PEDRO U. DIAZ and NOEMI C. DIAZ v. BBVA USA, Fka COMPASS BANK

IN THE
ARIZONA COURT OF APPEALS
DIVISION TWO
PEDRO U. DIAZ AND NOEMI C. DIAZ,
HUSBAND AND WIFE,
Plaintiffs/Appellants,
v.
BBVA USA,
FKA COMPASS BANK, A CORPORATION,
Defendant/Appellee.
No. 2 CA-CV 2021-0046
Filed January 7, 2022
Appeal from the Superior Court in Pinal County
No. S1100CV202001239
The Honorable Steven J. Fuller, Judge
AFFIRMED
COUNSEL
Denny & Boulton P.C., Phoenix
By G. Michael Denny
Counsel for Plaintiffs/Appellants
Akerman LLP
By Erin E. Edwards, Chicago, Illinois
Counsel for Defendant/Appellee
DIAZ v. BBVA USA
Opinion of the Court
OPINION
Judge Brearcliffe authored the opinion of the Court, in which Presiding
Judge Eppich and Chief Judge Vásquez concurred.
B R E A R C L I F F E, Judge:
¶1 Pedro and Noemi Diaz appeal from the trial court’s dismissal of their
action to quiet title. The Diazes contend the court erred by concluding that
the six-year statute of limitations to enforce the subject deed of trust would
not begin to run until the earlier of its maturity date or the creditor’s
acceleration of the underlying debt. The Diazes contend that the limitations
period began, at the latest, when their debt was discharged in bankruptcy.
For the following reasons, we affirm.
Factual and Procedural Background
¶2 The Diazes’ complaint to quiet title to their home was
dismissed by the trial court under Rule 12(b)(6), Ariz. R. Civ. P., for failure
to state a claim. “When a motion to dismiss for failure to state a claim is
granted, review on appeal necessarily assumes the truth of facts alleged in
the complaint.” Airfreight Express Ltd. v. Evergreen Air Ctr., Inc., 215 Ariz.
103, ¶ 2 (App. 2007) (quoting Logan v. Forever Living Prods. Int’l, Inc., 203
Ariz. 191, ¶ 2 (2002)). Documents attached to, or incorporated by reference
in a complaint, are similarly considered. See Belen Loan Invs., LLC v. Bradley,
231 Ariz. 448, n.8 (App. 2012) (citing Strategic Dev. & Constr., Inc. v. 7th &
Roosevelt Partners, LLC, 224 Ariz. 60, ¶¶ 10, 14 (App. 2010) (documents
referenced but not attached are considered when they are central to
complaint)). The facts below are drawn from both the Diazes’ complaint
and the deed of trust cited in, and central to, the complaint.
¶3 In April 2005, the Diazes executed a note for a home equity
line-of-credit (“HELOC”) with Compass Bank, now BBVA, for the principal
amount of $145,000. The Diazes secured the note with a deed of trust on
their home, for the benefit of BBVA. As described in the deed of trust, the
credit agreement was a revolving line of credit, allowing the Diazes to
borrow funds at their discretion, repeatedly, up to a limit of $145,000 while
they made monthly payments. Each payment on the balance would
replenish the amount available to the Diazes. The deed of trust’s maturity
date is April 9, 2040.
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DIAZ v. BBVA USA
Opinion of the Court
¶4 The Diazes’ last payment to BBVA under the note was made
before March 2012 and they have made no payments since then. In March
2012, the Diazes filed for bankruptcy relief, under chapter 7 of the
bankruptcy code, and were granted a discharge of debts in August 2012.1
The Diazes’ then-existing debt to BBVA under the note was included in the
bankruptcy discharge. BBVA and the Diazes did not enter a reaffirmation
agreement.2 We assume for the purposes of this decision that the entirety
of the outstanding debt to BBVA was discharged in the bankruptcy action.
¶5 Under the deed of trust, the Diazes’ failure to “meet the
repayment terms” of the HELOC after March 2012 was an event of default.
