Facts: A homebuyer obtained an unfavorable subprime loan on terms grossly misrepresented by the lender. At closing, the buyer inquired about a prepayment penalty, but the lender did not respond and the sale closed. Three years later, the buyer experienced a reduction in their income and obtained a temporary loan modification reducing their payments. The temporary modification expired and the buyer defaulted one year after initially seeking the modification. Upon default, the buyer consulted with an attorney who discovered the misrepresented terms and conditions set by the lender and filed suit.
Claim: The lender sought to dismiss the buyer’s suit, arguing the buyer’s claim was no longer actionable since the applicable statutory limitations periods had elapsed in the four years after the buyer initially inquired about the prepayment penalty.
Counterclaim: The buyer sought to prevent the dismissal and seek money damages, claiming they were not outside of the time period to file a complaint since the statutory limitations periods only began to run when they became aware of the misrepresented loan terms on their attorney’s review one year prior to filing the action.
Holding: A California Court of Appeals held the buyer may pursue the lender for money damages since the applicable limitations periods only began to run when the buyer became aware of the loan defects when they consulted with an attorney, one year before filing the action. [Fuller et al. v. First Franklin Financial Corporation et al. (2013) 13 C.D.O.S. 5379]
Editor’s note — Three limitations periods are brought up in this case:
- four years for a cause of action under the unfair competition law;
- three years for a deceitful breach of fiduciary duty; and
- two years for a negligent failure to meet a standard of reasonable care.
The lender grasped at a number of straws in the course of trying to invalidate the buyer’s claims against them based on the Statute of Limitations. For the purposes of this article, “Lender” refers collectively to the buyer’s loan broker and the mortgage lender.
Originally, the lender argued that all of the misconduct on which the buyer’s claim was based occurred before the sale closed in June 2006. Thus, they claimed, all three limitations periods had expired by the time the buyer filed the action in November 2010.
Additionally, the lender argued that, since the buyer demonstrated apprehension about the prepayment penalty when the loan closed, the buyer should have had notice that something was amiss. By the lender’s reasoning, this would have triggered the commencement of the limitations periods, placing the buyer well outside all three periods when they filed their action four and a half years later.
The court found that the lender misapplied the statute of limitations in both scenarios.
Case law states statutory limitations periods do not begin to run until a party discovers a cause of action, or is aware of facts or has access to sources of information that would alert them to the need to investigate further. [Community Cause v. Boatwright 124 CA3d 888]
Related article: As time passes, stale claims crumble away
The buyer, who had never purchased a home before, legitimately relied on the lender’s representation of the terms and consequences of the loan. As a novice, the buyer had no reason to suspect any of the lender’s – an expert on the subject – representations at the time of closing. The court also stated the buyer could not be expected to have the same knowledge of standard mortgage lending practice as the lender, nor would they have access to the same sources of information as the lender.
The court further held that the buyer’s question about the prepayment penalty was not sufficient reason to put the buyer on notice of any need to investigate further. Nor did the court determine that there were any other “red flags” alerting the buyer to misconduct in during the period from June 2006 to November 2009, when the buyer’s loss of income set them on the course to default one year later. The buyer did not attain sufficient notice of the lender’s wrongdoing until they consulted with their attorney.
Thus, the limitations periods did not begin until the buyer’s reduced ability to service the debt became an issue in late 2009 – well within all three of the applicable limitations periods.