The Statute of Limitations As Applied to Mortgages

By Edward Pamintuan, Esq.

Foreclosure defense practitioners have not come up with a definitive answer as to whether the standard 4 years statute of limitations on written instruments applies to mortgage loans or whether the 6 year statute of limitations contained in the California Commercial Code applies. I have done research on the issue of whether the 4 year SOL contained in the Code of Civil Procedure applies or the 6 years SOL contained in the Commercial Code Div. 3, Section 118 applies to a mortgage. The answer is dependent on whether the mortgage is a negotiable instrument (in which case the 6 years SOL governs) or is a non-negotiable instrument (in which case the 4 years SOL governs). I find that the typical mortgage is a non-negotiable instrument and the 4 year SOL applies.

Why Negotiable v. Non-negotiable

The California Commercial Code in Division 3 applies to "negotiable instruments."

Div. 3, Section 104 defines a "negotiable instrument" as an unconditional promise to or order to pay a fixed amount of money, with or without interest or other charges described in the promise or order, if it is all of the following: 1) Is payable to the bearer...at the time it is issued or first comes into possession of a holder, 2) Is payable on demand at a definite time, and 3) Does not state any other undertaking or instruction by the person promising ... payment to do any act in addition to the payment of money, but the promise ... may contain (i) an undertaking or power to give, maintain, or protect collateral to secure payment, (ii) an authorization or power to the holder to confess judgment or realize on or dispose of collateral, or (iii) a waiver of the benefit of any law intended for the advantage or protection of the obligor.

Therefore, if the mortgage does not meet the definition of a negotiable instrument then the 6 years SOL does not apply because the mortgage is not the type of note Division 3 covers.

The Typical Mortgage is a Non-Negotiable Instrument

To determine whether the mortgage is a negotiable instrument or non-negotiable instrument we, simply, must look to the terms of the note and deed to trust of the mortgage to determine if the mortgage meets the definition of a negotiable instrument. If it does not then the 4 year SOL applies. Fortunately for consumers, lenders have placed so many terms in their boilerplate that qualify as "other undertakings" or "non-fixed amounts of money" that I don't think any mortgage or deed trust will qualify as a negotiable instrument.

Non-Fixed Sums of Money Terms and Other Undertakings

Many notes and deed of trust require the consumer to:

  • Non-fixed amount - Pay, in the event of a default, "all expenses related to retaking, holding, preparing for sale and selling the property and reasonable collections costs, attorneys' fees and legal expenses..."

  • Additional undertaking - Notify the bank of any loss or damage to the property.

  • Non-fixed amount - In the event the consumer does not insure the property, "...pay the expense of such insurance on demand or agree that we may add such expense to this loan."

  • Additional undertaking - Defend, at the consumers expense, the banks security interest in the Property and to pay all actual costs imposed to release the banks interest in the property.

  • Additional undertaking and un-fixed amount - Pay all fees, fines and taxes related to this loan and the property. If you do not pay any of the foregoing, we may do so at our sole option and add the costs to this loan or require you to provide us with additional collateral.

  • Additional undertaking - Obtain written consent to sell or assign the note, property or any of its benefits or obligations.

  • Non-fixed amount - Pay, in addition to the monthly payment, a sum equal to 1/12th of the yearly taxes and assessments (including condominium and planned unit development assessments), and ground rents on the property, plus 1/12th of yearly premium installments for hazard insurance, plus 1/12th of yearly premium installments for mortgage insurance....

Conclusion

The notes and deeds of trust are rife with language that render mortgages non-negotiable instruments. A non-negotiable instrument is not covered by the California Commercial Code and therefore not subject to the 6 year statute of limitations contained in the code. Rather a mortgage is subject to the 4 year statute of limitations that applies to written agreements contained in the California Commercial Code. This 4 year statute of limitations can have a great impact on a consumer who is being sued for a deficiency on a mortgage because a statute of limitations defense is a good, sound legal defense that an attorney can raise to defense a lawsuit and have the lawsuit thrown out.