Dawdling Bank's Foreclosure Saved by Ambiguous Acceleration

By Claire H. Taylor and Thomas A. Lerner | Related Practice: Financial Services

The Deed of Trust Act continues to offer opportunities for befuddlement with regard to recovery of the full amount of the indebtedness through foreclosure and the right of a borrower to cure a default. The statute of limitations for enforcement of loan documents begins to run upon the occurrence of an event of default. For installment contracts, each missed payment begins a new limitations period. If the loan is accelerated, the statute of limitations runs from the date of acceleration. 
In 2016, in 4518 S. 256th LLC v. Gibbon, the Court of Appeals was explicit that a lender who sought to accelerate the balance owed needed to do so unambiguously, as was more fully discussed in our blog post "Accelerate with Vigor!" On April 2, 2019, in U.S. Bank et al. v. Ukpoma, the Court of Appeals found the acceleration in a default notice to be ambiguous, and on that basis concluded that the Bank could judicially foreclose eight years after sending the borrower a letter containing this:

You are hereby notified that [U.S. Bank] has elected to accelerate the loan described herein, and has declared the entire balance of $252,000.00, plus accrued costs, immediately due and payable. NOTWITHSTANDING SAID ACCELERATION, YOU HAVE THE RIGHT TO REINSTATE THE LOAN BY PAYING THE DELINQUENT PAYMENTS, LATE CHARGES, COSTS AND FEES ON OR BEFORE THE ELEVENTH (11TH) DAY BEFORE THE DATE OF THE TRUSTEE’S SALE . . . .

The Court found that the reference to the right to reinstate the loan by payment of the arrearages meant that the Bank had not accelerated the loan at all, even though in this paragraph they appeared (twice) to be saying that they were doing so. Here, the loan servicer jumped the gun by referring to the borrower’s right to reinstate the loan. That opportunity is a required disclosure in a Notice of Trustee’s Sale (where the borrower can in fact reinstate the Deed of Trust, and by doing so de-accelerates the loan) but is not required in a Notice of Default.

The loan servicer waited nine months from the notice of default to commence a nonjudicial foreclosure, and subsequently initiated and discontinued six other trustee sales over the next six years, amidst four intervening bankruptcies. Finally, the Bank chose to proceed by judicial foreclosure. Strikingly, the borrower last made a mortgage payment in 2007, but has occupied the property ever since, leaving one to wonder why the Bank proceeded so indecisively.

If the default notice had included an unambiguous and effective acceleration, the Bank would have had to commence its foreclosure within six years, as otherwise the right to enforce the Promissory Note would have been barred by the statute of limitations. The Court concluded that the reference to the right to reinstate the loan by payment of the delinquency meant that the Note had in fact never been unambiguously accelerated, and therefore the statute of limitations had not run on all of the installment payments. It follows, however, that those unpaid installment payments which were more than six years old could not be collected.

If the Court concluded that this Notice of Default had effectively accelerated the loan, and that the judicial foreclosure action was time-barred, the borrower would have ended up with a windfall by owning the property without fully paying for it, as noted by the Court. Some may infer that this outcome influenced the construction of the quoted language, to avoid an unfair result.

The second question addressed by the Court is whether the commencement of a nonjudicial foreclosure tolled (or stopped) the statute of limitations from running. The current rule is that starting a nonjudicial foreclosure does stop the statute of limitations running through the date of the sale. In Ukpoma, the Court was divided on this issue, with the judge who wrote the decision arguing that the prior appellate case on which the rule relies be overruled. It is unusual for the author of the decision to cast a minority vote on an issue before the Court. Here, the Court published its opinion for the explicit purpose of highlighting this issue.

Why does this case matter? No lender wants to find that its loan enforcement is barred by its own delay. No lender should want to know that when it told the borrower that the entire balance was being accelerated, that a Court concluded that they failed to be unequivocal about that. Both of these problems can be avoided by the lender being firm in its choice of remedy, clear in its statements, and by diligently following through on what it started. The statute of limitations for enforcement of a Promissory Note is six years from the date of default. That is ample time to choose and implement a remedy.