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A recent case illustrates how a borrower who has made late payments under a mortgage over a period of time can’t assume that a bank will be bound to continue to accept late payments. In Buckeye Retirement Co. LLC v. Walling, the borrower tried to head off a foreclosure on his home by arguing that the bank was precluded from foreclosing because it had waived its right to declare the loan in default by previously accepting late payments, and by failing to cash two checks that could have covered a number of overdue installments. Over a period of seven years, monthly payments were often sent late and the borrower would periodically combine payments in order to make the loan current. The bank would regularly assess late charges for the untimely payments. After the borrower had not made any payments for three months, the bank sent him a letter notifying him that he was in default and the loan was being accelerated. He responded by sending a letter to the bank with a check for five monthly payments and late charges. Unfortunately for the borrower, the letter stated that the bank could only use the check if it understood that the endorsement would remove the loan from default status. The letter also included a proposal for making current and future payments. The bank did not deposit the check, but over a month later the bank sent another request for payment to make the account current and borrowers then paid that amount and the check was deposited by the bank. After that, the bank sent out monthly billing slips to the borrower but the borrower did not pay any more installments. When the bank filed a foreclosure action, the borrower responded by asserting that it was unconscionable and improper under the circumstances of the case. He argued that the bank had established a pattern of accepting late payments, which gave it a duty to notify the borrower before demanding monthly payments on time; and also that it was improper for the bank to accept payments knowing that it was soon going to foreclose. Restatement of Mortgages Ruling in favor of the bank, the Ohio Court of Appeals relied on other precedents and on the Restatement of the Law, Mortgages, 563, Section 8.1. It held that the bank had no duty to accept mortgage payments that had conditions attached to them because those conditions were not part of the original mortgage. It considered the conditional checks as an offer to the bank to change the terms of the mortgage, which the bank has no obligation to accept. Also, the court pointed out that even after that submission to the bank, the borrower again failed to keep current with the final mortgage payments. It was only after those additional payments were missed that the bank decided to act on the default by seeking foreclosure. The court also pointed to other factors that worked in favor of the bank’s position. First, the mortgage contained an “anti-waiver provision” that made clear that any grant by the bank of an extension of time for payment or any failure of the bank to exercise any right under the mortgage, including the right to accelerate the debt, shall not affect the mortgage or the rights of the bank under it. Also, the mortgage contained a “cognovit provision” in which the borrower waived the right to any notice of default and agreed that any legal proceedings could be taken against him even without his knowledge if he failed to pay the installments on time. In the court’s analysis of the Restatement of the Law, Mortgages, the court acknowledged that a mortgagor may defeat acceleration and reinstate the mortgage obligation by paying the amount due to the lender in the absence of an acceleration if the lender has waived its right to accelerate. It cited an Illustration 12 in the Restatement as an example of the type of waiver that could occur. That illustration describes a situation where the mortgagor is, on the average 15 days late, in paying seven of 12 loan installments and where the mortgagee accept such payments without reservation. The lender then sends an acceleration notice after the borrower is again late in sending the thirteenth payment; and that illustration concludes that the acceleration is ineffective and the default excused. Despite that the court concluded, based on another Restatement illustration, that the acceleration clause would be effective in those cases where the mortgage had included an anti-waiver provision. In a dissenting opinion one of the judges disagreed with the Restatement interpretation by the majority. It cited “comments and illustrations” in connection with Illustration 14 to support its view that while an anti-waiver provision may “in close cases, tip the balance against a finding of waiver,” it usually will not be dispositive on the waiver issue. Those comments said that the effect of that clause will be negated “where the pattern of accepting late payments is sufficiently continuous and prolonged to justify the conclusion that the mortgagee has abandoned or waived the protection of the provision.” Lessons One of the lessons from Buckeye Retirement Co. is that the Restatement of Mortgages may be used as a resource in trying to deal with late-payment cases. On the other hand, based on the dissent, the Restatement may prove to be far from a final solution in resolving these types of disputes, which frequently depend on factual determinations. One of the lessons to lenders is that their mortgage documents should contain both anti-waiver and cognovit provisions. While that may not be dispositive of late-payment issues, those clauses apparently can go a long way in some jurisdictions to helping the lender. It seems that without the anti-waiver clause, Buckeye Retirement Co. would have lost its case. The lesson to a borrower is that one cannot assume that acceptance of a series of late payments by a lender will mean that the borrower can continue to be late with impunity. In addition, if a catch-up payment is intended to head off acceleration, the borrower should not submit the payment with conditions attached to it. The decision might have been different if Walling had sent in the check without trying to obtain an agreement that the loan would thereby be removed from default status. This case illustrates how important it is for troubled borrowers to communicate with bank officers when they are having trouble making payments. They should not assume that because the bank has carried them through defaults in the past that it will continue to do so. At some point the bank will simply say, “enough is enough,” and “the ax will fall.” HARRIS OMINSKY is with the law firm of Blank Rome and is a former president of the board of the Pennsylvania Bar Institute.

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