Lender's Ability to Foreclose Survives Borrower's Bankruptcy Discharge

To have standing to bring a foreclosure action in New York, the plaintiff must be the holder or assignee of a note that a mortgage secures. Here, the defendant executed a promissory note for a loan in 2002 and executed a mortgage on his property to secure the loan. Both were executed with a predecessor lender. The defendant filed for personal bankruptcy in May 2004, listing the mortgage as a secured claim against the property, and was granted a discharge in bankruptcy in 2004. The defendant then failed to meet a payment obligation due under the note in 2010. The plaintiff had received a written assignment of the mortgage in 2011 and sought to foreclose on it in 2012 due to the defendant's default on the note. The plaintiff contended that it had physically received delivery of both the note and the mortgage in March 2004, prior to the defendant's bankruptcy. The plaintiff acknowledged that the bankruptcy discharge extinguished the defendant's personal liability on the note, but that it still had the right to in rem relief based on the mortgage. The defendant argued that because the bankruptcy discharge extinguished personal liability on the note, the plaintiff did not hold a valid and legally operable note together with the mortgage, and thus lacked standing to foreclose. The appellate court disagreed.

The court observed that a plaintiff's standing to foreclose generally can be shown by "[e]ither a written assignment of the underlying note or the physical delivery of the note prior to the commencement of the foreclosure action," id. at *3 (citation omitted), and that assignment of a mortgage alone, without assignment of the underlying note, is insufficient to convey standing to foreclose. Id. Here, the defendant submitted no evidence that the note was assigned or delivered to the plaintiff after the bankruptcy discharge. Rather, the plaintiff received physical delivery of the note prior to the bankruptcy discharge, as well as prior to commencement of the foreclosure action, sufficient to convey standing.

The court further found that "it is not necessary that an obligation involve personal liability in order for a mortgage to remain valid after a bankruptcy discharge." Id. at *4–5. Citing Johnson v. Home State Bank, 501 U.S. 78, 82–84 (1991), for the proposition that "even after a debtor's personal obligations have been extinguished, the mortgage holder still retains a right to repayment in the form of its right to the proceeds from the sale of the debtor's property," the court stated that the

[Defendant] obtained a personal discharge in bankruptcy; thus, his personal liability for the obligation was released . . . This did not affect the mortgage securing the note. Post-bankruptcy, the mortgage still secures an obligation; it is simply no longer personal, but in rem . . . . A discharge in bankruptcy is a discharge from personal liability only and, without more, does not affect a lien. . . . . Although a bankruptcy discharge extinguishes one mode of enforcing a note – namely, an action against the debtor in personam, it leaves intact another – namely, an action against the debtor in rem.

Deutsche Bank, No. 14695/12, at *4–5. The court observed that to rule otherwise would give a debtor broader relief than entitled under the Bankruptcy Code because it would preclude any mortgagee from foreclosing in rem after a bankruptcy discharge in which a personal obligation on a note is extinguished. Accordingly, the court held that since the plaintiff could establish that it was the holder or assignee of the note prior to commencement of the foreclosure action, it had standing. The court further noted that, based on the plaintiff's pleading, the bank recognized the defendant's defense of the bankruptcy discharge such that it would not seek a deficiency judgment against defendant personally after foreclosure on the mortgaged property.

Keywords:bankruptcy, commercial and business, litigation, discharge, foreclosure, mortgage, promissory note

_{Charles W. Stotter is with Bressler, Amery & Ross, P.C. in Florham Park, New Jersey, and New York, New York.}

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