Daily Development for Wednesday, August 1, 2007
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri

MORTGAGES; ACCELERATION; WAIVER: Extended period of acceptance of late payments will not establish waiver of acceleration where loan documents contain “anti-waiver” clause. 

Buckeye Retirement System, L.L.C. v. Walling, 2006-Ohio-7059, 2006 Westlaw 3849863 (Ohio App. 12/26/07) (slip opinion - may be unpublished)

In 1991, Borrowers borrowed $60,000 from Lender and executed a promissory note and mortgage deed on their residence. Monthly payments on the loan were $560.00. Many of the payments from 1991 to 1998 were sent late, and Appellants would periodically combine payments in order to make the loan current. For example, on May 12, 1997, Appellants paid $1,176.00, which represented two monthly payments, and on July 10, 1997, they paid $3,164.00, which represented five monthly payments. The Bank regularly assessed late charges for Borrowers’ untimely payments.

Borrowers did not make any payments on the loan in the months of November and December of 1997, and January and February of 1998. On February 20, 1998, the Lender sent them a letter notifying them that they were in default and that the loan was being accelerated. The Lender demanded payment of the entire outstanding balance of the loan by March 7, 1998. The letter was signed by a vice-president of the Lender. Borrowers responded to the letter by sending a letter to the Lender  along with a check for $2,940 .00, which represented five monthly payments and late charges. The letter stated that Borrowers were not able to pay off the outstanding balance of the loan. The letter also stated that the Lender, "may endorse and negotiate that check only with the understanding that such endorsement, presentment and negotiation removes the loan from default status." The letter also included a proposal for making current and future payments.

The Lender didn’t cash the check.  It referred the matter to counsel. 

The next month, borrowers sent in another check for that month’s payment, subject to a similar restriction.  The Lender held that check as well.

In April of 1998, the Lender’s computer send a demand notice for all payments and penalties to date.  In response to that notice,   Borrowers sent a check for the entire overdue amount plus penalties, and the Lender’s automatic system cashed that check.  Thus, counting the two checks sent in with the restriction that acceleration be cured as a condition of payment, the Borrowers had overpaid the loan by several months.

The Borrowers failed to make the next two scheduled payments.  (Remember that their position is that they had already made these payments and the Lender was holding th e money.)  The Lender filed foreclosure without further notice.  The dispute here is over the validity of the foreclosure.  Borrower argued that it had made all late payments and that Lender had no right to accelerate to begin with, since it had not provided prior notice to cure any waiver based on its prior acceptance of late payments.

Lender responded that it had no duty to cash the checks with the restriction.  Borrowers pointed to authority in Ohio in which a lender had been denied the right to accelerate when the borrower had submitted checks for the overdue amount and the lender had not cashed them. 

The court held that the prior authority was inapposite because of the fact that there was a restriction on the checks in this case, and not in the prior case.  In the prior case, however, the checks had been submitted prior to acceleration.  So no similar condition would have been necessary.  As to the conditions on the checks, Borrowers argued here that the condition to withdraw acceleration was in fact consistent with the Bank’s duty because it had accepted so many late payments in the past that it did not have the right to accelerate without prior notice that late payments would no longer be tolerated.

In response to this, Lender pointed to the “anti waiver” language in the loan papers:

"Any grant by the Mortgagee of any extension of time for the payment of any obligations secured hereby, either to the Mortgagor or to any other maker, endorser or other person, or the taking of other or additional security for any such obligation, or Mortgagee's waiver of or failure to exercise any right hereunder, including the right to accelerate the whole or any part of the debt secured hereby, shall not in any way affect this mortgage, nor the rights of the Mortgagee hereunder, nor operate as a release from any personal liability upon the obligations secured hereby or under any covenant or stipulation herein contained."

Lender argued that this language is dispositive of the issue.  It cited some Ohio authority relying on such a clause.  It stated that the Restatement of Mortgages has embraced anti waiver language and has concluded that where such language exists, a lender will never be barred from accelerating due to prior acceptance of late payments.      

A dissenting judge disagreed vehemently with the majority’s interpretation of the Restatement. In fact, this judge would rely on the Restatement to prohibit accelerations without notice where, as here, there is a long history of acceptance of late payments, notwithstanding an anti waiver clause.  This judge would set aside prior Ohio authority that had not followed the Restatement.  Here is that judge’s analysis:  

“Although there is an anti-waiver provision in the mortgage document, the Restatement states in its ‘Comments and Illustrations’ section that, ‘[w]hile such a provision may, in close cases, tip the balance against a finding of waiver (see Illustration 14), it usually will not be dispositive on the waiver issue. For example, its effect will be negated where the pattern of accepting late payments is sufficiently continuous and prolonged to justify the conclusion that the mortgagee has abandoned or waived the protection of the provision. See Illustration 15.’

 Illustration 15 is as follows:

‘15. Mortgagor delivers to Mortgagee a promissory note secured by a mortgage on Blackacre. The mortgage documents contain an acceleration provision. They also contain an anti-waiver provision . . . .The documents call for payment of monthly installments of principal and interest on the first day of each month. During the first 18 months after the loan is made, Mortgagor makes each monthly payment on the 14th or 15th day of the month. In the 19th month, Mortgagor fails to pay that month's installment when it is due. Mortgagee then accelerates the mortgage obligation. Mortgagor then tenders the past due installment. Mortgagee refuses the tender. The acceleration is ineffective and the default is cured’."

The dissenting judge noted that, based upon the loan records submitted by Lender here, the frequency of acceptance of late payments was more pronounced than in the above example.

Comment 1: It is interesting to see the two sides disagree on something as fundamental as the meaning of the Restatement.  The editor believes that the Restatement authors do believe that the right to accelerate and foreclose is subject equitable principles and an anti waiver clause in the legal instruments does not trump significant equities in favor of the Borrower.

The majority noted that in the comparison Ohio precedent, where the court had set aside the foreclosure, the borrower had continued to make payments all through the loan dispute following acceleration and up to the time of foreclosure.  It viewed this as significant.  The editor does not.

Comment 2: Of course, in general, borrowers should measure up to the performance standards set by the loan documents and pay on time.  But most home mortgage documents provide for plenty of pre acceleration notice and even give post acceleration right to cure.  It is interesting that the 1991 loan papers used here apparently did not meet the FNMA/FHLMC model and did not include a cure right. 

Further, anti waiver clauses usually are not raised to a level of absolute enforceability in consumer documents such as the Ohio court finds here.  (The court also give some credence to a cognovit agreement appearing in the loan documents.)  But there apparently was no successful appeal here.  So borrowers should walk carefully in Ohio 

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