A lender that waited 16 years after default before invoking an optional acceleration clause in a promissory note was prohibited from collecting the unpaid balance and from foreclosing on the mortgage that secured the note.
Borrowers Dean and Paula Blair borrowed $110,300 in 1992 from United Companies Lending Corporation (“UCLC”), and granted a mortgage to UCLC on two properties to secure repayment of the loan. Both the promissory note and the mortgage contained an acceleration clause, which permitted UCLC to require payment of the entire balance of the loan when the note or mortgage was breached.
Less than a year later, in November 1993, the Blairs sued UCLC and its agent for breach of contract and various torts (the “Ash Suit”).
The Blairs stopped making loan payments in June 1995 and filed a bankruptcy petition in August 1997. Although the bankruptcy court subsequently permitted UCLC to file a foreclosure action in state court by terminating the automatic stay, and the trial court in the Ash Suit entered an order in October 1998 permitting UCLC to file a counterclaim against the Blairs to foreclose the mortgage, UCLC did neither.
Instead, UCLC filed its own bankruptcy petition in Delaware in March, 1999, and in July 2000, assigned the note and mortgage to EMC Mortgage (“EMC”). The Delaware bankruptcy court did not authorize the sale of UCLC’s assets until September, 2000.
What followed was years of delay:
- October 2003 – the Blairs Chapter 13 bankruptcy discharge was entered
- March 2007 – the Blairs obtained judgment against the broker in the Ash Suit
- June 2007 – EMC recorded the mortgage assignment from UCLC
- June 2009 – EMC asked the bankruptcy court to re-open the Blairs’ Chapter 13 case to determine the validity of the note and mortgage, the priority of the mortgage, and the extent to which EMC could collect the balance of the note
- April 2011 – EMC’s servicing agent sent a default notice and right to cure to the Blairs (16 years after their last payment on the note)
- January 2012 – EMC and the Blairs jointly stipulated to the bankruptcy court that the mortgage lien was not affected by, and the loan balance was not discharged in, the bankruptcy
- July 2012 – EMC filed suit against the Blairs to collect the balance of the loan and to foreclose the mortgage
- September 2012 – the Blairs answered, raised affirmative defenses and counterclaimed, asserting UCLC’s assignment to EMC was invalid because it was dated two months before the Delaware bankruptcy court authorized the sale of UCLC’s assets
- May 2014 – EMC moved for summary judgment, without responding to or otherwise addressing the counterclaim
- December 2014 – the Blairs responded to the summary judgment motion, amended their answer to raise a statute of limitations defense, and filed their own motion for summary judgment
- January 2016 – the trial court denied both motions for summary judgment
- January 2018 – the trial court held a bench trial
- March 2018 – the trial court entered findings of fact, conclusions of law and partial judgment.
The trial court held the 10 year statute of limitations for installment payments was a defense to delinquent loan payments due prior to 2002, and the 6 year statute of limitations applicable to the note was a defense for delinquent payments prior to 2006, and awarded partial judgment to EMC in the amount of $193,359, plus costs of nearly $77,000.00 (the then outstanding loan balance exceeded $493,000.00). The Blairs appealed and EMC cross-appealed.[1]
The Blairs argued that EMC’s foreclosure was barred by the applicable statutes of limitations because EMC waited 16 years after their default before utilizing the acceleration clause.
The Court of Appeals, in reversing the judgment in Blair v. EMC Mortgage, LLC, held the six year statute of limitations applicable to the note, and ten year statute of limitations applicable to the mortgage, constituted a complete bar to EMC’s recovery.
The six year statute of limitations for notes, and the ten year statute of limitations for mortgages, both accrue on the date that the cause of action arises. The Court explained that when an acceleration clause is at the creditor’s option, the cause of action does not arise automatically upon the initial default, but instead generally arises when the creditor exercises its option to accelerate. Nevertheless, a creditor cannot indefinitely stave off the operation of the statute of limitations by simply failing to make demand; demand must be made within a reasonable time.
The Court concluded that EMC failed to accelerate within a reasonable time of the Blairs’ default, which it could have done after it acquired the note and mortgage from the original lender (in 2000). The fact that EMC failed to request guidance from the bankruptcy court until 6 years after the Blairs’ discharge, and failed to file suit for another 3 years thereafter, supported the Court’s conclusion that EMC’s acceleration of the loan more than ten years after the initial default, was unreasonable per se.
In short, EMC could have accelerated the note and mortgage as early as 2000, should have exercised the acceleration clause before 2011, and likely would have prevailed if it had acted more diligently.
If you need assistance with exercising your remedies under a promissory note or mortgage, we can help you sort out what you can and should do. Contact Melissa De Groff or Harley Means at (317) 692-9000.
[1] EMC’s cross appeal was limited to the trial court’s authority failure to enter summary judgment in its favor after the Blairs did not timely respond; that portion of the decision is not discussed here.
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