In a victory for mortgage lenders and servicers, the Virginia Supreme Court held on September 27 that Virginia’s five-year statute of limitations for a breach of contract claim based on a deed of trust begins to run when the loan is accelerated – not when a foreclosure sale is held much later.
By way of background, most Virginia deeds of trust, including the one at issue in Kerns, require the lender to send a written notice of default to the borrower before accelerating the loan debt and foreclosing. Among other requirements, the notice of default typically must notify the mortgagor of the default and allow the mortgagor at least thirty days to cure the default.
In 2008, the Virginia Supreme Court held that giving this notice of default to the borrower is a contractual condition precedent to acceleration of the debt and foreclosure. If not given, a mortgagor may be able to bring a viable breach of contract claim and seek damages if the foreclosure has been completed. This ruling has given rise to a plethora of cases by defaulting borrowers seeking to avoid foreclosure and eviction by disputing the notice of default’s contents or claiming that it was never given.
In Kerns, the mortgagor acknowledged that the lender had given him a notice of default dated June 20, 2010. A foreclosure sale was held on August 23, 2011. Exactly five years after the foreclosure sale, on August 23, 2016, Kerns filed a breach of contract lawsuit asserting, for the first time, a proper notice of default was never given.
Kerns’ theory was that the notice of default was defective because it was not mailed until June 21, 2010 – one day after the date that appeared on the notice – depriving the mortgagor of the full thirty days to cure the default. Relying on the 2008 Virginia Supreme Court ruling mentioned above, the mortgagor argued that because the notice of default was defective, the lender never acquired any right to accelerate the loan or foreclose.
The trial court dismissed Kerns’ complaint, finding that it was barred by Virginia’s five-year statute of limitations applicable to claims for breach of a written contract. It held that the breach of contract claim accrued, and the statute of limitations began to run, when the loan was accelerated – not years later when the foreclosure sale auction is held and the mortgagor’s interest in the secured property is extinguished.
The Virginia Supreme Court affirmed, holding that the trial court did not err in finding that the statute of limitations clock started to run on the date the loan accelerated. In its precedential opinion, the Court acknowledged that the mortgagor’s breach of contract claim accrues when a “legally cognizable harm” is suffered by the plaintiff and that any act which “impermissibly alter[s] the legal relationship between the parties” may fall into this category.
Kerns is significant in that it clarifies a previously unsettled issue and gives mortgage lenders and servicers more control over when a mortgagor’s alleged breach of contract claims will accrue. That is, once a notice of default has been given and the time to cure the default has elapsed, the lender or servicer can unilaterally and without further notice decide when to accelerate the loan. Therefore, it will be important for lenders and servicers doing business in Virginia to clearly document a loan’s date of acceleration in its records, so that stale claims – like those raised in Kerns – will not impede attempts to foreclose or recover possession of the secured property.