When is a Mortgage Lien Extinguished Through Expiration of the Statute of Limitations?

During the housing boom and prior to 2007, property owners gained access to second and sometimes third mortgages with ease. Lending standards were lax, and as we now know, the entity arranging for the loan oftentimes had no "skin in the game" and no incentive to thoroughly assess the debtor's ability to repay. When the recession came, billions of dollars of home equity lines of credit (HELOCs) went into default. Lenders that did not foreclose would sell the mortgage to third-party collection agencies for pennies on the dollar. Many homeowners, however, continued to pay their first mortgages in order to avoid foreclosure while weathering the collection efforts of these assignees of the debt.

As real estate and home prices have risen, there is now equity over and above the outstanding first mortgages. It has become economically feasible for the junior lienholder to pursue the property as the means of generating a return. Investors and hedge funds see the numbers. They have created well-financed investment vehicles to buy these distressed loans. With ownership of the loans comes the right to foreclose. From what we can see, there has been a significant spike in foreclosure activity by these types of investment entities in Colorado as they try to generate a profit. The problem, however, is that many of the loans for which foreclosure rights are asserted have been in default for a long time. This raises challenging questions for the courts: Should the holder of the promissory note be vindicated, or should the property be stripped of the lien represented by the deed of trust because the applicable statute of limitations has expired?

Colo. Rev. Stat. Ann.§ 38-39-207 states:

The lien created by any instrument shall be extinguished, regardless of any other provision in this article to the contrary, at the same time that the right to commence a suit to enforce payment of the indebtedness or performance of the obligation secured by the lien is barred by any statute of limitation of this state.

Under C.R.S. § 13-80-103.5, applicable limitations period for promissory notes is six years:

(1) The following actions shall be commenced within six years after the cause of action accrues and not thereafter:
(a) All actions to recover a liquidated debt or an unliquidated, determinable amount of money due to the person bringing the action, all actions for the enforcement of rights set forth in any instrument securing the payment of or evidencing any debt, and all actions of replevin to recover the possession of personal property encumbered under any instrument securing any debt; except that actions to recover pursuant to section 38-35-124.5(3), C.R.S., shall be commenced within one year;

When does a statute of limitations begin to run? Under Colo. Rev. Stat. Ann.§ 13-80-108(4), it runs from the date that the cause of action accrues:

A cause of action for debt, obligation, money owed, or performance shall be considered to accrue on the date such debt, obligation, money owed, or performance becomes due.

To toll, or stop, the statute of limitations period from running, the creditor must file a notice of election and demand with the clerk and recorder of the proper county. The lien created by the promissory note then continues until "final disposition of the action or foreclosure proceeding." Colo. Rev. Stat. Ann.§ 38-39-204. Thus, if there is a pending non-judicial sale by the Public Trustee or a judicial foreclosure, the lien can continue beyond the six years. However, once the six period is over, the lien extinguished. The Colorado Court of Appeals is very specific on that point:

"By its plain terms, this statute [C.R.S. 38-39-207] does not merely affect a creditor's ability to enforce a lien. It destroys the lien." Rossi v. Osage Highland Dev., LLC, 219 P.3d 319, 322 (Colo.App. 2009); Tidwell v. Bevan Properties, Ld., 262 P3d 964, 967 (Colo.App. 2011).

In Mortgage Investments Corp. v. Battle Mountain Corp., 70 P.3d 1176, 1183 (Colo. 2003), The Colorado Supreme Court analyzed the relationship between the six year statute of limitations applicable to promissory notes and the longer fifteen year statute applicable to deeds of trust. It concluded that enforcement of the deed of trust must take place during the six year period:

If a party does not commence suit on a promissory note within six years of default, the deed of trust is extinguished because the six-year limitations period in section 13-80-103.5(1)(a), 5 C.R.S. (2002), would bar enforcement of the promissory note; therefore, the lien would be extinguished under section 38-39-207, 10 C.R.S. (2002).....But, if a party commences suit on the promissory note within six years of default, subsequent collection of payment of the debt through execution on a judgment lien or foreclosure on the lien of the deed of trust is not barred by section 38-39-207, 10 C.R.S. (2002).

Two major issues can arise when litigating the issue of whether the lien has been extinguished by operation of the statute of limitations. First, when exactly does the claim under the promissory note accrue? The creditor can argue that each monthly installment constitutes a new default. Therefore, the limitations period begins anew as each successive installment is not paid. While this may be true, the acceleration of the promissory note makes the entire amount due and owing at that time. Hassler v. Account Brokers of Larimer Cty., 274 P.3d 547, 553 (Colo. 2012). The statute of limitations is triggered "for all installments that had not previously become due." Id.

The second issue arises in the context of the party's actions subsequent to the default. A new promise to repay the loan may re-start the statute of limitations. Also, the loan can be modified during the six month time period; then there is a new contract, and the original default becomes irrelevant. When there is a new oral promise to repay, and the loan is more for than $25,000, the oral promise to repay does not take the case out of the statute of limitations. This is due to Colorado's credit statute of frauds, C.R.S. § 13-80-113. The effect of this statute is to render non-existent for legal purposes any representation that is not in writing concerning a loan for over $25,000. Rossi v. Osage Highland Dev., LLC, 219 P.3d 319, 322 (Colo. Ct. App. 2009).

Other factors may affect the running of the statute of limitations. If the debtor files for bankruptcy protection, the creditor can argue that the running of the period is tolled. The bottom line is that both creditor and debtor need to carefully construct the timetable of events and examine all documents, instruments, emails, and payment history before drawing any conclusions as to whether the lien has been extinguished.