Challenges to mortgage lenders and servicers’ right to foreclose based on the expiration of the statute of limitations are rapidly increasing in the Pacific Northwest and Southwest regions.
Consumer attorneys are now representing borrowers in a winner-take-all bid to avoid repayment of their home loan and simultaneously prevent servicers from ever foreclosing and recovering the principal owed.
However, two strategies for defeating these claims are now gaining acceptance: waiver of acceleration and tolling due to bankruptcy.
As a brief reminder, a statute of limitation is the outward time limit of when a servicer can enforce its deed of trust following a particular default. For example, if the statute of limitation is six years, the servicer must
complete its foreclosure within six years. If the servicer fails to foreclose within six years, it is arguably prevented from ever foreclosing on its lien, effectively giving the property to the borrower or owner free and clear of the deed of trust.
A notice from the servicer declaring the loan to be in default and that all sums are immediately due generally commences the statute of limitations (i.e., acceleration).
Waiver of Acceleration
Borrowers and their attorneys tend to focus on a long-ago acceleration of the loan and the lack of any authority (contractual or otherwise) for a servicer to unilaterally waive, cancel or decelerate the same. Often, the servicer’s records will not reflect an express deceleration but, instead, the commencement or cancellation of foreclosure activities and mailing the requisite notice of default and intent to accelerate. Both of these activities are key to demonstrating that any prior acceleration was waived by implication.
Courts in Arizona substitute the term “waiver” of acceleration with “revocation,” but the concept is the same. “[R]evocation of acceleration may occur when a lender commits an affirmative act to revoke acceleration.”(1)
The requisite “affirmative act” would be any act “that places the borrower on actual or constructive notice of the revocation.”(2) In practice, servicers often send a “notice of default and intent to accelerate” when seeking to commence foreclosure. Providing this notice to borrowers is typically required by the subject security instrument. The notice of intent also implies that any prior acceleration has been revoked for two reasons:
First, the notice of intent typically informs the borrowers that the loan is in default and that they may bring it current by paying less than the entire loan balance. If the prior acceleration was still in effect, the demand would have been for the full amount owing, not a lesser amount.(3)
Second, the notice of intent often states that borrowers’ failure to make payment may/will result in the acceleration of all sums due under the loan. A loan that is already in an accelerated status cannot be accelerated again without first canceling the prior acceleration.
Finally, recording cancellations of foreclosure sales is further indication that any prior acceleration was impliedly waived.
Tolling Due to Bankruptcy
Tolling under the U.S. Bankruptcy Code provides little relief to servicers in the Ninth Circuit. Courts in this circuit conclude that 11 U.S.C. § 108(c)(1) does not create a day-for-day tolling provision, independent of state law, where the statute of limitations does not expire during the bankruptcy.(4) Instead, where the SOL does expire during the bankruptcy, 11 U.S.C. § 108(c)(2) provides a 30 day extension of the statute of limitations, which is nearly always insufficient.
However, state law interpretation of a bankruptcy’s tolling effect on the SOL may apply.(5)
The Arizona Supreme Court, for example, concluded in In re Smith, 101 P.3d 637 (2004), that although ministerial actions, with the primary purpose of putting parties on notice (such as affidavits renewing a judgment), were not subject to a bankruptcy stay and, therefore, were not tolled during a bankruptcy action, the automatic bankruptcy stay did stay actions that “create, perfect or enforce liens or judgments.”(6)
Applying this reasoning in the context of foreclosure, the U.S. District Court, for the District of Arizona held that because the lender’s foreclosure was prohibited by the automatic bankruptcy stay, the statute of limitations for completing the same was tolled (day-for-day) from the filing of the borrowers’ bankruptcy until the automatic stay was lifted.(7)
Tips for Increasing the Chance of a Successful Defense
Servicers can increase their chances of successfully defending a statute of limitations claim (under the above-discussed principles) by reviewing their loan files, extracting any notices of Intent sent after the alleged acceleration date, and making a time line of any bankruptcy filings affecting the loan.
Because a borrowers’ statute of limitations challenge is an all-or-nothing gamble, pre-litigation resolution of these types of claims is unlikely. However, having this information readily available for review will allow servicers or their counsel to determine if this defense strategy should be pursued.
