By Nicole Murray, Esq.

Wilson & Associates, PLLC*

USFN Member (AR, MS, TN)

               In May of this year, the Arkansas Court of Appeals reversed a decision from the Pulaski County Circuit Court, Third Division, holding that the appellant’s foreclosure complaint was not barred by the statute of limitations because its prior maturities of the debt that occurred when it exercised the option to accelerate were later extinguished by filing notices of cancellation (Wilmington Savings Fund Soc’y v. Smith, 2023 Ark. App. 326 (2023)). 

               Milton Smith purchased the subject property and executed a promissory note and mortgage in favor of Bank of America on October 16, 2007. The mortgage provided that, in the event of a default, the lender had the option to declare the entire unpaid balance of the debt, including interest, immediately due and payable, and both the note and mortgage were payable in monthly installments. 

               Smith defaulted on payments on the note in December of 2009, and Bank of America filed a Notice of Default and Intention to Sell which stated that a default had occurred in the payment of the indebtedness and that the unpaid balance of the debt was now wholly due. It also set a foreclosure sale date of July 8, 2010. The sale was later canceled, and a notice of cancellation was recorded in the county records on July 8, 2010. On December 16, 2010, Bank of America recorded another Notice of Default and Intention to Sell with a foreclosure sale scheduled for February 17, 2011, which was later canceled by a recorded notice of cancellation on February 14, 2011.

               The note and mortgage were later assigned to Wilmington Savings Fund Society (“Wilmington”), and Wilmington filed a third Notice of Default and Intention to Sell on February 4, 2016, with a foreclosure sale scheduled for April 5, 2016. In response, Smith filed a complaint to quiet title alleging that the promissory note could not be enforced because no payment had been made since 2009, and thus the statute of limitations for enforcing it had expired. Meanwhile, the hazard insurance on the subject property had expired, and Wilmington sent Smith a letter notifying him that it had obtained the required hazard insurance, as permitted under the terms of the mortgage, and that the premium had been billed to an escrow account created for the loan. Wilmington also later counterclaimed alleging that it was entitled to foreclose because it was still owed the remaining principal sum, plus accrued interest and costs, and the indebtedness under the note had never been accelerated, but even if it had been, the statute of limitations had been tolled by Wilmington’s and/or its predecessors’ abandonment of acceleration as shown by the filing of the notices of cancellation.

               Smith responded with a motion for summary judgment and dismissal arguing that Wilmington’s foreclosure cause of action was barred by the five-year statute of limitation because the limitation period had run many years ago in May 2015 due to Bank of America’s original acceleration of the indebtedness on the note in May of 2010. Wilmington responded by citing Mitchell v. Federal Land Bank, 206 Ark. 253, 174 S.W.2d 671 (1943), arguing the acceleration had been waived through the unilateral actions of the mortgagee when Bank of America waived the May 2010 and December 2010 accelerations by filing notices canceling the foreclosure sales. Wilmington also cited Dunnington v. Taylor, 198 Ark. 770, 131 S.W.2d 62 (1939), arguing that even if the statute of limitation has begun to run when the debt was first accelerated in May 2010, the insurance payments made by Wilmington either tolled the statute of limitation or created a new date from which the limitations would run as each payment was made.

Smith responded by arguing that Mitchell and Dunnington were no longer binding legal precedents because Ark. Code Ann. § 16-56-111 had been amended in 1989, and prior to that date, all exceptions to the five-year limitation period had been judicially created. Smith alleged the statute of limitations had undergone a major change after the amendment because the General Assembly had only codified a part of the judicially created exceptions to the statute, but not all of them, and thus the exceptions not expressly included in the statute, such as those from Dunnington and Mitchell, were no longer binding precedent. Wilmington responded by arguing that Dunnington and Mitchell were still binding because the amendment did not include unmistakable language displaying a legislative intent to overrule them.

The circuit court ruled on the motions and entered an order on February 21, 2020, finding that the five-year statute of limitations had run, barring Wilmington from foreclosing on the subject property. In another order on April 6, 2020, the circuit court denied Wilmington’s motion for a new trial, stating that the limitation period had run and the 1989 amendment controlled. Wilmington appealed.

On appeal, the Arkansas Court of Appeals ruled that Mitchell and Dunnington remained good law and that the legislature had not intended to overrule the prior cases when it amended the statute of limitations in 1989 as shown by the lack of unmistakable language showing such intent. Applying Mitchell to the facts of the present case, the court of appeals found that Wilmington’s foreclosure action was not barred by the statute of limitations because the accelerations of the debt that occurred in May and December 2010 were later extinguished and waived as shown by the filing of the notices of cancellation in July 2010 and February 2011. The note did not mature again until Wilmington later chose to accelerate in 2016, and thus Wilmington’s foreclosure complaint filed in June of 2019 was within the five-year period and not barred by the statute of limitations.

This holding comes as good news to lenders and investors who have chosen to previously accelerate their notes and filed Notices of Default and Intention to Sell, only to later cancel the scheduled foreclosure date. The holding is good news for borrowers too because the parties can now afford to be more generous in canceling prior foreclosures to work with the borrower while no longer battling a looming statute of limitations deadline. While deceleration has long been an option to toll the statute of limitations, this holding provides a clear, concrete example of what deceleration looks like. Lenders and investors can rest assured that their interests are protected by canceling a foreclosure sale after acceleration has occurred as long as a notice of cancellation is filed to toll the statute of limitations.

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