The Indiana Supreme Court recently held that there are important legal differences between closed-end installment contracts (such as ordinary mortgage loans) and open-end accounts (such as HELOCs) when considering statute of limitations, and there is no need to impose a rule of reasonableness when a lender sues for payment on a closed-end installment contract.
In so ruling, the Court explained the three options that a closed-end mortgagee has under Indiana law in relation to the Indiana statutes of limitations, and held that the mortgagee’s foreclosure action at issue was not time-barred.
A copy of the opinion in Blair v. EMC Mortgage, LLC is available at: Link to Opinion.
Mortgagors executed a 15-year note and mortgage beginning in 1993. The note allowed the lender to accelerate and demand immediate payment in full upon default.
The mortgagors defaulted on the note in June 1995, the original lender filed for bankruptcy, and the note and mortgage were eventually transferred and assigned to another entity (“bank”) in July 2000. The bank chose not to sue the mortgagors until July 3, 2012, four and a half years after the note matured.
The trial court issued an order foreclosing the mortgage but limited the bank’s recovery to the payments and interest which accrued after July 3, 2006 — six years prior to the date when the mortgagors pursued their claim — based on Indiana’s six-year statute of limitations.
The mortgagors appealed. The bank in its appellate brief stated that, although it did “not agree with the trial court’s conclusions regarding the impact of the [mortgagors] statute of limitations defense,” it did “not appeal the same.”
The Court of Appeals reversed, finding that “a party is not at liberty to stave off operation of the statute [of limitations] inordinately by failing to make demand,” citing Smither v. Asset Acceptance, LLC, 919 N.E.2d 1153, 1161 (Ind. Ct. App. 2010). Here, because the original lender did not accelerate the note within six years of the mortgagors’ initial default, the Court of Appeals held that the bank waited “an unreasonable amount of time” and could not recover.
The Indiana Supreme Court granted transfer, vacating the Court of Appeals opinion.
The mortgagors argued that failing to exercise the acceleration clause within six years of default was unreasonable, and thus the bank’s claim should be time-barred. The mortgagors contended, that when a mortgagee “has the option to accelerate payments but is not required to do so, some reasonableness limitation is necessary to ensure that ‘the creditor is not at liberty to stave off operation of the limitations period inordinately by failing to make demand.’”
The bank countered there are “three possible points in time when the statute of limitations could have been triggered: (1) as each installment payment became due; (2) upon an exercise of the optional acceleration clause, had it chosen to accelerate; or (3) upon loan maturity.”
The bank argued its claim was timely because it was asserted within six years of many of the mortgagors’ missed installment payments and within six years of the note’s maturity date.
The Indiana Supreme Court found that “for purposes of the statute of limitations, closed installment contracts should be treated differently than open accounts” and two statutes of limitations would apply.
- Indiana Code section 34-11-2-9 is the general statute of limitations for “action[s] upon promissory notes.” This statute states that such an action, when pertaining to a note executed after Aug. 31, 1982, “must be commenced within six (6) years after the cause of action accrues.” I.C. § 34-11-2-9.
- Indiana “adopted the relevant Uniform Commercial Code (UCC) statute of limitations as Indiana Code section 26-1-3.1-118” which specifically governs “an action to enforce the obligation of a party to pay a note payable at a definite time.” I.C. § 26-1-3.1-118(a). It gives two alternative deadlines for asserting a cause of action upon such a note: either “within six (6) years after the due date or dates stated in the note or, if a due date is accelerated, within six (6) years after the accelerated due date.”
The Indiana Supreme Court further noted that “[t]hese statutes’ plain language shows that they are not mutually exclusive when applied to an action on a promissory note.”
The Court concluded “that Indiana’s two applicable statutes of limitations recognize three events triggering the accrual of a cause of action for payment upon a promissory note containing an optional acceleration clause.”
First, “a lender can sue for a missed payment within six years of a borrower’s default.”
Second, “a lender can exercise its option to accelerate and fast-forward to the note’s maturity date, rendering the full balance immediately due. The lender must then bring a cause of action within six years of that acceleration date.”
Third, “a lender can opt not to accelerate and sue for the entire amount owed within six years of the note’s date of maturity.”
The Indiana Supreme Court affirmed the trial court’s order limiting the bank’s recovery to the payments and interest which accrued after July 3, 2006 further explaining that “ordinarily, lenders may recover the entire amount owed on a promissory note by filing suit within six years of the note’s maturity date, if they choose not to exercise the note’s optional acceleration clause.”
However, here, the bank refrained from asking for full relief and the Court declined to grant relief beyond what the bank sought.