Upon an event of default, BBVA could elect “one or more” of identified
remedies, including acceleration (as lender, by declaring “the entire
indebtedness immediately due and payable”) and foreclosure (as trustee,
“by notice and sale,” or as lender, “by judicial foreclosure”). The Diazes
agreed in the deed of trust that BBVA does “not give up any of [its] rights
under [the] Deed of Trust unless [it] does so in writing,” and that “[t]he fact
that [BBVA] delays or omits to exercise any right will not mean that [BBVA]
has given up that right.” They further agreed that the deed of trust would
secure any obligation to BBVA “whether the obligation to repay such
amounts may be or hereafter may become otherwise unenforceable.” It is
undisputed that BBVA had not, as of the date of the complaint, exercised or
attempted to exercise either acceleration or foreclosure under the deed of
trust.
¶6 Eight years after receiving the bankruptcy discharge, in
August 2020, the Diazes filed this quiet title action to preemptively bar
BBVA “from having or claiming any right or title” to their home adverse to
theirs, and a “[j]udgment extinguishing” the deed of trust. They asserted
that more than six years had passed since both their first uncured, missed
1See 11 U.S.C. §§ 524, 727.
2“A reaffirmation agreement is one in which a debtor agrees to pay
all or part of the dischargeable debt after a bankruptcy petition has been
filed.” 9D Am. Jur. 2d Bankruptcy § 3659, Westlaw (database updated
November 2021). A bankruptcy petitioner may enter into a reaffirmation
agreement with a secured creditor to prevent foreclosure on the collateral.
See 9D Am. Jur. 2d Bankruptcy § 3513, Westlaw (database updated
November 2021) (“The debtor can avert foreclosure in such a situation . . .
by . . . a reaffirmation of the mortgage debt which preserves the debtor’s
personal liability in spite of discharge . . . .”).
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DIAZ v. BBVA USA
Opinion of the Court
payment in March 2012, and the date of their “last payment owed,” which
is, effectively, the date of the bankruptcy discharge in August 2012.
Consequently, they argued, because BBVA had failed to enforce the deed
of trust within Arizona’s six-year limitations period, it was forever barred
from doing so. A.R.S. § 12-548(A)(1); see A.R.S. § 33-816 (statute of
limitations for contract applies to deed of trust securing contract). BBVA
filed a motion to dismiss, arguing the statute of limitations had not run, and
would not begin to run until either April 2040—the maturity date of the
deed of trust—or its election to accelerate the underlying debt. The trial
court granted BBVA’s motion, dismissing the complaint with prejudice,
and this appeal followed. We have jurisdiction pursuant to A.R.S. §§ 12-
120.21(A)(1) and 12-2101(A)(1).
Analysis
¶7 In granting BBVA’s Rule 12(b)(6) motion to dismiss, the trial
court determined that BBVA was not barred by the statute of limitations
and that the Diazes had therefore failed to state a claim upon which the
relief they sought could be granted. On appeal, the Diazes argue that the
trial court erred by: (1) applying precedent that requires a creditor to
accelerate a debt to commence the six-year statute of limitations and (2)
“applying legal precedent without regard to the legal significance of [their]
bankruptcy discharge.” We review the dismissal of a complaint under Rule
12(b)(6), de novo. Coleman v. City of Mesa, 230 Ariz. 352, ¶ 7 (2012).
Dismissal is only appropriate under Rule 12(b)(6) if “as a matter of law . . .
plaintiffs would not be entitled to relief under any interpretation of the facts
susceptible of proof.” Id. ¶ 8 (quoting Fid. Sec. Life Ins. Co. v. State Dep’t of
Ins., 191 Ariz. 222, ¶ 4 (1998)). “The accrual of the cause of action and the
interpretation of a statute of limitations are legal questions, which we
review de novo.” Mertola, LLC v. Santos, 244 Ariz. 488, ¶ 8 (2018).
Navy Federal, Webster and Miller versus Mertola
¶8 In support of their claim that the trial court erroneously
dismissed their complaint, the Diazes cite to Mertola, 244 Ariz. 488. In
Mertola, a couple entered into a consumer credit card agreement with a
bank and the agreement contained an optional acceleration clause upon
default. Id. ¶ 2. The borrowers defaulted for the first time in 2008 and the
creditor did not sue for the unpaid balance of the credit card debt until 2014.
