Daily Development for Wednesday, February 14, 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: When mortgage borrower is aware that lender is refusing to reinstate debt and insisting on acceleration, borrower cannot reinstate the loan by paying the arrearages in response to a computer generated demand for them.

Buckeye Retirement Co., LLC, v. Walling, 2006 Westlaw 3849683 (Ohio App.  12/29/06)

Borrower entered into a mortgage loan in 1991.  Borrower was frequently late in payment, and periodically brought payments up to date with a large “catch up” check which lender had accepted in the past.  After about eight years of this, Borrower was late four months in payment.  Lender sent a notice that the loan was accelerated. 

Borrower sent a letter to the party that wrote the Bank’s letter to Borrower, enclosing a check for the back payments and late charges.  The letter state that the Bank “may endorse and negotiate the check only with the understanding that such endorsement, presentment and negotiation removes the loan from default status.”  The Bank, apparently advised that negotiation of the check under such circumstances might constitute an accord and satisfaction that would compromise its rights to foreclose, and apparently determined to foreclose, did not negotiate the check.  Borrower subsequently sent in another monthly payment along with another proposal to remove the default and make the loan current.  Again, the Bank did not negotiate the check or respond to the letter. 

Ultimately, Borrower did speak to the Bank officer who had been receiving the checks, and the officer informed Borrower that, in the court’s words, “the matter had been turned over to an attorney and the Bank was awaiting a response as to how to proceed.” 

Then came the computer generated demand letter, and the Borrower promptly fired in a check for the demanded arrearages (this time with no proposal for accord and satisfaction.”  But, according to the court, the letter said that a payment of $4,026.13 was needed “to make the account current.”

Then, incredibly, the Borrower did not make payments for the next two months.  Then the Bank filed a foreclosure action. 

Borrower argued that proceeding with the acceleration and foreclosure under these circumstances was inequitable.  The trial court disagreed, and this appeal ensued.

The appeals court concurred that a foreclosure is an equitable proceeding and that a lender’s actions in accelerating and foreclosing may be reviewed for “abuse of discretion.”  The court then proceeded to analyze Bank’s conduct here.

First, the court concluded that Lender was under no duty to accept the tendered checks for payment of the defaulted debt.  Although there was precedent where a lender was prevented from foreclosing when the borrower had sent checks in envelopes that the lender left unopened, the court held that the present situation was different, because the tendered accord and satisfaction would have forced the lender to “give up a number of rights, such as the right to enforce for prior defaults.”  The court didn’t explain exactly how this situation differed from the prior case, where the unopened checks also would have reinstated the account, but the court saw a difference. 

The court went on to point to the significant difference that the Borrower in the instant case in fact had missed two subsequent payments by the time the foreclosure was brought.  So even acceptance of the checks would not have cleared the record.  But it should be noted that by this time Borrower had brought up to date all prior defaults in response to the computer demand letter.  Consequently, the negotiation of the checks would have more than covered the existing defaults.  Still, there were conditions attached.

The court also saw a significant difference in that in the case of the Bank’s mortgage, unlike in the precedent case, there was an “anti wavier” clause.  Since it is a rare case where an anti-waiver cause actually provokes a court to ignore evidence of waiver, it is worth quoting the clause at length.

"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."

The court cited this language, and cases relying upon similar language, to reject Borrower’s argument that its prior acceptances of late payments created a situation in which the Bank had a duty to “reinstate” the prompt payment requirement before it could rely upon a default to justify acceleration without further notice.  But it does not really say what relevance the language has to a situation in which the lender proceeds to foreclose when the unpaid payments are sitting on the Lender’s desk.

Further, in the precedent case, the borrower had kept current on the mortgage all during the time it was wrestling with the Lender over the foreclosure for the prior default.  Borrower, you’ll not be surprised to learn, did not behave that way here, but made no further payments once the Lender indicated it was foreclosing.

An interesting byplay between the majority opinion and the dissent has to do with the new Restatement of Mortgages.  Section 8.1 of the Restatement embraces the “waiver of acceleration” doctrine, including waiver due to frequent acceptance of late performance.  But the Restatement emphasizes that an anti waiver clause might tip the scales against waiver.  The editor is not certain that the Restatement reporters intended to state conclusively that there can be no waiver in the face of an anti-waiver clause (as the court suggests here).  The dissent points out that the Restatement makes an anti-waver clause only a factor in determining whether waiver has occurred, and not a bar to such a determination.   But certainly the overall thrust of the Restatement is to give greater weight to language in a commercial mortgage.

Finally, the court noted that the Lender had no contract duty to notify the Borrower in the event of default, and therefore was perfectly justified in proceeding to foreclose without notice due to the two missed payments following the last reinstatement.

A dissenting opinion noted that the Bank had tolerated lateness and unpaid balances from the Borrower for 66 out of the 78 months of their relationship, and then proceeded to accelerate without prior notice. 

Comment: How much is left of that case that held that a lender can’t accelerate when it has the checks in hand to cover the balance owed?  Not much, the editor thinks.  Unless there is an argument based upon waiver, it appears that Ohio will permit a lender to reject a tendered reinstatement if it has concluded “enough is enough.” 

If lenders routinely were beating up borrowers with vicious acceleration practices, the editor would conclude that courts should fashion a broad and flexible waiver doctrine.  But the fact is that borrowers who suffer defaults usually have been late frequently for substantial periods, and the lender has lost hope that the loan will be paid properly in the future. The lender has the right to look at the situation from this perspective.

It is true that often, from the standpoint of the borrower, foreclosure will lead to great hardship.  It is also true that sometime the originating lender (often someone other than the foreclosing lender, should not have permitted the bower to get in so deep, and that default was almost an inevitable consequence of the origination of the loan itself.  But in order to give people freedom of choice, we must also accept that they will live with the consequences of their choices.  Outside of a narrow band of transactions involving unsophisticated consumer borrowers and rapacious lenders, the editor feels that equitable discretion in setting aside acceleration should be used rarely.  It is best to establish uniform rules by statute for acceleration notice in consumer lending, and permit lenders to proceed after complying with such rules.

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