Accelerate With Vigor!

Aug 22, 2016

By Thomas A. Lerner | Related Practice: Financial Services

Readers of our recent new case bulletin ("Old Law is still Good Law, but sometimes you still have to explain  it . . .")  regarding the July 11, 2016 case, Edmundson v. Bank of America, may recall the appellate court in that case addressed the effect of accelerating a Note obligation on the statute of limitations.  In a more recent case, 4518 S. 256th LLC v. Gibbon, the Court very explicitly described what is necessary to accelerate the amount due under a Note following a default. 

First, the Court reiterated one part of the Edmundson holding, that the statute of limitations runs anew from each missed payment on a Note, in the absence of acceleration.  If acceleration occurs, the statute of limitations runs from the date of the default, but is not renewed with each subsequent missed payment.  Rather, the entire balance is due as of the date of the acceleration.  In Gibbon, no acceleration had expressly been asserted in either a preforeclosure notice of default nor in the notice of trustee’s sale. 

The Court clarified some of the ambiguous language left in Edmundson, which in our earlier commentary we suggested could lead to mischief.  In Gibbon, the Court said:

To accelerate the maturity date of a promissory note, some affirmative action is required, some action by which the holder of the note makes known to the payors that he intends to declare the whole debt due.  Mere default alone will not accelerate the note. Acceleration of the maturity of the debt must be made in a clear and unequivocal manner which effectively apprises the maker that the holder has exercised his right to accelerate the payment date.

The Court concluded in this instance that the lender had not accelerated the note through mere issuance of a Notice of Default because the lender had made no explicit statement of its intent to accelerate, and therefore the statute of limitations was based upon the recurring missed payments.  One effect of this was to reduce the cure amount by which a foreclosure could have been avoided.  The Court then clarified that after a default, the lender can accelerate the maturity date; accelerate the maturity date and proceed with a nonjudicial foreclosure; or proceed with foreclosure, but recognized “a lender is not required to accelerate a loan in order to pursue nonjudicial foreclosure.”  Perhaps most importantly, the Court held that “acceleration does not occur automatically by invoking the power of sale” but that acceleration must be made in some “clear and unequivocal manner.”

Thus, once the decision has been made to accelerate the loan balance, the lender should be explicit and unambiguous.  Acceleration should not be automatic, however, when there are concerns with regard to whether the time for enforcement of the obligation under the statute of limitations has passed.

If you have questions regarding acceleration or the statute of limitations for enforcement of loans, contact Tom Lerner or a member of the Stokes Lawrence Financial Services Group.