Id. ¶¶ 3-4. The court concluded that, when a credit card agreement contains
an optional acceleration clause, the statute of limitations for a creditor to
collect the entire outstanding debt begins to accrue upon the first defaulted
payment. Id. ¶ 21. Consequently, the creditor’s claim for the unpaid debt
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DIAZ v. BBVA USA
Opinion of the Court
was barred by the six-year statute of limitations of A.R.S. § 12-548(A)(2). Id.
¶¶ 1, 21-22.
¶9 The Diazes similarly assert that BBVA was obliged to
foreclose on the home either within six years of the first missed payment,
or, at the latest, within six years of the last payment due just before their
bankruptcy discharge. BBVA argues in response, as it did below, that it
was entitled to wait to foreclose (or exercise any other available remedy
under the deed of trust) until the April 2040 maturity date of the deed of
trust. Any applicable statute of limitations, it argues, does not begin to run
any sooner than that maturity date unless it affirmatively takes some earlier
remedial action such as acceleration. It argues, also as it did below, that—
as we held recently in Webster Bank N.A. v. Mutka, 250 Ariz. 498, ¶ 12 (App.
2021)— Mertola applies only to unsecured credit card debt, not secured debt
such as that involved here.
¶10 In Webster, the debtor, Mutka, entered a thirty-year HELOC,
with a borrowing limit of $73,000, secured by a deed of trust on his home.
Id. ¶ 2. During the first fifteen years of the loan, Mutka was required to
make monthly interest payments, but was not obligated to make principal
payments until the second fifteen years. Id. Four years after taking out the
loan, Mutka failed to make a monthly interest payment, and, thereafter,
made no further payments under the loan. Id. ¶ 3. Six and a half years after
that default, the lender bank accelerated the debt under the optional
acceleration clause in the loan agreement, and sued to collect the balance.
Id. In response to the suit, Mutka moved for summary judgment, arguing
that the six-year statute of limitations barred the bank’s suit. Id. ¶ 4. The
trial court denied the motion and, after a trial, the bank secured judgment
against Mutka. Id.
¶11 On appeal, this court recited the rule that “[w]hen a fixed debt
is payable in installments, the statute of limitations ‘commences on the due
date of each matured but unpaid installment and, as to unmatured future
installments, the period commences on the date the creditor exercises the
optional acceleration clause.’” Id. ¶ 7 (quoting Navy Fed. Credit Union v.
Jones, 187 Ariz. 493, 494 (App. 1996)). Mutka had argued that, because his
debt was akin to credit card debt, Mertola applied, not Navy Federal, and that
the “cause of action to collect the entire outstanding [credit card] debt
accrues upon default: that is, when the debtor first fails to make a full,
agreed-to minimum monthly payment.” Id. ¶ 8 (quoting Mertola, 244 Ariz.
488, ¶ 21). Consequently, Mutka argued, the bank’s claim—filed six years
and eight months after he first failed to make an interest payment—was
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DIAZ v. BBVA USA
Opinion of the Court
barred. Id. We disagreed with Mutka, recognizing that our supreme court
in Mertola, in declining to apply the Navy Federal rule to credit card debt,
had also “expressly declined” to determine whether that rule applied to
other types of debt. Id. ¶ 9. We concluded that the Navy Federal rule applied
to any secured HELOC with a defined maturity date, 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. Id. Consequently,
the bank’s suit against Mutka, undertaken simultaneously with
acceleration, was within the six-year statute of limitations. Id. ¶¶ 3-4, 13,
15.
¶12 We see no cogent reason to go beyond Webster. See Castillo v.
Indus. Comm’n, 21 Ariz. App. 465, 471 (1974) (we should consider a prior
court of appeals decision binding unless it is “based upon clearly erroneous
principles, or conditions have changed so as to render these prior decisions
inapplicable.”). Because Webster limits the application of Mertola to credit
card debt, or, at least, does not extend it to HELOCs, Mertola is not
applicable in this case.3 And because Navy Federal and Webster control, the
trial court did not err in rejecting the application of Mertola.4
Effect of the Bankruptcy Discharge
¶13 The Diazes further point out that the cases on which we and
the trial court rely did not involve a bankruptcy discharge. The Diazes
argue that, even if the statute of limitations did not begin to run when they
stopped making payments under the note, it was certainly triggered by the
discharge of their debt in bankruptcy. They argue that discharge is the
equivalent of maturation of the debt. We disagree.
