Last month, the Arkansas Court of Appeals delivered some good news for lenders trying to collect on loans after years of non-payment. In Wilmington Savings Fund Society v. Smith, the Court held the lender’s claims for foreclosure and money judgment were not barred by the statute of limitations, despite the fact that more than five years had passed since the debt was originally accelerated.
Here’s the scoop. Smith executed a promissory note and mortgage to Bank of America in 2007. Smith stopped paying in December 2009. Bank of America accelerated and scheduled two non-judicial foreclosure sales, both of which were cancelled. It assigned the note and mortgage to Wilmington in 2015. Wilmington scheduled a non-judicial foreclosure sale for April 2016. Smith sued Wilmington to stop the sale. Smith alleged the note was unenforceable by foreclosure or otherwise because no payment had been made since 2009. His argument was based on Ark. Code Ann. 16-56-111, which creates a five-year statute of limitations on written contracts. The trial court granted Smith’s request for a temporary injunction, which cancelled the sale. Around the same time, Wilmington sent letters informing Smith that the hazard insurance on the property, which Smith was required to maintain under the terms of the mortgage, had expired. It further notified Smith that it had obtained hazard insurance and the annual premium was billed to the escrow account set up for his loan.
Three years later, Wilmington filed a counterclaim against Smith for foreclosure and a money judgment. Wilmington argued acceleration had been waived when the foreclosure sales were cancelled, and its payment of insurance restarted the statute of limitations. In support, Wilmington cited to cases from the Arkansas Supreme Court decided in 1943 and 1939. Smith argued the cases were no longer good law, having been decided before the 1989 amendment to 16-56-111. After a hearing, the lower court agreed with Smith.
On appeal, the Court of Appeals overturned the lower court’s decision. It held the 1943 and 1939 cases were still good law because there was no “unmistakable language” indicating the Legislature’s intent to require courts to rule again on whether payments restart the statute of limitations and whether a lender can de-accelerate a debt. Based on the prior case law, the Court held when acceleration is optional, it can be exercised or waived by the unilateral act of the creditor, in the absence of a claim that the debtor changed position in reliance on acceleration. It further held that a lender’s payment of insurance premiums under the terms of the loan documents restarts the statute of limitations if the premiums are added to the original debt. Bank of America waived its accelerations by cancelling the foreclosure sales. When Wilmington accelerated in 2016, the five-year clock started ticking anew. When Wilmington paid insurance, the five-year clock again started ticking anew.
Lenders will appreciate the Court’s view that “it would be manifestly unjust and inequitable” if a debtor could “take advantage of their own wrong” by arguing the statute has run on the original debt.
You can read the full opinion here: https://opinions.arcourts.gov/ark/courtofappeals/en/item/521981/index.do