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Sued for debt/breach of contract 11 years after foreclosure

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Rushan2112

New member
California -
In 2004, I purchased a home in Orange County, CA. In the middle of 2005, I took a new "80/20" 1st and 2nd loan out, to pay off the existing loan, and take cash out for home remodel & repairs. Long story short, by 2006 things got bad, and I tried to sell my home. 6 months on the market, tons of open houses, but no luck, as the market had started its downturn in prices (I stupidly bought at near the height of the market). The home was lost to foreclosure in December of 2006.

Early this year, over 11 years later, I get a summons claiming breach of contract. I consulted an attorney (not one who specializes in real estate, but a friend's referral), and he filed a demurrer based on statute of limitations being expired. The bank/servicer claims the statute doesn't begin until the debt was 'accelerated', which only happened late 2017. I don't understand all the legalities in that, but I most certainly don't have the $180,000 to pay, and I don't want a judgment filed as I now own property again (I believe that is what triggered interest in the bank in the first place). Any advice would help.

Thanks
 


Whoops2u

Active Member
An acceleration clause in a contract to pay back a debt over time has the entire amount due at the time events described occur. This is so the creditor does not have to sue on each missed payment until all is collected. While an acceleration clause that is mandatory would start the statute of limitations running, an optional one might not.

A very old case standing for the proposition is at:
https://law.justia.com/cases/california/court-of-appeal/2d/22/455.html
It is obvious that an acceleration clause which is optional in character cannot be regarded as self-operative since the parties to the contract have expressly and unequivocally conferred upon the holder of the instrument the right to elect whether or not he will exact the penalty which is exclusively for his benefit. Without some affirmative action on the part of the holder of a note containing an optional acceleration clause the statute of limitations is not set in motion for the theory of the statute is that a creditor has the full statutory period, whatever that may be, on any day of which he may of his own volition commence an action. (Hoff v. Funkenstein, 54 Cal. 233, 235; Barclay v. [22 Cal. App. 2d 459] Blackinton, 127 Cal. 189, 193 [59 P. 834]; Union Collection Co. v. Soule, 141 Cal. 99, 100 [74 P. 549]; Bogart v. George K. Porter Co., 193 Cal. 197, 208 [223 P. 959, 31 A.L.R. 1045]; People v. California S. Deposit Co., 41 Cal. App. 727, 730 [183 P. 289]; Hinkel v. Crowson, 83 Cal. App. 87, 95 [256 P. 479].)


Modernly, it seems worse. Moran v. STETLER, Cal: Court of Appeal, 4th Appellate Dist., 3rd Div. 2014:
But defendant cites no authority for the proposition that obligors on a promissory note may utilize an acceleration clause to start the running of the applicable statute of limitations, whether that be section 337 or California Uniform Commercial Code section 3118. The law is to the contrary.

"[T]he presence in a promissory note of a positive nonoptional acceleration clause does not have a self-operative effect so that the statute of limitations begins to run immediately upon the happening of a default in a payment which the note specifies shall be made on a designated date." (Trigg v. Arnott (1937) 22 Cal.App.2d 455, 458, italics added.) Instead, "f the creditor fails to act affirmatively to mature the indebtedness, the statute of limitations is not set in motion. This is the rule notwithstanding the acceleration clause is positive, rather than optional, in terms." (Jones v. Wilton (1938) 10 Cal.2d 493, 500.) Thus, even when "the acceleration clause provides that the obligation shall be due and payable `immediately' or `at once,' . . . the clause is not self-operative; that it is for the benefit of the creditor, and the default cannot be taken advantage of by the debtor to mature the indebtedness." (Ibid.) Because this rule applies regardless whether the acceleration clause is stated in optional or mandatory terms, defendant's claim to the contrary made during oral argument fails.

Belloc v. Davis (1869) 38 Cal. 242 involved a clause similar to the one here. It provided that "`in case default be made in any payment of interest, when the same shall become due as aforesaid, then the whole amount of principal and interest to become due and payable, immediately, upon such default.'" (Id. at p. 247.) The plaintiff filed the action over four years after a default in the payment of interest. The defendant argued the whole amount of the note became due and payable upon a default in the payment of interest. (Id. at pp. 248-249.)

