The Arizona Court of Appeals recently clarified how the state’s debt collection statute of limitations applies to debt created by a land sale contract.

Arizona has a six-year statute of limitations to enforce installment debt created by a written contract, which is codified at A.R.S. § 12-548. A lender must enforce the debt through foreclosure or a lawsuit within six years after the cause of action accrues. The Arizona Court of Appeals and Arizona Supreme Court have issued numerous opinions over the last several years clarifying when a cause of action accrues for mortgages and credit card debt. A recent decision provides further guidance for lenders and loan servicers enforcing land sale contracts where title to the property does not transfer until the loan is paid in full.

In Velazquez v. FMZ Industries, Inc. (FMZ), FMZ sold property to a purchaser under a sale agreement, which granted it the right to installment payments for the sale amount. FMZ and the purchaser agreed that FMZ would tender title to the property after the purchaser fulfilled its payment obligations. The purchaser stopped making payments under the agreement and purportedly sold the property to a third party. The third party filed suit against FMZ for quiet title, claiming the six-year statute of limitations barred foreclosure and FMZ’s ability to enforce its title to the property.

The superior court ruled in the third party’s favor holding the statute of limitations to enforce the debt had run and, therefore, title should be quieted in the third party’s name. However, the court of appeals reversed the decision, explaining that FMZ had two distinct rights: 1) the right to installment payments; and 2) the right to ownership of the property. Section 12-548 applies to FMZ’s ability to enforce the first right, but not the second.

Specifically, FMZ’s title to the property was not created by the land sale contract and remained intact. The court reasoned that while the statute of limitations may apply to block enforcement of the debt created by the contract, the statute cannot extinguish a right to land ownership. Thus, the opinion provides Arizona lenders and loan servicers another avenue to seek recovery where the statute of limitations to enforce the debt created by a land sale contract may have run.

Troutman Pepper attorneys have significant experience defending financial institutions in statute of limitations litigation across the country and have helped created favorable case law in this area.