Accelerating the Debt? Consider Slowing Down!
Simple timing errors can cost you money.
By Randy Newman
Limitation of Actions. Or, put colloquially, the Statute of Limitation. Three words that can derail your foreclosure and impair the legal validity of both the mortgage and the underlying promissory note. Not paying attention can be devastating to a lender. So, what is the Statute of Limitation and how does it work?
What Is the Statute of Limitation?
The statute of limitation is the time period within which an action must be commenced in order to enforce the rights of the aggrieved (or nonbreaching) party. In other words, in the context of mortgage finance, it is the deadline for starting the foreclosure action.
Waiting beyond the applicable statute of limitation before filing the foreclosure means that the lender is no longer able to either (1) enforce the deed of trust (i.e., foreclose) and (2) collect the monies owed to the lender by the borrower.
Tick Tock
The easy part is understanding what the statute of limitation is. The sometimes harder part is figuring out when the proverbial clock starts running. A few recent court decisions should give lenders pause for concern.
In general, the statute of limitation period commences upon a breach of the note and/or security agreement. Typically, the statute of limitation would start when the borrower misses its first payment and does not cure the missed payment. However, because in most states borrowers have a right of reinstatement (bringing the loan current), the statute of limitation may only apply to missed payments and not the entire amount due.
For example, let’s assume the following:
- The borrower’s first missed payment was June 1, 2012. (While this may seem ridiculous, we have recently commenced foreclosure actions where the payment default occurred in 2005.)
- The lender did not accelerate the debt.
- The applicable statute of limitation is six years.
- Foreclosure started May 15, 2019.
To bring the loan current, the borrower would have to pay the monthly payments for the period from and following June 1, 2013: six years’ worth of monthly installments. That is because the statute of limitation is reset each and every month since missing each payment is, in and of itself, a breach.
However, following a default in installment payments, most lenders have their counsel send to the borrower a default letter prior to the commencement of foreclosure. These letters often contain a provision for acceleration; that is, the lender is asking for the entire amount owed to the lender is now all due and payable due to the breach of the terms of the loan, regardless of the maturity date in the loan documents.
Using the same example as before, except this time the acceleration letter was sent Dec. 15, 2012, the lender’s foreclosure action would, in all likelihood, be dismissed for waiting more than six years to start the foreclosure.
Conventional wisdom has held that in most cases, the statute of limitation is only relevant in connection with a judicial foreclosure. Each state will have its own statute of limitation. Some states include the breach of a mortgage loan in with breach of contract. Other states have expressly classified the mortgage loan in a separate category.
For instance, in New York, the statute of limitation to enforce a mortgage is six years, but in California the time to enforce a deed of trust is only four years if the lender wants to proceed through a judicial foreclosure since a note and mortgage are considered contracts.
However, in California where nonjudicial foreclosure is the predominant method of foreclosure, the statute of limitation is 10 years after the maturity date of the loan if the maturity date is stated in the deed of trust, or 60 years after the deed of trust recorded if the maturity date is not stated in the deed of trust. In a nonjudicial foreclosure in Arizona, the time period for a nonjudicial foreclosure is six years following acceleration of the debt.
Accelerating the Debt
That begs the question: When is the debt accelerated?
This can be a potential minefield for lenders. When an acceleration letter is sent following a default, the letter represents the acceleration of the debt and thus begins the start of the time to compute the statute of limitation. If the loan is reinstated, it is imperative that the lender decelerate the debt, which may be a letter to the borrower including the appropriate language in the document canceling the foreclosure process.
Other actions may be deemed to accelerate the debt. Recently in Washington state, the federal court has held that a borrower’s discharge under bankruptcy accelerates the debt since the borrower is no longer obligated to make payments, making the discharge analogous to the maturation of the loan and therefore triggering the commencement of the six-year statute of limitation to foreclose.
In each case presented, the lender commenced a nonjudicial foreclosure following the discharge in bankruptcy. Thereafter, each borrower brought an action to stop the sale. The cases were removed to the U.S. District Court for the Western District of Washington, where in each case the court held that the discharge in bankruptcy started the running of the statute of limitation. In one case, where the borrower argued that the commencement date should be the date of the first missed payment, the court found in favor of the lender. In the other case, the lender commenced the foreclosure more than six years after the discharge was granted; the court found for the borrower and dismissed the case. Lenders must involve their counsel sooner rather than later in order to determine when the foreclosure action must be commenced. When the debt has been accelerated and then reinstated, the acceleration must be undone. A simple timing error can result in lost monies and possibly other actions against the lender.
