Despite seemingly concrete language in loan agreements and mortgage documents, a recent case decided by the Rhode Island Supreme Court highlights that contractual language is not always as clear as it appears. In Webster Bank v. Rosenbaum, et al., the Rhode Island Supreme Court held that a choice-of-law provision which specified Connecticut law as the law governing a loan agreement did not apply to determining the applicable statute of limitations in a foreclosure action.
On July 30, 2006, defendant, Arnold Rosenbaum, entered into a loan agreement, secured by a mortgage on a property in Portsmouth, Rhode Island, which extended credit up to one million dollars ($1,000,000.00).
Arnold failed to make payments on the loan starting on July 6, 2007. As a result, on May 30, 2008, defendants, Arnold and Judith Rosenbaum, executed an amended note, adding Judith as an obligor, acknowledging and agreeing to their indebtedness to the plaintiff, and waiving any defenses or offsets regarding notice.
On January 6, 2016, approximately nine years after the defendants initially failed to make a payment, the plaintiff-servicer initiated an action in Rhode Island Superior Court to recover under the loan agreement. Said loan agreement contained a choice-of-law provision, which stated “Governing Law: Federal law and the law of the State of Connecticut (to the extent consistent with Federal law) govern this agreement.” The choice-of-law-provision did not include a forum selection clause or any separate indication with respect to which forum’s statute of limitations would govern.
The only issue before the Supreme Court was which jurisdiction’s statute of limitations would apply: that of the situs of the property, namely Rhode Island, or that of the choice-of-law provision of the loan agreement, namely Connecticut. Under Rhode Island’s ten-year statute of limitations for civil actions, see G.L. 1956 § 9-1-13, plaintiff’s action to recover under the loan agreement would be valid. However, if the choice-of-law provision required Connecticut’s law be applied, the plaintiff’s action would be time-barred as outside of the applicable six-year statute of limitations for actions on contracts. See C.G.S. § 52-576.
Despite the contractual language designating the law of Connecticut as the governing law of the agreement, the Supreme Court of Rhode Island held that, as the choice-of-law provision did not specifically mention choice-of-forum or the applicable statute of limitations, and as Connecticut had very little relationship to the matter outside of the location of the bank’s headquarters, it would not enforce the choice-of-law provision. Specifically, the Court noted it would refuse to apply the law of a contractually-chosen state if “the chosen state has no substantial relationship to the parties or the transaction and there is no other reasonable basis for the parties’ choice.” As a result, the Court performed an interest-weighing analysis as if the choice-of-law provision did not exist. Such an analysis requires the Court to examine:
- Predictability of results;
- Maintenance of interstate and international order;
- Simplification of the judicial task;
- Advancement of the forum’s governmental interests; and
- Application of the better rule of law.
Analyzing each of these interests with respect to the specific facts of that case, the Court determined that most of the policy-based factors tipped in favor of applying the ten-year Rhode Island statute of limitations. As such, the foreclosure action was allowed to proceed against the defendants.
While the Court’s disregard for the language of the choice-of-law provision in the loan agreement ended up benefiting the plaintiff in this instance, loan servicers will not always be so lucky. This case serves as an important reminder that even though your loan and mortgage documents may state something in what appears to be concrete terms, a court may not see it so simply.
As an industry which regularly crosses state lines, loan servicers require attorneys who can clearly and effectively communicate the potential ramifications of choice-of-law provisions, including when a court may elect to ignore the same. For more information about this case, the sufficiency of choice-of-law provisions in loan documents, or any other foreclosure matter, please contact Vincent J. Averaimo, Thomas A. Costello, or your Barton Gilman foreclosure attorney.