A 2021 decision from the Utah Court of Appeals, Daniels v. Deutsche Bank National Trust, et al., presents a cautionary reminder to lenders. The case began with an ordinary $300,000 loan, secured by a deed of trust against the borrower’s home, and ended with the borrowers taking their home free of the bank’s lien. To add insult to injury, the bank was required to reimburse the borrowers $95,523 in legal fees.

In January 2007, a couple purchased a newly-constructed house in Kamas, Utah, financed by a loan of over $300,000. By mid-2007, they had defaulted on their loan. After the lender recorded a notice of default, the couple filed for bankruptcy protection, thus staying foreclosure proceedings and tolling the applicable six-year statute of limitations for breach of a written contract.

In Utah, a lender must generally move forward to collect any debt made pursuant to a written loan document within six years. But when does the six-year statute start to run? Utah Code Ann. § 78B-2-113(1) clarifies:

An action for recovery of a debt may be brought within the applicable statute of limitations from the date: (a) the debt arose; (b) a written acknowledgment of the debt or a promise to pay is made by the debtor; or (c) a payment is made on the debt by the debtor.

In other words, the statute of limitations starts to run when the debt arises and may “restart” each time a debtor makes a payment on the debt or when the borrower acknowledges the debt or promises to pay the debt in writing.

In the Daniels case, the homeowners obtained a discharge of their personal liability to the bank in their bankruptcy case. However, the bank’s trust deed lien against the home remained in place. After emerging from bankruptcy, the homeowners repeatedly sent letters to the bank asking to help them “keep their home” and to “mediate a new mortgage.” During this time, the homeowners also made some post-bankruptcy payments to the bank. Their last such payment was made on Feb. 25, 2010 — the key date in this case.

Fast forward nearly six years later. On Sept. 29, 2015, the lender recorded a new notice of default. Under Utah law, the trustee may have been able to hold the trustee’s sale as early as February 2016. But, for reasons not specified in the Daniels decision, the sale was not scheduled until May 6, 2016. That later sale date, of course, was more than six years after the homeowners had made their last payment on the loan.

In April 2016, before the bank completed its foreclosure sale, the homeowners filed a complaint seeking a declaratory judgment that the six-year statute of limitations had run on the bank’s right to foreclose against the property.

The homeowners argued that the six-year period began running on the date of their last payment, Feb. 25, 2010, and thus had expired on Feb. 25, 2016. The trial court ruled in favor of the homeowners and quieted title in their favor, free of the bank’s lien. The trial court also ordered the bank to pay the borrowers’ attorneys over $95,000.

The bank appealed the trial court’s decision to the Utah Court of Appeals.

It should be noted that at roughly the same time the homeowners filed their lawsuit, the Utah legislature was working on a series of changes to Utah’s nonjudicial foreclosure law, including to Utah Code Ann. § 57-1-34, that establishes the actions a lender collecting a debt secured by real property must take before the statute of limitation expires. That change in the law became effective on May 10, 2016, the month after the borrowers filed their lawsuit and about three months after the statute of limitation had already expired under the old law.

Prior to May 2016, Utah law required a lender to either: 1) complete a nonjudicial “trustee’s sale of property under a trust deed” or 2) file “an action to foreclose a trust deed.” But after May 10, 2016, a lender need only file a lawsuit commencing a judicial foreclosure or “file for record a notice of default.” In other words, before May 10, 2016, a nonjudicial trustee’s sale had to be completed during the limitations period. Under the new statute, a lender need only record a notice of default in the county recorder’s office prior to the running of the limitations period. That change in law, had it been in effect sooner, may have saved the bank’s lien in the Daniels case. The bank had, in fact, recorded a notice of default before the limitations period expired, but it had not completed its trustee’s sale. Thus, the bank had complied with the new law (that had not then been enacted) but not the old law, which was in place when the statute of limitation lapsed.

Although the bank was not able to take advantage of the new law, it still had other arguments to present. For example, what about all those post-bankruptcy letters the bank received from the borrowers asking the bank to modify their loan? The bank argued that those communications must certainly constitute a written acknowledgment or promise to pay the debt, which should have restarted the limitations period.

The Court of Appeals agreed that a written acknowledgment of a debt restarts a statute of limitations. However, the court explained, the borrower’s acknowledgment of debt must be “clear, distinct, direct, unqualified, and intentional” and “must be more than a hint, a reference, or a discussion of an old debt; it must amount to a clear recognition of the claim and liability as presently existing.”

The Court of Appeals ruled that the communications between the homeowners and the bank did not meet this standard, in large part because the homeowners reiterated during those conversations that their personal liability had been discharged in bankruptcy. The Court of Appeals determined that these “communications were a ‘reference’ to ‘or a discussion of an old debt’ not a clear recognition of . . . [a] liability as presently existing.” Therefore, the limitations period was not tolled by those letters.

In short, the Court of Appeals affirmed the remedy granted by the trial court of quieting title in favor of the homeowners, free of the bank’s lien, because “the Trust Deed was no longer enforceable as security . . . after the limitations period expired.” And as mentioned earlier, the court also affirmed the trial court’s award of attorney’s fees to the borrowers.

The main takeaway of the Daniels decision is probably just a reminder that there is a clock ticking that limits the time a lender has to work out a problem loan. For purposes of restarting that clock, “money talks.” Promises and ambiguous requests for loan modifications, very well, may not. So, even though it may be beneficial for a lender to attempt to work out a problem loan without resorting to judicial or nonjudicial foreclosure, the prudent course is to calculate the statute of limitations based on the date the last payment was made, and not by a debtor’s acknowledgment or promise to pay the debt. Better yet, lenders may decide to simply record their notice of default early in the workout process, even if negotiations with the borrower are ongoing.