Not so Fast! How Does Revoking Acceleration of a Note Impact the Statute of Limitations?

Introduction

Lenders routinely accelerate notes after a default occurs, calling the entire loan due immediately. Less regularly, a lender may change its mind and unilaterally revoke the acceleration.  Rarely, however, does a lender fail to foreclose on its real property collateral before the statute of limitations expires.  In Andra R. Miller Designs, LLC v. U.S. Bank, N.A., 244 Ariz. 265, 418 P.3d 1038 (Ct. App. 2018), a unique set of facts involving these issues led the Arizona Court of Appeals to hold that proper revocation of acceleration resets the statute of limitations.

The Facts

In Miller, a lender made a $1,940,000 loan evidenced by a promissory note and secured by a deed of trust against a home in Paradise Valley, Arizona.  The borrower defaulted in September 2008.  The default prompted the lender to notice a default, accelerate the note, and initiate a trustee’s sale of the home in 2009.  After the lender accelerated the note, the six year statute of limitations began to run. See A.R.S. § 12-548(A)(1) and A.R.S. § 33-816. Pretty standard facts so far, right?  Don’t worry, it gets a bit more convoluted.

Rather than proceed with the sale, however, in 2009 the trustee recorded a notice of cancellation of sale that revoked the acceleration of the debt.

Four years after the trustee cancelled the first trustee’s sale, a homeowners’ association (“HOA”) obtained a judgment authorizing it to foreclose against the house by sheriff’s sale. The HOA, however, did not proceed with foreclosure at that time.

In 2013, the lender accelerated the debt—again—and initiated yet another trustee’s sale of the home. Again, the trustee’s sale did not occur.  Instead, in 2014, the trustee recorded a second notice of cancellation of sale that—again—revoked the acceleration of the note.

In December 2014, the lender initiated yet another trustee’s sale. Before it could complete the sale, however, Miller purchased the junior HOA judgment and foreclosed.  The day after Miller took ownership of the home, it sued the lender to stop the trustee’s sale from occurring.

Miller argued that the failure to complete a trustee’s sale within six years after the initial acceleration barred the lender from enforcing its lien. The trial court agreed, and entered judgment in favor of Miller.  The Court of Appeals reversed, because by revoking the acceleration in 2014, the lender effectively reset the statute of limitations.  As such, the lender was not time barred from completing its trustee’s sale when Miller filed suit in 2015.

Legal Analysis

There’s four points of interest to take from the Miller opinion.

First, the holding itself: although accelerating a note starts the statute of limitations running, revoking the acceleration resets the clock. Miller, 224 Ariz. at 270, 418 P.3d at 1043 (citing Navy Fed. Credit Union v. Jones, 187 Ariz. 493, 495, 930 P.2d 1007, 1009 (Ct. App. 1996)).  This is important to keep in mind if there is a potential for delay in enforcement.

Second, the opinion explains that “unilateral revocation of the debt’s acceleration [like acceleration itself] requires an affirmative act by the creditor that communicates to the debtor that the creditor has revoked the debt’s acceleration.” Id. at 271, 418 P.3d at 1044 (citing Fed. Nat. Mort. Ass’n v. Mebane, 208 A.D.2d 892, 618 N.Y.S.2d 88, 89 (1994)) (emphasis added).  In Miller, the mere cancelling of the trustee’s sales—alone—would not have been sufficient to revoke the acceleration.  Because the recorded cancellations, however, purported to revoke the acceleration, that provided sufficient notice to the borrower to constitute a valid revocation.  Accordingly, notice is of paramount concern for accelerations and revocations alike.

Third, the Court somewhat surprisingly held that Miller—who was not a party to the note—had standing to assert a statute of limitations defense. The Court recognized that the statute of limitations defense is a “personal privilege” that only a contracting party may raise. Miller, 224 Ariz. at 269, 418 P.3d at 1042 (quoting Acad. Life Ins. Co. v. Odiorne, 165 Ariz. 188, 190, 797 P.2d 727, 719 (Ct. App. 1990)).  However, because the sheriff’s sale statute provides that “the purchaser is substituted to and acquires all right, title, interest and claim of the judgment debtor thereto,” the Court of Appeals determined that Miller inherited standing by statute. Id. (quoting A.R.S. § 12-1626(A)).  Absent this language in the statute, it is unclear whether Miller would have been able to assert the statute of limitations defense.

Fourth, in a footnote, the Court of Appeals noted that “[t]he revocation of an acceleration would not reset the statute of limitations for payments already in default.” Id. at n.2 (citing Wheel Estate Corp. v. Webb, 139 Ariz. 506, 508, 679 P.2d 529, 531 (Ct. App. 1983)).  Thus, the lender could not collect for the months of missed payments that occurred more than six years before enforcement.  Instead, the lender was limited to collecting the amount that became due within the six years of the trustee’s sale.  In essence, this means that each missed monthly payment on an unaccelerated note constitutes a new default with its own six year statute of limitations period.

Conclusion

The unusual fact-pattern in Miller provided a unique opportunity to explore the effects of acceleration and deacceleration of a note.  Usually, a lender quickly resorts to its remedies following a default such that the statute of limitations is of little concern.  Going forward, however, lenders should keep in mind the requirement of an “affirmative act” necessary to revoke acceleration if there is any expected delay in enforcement.