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Arizona Supreme Court Addresses Statute of Limitations for Debt Collectors

Addressing an issue of first impression in Arizona, the Arizona Supreme Court recently held that the statute of limitations on a credit card debt subject to an optional acceleration clause commences "when the debtor first fails to make a full, agreed-to minimum monthly payment." The decision sets a clear date for accrual of the six-year statute of limitations on unpaid credit card accounts.

In Mertola, LLC v. Santos, Alberto and Arlene Santos (Santos) entered into a credit card contract with Washington Mutual Bank in 2007. They repeatedly made late minimum payments due under the credit card contract from August 2007 to January 2008. After that—but for one $50 payment in August 2008—Santos stopped making payments altogether. The bank charged off the account and Santos's debt was eventually acquired by Mertola, LLC.

Mertola brought suit for breach of the credit card contract in 2014, seeking recovery of the full outstanding balance. Santos moved for, and the trial court granted, summary judgment in their favor based on a six-year statute of limitations. Under Arizona law, actions for recovery of a debt founded on a credit card must be commenced and prosecuted within six years after the cause of action accrues. See A.R.S. § 12-548(A)(2).

The trial court held that the bank's, and Mertola's, cause of action accrued after the first missed Santos payment in February 2008. Mertola turned to the Arizona Court of Appeals, which reversed the trial court's decision, holding that the missed payments gave the creditor a cause of action to sue only for those missed payments—the cause of action to sue for collection of the outstanding balance did not accrue until Santos failed to comply with a demand for full payment or a notice that the lender was accelerating the debt.

The Arizona Supreme Court recognized the logic of the appellate court's decision, but overruled it, noting in paragraph 18 of the ruling: "[t]o hold that a cause of action on the debt does not accrue until the creditor exercises his right to accelerate would vest the creditor with unilateral power to extend the statutory limitation period and permit interest to continue to accrue, long after it is clear that no further payments will be made . . . ."

The court recognized that a debtor could cure a default if the creditor accepts a payment of arrearages bringing the account current under the credit-card contract—though Santos's August 2008 payment was insufficient to do this—and further noted that a debtor's cure voids the creditor's cause of action and a new six-year limitations period commences upon any further default.

The Arizona Supreme Court described its holding as a "bright-line rule" that sets a clear accrual date and allows creditors to wait to accelerate a debt for up to six years following a default. As such, any party contemplating initiation of collection efforts or filing suit for recovery of an unpaid credit card debt should make Mertola part of its analysis.

Copyright © by Ballard Spahr LLP


About this Author

John Kerkorian, Ballard Spahr Law Firm, Phoenix, Litigation Attorney

John G. Kerkorian is Managing Partner of the Phoenix office. He has wide-ranging civil litigation experience, with emphasis on disputes involving contract breaches, business torts, commercial acquisitions and investments, real estate and mortgages, partnership matters, trade secret misappropriation, and business terminations. In addition, John regularly handles employment-related disputes involving restrictive covenants, harassment, and discrimination.

John is also a member of the Privacy and Data Security Group, providing assistance with...

Michael DiGiacomo, Ballard Spahr Law Firm, Phoenix, Bankruptcy and Litigation Law Attorney

Michael A. DiGiacomo focuses his practice on commercial litigation and corporate restructuring. Michael represents diverse clients, including REIT's, secured lenders, commercial landlords, special servicers, and hospitality companies, in litigation in federal and state courts. Michael regularly advises clients on bankruptcy issues, including use of cash collateral, filing proofs of claim, assumption and rejection of non-residential leases, avoidance and preference actions, and stay relief proceedings.

Judicial Clerkships

Hon. David T. Thuma, U.S. Bankruptcy Court for the District of New Mexico, 2013-2014

Externship - Hon. David C. Bury, U.S. District Court for the District of Arizona, summer 2012

Representative Matters

Represents large, privately-held medical device company in contract enforcement actions

Represents publicly-traded REITs in various bankruptcy and commercial litigation matters, including bankruptcy asset purchases, lease agreements, and breach of contract

Represents international hotel chain in both state and federal court litigation matters, including breach of membership agreements and indemnification

Represents multi-state charter school financier in bankruptcy matters related to purchase of accounts, cash collateral, and disclosure statements and plans of reorganization

Represents multiple commercial landlords in bankruptcy matters related to assumption/rejection of leases