3The trial court here did not have the benefit of Webster, which was
filed several months after the court’s order of dismissal. The court,
nonetheless, reached the same conclusion relying on Andra R Miller Designs
LLC v. US Bank NA, 244 Ariz. 265 (App. 2018) (“Miller”).
4The Diazes also argue that A.R.S. § 33-816 “prohibits a distinction
between secured and unsecured debt for purposes of determining the
appropriate statute of limitations when a deed of trust is involved,” and
therefore the trial court should not have refused to follow Mertola solely
based on the security status of the debt. We see no such prohibition in that
statute.
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DIAZ v. BBVA USA
Opinion of the Court
¶14 As an initial matter, the United States Bankruptcy Code
controls the legal effect of a bankruptcy discharge. See Stewart v. Underwood,
146 Ariz. 145, 147 (App. 1985). Under non-bankruptcy law, the payment or
discharge of an underlying debt extinguishes any lien or other right or
interest in property securing the debt. See Deming Nat. Bank v. Walraven,
133 Ariz. 378, 379 (App. 1982) (“There can be no quarrel with the general
principle that ordinarily when the secured obligation is discharged in full,
any mortgage securing that obligation is extinguished and ceases to exist.”).
A debtor can no longer be sued on the note or security agreement.
¶15 Similarly, the discharge of a debt in bankruptcy expressly
relieves the debtor of the underlying obligation, from risk of in personam
suit on the debt, and even a personal judgment. 11 U.S.C. § 524(a)(1)-(3);
see Stewart, 146 Ariz. at 148 (discharge under the Code is “a bar to
enforcement of the debt as a personal obligation of the debtor”); see also
Tonnemacher v. Touche Ross & Co., 186 Ariz. 125, 129 (App. 1996) (action in
personam is action seeking personal judgment). 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. 11 U.S.C. § 524(j)
(discharge “does not operate as an injunction against an act by a creditor
that is the holder of a secured claim”); see Stewart, 146 Ariz. at 146;
Transamerica Ins. Co. v. Trout, 145 Ariz. 355, 359 (App. 1985); Tonnemacher,
186 Ariz. at 129 (action in rem seeks control over property).
¶16 Consequently, while the Diazes received relief of their
personal obligation to BBVA when their debt was discharged in
bankruptcy, the deed of trust they executed to secure that personal
obligation was not extinguished. Therefore, unless its claim is indeed
barred by the statute of limitations as the Diazes contend, BBVA retains
whatever rights arise under the deed of trust in rem against the subject
home, including foreclosure.
¶17 Nonetheless, the Diazes argue that, because the underlying
debt was discharged, any acceleration of the debt by BBVA would be
“illegal and meaningless.” Therefore, they maintain, “[t]he [bankruptcy]
discharge has the same legal effect as a maturation of the loan.” The Diazes
assert that, at a minimum, “[n]othing in § 12-548(A)(1) denies the possibility
that a bankruptcy discharge can trigger the statute of limitations.” In its
ruling, the trial court did not address the Diazes’ bankruptcy discharge.
¶18 The Diazes rely, as they did below, on an unpublished federal
district court case, Jarvis v. Fed. Nat’l Mortg. Ass’n, No. C16-5194-RBL, 2017
WL 1438040 (W.D. Wash. Apr. 24, 2017), affirmed by an unpublished
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DIAZ v. BBVA USA
Opinion of the Court
federal appellate case, Jarvis v. Fed. Nat’l Mortg. Ass’n, 726 F. App’x 666 (9th
Cir. 2018), to support their argument. They assert we should follow these
cases and “turn to Washington State law,” because “[t]here is no law on
point in Arizona.” In Jarvis, the facts were very similar to those here, and
that court determined that the limitations period begins to run from the due
date of the payment “owed immediately prior to the discharge of a
borrower’s personal liability in bankruptcy, because after discharge, a
borrower no longer has forthcoming installments that he must pay.” Jarvis,
2017 WL 1438040, at *2. As a result, it barred the lender from enforcing its
rights under the deed of trust due to the passing of the statute of limitations
following a bankruptcy discharge. Id., at *3-4. Although Jarvis would
certainly command that BBVA’s in rem action here is similarly barred, Jarvis
is not binding. See Skydive Ariz., Inc. v. Hogue, 238 Ariz. 357, ¶ 29 (App.
