The U.S. Bankruptcy Court for the District of New Jersey recently held that a debtor was entitled to a “free house” because the mortgagee failed to re-file its foreclosure within the 6 years allowed for post-maturity-date foreclosures under New Jersey state law.
In so ruling, the Bankruptcy Court also held that the mortgage foreclosure statute of limitations period for post-maturity-date foreclosures at N.J.S.A. § 2A:50-56.1(a) applied retroactively, even though the statute became effective after the date of the mortgage and after the mortgagee’s original complaint to foreclose.
A copy of the opinion is attached.
On February 27, 2007, the borrower (“Debtor”) obtained a $520,000 loan secured by a mortgage to the subject property. Debtor failed to make the July 1, 2007 mortgage payment and the loan was in continuous default since that time.
On December 14, 2007, the creditor (“Creditor”) filed a foreclosure complaint, but the case was dismissed without prejudice for lack of prosecution on July 5, 2013. The Creditor did not obtain a final judgment of foreclosure nor took any action to de-accelerate the maturity date.
On March 12, 2014, Debtor filed bankruptcy and proposed to sell the property under his chapter 13 plan. In addition, Debtor also filed an adversary proceeding seeking to disallow the lender’s proof of claim and to void the mortgage lien.
Debtor initially argued that Creditor’s claim for action on the note accrued on June 1, 2007, when it declared default and accelerated the loan, which the Debtor argued was now time barred under the 6 year limitations period under N.J.S.A. § 12A:3-1118(a) applicable to actions on negotiable instruments.
In response, Creditor conceded that the 6 year statute of limitations for enforcement of the note had run, but argued that enforcement of the mortgage is subject to a 20-year statute of limitations recognized as a common law matter in Security Nat’l Partners Ltd. P’ship v. Mahler, 336 N.J. Super. 101, 107, cert den., 169 N.J. 607 (2001), and later codified at N.J.S.A. § 2A:50-56.1(c).
Debtor then countered, arguing Creditor’s declaration of default and acceleration advanced the maturity date of the mortgage to June 1, 2007, such that under N.J.S.A. § 2A:50-56.1(a), which required the mortgagee to file a foreclosure action within 6 years of the maturity date of the mortgage, Creditor’s foreclosure was time barred as of June 1, 2013.
The issues before the Bankruptcy Court were whether acceleration of the note and mortgage advanced the maturity date such that N.J.S.A. § 2A:50-56.1(a) cut off Creditor’s cause of action, and whether this statute could be retroactively applied to this case.
As you may recall, N.J.S.A. § 2A:50-53 through -68, “Foreclosure of Residential Mortgages” (“Fair Foreclosure Act”), became effective on December 4, 1995 and was applicable to “to foreclosure actions commenced on or after that date.” See N.J.S.A. § 2A:50-53, citing L. 1995, C. 244, § 19.
The Bankruptcy Court began its analysis by looking to Mahler, which concluded that a foreclosure action was time-barred if not commenced within 20 years after the debtor’s default. The court in Mahler reiterated the distinction between an action on the note and an action on the mortgage, and held that the lender’s time to sue on the note was governed by the 6 year limitations period in N.J.S.A. § 12A:3-118(a). Mahler expressly rejected the borrower’s argument that the same 6 year statute governed suits on the mortgage.
However, the New Jersey Legislature enacted N.J.S.A. § 2A:50-56.1 in response to Mahler, and clarified the statute of limitations relative to foreclosure proceedings:
An action to foreclose a residential mortgage shall not be commenced following the earliest of:
a. Six years from the date fixed for the making of the last payment or the maturity date set forth in the mortgage or the note, bond, or other obligation secured by the mortgage, whether the date is itself set forth or may be calculated from information contained in the mortgage or note, bond, or other obligation, except that if the date fixed for the making of the last payment or the maturity date has been extended by a written instrument, the action to foreclose shall not be commenced after six years from the extended date under the terms of the written instrument;
b. Thirty-six years from the date of recording of the mortgage, or, if the mortgage is not recorded, 36 years from the date of execution, so long as the mortgage itself does not provide for a period of repayment in excess of 30 years; or
c. Twenty years from the date on which the debtor defaulted, which default has not been cured, as to any of the obligations or covenants contained in the mortgage or in the note, bond, or other obligation secured by the mortgage, except that if the date to perform any of the obligations or covenants has been extended by a written instrument or payment on account has been made, the action to foreclose shall not be commenced after 20 years from the date on which the default or payment on account thereof occurred under the terms of the written instrument.
N.J.S.A. § 2A:50-56.1.
The Bankruptcy Court noted that N.J.S.A. § 2A:50-56.1 went into effect on August 6, 2009, and was silent as to its retroactive effect. Moreover, the statute does not state whether the limitations period should be measured by the date of the mortgage, the date of the default, or the date on which the foreclosure action is filed.
The Debtor argued that date should be measured from July 1, 2007, the date of the alleged default or, alternatively, “relate back” to the complaint filed on December 14, 2007 because the Creditor discharged the lis pendens and failed to appeal the July 5, 2013 dismissal. The Bankruptcy Court agreed that the Creditor is now time barred under either effective date.
Noting that neither the Debtor nor the Creditor had taken any measures under the note and mortgage, or under the Fair Foreclosure Act, to de-accelerate the debt, the Bankruptcy Court concluded that the Creditor was now time-barred from filing a foreclosure complaint by having failed to re-file its foreclosure within 6 years of the accelerated maturity date as required by N.J.S.A. § 2A:50-56.1(a).
In addition, and relying on the statute’s legislative history, the Bankruptcy Court held that N.J.S.A. § 2A:50-56.1 applied retroactively because the effectiveness of the statute would be greatly reduced otherwise. According to the Bankruptcy Court, one of the stated purposes of the statute was to remove mortgages that constitute “clouds on title” which may render real property titles unmarketable and delay real estate transactions.
Accordingly, because Creditor’s proof of claim was not allowed under 11 U.S.C. § 502(b)(1) as the debt is unenforceable under applicable state law, the mortgage lien was therefore void under 11 U.S.C. § 506(d). To the displeasure of the Bankruptcy Court, it held that the Debtor shall retain the subject property free of any claims of the Creditor.
Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
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Chicago, Illinois 60602
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