This summer the Arizona Supreme Court overruled the Arizona Court of Appeals decision in Mertola, LLC v. Santos, which impacts the statute of limitations (SOL) for collection of a written debt.Mertola involved collection of a credit card debt. The Court of Appeals held that a creditor must take some “affirmative act to make clear to the debtor it has accelerated the obligation” before the 6-year SOL begins to run. The Arizona Supreme Court, however, relied on the premise that a SOL is designed to protect borrowers from “stale claims and uncertainty.” The Court held that since the contract contained an optional acceleration clause, the SOL on an action to collect the entire outstanding debt began when the borrower first failed to make a minimum monthly payment. This holding will require creditors to act promptly to collect on past due accounts. However, by bringing the account current, the debtor ends that cause of action and the next default begins a new action and restarts the SOL.
The Arizona Supreme Court specifically declined to decide whether to apply the same reasoning to closed-end or fixed installment loans such as home loans. The current Court of Appeals cases on home loans, including Navy Federal Credit Union v. Jones (App. 1996) andBaseline Financial Services v. Madison (App. 2012), hold that the lender cannot sue to collect the outstanding balance unless or until the borrower fails to comply with a demand for payment in full or a notice accelerating the debt. This current rule frustrates some borrowers who, especially during the housing crash, waited years for their lenders to act on past due home loans, adding years of bad credit, when the lender should have conducted a trustee’s sale already. There was nothing the borrower could do to force the lender to conduct a trustee’s sale, foreclose or accept a deed in lieu of foreclosure so that the borrower could move on and reestablish their credit. If the Arizona Supreme Court does apply the Mertolaholding to home loans, lenders who wait more than 6 years to enforce the contract could wind up with borrowers owning their homes without making further payments!