Arkansas Court of Appeals Clarifies Statute of Limitations for the Enforcement of Mortgage Debt

In a big win for creditors on May 31, 2023, in Wilmington Savings Fund Society d/b/a Christiana Trust, Trustee for BCAT 2015-4-BTT v. Milton A. Smith, 2023 Ark. App. 326, the Arkansas Court of Appeals held that: (1) a 1989 amendment to Arkansas’s statute of limitations for mortgage debt did not have the effect of precluding previous exceptions to the statute of limitations announced in earlier caselaw; and (2) that acceleration of the mortgage indebtedness in this particular case was waived by the recording of notices of cancellation of a nonjudicial (or statutory) foreclosure sale.

Arkansas Loan Financing and Optional Acceleration Clause

In Arkansas, in the financing process for a loan to purchase real property, to secure the payment of indebtedness owed under a promissory note, creditors will often record either a mortgage or deed of trust.  Although there are slight differences between mortgages and deeds of trust, their goal of securing the payment of indebtedness is the same, i.e., through a lien on the real property that is being purchased.

Mortgages and deeds of trust have a maturity date, and at maturity, all of the indebtedness owed under the instrument must be paid in full.  Different timeframes may apply for the maturity period; commonly, the maturity periods are for 30-years, but some are longer or shorter depending on the circumstances.  In the event of default prior to maturity for failure to make monthly payments, many mortgages and deeds of trust state that, at its option, the creditor has the right to accelerate the indebtedness owed, meaning that all of the indebtedness owed under the loan at maturity can be called due immediately.  This provision in the mortgage or deed of trust is called an optional acceleration clause.

Additionally, many homeowners who finance the purchase of their residences make only one loan payment per month which includes allotments for the principal and interest owed under the indebtedness as well as pro rata disbursements for taxes and hazard insurance.  Thus, a part of this payment is allocated to the principal and interest due under the loan and another part is placed in an escrow account where the creditor tracks and makes payments for the required taxes and hazard insurance owed on the residence.  Often, the terms of the mortgage or deed of trust require these taxes and insurance payments to be paid by the creditor, even if the borrower fails to make their monthly payment.

Debt Enforcement Statute of Limitations

Debts have a statute of limitations for their enforcement.  This means that after a certain period of time, creditors may no longer be able to enforce their contracts with borrowers due to the length of time that has passed, typically after a default is made due to a lack of payment.

Arkansas Code Annotated Section 16-56-111 states that actions to enforce written obligations, such as mortgages and deeds of trust, must be brought within five years “after the cause of action shall accrue.”  Arkansas courts have consistently determined that when a creditor decides to accelerate the indebtedness owed under a mortgage or deed of trust that has an optional acceleration clause (as described above), the creditor’s cause of action has accrued, and it has five years from the date that the loan is accelerated to enforce the deed of trust or mortgage through foreclosure.  If five years have passed post-acceleration and the creditor has not sought enforcement of its mortgage or deed of trust, then the creditor is barred from doing so by the statute of limitations unless an exception to this rule applies.

Smith Decision’s Implications for Creditors

In Smith, even though in default, the borrower argued that five years had passed since the creditor had accelerated the indebtedness owed under his mortgage by initiating a nonjudicial or statutory foreclosure, and therefore the creditor was no longer able to enforce the terms of the mortgage through foreclosure.  In response, the creditor argued that since it continued to make payments for insurance premiums on the property even after the loan was accelerated, this had the effect of preventing the expiration of the limitations period, and, thus, the creditor still had the right to foreclose its interest in the borrower’s real property.  The creditor also argued that it waived acceleration by canceling the foreclosure sale that had been previously scheduled.

To counter these arguments, the borrower alleged that because a 1989 amendment to Arkansas Code Annotated Section 16-56-111 contained only two exceptions to the five-year statute of limitations period, namely partial payment or written acknowledgment of the debt, the creditor’s arguments that the statute of limitations period had not expired due to waiver of acceleration and the payment of insurance premiums no longer applied.  In this, the trial court agreed, and summary judgment was awarded to the borrower.

The decision of the trial court was then appealed to the Arkansas Court of Appeals who reversed the trial court and held that both the payment of insurance premiums and the cancellation of the previous foreclosure action acted as events that prevented the expiration of the limitations period.  Now, creditors can rest easy that when insurance payment premiums are made by a creditor on a loan that is in default status; these payments are well spent and can revive what may have otherwise been an unenforceable debt.  Additionally, if a statutory or nonjudicial foreclosure action is brought and later canceled for some reason, this will also prevent an expiration of the limitations period even if it has been over five years since the loan was initially accelerated.

Contact The Law Group of Northwest Arkansas PLLC for Banking & Finance Representation

Teaven Stamatis, an associate with The Law Group of Northwest Arkansas PLLC, handled the Smith case at the trial court level, and the arguments he made there were eventually used to secure the favorable appellate ruling. At the Law Group, Teaven handles a variety of banking matters for creditors including foreclosures, suits on note, garnishments, replevins, judgment renewals, collections, unlawful detainer/eviction matters, bankruptcy, partition actions, and other civil defensive litigation.

Please reach out to Teaven Stamatis at teaven.stamatis@lawgroupnwa.com or call us at 479-316-3760 for any of your legal needs!