Three recent decisions from Indiana Court of Appeals provide insight into whether delaying acceleration after an act of default tolls the statute of limitation to initiate legal action on defaulted debt.
The Alialy Case
First, in the Alialy case, the loan at issue – like many mortgages – had an optional acceleration clause. The mortgagee didn’t exercise the clause until more than eight years after the mortgagor stopped making payments. The court found that when a note included an optional acceleration clause, a lender’s failure to exercise that clause for an “unreasonable” amount of time did not stay the tolling of the statute of limitations. In this respect, the court relied generally on the statutory provision related to promissory notes under the civil law section of the Indiana code (I.C. 34-11-2-9).
Notably, the statutory provision used in this court’s decision does not include an exception for acceleration contained in the Uniform Commercial Code (UCC)’s limitations period for negotiable instruments. (I.C. 26-1-3.1-118). Under the UCC, the limitations period is explicitly defined as six years after the due date, “or if due date is accelerated, within six (6) years after the accelerated due date.” It is not clear if the court’s analysis would have been the same under this provision because the argument was not raised at the trial court level and was therefore barred on appeal.
The Stone and Blair Cases
In addition, the Alialy case and its rationale have influenced two more Court of Appeals decisions involving promissory notes related to mortgages. In both the Stone case and the Blair case, the Court of Appeals relied on I.C. 34-11-2-9 and the case law pertaining to it to find that optional acceleration clauses must be exercised within a reasonable timeframe or be barred by the statute of limitations contained in I.C. 34-11-2-9.
Unfortunately, neither case addressed the possibility of a different outcome under the UCC’s statute of limitations provision (I.C. 26-1-3.1-118). While the Blair court did attempt to distinguish the originating I.C. 34-11-2-9 case law on credit card accounts from that of installment loan contracts, the court dismissed the argument, citing its use of the statute in the Alialy case as guiding precedent.
In the future, mortgagees and their counsel should be aware of these cases, which leave many questions unanswered in the typical foreclosure context. It is unclear if the courts’ rulings would be the same under the UCC’s limitations provision for negotiable instruments, but even if “reasonableness” is considered, the courts fail to define what constitutes a “reasonable” time within which to file a foreclosure action after a default. As a result, each case may be fact-specific as to whether delays should be considered reasonable and whether the total delay in accelerating the loan runs afoul with the purpose of statutes of limitation, which is to provide security against stale claims.