In holding it did not, the court stated the acceleration clause "is evidently in the nature of a penalty, inserted for the benefit of the creditor, and as an incentive to the debtor to stimulate him to prompt payment of the interest, in order to avoid a forfeiture of the credit allowed by the note. . . . [¶] . . . [¶] If it were otherwise, a perfectly solvent debtor, owing a debt payable at a remote period, with interest payable monthly, or at other stated periods, might shorten the credit to the statutory time of four years by wil[l]fully declining to pay the first instal[l]ment of interest, provided the note contained a clause similar to that in this case. . . . This would convert the statute of [l]imitations from a statute of repose into one of oppression and fraud. Instead of simply compelling the creditor to sue upon his demand within a reasonable time after it is due, it would enable a dishonest debtor, if his interest prompted it, to compel the creditor to take payment long before it is due, and thereby to escape the payment of future interest. We do not give to the statute so narrow a construction, and therefore hold that the cause of action in this case did not accrue until the maturity of the note." (Belloc v. Davis, supra, 38 Cal. at pp. 249, 251-252, italics added; accord, Jones v. Wilton, supra, 10 Cal.2d at pp. 499-501; Mason v. Luce (1897) 116 Cal. 232, 236-237.)

As in Belloc v. Davis, supra, 38 Cal. at pp. 248, 249, plaintiff waived the benefits of the acceleration clause by not acting on it. (See Congregational Church Bldg. Soc. v. Osborn (1908) 153 Cal. 197, 204 [waiver of acceleration clause can "be accomplished by mere passive acquiescence"].) The claims on notes 3 and 4 thus did not accrue until their maturity dates of December 9 and 27, 2007, respectively, and plaintiff's complaint was timely filed in September 2010.
 

FlyingRon

Senior Member
Moran isn't precedent. It's an unpublished opinion

However, there are a few citable cases that bode poorly for the poster in this case. The question is whether the acceleration clause was optional and was it not waived (explicitly or implicitly) or not timely executed when they claim they were taking action.

We'll have to see what the response to the demurrer is, but frankly, he probably needs an attorney who has experience in banking matters (this is not a real estate issue). What to do next really depends on details not presented here.
 

Whoops2u

Active Member
I agree this is a suit on a note and experience in banking matters is useful. Certainly, a knowledgeable attorney is better than a friend of a friend who is an attorney. The first thing I'd look at is if the refinance was recourse or not. While /u/Rushan2112 says he "took cash out" on the refinance, he also said it was for "home remodel and repairs". See Ca. Code Civ. Pro 580b.

However, the law changed in 2013 and how all the changes would interact with the OP's situation would be difficult to know without a lot more facts and a lot of research.
 

FlyingRon

Senior Member
Yeah, I thought about the recourse issue as well, but even though they got more liberal in construing refi's of purchase money to fall under that exemption, the fact he took additional principal apparently obviates the protections there. However, it also matters whether the foreclosure was a judicial one. (No recourse on non-judicial foreclosures).
 

LdiJ

Senior Member
Yeah, I thought about the recourse issue as well, but even though they got more liberal in construing refi's of purchase money to fall under that exemption, the fact he took additional principal apparently obviates the protections there. However, it also matters whether the foreclosure was a judicial one. (No recourse on non-judicial foreclosures).
I don't know about that. I think that perhaps the equity loan could considered to be recourse but the mortgage portion should not be. I even wonder if the equity loan would be because it was used to preserve the asset.
 

FlyingRon

Senior Member
We can't tell given the limited information. Even the 80% may have been more than the original principal.
 

LdiJ

Senior Member
We can't tell given the limited information. Even the 80% may have been more than the original principal.
I understand that but mortgages loans in CA are non-recourse. Therefore its highly questionable whether something could change that to recourse and allow a creditor to come after the former homeowner 11 years later.
 

FlyingRon

Senior Member
I understand that but mortgages loans in CA are non-recourse. Therefore its highly questionable whether something could change that to recourse and allow a creditor to come after the former homeowner 11 years later.
Untrue. Not all mortgages in California are non-recourse. PURCHASE MONEY loans are non-recourse. What was changed over time was that this was modified to include refinance, but only to the extent that there wasn't an increase in the principal.
 

LdiJ

Senior Member
Untrue. Not all mortgages in California are non-recourse. PURCHASE MONEY loans are non-recourse. What was changed over time was that this was modified to include refinance, but only to the extent that there wasn't an increase in the principal.
All I can say at this point is that the OP needs to consult an attorney who specializes in this area of law.
 

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