A borrower took out a loan secured by a deed of trust. After the borrower failed to make a monthly payment, the bank declared the loan in default, accelerated the remaining debt, and in January 2009 recorded a notice of trustee’s sale. But the sale never occurred. Instead, the bank recorded a cancellation notice, which contained an acceleration revocation clause stating that the bank “does hereby rescind, cancel, and withdraw” its “Declaration” of default and its “Notice” of trustee’s sale, such that the “Deed of Trust and all obligations secured thereby are hereby reinstated” and “remain in force the same as if said Declaration and Notice had not been made.”
In December 2014, the bank recorded a new notice of trustee’s sale. But then a junior lienholder foreclosed on its own lien on the property and purchased the property at a sheriff’s sale, subject to the bank’s senior lien. In March 2015, the junior lienholder sued to enjoin the trustee’s sale, arguing that the six-year statute of limitations on the bank’s right to foreclose (see A.R.S. §§ 12-548(A)(1), 33-816), which had begun to run when the bank recorded its January 2009 notice of trustee’s sale, had lapsed. The trial court agreed and granted summary judgment to the junior lienholder.
The Court of Appeals reversed. The first question was whether the junior lienholder had standing to raise the statute of limitations defense at all, given that the defense is generally a privilege of the borrower and those in privity with the borrower. Here, the junior lienholder had standing because it purchased the property at a sheriff’s sale and thus acquired the borrower’s right to raise the defense. (See A.R.S. § 12-1626(A).)
The next question was whether the statute of limitations on the bank’s right to foreclose had lapsed. Under Arizona law, the limitations period began to run when the bank recorded its January 2009 notice of trustee’s sale, because that was when the bank made clear that it had accelerated the remaining debt. However, creditors are free to revoke their acceleration of debt. To do so, a creditor must take an “affirmative act” that “communicates to the debtor that the creditor has revoked the debt’s acceleration.” Here, the acceleration revocation clause in the bank’s notice of cancellation of trustee’s sale sufficiently communicated to the debtor, and to any third party investigating title, that the bank had revoked the debt’s acceleration. Thus, the cancellation notice “reset” the statute of limitations as to the accelerated debt.
The Court emphasized that a notice of cancellation of trustee’s sale, by itself, is not enough to revoke a debt’s acceleration. Rather, “the notice of cancellation must also contain a statement that the acceleration of the debt has been withdrawn.” The Court also noted that even a successful revocation of a debt’s acceleration “would not reset the statute of limitations for payments already in default.”
Judge McMurdie wrote the opinion; Judges Winthrop and Campbell joined.
Posted by: Josh Whitaker.