Arizona Court of Appeals Division One holds that statute of limitations begins to run when a payment matures under a home equity consumer revolving loan agreement.

In 2007, a homeowner entered into a home equity consumer revolving loan agreement (“HELOC”) that allowed him to borrow up to $75,000 over a roughly fifteen-year period.  During that period, the homeowner was required to make monthly interest payments, but was not required to pay down the principal.  After the first fifteen years, in addition to the interest payments, the homeowner was required to make monthly payments towards the principal.  The HELOC was secured by a deed of trust on the homeowner’s home.

In April 2011, the homeowner stopped making his monthly interest payments, and never paid the bank providing the HELOC again.  Over six years later, the bank exercised its right under the HELOC to accelerate the debt and sued the homeowner to collect the outstanding balance owed.  The homeowner moved for summary judgment, arguing that the six-year statute of limitations imposed by A.R.S. § 12-548(1) ran from the time he defaulted on the loan.  In other words, he argued, the bank’s claim accrued when he first stopped making payments in April 2011, and thus the six-year statute of limitations barred the bank’s claim.

The superior court denied the homeowner’s motion.  The superior court, relying on Navy Federal Credit Union v. Jones, 187 Ariz. 494 (App. 1996), held that the bank’s claim accrued on the due date of each payment and any claims on unmatured payments accrued when the bank exercised its option to accelerate repayment of the debt.  Thus, the bank’s claims for payments that became due within the last six years were not barred by the statute of limitations.  At the subsequent trial, the superior court entered judgment in favor of the bank.

The Court of Appeals affirmed.  The Court framed the issues as a choice between one of two potential applications of § 12-548(1).  The first, based on Navy Federal, would run the statute of limitations from the date a payment became due.  The other, advanced by the homeowner, would run the statute of limitations from the time the initial default occurred.  This rule is based on the Arizona Supreme Court’s decision in Mertola, LLC v. Santos, 244 Ariz. 488 (2018), which specifically applied the rule to credit card accounts.  The homeowner argued that because the HELOC involved an established billing cycle, annual fees, over limit-fees, and terms on which the bank could suspend his right to borrow, it was essentially the same as a credit card account, and thus the Mertola rule should apply.  But, the Court held, the differences between a credit card account and a HELOC outweighed the similarities.  Importantly, a HELOC is secured, whereas a credit card account is not, giving the HELOC lender an incentive to accelerate the debt immediately, rather than refraining from collecting so as to accrue more interest at higher rates.  The incentive to accelerate the debt undercut the core reasoning of Mertola, so the Court determined that the Navy Federal rule was the appropriate rule to apply to the collection of HELOC debts.  As such, the superior court had properly entered judgment in favor of the bank.   

Judge Cruz authored the opinion for the Court, joined by Judges Morse and McMurdie.