No One Gets a Free House—Unless the Statute of Limitations Runs

The Mortgage and Foreclosure Proceedings

On February 27, 2007, the debtor purchased a three-family home in Madison, New Jersey, taking a 30-year adjustable-rate mortgage and note for $520,000 from America’s Wholesale Lender. The debtor’s first payment on the mortgage was due on April 1, 2007. The debtor moved into the third-floor apartment and began to renovate the first and second floors to rent. However, due to water damage during the renovations, the first- and second-floor apartments became uninhabitable. The debtor failed to make the July 2007 mortgage payment, and the loan had been in default since July 2007.

The mortgage was assigned by MERS as nominee for America’s Wholesale Lender to BONY by an assignment of mortgage effective November 12, 2007. The assignment was not recorded until September 9, 2008. The assignment states:

And the Assignor covenants that there is now due and owing upon the Mortgage and the Bond, Note or other obligation secured thereby, the sum of $519,132.54 Dollars principal with interest thereon to be computed at the rate of 8.950 percent per year from June 1, 2007, along with such other sums as may be collectible, and that there are no set-offs, counterclaims or defenses against the Mortgage or the Bond, Note or other obligation, in law or in equity, nor have there been any modifications or other changes in the original terms thereof, other than as stated in this Assignment.

On December 14, 2007, the defendants filed a foreclosure complaint in the Superior Court of New Jersey, Morris County. The foreclosure complaint stated, in part, “Plaintiff herein, by reason of said default, elected that the whole unpaid principal sum due on the aforesaid obligation and mortgage . . . shall be now due.”

On October 28, 2010, the New Jersey Office of Foreclosure returned the foreclosure judgment package to BONY and noted extensive deficiencies, including the failure to submit an attorney-certified copy of the note, mortgage, and assignments. BONY filed a notice of lis pendens on February 5, 2013. On May 13, 2013, the Superior Court Clerk’s Office issued a notice of intent to dismiss the foreclosure action if BONY did not produce certain documents within 30 days. On July 5, 2013, the foreclosure action was dismissed without prejudice. BONY discharged the lis pendens on August 21, 2013. Accordingly, the defendants never obtained a final judgment of foreclosure.

The Debtor’s Bankruptcy

The debtor filed for relief under Chapter 7 of the Bankruptcy Code on March 12, 2014, along with a motion to convert to Chapter 13. The bankruptcy case was converted to Chapter 13 on April 9, 2014.

The debtor filed two plans—both of which proposed to sell the property. The first plan proposed payments for 12 months at $492 plus $554,000 in the last month. The first modified plan proposed payments for 17 months at $492 plus $554,000 in the last month. The debtor’s schedules reflected that the property was worth between $500,000 and $600,000. The defendants asserted a claim against the estate for $920,469, while the debtor’s plan only scheduled a $554,000 payment to the defendants in the eighteenth month.

The debtor filed an adversary proceeding on March 14, 2014, seeking to determine the validity, priority, and extent of the mortgage lien held by the defendants on the property.

The Parties’ Arguments

The debtor first argued that BONY’s cause of action on the note accrued on June 1, 2007, when BONY declared a default and accelerated the mortgage. Pursuant to section 12A:3-118(a) of the New Jersey Statutes,

[e]xcept as provided in subsection e of this section, an action to enforce the obligation of a party to pay a note payable at a definite time must be commenced within six years after the due date or dates stated in the note or, if a due date is accelerated, within six years after the accelerated due date.

N.J. Stat. Ann. § 12A:3-118(a) (West 2015) (emphasis added).

Accordingly, the debtor asserted that the statute of limitations had run and that the note should be declared unenforceable.

The defendants conceded that the 6-year statute of limitations for an action on the note had run but argued that a 20-year statute of limitations, pursuant to section 2A:50-56.1(c) of the New Jersey Statutes, should be applied to an action to foreclose on the mortgage. The defendants acknowledged that the debtor would not be personally liable for the deficiency judgment, but they argued that the proceeds from a foreclosure sale should be applied to their debt.

The debtor then argued that, pursuant to section 2A:50-56.1(a) of the New Jersey Statutes, the defendants could not pursue foreclosure because the defendants were required to file a foreclosure action within six years of the maturity date of the mortgage. The debtor relied on the language in the assignment and the foreclosure complaint for the proposition that the defendants accelerated the maturity date of the mortgage to June 1, 2007.

The court addressed the questions of “whether acceleration of the note and mortgage advanced the maturity date so that N.J.S.A. § 2A:50–56.1(a) cuts off the Defendants’ cause of action, and whether this statute, effective August 6, 2009,” applied in the instant case.

The Court’s Findings

The court began with a review of the Fair Foreclosure Act and section 2A:50-56.1 of the New Jersey Statutes, finding that both statutes were applicable to a foreclosure on the property. Furthermore, the court found that the Fair Foreclosure Act acknowledged acceleration of the maturity date as a consequence of default and de-acceleration as a consequence of curing default. See N.J. Stat. Ann. § 2A:50-56 (West 2015). However, neither acceleration nor maturity is defined under the Fair Foreclosure Act.

The court noted that New Jersey courts originally relied on adverse possession law as the statute of limitations for actions to foreclose on a mortgage because no statute of limitations existed. However, the New Jersey legislature promulgated a new statute of limitations in 2009, which provides in relevant part:

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

 . . .

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. Stat. Ann. § 2A:50-56.1 (West 2015).

Citing both New Jersey and Seventh Circuit case law, the court stated that “[c]ertain courts view as axiomatic the proposition that acceleration advances the maturity date of the debt.”

Turning to the legislative history of section 2A:50-56.1 of the New Jersey Statutes, the court noted that the six-year statute of limitations was intended to be based on the statute of limitations under contract law. However, the statute of limitations for contracts is also silent as to the effect of acceleration and maturity. The court then looked to the statute of limitations for actions on a note to find that an accelerated maturity date starts the running of the statute of limitations under section 2A:50-56.1 of the New Jersey Statutes.

The court was then faced with whether section 2A:50-56.1 applied to the instant mortgage, given that it was enacted in 2009. That section does not state whether the statute’s effective date is measured against the date of the mortgage, the date of default, or the date of the foreclosure filing. Looking to the Fair Foreclosure Act for guidance, the court found that the enactment of the statute applies to foreclosure actions commenced on or after the effective date. The court also found that, even if the measure of effectiveness was not the same as the Fair Foreclosure Act’s, the statute would have retroactive effect.

Accordingly, the court held that the six-year statute of limitations applied to the debtor’s mortgage. In applying the six-year statute of limitations, the court noted that (1) the assignment acknowledged that the defendants accelerated the maturity date of the loan to June 1, 2007, (2) neither the debtor nor the defendants took any action to de-accelerate the debt, and (3) the defendants had not filed a foreclosure complaint within six years of the accelerated maturity date. Therefore, the defendants were time-barred from filing a foreclosure complaint and from obtaining a final judgment in foreclosure.

Finally, the court held that the defendants’ secured claim was unenforceable under 11 U.S.C. § 502(b)(1) because the defendants were time-barred from enforcing either the note or the accelerated mortgage. Accordingly, the mortgage lien was deemed void under 11 U.S.C. § 506(d).

Conclusion

While the debtor retained the property free of any claim of the mortgage-holding defendants, the court’s decision was based on a narrow set of facts. Indeed, the decision did not sit well with the court, which “proceed[ed] to gargle in an effort to remove the lingering bad taste” because of the outcome. However, both debtors and secured creditors must be aware of the notable consequences of accelerating mortgages.