Not So Fast: Automatic Acceleration Provisions in Promissory Notes
In December 2014, the Nebraska Court of Appeals rendered its decision in the case Village of Filley v. Setzer, 22 Neb. App. 575 (Neb. Ct. App. 2014). In 2002, the Village of Filley (the “Village”) loaned money to a local business and the owners thereof (collectively, the “Business”) pursuant to a community development block grant program. The Business executed and delivered a promissory note (the “Note”) which detailed the loan’s repayment terms. Among the Note’s default provisions was one stating, “It is further understood and agreed that, in the event of the sale or transfer of any ownership interest in the [Business], then this note shall become immediately due and payable.”
In 2003, one of the Business owners sold all of his interest in the Business; however, the Business continued to make payments to the Village. It was not until 2009 that the Business stopped making payments under the Note. In 2011, the Village filed its Complaint against the Business requesting judgment for the Note’s outstanding balance. The Business defended, asserting that the Note’s balance accelerated in 2003 when the Business owner sold his interest. Thus, the Business argued, the Village was barred from recovering because it failed to bring suit within the five-year statute of limitations after its claim accrued in 2003. The Gage County District Court agreed with the Village and entered judgment in the Village’s favor. The Business appealed.
On appeal, the Nebraska Court of Appeals (citing Nat’l Bank of Commerce Trust & Sav. Ass’n. v. Ham, 256 Neb. 679, 592 N.W.2d 477 (1999)) held that, under Nebraska law, acceleration clauses are not self-operating, regardless of whether they are phrased in permissive or mandatory terms. Instead, the statute of limitations does not begin to run on such a provision until the lender affirmatively elects to accelerate. In Filley, the Business owner “triggered” the Note’s self-operating acceleration clause by transferring his interest in the Business. However, since such a self-operating clause was invalid, the statute of limitations did not begin to run against the Village’s claim until it accelerated the Note’s balance in 2011. As such, the Court of Appeals determined, the Village properly brought its claim within the statute of limitations.
The Court of Appeals’ decision promotes several important policies. First, to hold acceleration provisions to be self-operative would prohibit the lender from exercising leniency toward the debtor. Instead, a breach would essentially force a lender to bring suit within the five-year statute of limitations. Second, the decision promotes the policy that a borrower, by defaulting, should not be permitted to force the maturation of an indebtedness which was intended as an investment for a given period. Finally, a rule contrary to the Filley holding leads to an absurdity. For example, if a borrower could force maturation, a borrower could intentionally breach a contract covenant, fail to alert the lender of the breach, diligently pay under the contract for five years, and then stop paying. Under this rule, even though the lender did nothing but accept the payments as the contract required, the creditor would have no recourse against the debtor. The covenant breach would have automatically started the statute of limitations, and five years had elapsed.
Although “automatic” acceleration provisions are somewhat uncommon, a lender can take solace in the fact that the statute of limitations does not begin to run on a claim for borrower’s breach of an automatic acceleration provision until it takes affirmative action to accelerate.