Arizona Court of Appeals Division One Holds That a Claim Accrues under an Installment Contract with an Optional Acceleration Clause When the Creditor Takes an Affirmative Action to Make Clear to the Debtor That It Has Exercised the Acceleration Option.

In 2003, Madison bought a car and financed the purchase through a retail installment contract with the dealer.  The contract contained a provision allowing the dealer, without notice, to repossess the car and accelerate the remaining payments upon an event of default, including failure to make a payment.  The contract was assigned to Bank of the West.

In August 2006, Madison stopped making payments, and the bank internally charged off her loan.  The bank repossessed the car in December 2007.  After the bank sold the car and applied the proceeds to Madison’s debt, a balance of $21,000 remained.  The bank assigned the contract to Baseline Financial Services, which sued Madison to collect on the debt.

Madison filed a motion for summary judgment, arguing that the four-year statute of limitations for contract actions barred the suit.  Madison claimed that the action accrued when the bank wrote off the debt in August 2006.  Baseline argued that the claim did not accrue until December 2007 when the bank repossessed the car.  The trial court agreed with Madison and granted her motion for summary judgment.

The Court of Appeals reversed.  First, the Court observed that the case turned on when it could be said that the bank exercised its option to accelerate the contract – when it wrote off the debtor when it repossessed the car.  The Court followed the majority view, which holds that when a creditor has a contractual right to accelerate a debt without notice, it must take “some affirmative act to make clear to the debtor it has accelerated the obligation.”  A variety of actions, including repossession of property, can be sufficient to demonstrate that the creditor has exercised its option to accelerate the payments.  But other courts have held that an internal write-off is not such an affirmative act.  Rather, the write-off is merely an internal accounting procedure.  The Court, therefore, reversed the summary judgment in favor of Madison.

Judge Downie authored the opinion; Judges Brown and Portley concurred.