Thursday, December 26, 2019

FYI: 5th Cir Rejects Borrower's Texas Foreclosure Statute of Limitations Challenge

The U.S. Court of Appeals for the Fifth Circuit recently affirmed judgment against a borrower for quiet title claims brought against the owner and servicer of her mortgage loan, and entered judgment of foreclosure in the loan owner and servicer's favor on their counterclaims for foreclosure against the borrower.


In so ruling, the Fifth Circuit concluded that the foreclosure was not barred under Texas's four-year statute of limitations, because the borrower's successive bankruptcy filings did not terminate the action with respect to the property of the bankruptcy estate, as section 11 U.S.C. 362(c)(3)(A) on the Bankruptcy Code terminates the automatic stay only with respect to the debtor.


A copy of the opinion is available at:  Link to Opinion


In 2005, a borrower ("Borrower") and her then-husband purchased a property with a purchase-money mortgage.  The Borrower's ex-husband was awarded the home after a divorce, subject to a lien that required him to convey the home to Borrower in the event of default.


On October 1, 2013, the mortgage loan servicer (the "Mortgagee") mailed Borrower a notice of default, as no payment had been made on the loan since March 2011.  A subsequent notice of acceleration was mailed to Borrower in March 2014, setting a foreclosure sale of the property for May 6, 2014.


The day before the scheduled foreclosure sale, the Borrower filed suit in Texas state court asserting various claims relating to the pending foreclosure sale and requesting a temporary restraining order, which was granted on the same date and cancelled the foreclosure sale.  After the temporary restraining order expired, the Mortgagee removed the Borrower's action to federal court, where the action was subsequently dismissed with prejudice by stipulation of the parties.


In June 2015, the Borrower received a second notice of acceleration letter, setting a foreclosure sale for July 7, 2015.  On January 4, 2016, the Borrower filed her first bankruptcy petition, which was dismissed later that month for failure to timely file her plan and/or schedules.  Over the next three years, three additional acceleration letters were mailed to the Borrower scheduling foreclosure sales, all of which were thwarted by new bankruptcy petitions filed by the Borrower.


Before her last bankruptcy matter was dismissed, the Borrower filed suit in state court to quiet title to her property, arguing that the Mortgagee's right to foreclose was barred by Texas's statute of limitations to foreclose on real property.  The quiet title action was removed to federal court by the Mortgagee, who filed a counterclaim for foreclosure. 


Ruling upon the parties' respective motions for summary judgment, the trial court entered final judgment against the Borrower and in the Mortgagee's favor, holding that the statute of limitations had not expired, and ordering foreclosure.  The Borrower appealed judgment and underlying magistrate's report and recommendation and order on same.


On appeal, the sole issue before the Fifth Circuit was whether the statute of limitations expired on the Mortgagee's right to foreclose.  Here, the statute of limitations issue turned on the length of the Borrower's bankruptcy stays.


As you may recall, under Texas foreclosure law "[a] person must bring suit for the recovery of real property under a real property lien or the foreclosure of a real property lien not later than four years after the day the cause of action accrues."  Texas Civil Practice and Remedies Code § 16.035(a). Similarly, "[a] sale of real property under a power of sale in a mortgage or deed of trust that creates a real property lien must be made not later than four years after the day the cause of action accrues." Id.  The lien and power of sale become void after four years from accrual.  Id.


Texas common law tolls the statute of limitations during a bankruptcy stay, but the federal Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) limits the automatic stay for debtors who have filed for bankruptcy within the past year, providing that if a case was pending within the preceding 1-year period but was dismissed, "the stay… with respect to any action taken with respect to a debt or property securing such debt or with respect to any lease shall terminate with respect to the debtor on the 30th day after the filing of the later case . . . ."  11 U.S.C. § 362(c)(3)(A).


Courts have been divided on the interpretation of the code's phrase "respect to the debtor," but the Fifth Circuit had not yet addressed the issue. 


The majority view, adopted by three bankruptcy courts in the Fifth Circuit, interprets the provision to terminate the stay as to actions against the debtor but not as to actions against the bankruptcy estate.  The minority view, adopted by the First Circuit as a matter of first impression in the courts of appeals, "reads the provision to terminate the whole stay," concluding that the provision is ambiguous, and the legislative history evidences an intent for the provision to terminate the stay in its entirety.  See, e.g., In re Reswick, 446 B.R. 362, 371 (B.A.P. 9th Cir. 2011) (resorting to legislative history after determining the language in § 362(c)(3)(A) is ambiguous); Smith v. Me. Bureau of Revenue Servs., 590 B.R. 1, 9-10 (D. Me. 2018) (discussing how minority view courts examine the legislative history of the BAPCPA).


Here, the Fifth Circuit found no such ambiguities in § 362(c)(3)(A).  Read in conjunction with section 362 of the Bankruptcy Code, which defines the scope of the automatic stay, the Fifth Circuit noted that § 362(a)(1)-(3) operate as stays of actions in three distinct categories: against the debtor, the debtor's property, and property of the bankruptcy estate.  In re Smith, 910 F.3d at 580, citing § 362(a). 


Notably, § 362(c)(3)(A) provides that "the stay under [§ 362(a)] . . . shall terminate with respect to the debtor," and makes no mention of the bankruptcy estate.   Moreover, the next section, §362(c)(4)(A)(i), provides that the stay does not go into effect upon the filing of the later case for debtors who have had two or more cases pending in the prior year. 


The Fifth Circuit reasoned that Congress' use of a qualified in § 362(c)(3)(A) could only be interpreted as "impl[ying] a limitation upon the scope of the termination of the automatic stay."  See, e.g., In re Williford, No. 13-31738, 2013 WL 3772840, at *3 (Bankr. N.D. Tex. July 17, 2013) (discussing § 362(c)(4)(A)(i)'s language in relation to § 362(c)(3)(A)'s).  The Court further stated that its plain meaning interpretation does not substantially harm creditors, who can obtain judicial relief by motion under § 362(d) if a debtor is abusing the automatic stay.  In re Scott–Hood, 473 B.R. at 136 n.3.


Having determined that the plain language and statutory construction of § 362(c)(3)(A) does not terminate the automatic stay with respect to property of the bankruptcy estate, the Fifth Circuit applied this holding to the facts at bar. 


Here, Borrower argued that the statute of limitations began to accrue on March 26, 2014 when the Mortgagee mailed the first notice of acceleration, and thus expired on March 26, 2018.  Tex. Civ. P. & Rem. Code § 16.035(a).  However, under the interpretation of section 362(c)(3)(A) that the Court adopted, the statute of limitation was tolled for at least 269 days over the course of the Borrower's four bankruptcy proceedings, each of which was filed within one year of each other. 


Thus, because the Mortgagee's counterclaim for judicial foreclosure was filed within the 269-day tolling period (179 days after March 26, 2018), the statute of limitations was tolled and did not bar Mortgagee's claim for judicial foreclosure.


Accordingly, the trial court's entry of judgment of foreclosure in Mortgagee's favor and against Borrower for her quiet title claims was affirmed.




Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874


Admitted to practice law in Illinois




Alabama   |   California   |   Florida   |   Georgia   |   Illinois   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Texas   |   Washington, DC



NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.

Our updates and webinar presentations are available on the internet, in searchable format, at:


Financial Services Law Updates




The Consumer Financial Services Blog








California Finance Law Developments