2015). And, because our decision in Stewart v. Underwood is on point, Jarvis
is not persuasive.
¶19 In Stewart, Underwood executed a promissory note payable
to Stewart, secured by Underwood’s home under a deed of trust. 146 Ariz.
at 146. Underwood filed for bankruptcy and the debt owed to Stewart was
ultimately discharged. Id. During the bankruptcy proceedings, Stewart did
not file a proof of claim, nor did she accept an offer to reaffirm the debt. Id.Over a year after the discharge, Stewart commenced an action to foreclose
on Underwood’s residence under the deed of trust. Id. The trial court
found the deed of trust to be “null and void, presumably because of” the
bankruptcy discharge. Id. On appeal, Underwood argued that the
bankruptcy discharge “superseded the six year limitations period [under
A.R.S. §§ 12-548 and 33-816] and immediately enjoined any further action
on the contract.” Id. at 149-150. We concluded, however, that the discharge
was “not an extinguishment of the debt, but only a bar to enforcement of
the debt as a personal obligation of the debtor.” Id. at 148. We wrote:
A.R.S. § 12-548 sets out a precise period of
limitation, six years. There is no indication that
our legislature intended to create some type of
sliding scale in which enforcement of the lien is
precluded if some fortuitous circumstance
prevents an action on the contract. Neither is
there any indication that Congress intended the
bankruptcy discharge to interfere with state
statutes of limitation. In fact, . . . the intent was
to recognize the continued existence of the debt
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DIAZ v. BBVA USA
Opinion of the Court
for purposes not inconsistent with the discharge
of personal liability.
Id. at 150. Indeed, we determined that “a valid pre-bankruptcy lien that is
not avoided during the bankruptcy proceedings survives those
proceedings unaffected.” Id. at 146.5
¶20 Arizona courts, therefore, have not adopted the Jarvis
reasoning that the debtor is freed of his obligation for all purposes, thus
necessarily triggering the statute of limitations as a consequence. As
discussed above, Arizona requires that the lender take affirmative steps to
accelerate the debt to trigger the statute of limitations. Failing that, a
secured lender has until the maturity of the note or deed of trust to exercise
his remedies in enforcing his secured interest. BBVA took no such
affirmative steps to accelerate the debt. Although certainly, as a practical
matter, the bankruptcy discharge bars BBVA from accelerating that debt by
deeming it “immediately due and owing” and obtaining a money
judgment, that remedy was lost only by the Diazes’ unilateral action of
seeking bankruptcy protection. We see no statutory command that the
practical loss of the remedy of acceleration by operation of the bankruptcy
laws should also affect the other remedies available to BBVA under the
deed of trust, namely judicial and non-judicial foreclosure. Indeed, as
stated above, the Diazes expressly agreed that the deed of trust would
continue to secure their obligation to BBVA “whether the obligation to
repay” the debt “may be or hereafter may become otherwise
unenforceable.” And, although the Diazes do not ask us to depart from
Stewart, we see no reason to do so. Therefore, the trial court did not err in
refusing to apply the reasoning of Jarvis.
Attorney Fees and Costs
¶21 BBVA requests its attorney fees and costs under Rule 21(a),
Ariz. R. Civ. App. P., and A.R.S. § 12-341.01(A). In our discretion, we grant
BBVA, as the prevailing party on appeal, its reasonable attorney fees and
costs upon its compliance with Rule 21. See Modular Mining Sys., Inc. v.
Jigsaw Techs., Inc., 221 Ariz. 515, ¶ 27 (App. 2009). The Diazes have also
requested their attorney fees and costs on appeal, but they are not the
5The Diazes did not allege below or here, that the bankruptcy court
expressly nullified the deed of trust. Indeed, the Diazes acknowledge the
continued post-discharge existence and, but for their limitations defense,
enforceability of the deed of trust.
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Opinion of the Court
successful party and therefore, we deny their request. See Doneson v.
Farmers Ins. Exch., 245 Ariz. 484, ¶ 12 (App. 2018).
Disposition
¶22 For the foregoing reasons, we affirm the trial court’s grant of
BBVA’s motion to dismiss.
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