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Fifth Circuit Issues Warning for Lenders Seeking to Accelerate Loans in Default

Recent case assesses when the statute of limitations/prescriptive period begins to run.

There is an important warning for creditors hidden in dicta of the Fifth Circuit Court of Appeals’ recent ruling, Martin v. Federal National Mortgage Association, No. 15-41104 (5th Cir. Feb. 22, 2016) – accepting payment after accelerating a debt could waive the acceleration and start the clock running on the statute of limitations or prescriptive period.

In December 2009, Martin made a late mortgage payment to Wells Fargo. He resumed making timely payments and Wells Fargo took no action. In 2011, Martin failed to make his May and June mortgage payments. Wells Fargo refused to accept mortgage payments subsequently made and foreclosed on Martin’s home. Martin challenged the sale of his home in foreclosure to the Federal National Mortgage Association (“Fannie Mae”) alleging that Wells Fargo, plaintiff’s lender, waived its right to foreclosure by accepting payment after a default occurred. The Fifth Circuit did not agree, instead holding that Wells Fargo properly exercised its rights under the mortgage, which included a non-waiver provision. This provision preserved all of the bank’s rights, including the right to foreclose on the house, if the bank chose not to take action on a particular violation of the mortgage documents. That is to say, just because Wells Fargo chose not to foreclose when Martin defaulted on his loan by making a late payment in 2009 does not mean that Wells Fargo has waived it right to foreclose at some time in the future.

Accepting payments after default or offering debtor to bring loan current will waive acceleration.

The court looked to three cases in concluding that Wells Fargo properly exercised its rights in foreclosing on and selling Martin’s home. In Boren v. U.S. National Bank Association, 807 F.3d 99 (5th Cir. 2015), the homeowners defaulted on their mortgage. Upon default, the bank gave notice and accelerated the loan. Litigation ensued between the bank and the homeowners. The bank eventually offered to allow the homeowners to bring their loan current by making the payments owed. In doing so, the bank waived the previous acceleration. When payments were not made, the bank again accelerated the loan. The court ultimately ruled that the statute of limitations began to run from the latest acceleration, not from the first acceleration that had ultimately been waived by the bank.

In Leonard v. Ocwen Loan Servicing, L.L.C., 616 F. App’x 677 (5th Cir. 2015), the court was faced with a very similar situation as in Boren with a similar outcome: homeowners defaulted on mortgage, bank accelerated loan, new loan servicing company offered to allow homeowners to pay amounts owed and bring loans current, homeowners failed to make payments, loan servicing company sent new notice of acceleration and court determined that statute of limitations began to run from the last notice of acceleration, not the first which was waived when the loan servicing company offered to let the homeowners bring the loan current.

The same result occurred in Rivera v. Bank of America, N.A., 607 F. App’x 358 (5th Cir. 2015): default, acceleration, account brought current and subsequent payments accepted, new  default, new acceleration and the statute of limitations runs from the later acceleration because the first was waived/abandoned.

We should not be surprised by Martin, but lenders should heed the court’s warning.

Martin is not a surprising case. It is directly in line with other recent Fifth Circuit jurisprudence. Of importance, the dicta states that lenders and creditors should be aware that accepting a payment after acceleration could be intentional conduct inconsistent with acceleration that amounts to an abandonment or waiver of the acceleration. Likewise, representing to the mortgagor that payment of less than the entire obligation will bring the loan current may amount to an abandonment or waiver of the acceleration as a manifestation of actual intent to relinquish it. Even with a non-waiver provision in the mortgage, accepting payment or offering to accept less than the full accelerated amount due may waive the acceleration and start the clock running on the statute of limitations/prescriptive period!

There are many potential pitfalls facing banks, lenders and creditors. Your attorney can help you watch out for these issues so that you do not waive vital legal rights.


Allen & Gooch is providing this legal update for informational purposes only. This article should not be construed as legal advice or a legal opinion as to any specific facts or circumstances. You should consult your own attorney concerning your particular situation and any specific legal questions you may have.