Breach of Contract Action Does Not Need to Be Filed in a “Reasonable” Time; Blair v. EMC Mortgage, LLC

The statute of limitations on a breach of contract can be really long, and it may seem unfair to allow the non-breaching party to sue long after the breach occurs. The question before the Court in this case is whether equity will step in once enough time has passed.

The Blairs entered into a 15-year mortgage in 1992. The note gave the holder the option to accelerate the debt after a default and require immediate payment on the full amount due.

In June 1995, the Blairs made their last payment on the note. The original lender filed for bankruptcy; and the note and mortgage were eventually assigned to EMC in July 2000. Although the note matured on January 1, 2008, EMC didn’t sue the Blairs to recover on the note and foreclose the mortgage until July 3, 2012.

The trial court foreclosed on the mortgage, but limited EMC’s recovery to payments in the six years before bringing suit. On appeal, the Court of Appeals found that EMC had not sought foreclosure in a reasonable amount of time and reversed. The Supreme Court then granted transfer.

On transfer, the Court noted that the statute of limitations on an installment contract, like a mortgage, begins to run when the full balance becomes due (unless the lender accelerates the contract). The question framed to the Court was whether EMC should have accelerated the contract sometime in the 17 years between default and filing suit. The Court did not like this option.

First, the Court found it unnecessary to add additional time constraints on a lender’s ability to bring an action upon a closed installment contract. The Blairs had compared this situation to open accounts, like a credit card agreement, in which the balance is kept open in anticipation of future transactions. And the lender on an open account must bring an action within six years after a fault.

But the Court contrasted an open account with a closed one, like a mortgage. In an open account, the entire balance began to run either at the time of the borrower’s first default or the next payment due date thereafter. A rule of reasonableness was applied because there was no clearly defined end to the account. In contrast, in a closed account, the total indebtedness is known and there is a defined payment schedule. Because of these differences, the Court found no need to apply a rule of reasonableness to mortgages.

The Court then turned to the applicable statutes of limitations, and it found no reason in those statutes why a mortgage lender should be forced to accelerate a defaulted loan. Rather, the Court found three triggering events:

Finding these opinions persuasive, we conclude that Indiana’s two applicable statutes of limitations recognize three events triggering the accrual of a cause of action for payment upon a promissory note containing an optional acceleration clause. First, a lender can sue for a missed payment within six years of a borrower’s default. Second, a lender can exercise its option to accelerate and fast-forward to the note’s maturity date, rendering the full balance immediately due. The lender must then bring a cause of action within six years of that acceleration date. Or, third, a lender can opt not to accelerate and sue for the entire amount owed within six years of the note’s date of maturity.

Given this conclusion, the Court concluded that the trial court properly entered judgment for EMC.

However, the Court did not give a ringing endorsement to the trial court’s decision to limit EMC’s recovery to payments due in the six years before it filed suit. The Court noted that “ordinarily, lenders may recover the entire amount owed on a promissory note by filing suit within six years of the note’s maturity date, if they choose not to exercise the note’s optional acceleration clause.” But EMC disclaimed any attempt to obtain full relief when seeking transfer, so the Court did not award it that form of relief. Don’t expect trial courts in the future to “split the baby” like this one did.

Lessons:
1. A breach of contract on an open account, like a credit card, must be brought within six years after the borrower first defaults on the account.
2. A breach of contract on a closed account, like a mortgage, may be brought six years after the balance is due if the loan is not accelerated.
3. Indiana’s courts will not create a rule forcing lenders on closed accounts to bring an action within a reasonable time after a default.
4. If the Supreme Court has not yet addressed an issue, consider taking a more aggressive position even if it conflicts with multiple precedents from the Court of Appeals.

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