Daily Development for
Tuesday, September 1, 1998

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri

MORTGAGES; DEFAULT; WAIVER: Notwithstanding "time of essence clause," mortgagee waives nonpayment of property taxes by acceptance of intstallment payments on note over four years when mortgagee had constructive knowledge that taxes were unpaid because borrower supplied no paid tax receipts.

Alderman v. Davidson, 954 P.2d 779 (Or. 1998).

The deed of trust mortgagee brought a foreclosure action on the grounds that the borrower was late in making installment payments under the note and had failed to pay the property taxes. The loan documents included a provision that stated that time was of the essence with respect to any payments and performances required by the borrower under the loan documents. Borrower was consistently late in making his installment payments and did not pay the property taxes for the years 1990 through 1993. The mortgagee did send borrower several letters over the years indicating that she was unhappy with the late payments but still continued to accept the late payments. The trial court held that the repeated acceptance by the mortgagee of the late payments constituted a waiver and therefore dismissed the foreclosure action. The Court of Appeals reversed the trial court on the issue of the delinquent tax payments, as there was no evidence that the mortgagee had actual knowledge that the taxes were not paid prior to her initiating a suit to foreclose partly on the basis of such nonpayment.

On appeal to the Supreme Court: held: Affirmed in part and reversed in part. The Supreme Court concluded that the Court of Appeals did not give due consideration to the legal import of all of the undisputed facts and, reconsidering the case de novo, reversed the Court of Appeals and affirmed the decision of the trial court dismissing the foreclosure and setting aside the acceleration.

The Supreme Court of Oregon found that the mortgagee clearly had waived the right to receive prompt installment payments by her repeated acceptance of late installment payments. In the court's view, the borrower reasonably had relied on the mortgagee's failure to enforce the "time is of the essence" provision in the loan documents. Although the mortgagee had objected to lateness from time to time, she had taken no enforcement action. This amounted to an estoppel. To reinstate the "time is of the essence" provision, the mortgagee would have to give borrower notice that mortgagee would be insisting on timely payment and performance in the future and afford the borrower a reasonable time to cure past delinquencies.

The court pointed to a long history of waiver cases in Oregon, mostly in cases dealing with installment land contracts. Oregon courts have even found that specific "non waiver" provisions stating that acceptance of one late performance is not waiver of subsequent right to insist on timely performance, can themselves by waived by an obligee's conduct. Fisher v. Tiffin, 551 P.2d 1051 (Or. 1976).

In one interesting bit of dicta, the court did not agree with the courts below that the receipt of checks by the mortgagee's escrow agent constituted acceptance of late payments setting up an estoppel. But under the circumstances here, there was other evidence of estoppel both with regard to default in loan payments and taxes.

The Supreme Court also found that the mortgagee had also waived the "time is of the essence" provision in the loan documents with respect to timely payment of the property taxes and therefore, was estopped from foreclosing on the property on that basis. The mortgage required, and borrower never provided, paid tax receipts annually. The court reasoned that since the mortgagee had not received tax receipts from as early as 1990, she had constructive notice that the taxes on the property were not being paid by the borrower. The constructive notice of the nonpayment of the taxes coupled with the acceptance of delinquent installment payments for four years was found to be inconsistent with the mortgagee's insistence for strict compliance with the terms of the loan documents. The Supreme Court of Oregon held that the mortgagee could not foreclose on the property for unpaid taxes unless the mortgagee gave borrower notice of the defaults with a reasonable opportunity to cure such defaults.

"During that entire four year period, seller accepted late installment payments from buyer with hardly a complaint. That conduct collectively is inconsistent with seller's insistence on strict performance of the terms of the trust agreement and constitutes waiver of her right to foreclose on the basis of nonpayment of taxes. Moreover, because buyer reasonably relied to her detriment on seller's inaction over the years, seller now is estopped from foreclosing on the basis of that default without first giving buyer notice and a reasonable opportunity to cure."

Comment 1: When the editor researched his first article on Oregon land installment contracts in 1975, there had never been a mortgage case invoking the waiver doctrine in Oregon, and precious few elsewhere. The waiver doctrine, however, had been used liberally to set aside installment land contract forfeitures. Of course, installment land contracts typically have far harsher enforcement mechanisms, rarely providing for notice, and far harsher enforcement consequences immediate loss of title instead of a foreclosure sale. The editor argued echoed the doctrine stated elsewhere that "harsh remedies give rise to generous waiver doctrines," and suggested that the notice before loss provisions in Oregon mortgage and deed of trust law precluded the need for waiver theory. Obviously, the author was not persuasive to the Oregon courts. Although the court cites only installment contracts cases in support of its result here, there have been one or two appeals court decisions since 1976 in Oregon finding waiver in mortgage default contexts, and many in other jurisdictions as well.

Comment 2: The court's extension of the waiver doctrine here to apply to situations in which the mortgagee's knowledge of default is "mostly constructive" is a significant new intrusion into the contractual expectations of lenders. The knowledge is "mostly constructive" because technically the borrower was in default for not providing paid tax receipts to the mortgagee, and of course the mortgagee or her agent should have had notice that these receipts had not arrived. The court admits, however, that the real issue is not the failure to provide the receipts, but the failure to pay the taxes. The absence of the receipts was only constructive notice that the taxes had not been paid.

The editor's mind is boggled by the notion that a borrower would be fooled into believing that the mortgagee is not concerned about late tax payments just because the lender, without actual knowledge that the taxes are in default, continues to accept installments on the note. Were the editor four years behind in property tax payments, the editor would expect dogs at the door at any moment. But the Oregon Supreme Court's view of rational economic behavior obviously contemplates a mind that is far freer of ordinary mortal concerns than that of the editor. Life must be awfully laid back these days in Oregon!!

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