The Court of Appeal for the State of California, Second District, recently reversed a trial court’s dismissal of a debt buyer’s complaint to collect on a home equity line of credit (HELOC) as barred by the statute of limitations.
In so ruling, the Second District held that the statute of limitations for a breach of contract claim involving the borrower’s HELOC agreement was not triggered by a missed monthly payment, as the HELOC agreement gave the lender the option to accelerate the debt on default and the debt buyer did not do so until within the applicable statute of limitations.
A copy of the opinion in Piedmont Capital Management, LLC v. McElfish is available at: Link to Opinion.
In 2006, a borrower took out two deeds of trust with two different lenders against his property located in Los Angeles. The second deed of a trust was a HELOC memorialized in an Equity Reserve Agreement secured by a deed of trust against the property.
The HELOC agreement included terms stating the borrower was required to make monthly payments toward repaying the outstanding balance of the loan and that the lender could require the borrower to pay the entire outstanding balance in one payment if the borrower breached a material obligation. This included not meeting any of the repayment terms. The deed also contained a provision giving the lender the option to accelerate the debt and demand all or any part of the outstanding debt become immediately due and payable upon the occurrence, or “anytime thereafter” of a default by the borrower. The acceleration was not automatic, and the lender also reserved the right to delay exercising any or part of its rights, without losing those rights.
On April 1, 2011, the borrower did not pay his monthly HELOC payment. He did not make any payments after this date. In December 2012, the lender for the first deed of trust foreclosed on its deed of trust. The sale did not net any surplus funds to pay off the HELOC.
In October 2019, a debt buyer purchased the HELOC debt and issued a notice of acceleration to the borrower because he was in default for failing to make his monthly loan payment when due. No payments were made in response.
In April 2020, the debt buyer sued the borrower for breach of contract, money lent, money had and received, and declaratory relief. The debt buyer did not seek recovery for any amounts that were already time-barred by the statute of limitations.
The borrower moved to dismiss on the grounds that the lawsuit was barred by the four-year statute of limitations for breach of contract because the limitations period began to run when the borrower first missed his payment in 2011 not when the debt buyer exercised the acceleration clause in 2019. The trial court sustained the borrower’s demurrer without leave to amend and an appeal followed.
On appeal, the debt buyer argued that the trial court erred in sustaining the demurrer without leave to amend on statute of limitations grounds. To determine whether the debt buyer’s claims were barred by the statute of limitations, the Appellate Court examined the various contractual duties in the HELOC agreement.
Specifically, the Second District looked at whether the borrower’s contractual duty to make monthly payments and his duty to pay the full amount of his loan were divisible. The Court found that these duties are divisible. This turned on the lender being granted the right to choose whether to accelerate the maturity date when the borrow missed his first monthly payment or “anytime thereafter.”
By granting the lender that choice, and by explicitly reserving the lender’s ability to delay exercising this right without losing it, the HELOC agreement necessarily contemplated that a breach of the borrower’s duty to make monthly payments was divisible from his duty to pay the full amount of the loan. See Burrill v. Robert Marsh & Co., 138 Call. App. 101, at 107 (1934). Therefore, each breach of duty to make a monthly payment gives rise to its own breach of contract claim with its own limitations period.
The Second District rejected the borrower’s assertion that the discretionary acceleration clause in the HELOC agreement should not be allowed to be included in a contract because it means the lender is not obligated to sue the first time a periodic payment is missed. The Court held the clause was not against the policy behind the statute of limitations encouraging lawsuits to be filed as early as possible.
The Court held it could not ignore the discretionary acceleration clause because it was a mutually agreed to term of the contract. See Boghos v. Certain Underwriters at Lloyd’s of London, 36 Cal.4th 495, 503 (2005). In addition, the Second District cited a number of authorities demonstrating that the doctrine of waiver has been used to bar claims if a lender unduly delays exercising a discretionary acceleration clause. The Court then noted that no claim for undue delay was raised in this case.
In conclusion, the Appellate Court held that the statute of limitations for a claim of breach of contract involving a HELOC agreement does not start to run when the borrower misses the first monthly payment if the contract contains divisible contractual duties and gives the lender discretion to accelerate the fixed maturity date of the loan any time after the breach. Accordingly, the Appellate Court reversed the trial court’s dismissal.