Association v. Silvernagel et al.
