Q: What is the statute of limitations for lenders to pursue borrowers in Colorado who default on a home loan?
A: Six years. Conventional wisdom has been that collection actions had to be brought by lenders within six years from the date the loan first went into default. However, in a July 2012 decision, the Colorado Court of Appeals determined that if the lender does not accelerate the debt, the statute of limitations does not begin to run until the maturity date of the loan, even when the borrower defaulted many years earlier.
First, some background:
Loans secured by real property in Colorado require two basic instruments: a promissory note and deed of trust. The promissory note is the borrower's promise to repay the lender, while the deed of trust secures repayment of the loan by creating a lien against the subject property. Each instrument carries its own rules as to how a lender may enforce its terms. When a borrower defaults on their loan payment, the statute of limitations governing collection on promissory notes is implicated.
Colorado courts have long held that in the event of default on a promissory note, the creditor must bring legal action against the borrower within six years. The most common type of default under a promissory note is non-payment. If the collection action is not brought within the requisite six year period, the borrower can raise the defense that the lender is prohibited from bringing the action due to the statute of limitations. Successfully raising the statute of limitations defense would mean that the lender could not obtain a judgment against the borrower.
Past Colorado court cases that considered issues related to promissory note maturity dates have suggested that the statute of limitations begins running either when there is a default on the note or when the note matures. In separate cases, the Colorado Supreme Court has found that a "claim for relief on a promissory note accrues the day the note matures or the date of default"(E1) and that a "claim for relief on a promissory note accrues the day after the note matures."(E2) However, neither case delved deeply into the issue of how the maturity date of a note applies in situations where notes are to be repaid in installments, which is how the vast majority of home loans are structured.
Hassler v. Account Brokers of Larimer County, Inc.(E3)
In April 2012, the Colorado Supreme Court addressed the issue of when the six-year statute of limitations begins to run on loans which are to be repaid in installments.
In Hassler, a buyer borrowed money to purchase a car. The loan was memorialized by a promissory note and security agreement, using the vehicle as collateral. Hassler defaulted on the loan payments and ultimately the lender repossessed the car and sold it at auction. The lender then brought a lawsuit against Hassler to recover the deficiency between the auction proceeds and amount still owed on the loan. The suit was brought less than six years after the car was sold at auction, but more than six years after the loan default and repossession.
The court's analysis focused on when the "cause of action" accrued, which starts the clock running on the six-year statute of limitations. The court found that by demanding payment in full and repossessing the vehicle, the lender had accelerated the debt. On the date the loan was accelerated, the entire balance of the obligation immediately became due and payable.
When a loan is to be repaid in installments, a new cause of action accrues on each date an installment payment is missed. But once the loan is accelerated and the entire remaining balance is called due, the six-year statute of limitations period begins running on the full remainder of the obligation. Because the suit against Hassler was brought more than six years after the remaining balance of the loan was called due, the court determined that the lender was barred from obtaining a judgment for the deficiency amount.
But what happens when the lender merely keeps accepting payments on a loan in default without calling the entire obligation due?
Castle Rock Bank v. Team Transit(E4)
The Colorado Court of Appeals relied on Hassler in a July 2012 decision that considered the statute of limitations issue when a loan is in default but not called due.
Two loans were at issue in the case:
- A March 1, 2001 loan for approximately $75,000, secured by the borrower's residence, requiring monthly payments and including the following maturity date language: "A final payment of the unpaid principal balance plus accrued interest is due and payable on December 18, 2006."
- A March 1, 2001 loan for approximately $49,000, secured by the borrower's residence, requiring monthly payments and including the following maturity date language: "A final payment of the unpaid principal balance plus accrued interest is due and payable on April 09, 2005."
The borrowers only made two payments on the loans, first defaulting in July 2001. They sold the home in August 2002, with Castle Rock Bank only receiving $5,000 from the short sale proceeds, which was applied to the $75,000 loan. The bank filed a lawsuit in June 2009 to recover the outstanding amounts owed on the loans. The suit was brought more than six years from the date of first default, but less than six years from the maturity dates of the loans.
The borrower argued that the lender should be barred from obtaining a judgment on the notes because the action was brought more than six years from the date the loans went into default. However, the bank argued that while it had accepted additional payments on the loans after default, it had not accelerated or called the notes due prior to their maturity dates. Therefore, the six year statute of limitations clock had not started to run until the loans finally came due on their maturity dates.
