Debt Acceleration: If You Say It but Decide You Do Not Mean It, Better to Revisit and Say What You Do Mean

Wilmington Savings Fund Society, FSB v. Garza (In re Garza), 577 B.R. 258 (Bankr. S.D. Tex. 2017)

An assignee of debt secured by a deed of trust sought a determination of the validity and extent of its lien. The chapter 13 debtors claimed that the lien was lost because the assignee failed to foreclose in a timely manner after the debt was accelerated. The assignee moved for summary judgment.

In connection with debtors’ purchase of a home, the debtors obtained a loan secured by a deed of trust on the property. The deed of trust contained a standard acceleration clause that authorized the lender to demand payment in full after a default, and to invoke a power of sale if the default is not cured.

Several years after the loan was made, the debtors defaulted:

  • April 2011: The loan servicer sent the debtors a notice that they were in default and that the lender was exercising its right of acceleration under the deed of trust.
  • October 2011: A law firm representing the servicer and the lender sent a notice rescinding the election to accelerate.
  • November 2011: The debtors claimed that they received another notice of acceleration.
  • August 2012: A release of the deed of trust lien was recorded indicating that the loan had been paid in full.
  • August 2015: A rescission of the 2012 release was filed claiming that the release was improperly recorded due to a mistake.
  • December 2015: The debtors filed bankruptcy and brought an adversary proceeding to determine the status of the deed of trust.

Under state law (Texas) if a lender fails to foreclose on real property within four years after the debt secured by the property is accelerated, the lien on the property and the power of sale to enforce the lien become void. However, a lender can abandon the acceleration, which restores the original maturity date and releases the lender from the statutory obligation to foreclose.

Courts recognize unilateral abandonment by the lender (unless the debtor objects or shows detrimental reliance on the acceleration). Abandonment is based on the concept of waiver, so courts permit the lender to show abandonment the same way it would show waiver – namely abandonment can either be express or implied (i.e. shown through conduct inconsistent with abandonment).

The deed of trust was assigned a couple of times. However, that did not impact the result since under an assignment the right to receive payment includes the obligation to foreclose within the statutory period after an acceleration.

The debtors contended that the deed of trust lien was no longer enforceable since the deed of trust was not foreclosed within four years after the last November 2011 acceleration. The lender countered that an October 2015 notice of acceleration it issued to the debtors was evidence that the lender had abandoned all other previous accelerations. Specifically, the October 2015 notice stated:

Your account is in default… If you have not cured this default within forty-five (45) days of this notice, [the lender] will accelerate the maturity date of the Note and declare all outstanding amounts under the Note immediately due and payable.

Since this notice was sent before expiration of the statutory four year period based on the prior acceleration notice, the lender contended that this notice was sufficient to show abandonment of the prior accelerations.

The court framed the issue as the narrow question of whether the lender’s new notice of acceleration was sufficient to abandon all prior accelerations. It noted that courts have allowed a wide range of conduct to constitute abandonment.

In the first case reviewed by the court a creditor offered to deem the debt current if the borrower paid the default amount as opposed to the entire balance. In the second case, a creditor sent statements showing overdue balances and requesting payment only of the past due amounts. In both cases the creditor’s action was found to be sufficient to show abandonment of a prior acceleration. The court decided that this case was similar, and the 2015 acceleration notice was sufficient to demonstrate abandonment.

With respect to the inadvertent release of the lien in 2012, the court concluded that under state law a release can be rescinded for lack of consideration. In this case the deed of trust required payment in full as a condition of the release. Since it was clear that the loan remained unpaid, the lender was entitled to rescind the release since the debtors did not satisfy the condition for release.

Consequently, the lender was entitled to summary judgment.

This case highlights the fact that real estate law can be very state specific. Anyone who acts without the benefit of advice from counsel familiar with the law of the jurisdiction where the real estate is located acts of their own peril. It also suggests that in general a lender should be careful what it sends an acceleration notice. If it does not follow through and collect the accelerated debt, it would be a good idea to document the status of the acceleration.

Vicki R Harding, Esq.

About BankruptcyRealEstateInsights

Vicki R. Harding was a partner in the Detroit office of Pepper Hamilton LLP who moved to Arizona seeking warmer weather. Ms. Harding continues to handle commercial transactions with an emphasis on real estate and bankruptcy issues (but no longer owns a snow shovel).
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