Indiana Supreme Court Rejects Imposition of “Reasonableness Rule” on Limitation Periods Applicable to Lender’s Lawsuit for Defaulting Mortgage Payment Promissory Note
In a pair of decisions released on February 17, 2020, the Indiana Supreme Court ruled in favor of lenders by issuing guidelines regarding limitation periods applicable to a lender’s pursuit of a promissory note and a mortgage in default.
In Blair v. EMC Mortgage, LLC, the Indiana Supreme Court unanimously ruled that a lender’s foreclosure action on a defaulting mortgage promissory note was appropriate when the lender sued within six years of the due date. promissory note.
The Court noted that “[a] A closed installment contract, such as a mortgage or promissory note, is a contract in which a borrower agrees to make a series of payments to a lender on specific dates. In Blair, the borrowers signed a promissory note and a mortgage on two pieces of real estate; the promissory note was to be paid in monthly installments over 15 years, starting in February 1993. The promissory note gave the holder the ability to accelerate debt after default and demand immediate payment of the full amount owed . The borrowers made their last payment on the promissory note in June 1995; the promissory note was then assigned to EMC Mortgage, LLC (“CEM“). Although the note matured on January 1, 2008, EMC did not sue the borrowers to recover the promissory note and to foreclose the mortgage until July 3, 2012 (that is, within four years of deadline).
By rejecting the borrowers’ argument that EMC violated applicable Indiana statutes of limitations by asserting its rights under the promissory note and the defaulting mortgage and waited an unreasonable amount of time to assert its rights , the Indiana Supreme Court noted that “[t]Two limitation periods apply when a lender brings an action for payment on a promissory note ”. First, Ind. Code §34-11-2-9, the general limitation period for “the action[s] on promissory notes ”, states that such an action (for promissory notes executed after August 31, 1982)“ must be brought within six (6) years of the occurrence of the cause of action ”. Second, Indiana’s promulgation of the Uniform Commercial Code (“UCC”) Provides, in the Ind. Code §26-1-3.1-118 (a), that “an action in execution of the obligation of a party to pay a note payable at a specified time” must be brought either “within six) years after the maturity date or the dates indicated in the note or, if a maturity date is advanced, within six (6) years of the anticipated maturity date. ”
Noting that “the plain language of these laws shows that they are not mutually exclusive when applied to an action on a promissory note”, the Court ruled that Code Ind. §34-11-2-9 “addresses the accumulation of a cause of action in very general terms”, while the Code Ind. §26-1-3.1-118 (a) “deals with it more specifically”. So, “[s]prosecution to enforce obligations under [closed installment] contracts are subject to more than one limitation period ”, so that there are three possible times when the limitation period could have been triggered: (1) when each installment became due; (2) when exercising the optional acceleration clause, had EMC chosen to accelerate; or (3) when the loan matures. Noting that “[i]The important legal differences between closed installment contracts and open accounts advise against treating them identically for the purposes of limitation periods ”and concluding“ that it is not necessary to impose a rule of reasonableness when a lender sues for payment on a closed installment contract, ”the Indiana Supreme Court upheld the trial court’s decision in favor of EMC’s timely prosecution of its overdue promissory note and an overdue mortgage against borrowers.
Likewise, in Collins Asset Group, LLC v. Alialy, the Indiana Supreme Court unanimously ruled that a lender’s prosecution of a defaulting mortgage promissory note within one year of the lender’s acceleration of the promissory note was timely. In a.k.a, the borrower signed a promissory note and a mortgage payable in monthly installments over 25 years, starting in September 2007. The promissory note gave the holder the ability to accelerate the debt after a default and demand the immediate payment of the full amount due. The borrower stopped making payments on the promissory note in July 2008, and Collins Asset Group, LLC (“CAG”), Subsequently acquired the promissory note. In October 2016, the CAG accelerated the debt, demanding full payment from the borrower; when the borrower failed to pay, CAG sued the promissory note in April 2017.
In rejecting the borrower’s argument that the CAG’s pursuit of the promissory note was inappropriate, the Court noted that promissory notes accompanying a mortgage are negotiable instruments and often contain acceleration clauses giving the lender “the ability to quickly advance to the maturity date of the note and immediately demand full payment if the borrower fails to pay one or more installments”. Citing his decision in Blair, the Court noted that under Indiana law, “two limitation periods also apply when a lender brings an action for payment on a promissory note”, and that “[u]Under either law, there are several dates for the accumulation of causes of action ”. Denying the borrower’s request that the Court find that CAG had delayed an unreasonable delay in exercising its rights under the promissory note, the Court held that CAG “could also recover under either or the other law because it had brought an action within six years of the acceleration ”and“ we will not impose an additional rule of reasonableness on a lender’s ability to sue a contract at closed temperament ”.
Take away food: Blair and a.k.a represent the Indiana Supreme Court’s refusal to impose a court-created “reasonableness rule” in relation to a lender’s pursuit of default under a closed mortgage promissory note, the Court instead pointing out that under Indiana’s Statutory Scheme, a lender can timely sue a defaulting mortgage payment promissory note either (1) when each installment becomes due, (2) at the time of the exercise of the optional acceleration clause, if the lender chooses to accelerate, or (3) at the maturity of the loan.