This led the court to consider - apparently for the first time in Colorado - the following question: "When does the statute of limitations begin to run on a promissory note that is to be repaid in installments, was not accelerated by the creditor, and provides that a 'final payment of the unpaid principal balance plus accrued interest is due and payable' on the note's maturity date?"
The court concluded that in such a situation, the statute of limitations begins to run on the promissory note's maturity date, not the date of first default. In support of its decision, the court concluded that the language of the promissory notes meant exactly what it said, namely that the borrower was required to pay all amounts still outstanding on the loan's maturity date, regardless of whether the borrower was current on payments or had been in default for many years. If the loan is not accelerated, the six year statute of limitations clock does not start running until the loan's maturity date.
What does the Team Transit decision mean for Colorado homeowners?
In short, this decision means that lenders have a much longer period to pursue collection actions than many Colorado homeowners probably thought. If the lender doesn't call the loan due, it has six years from the note's maturity date to pursue a judgment against the borrower.
Consider a scenario for a typical Colorado homeowner: The homeowner purchased their property in 2008. The purchase was financed with two loans against the property: a senior mortgage for $200,000 and a junior loan for $50,000. The junior loan is a home equity line of credit with a due date of July 1, 2023. The borrower loses their job and stops making payments on both loans in January 2012. The property sells at foreclosure sale in October 2012 for $220,000. Without accounting for additional costs, fees, and missed payments, assume the first lender is paid off in full ($200,000) and the second lender receives the remaining proceeds from the sale ($20,000). How long does the second lender have to bring a lawsuit against the borrower for the unpaid balance?
Conventional wisdom assumed that the lender must file the lawsuit before January 2018, which would be six years from the date of the first missed payment on the loan, or when the loan went into default. But based on Team Transit, that understanding is incorrect. If the lender doesn't sooner call the balance of the loan due, it will have until July 1, 2029 - six years from the loan's maturity date and more than 17 years from the date of first default - to bring a lawsuit against the borrower for the unpaid balance.
This significantly expands the ability of lenders to lie in wait for borrowers who run into monetary difficulties to recover financially, and then to bring actions for recovery. Depending on how far out the maturity date of a loan is, if the lender doesn't accelerate the balance before it otherwise becomes due, Colorado homeowners could be looking at lawsuits for post-foreclosure or post-short sale deficiencies (if the deficiency wasn't waived) even decades after the sale of their properties.
The language in the Team Transit promissory notes isn't anything out of the ordinary. It is standard language in most Colorado home loans. In fact, the language mimics the language in the form promissory note adopted by the Colorado Real Estate Commission: "Such payments shall continue until the entire indebtedness evidenced by this Note is fully paid; provided, however, if not sooner paid, the entire principal amount outstanding and accrued interest thereon, shall be due and payable on _______________________."Colorado homeowners need to be on guard against lenders pursuing deficiencies on installment loans many years down the road. If a borrower has an outstanding obligation that a lender pursues years later, it will be important to review the facts and circumstances surrounding the loan and time of default. In particular, borrowers have to understand whether the lender called the loan due soon after default, or whether the lender preserved the option to start the statute of limitations clock running at the maturity date by not accelerating the debt.
The legal reasoning and interpretation in Team Transit may yet be revisited by the Colorado Supreme Court. But unless and until that happens, the decision is binding precedent in Colorado.
If you have questions about your outstanding obligations on unresolved home loans, contact me for a consultation.
(E1)Mortgage Investments Corp. v. Battle Mountain Corp., 70 P.3d 1176, 1184 (Colo. 2003).
(E2)Tivoli Ventures, Inc. v. Bumann, 870 P.2d 1244, 1246 (Colo. 1994).
(E3)Hassler v. Account Brokers of Larimer County, Inc., 274 P.3d 547 (Colo. 2012).
(E4)Castle Rock Bank v. Team Transit, 2012 WL 2928045 (Colo. Ct. App. 2012).
Michael A. Smeenk is an attorney in the law firm of Frascona, Joiner, Goodman and Greenstein, P.C., a Colorado law firm.  His practice areas include Estate Planning, Trust and Estate Administration, Real Estate, and Corporations. He can be reached at contact Michael Smeenk.
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