Foreclosure Effects: Beware of State Laws

In re Anthony, 534 B. R. 834 (Bankr. M.D. Fla. 2015)

A debtor objected to a mortgage debt on the basis that the mortgage lien was invalid due to the mortgagee’s delay in foreclosing. The court held that the debtor had to bring an adversary proceeding in order to challenge the claim, but expressed its views on the merits of the issues anyway.

The lender commenced a foreclosure action in state court in 2009. It declared that the full amount of the loan was due in its complaint, and it filed a notice of lis pendens indicating that a foreclosure was pending. The case was dismissed without prejudice in 2013. The lender had taken no further action to foreclose since then.

Under applicable state law (1) there is a five year statute of limitations for foreclosure actions: a lender must bring a foreclosure action within five years of a default; and (2) there is a five year statute of repose: “if the final maturity date of a note and mortgage is ‘ascertainable from the record of it’, then the mortgage lien terminates ‘five years after the date of maturity'”.

The debtor contended that the lender was barred from bringing another foreclosure action, and in fact the debt was unenforceable:

  • His first argument was that by accelerating the loan in 2009, the lender put all payments at issue, which started the five year statute of limitations running for the entire accelerated debt.
  • Alternatively, by filing the lis pendens in the public records, the lender in effect made the acceleration date the “date of maturity” for purposes of the statute of repose. Since five years had passed, the mortgage lien was now terminated.

As a procedural matter, the court agreed with the lender that the dispute had to be resolved in an adversary proceeding rather than through an objection to the claim or on motion in the main case. However, the court went on to explain why the debtor’s objection should be denied as a matter of law.

With respect to the second argument, the court noted that all the lis pendens said was that the lender was “seeking to foreclose a mortgage” – which did not say anything about acceleration or the maturity date. Consequently the maturity date remained 2035 and the statute of repose would not expire until five years after that.

The court also rejected the first argument. The debtor cited a lower court state case that supported his position. Under this case: When a mortgagee accelerates and initiates a foreclosure action the statute of limitations begins running for the entire accelerated debt. Dismissal of the foreclosure action without prejudice does not decelerate the debt. So the limitations period continues to run and after five years the statute of limitations precludes an action to collect the debt. Further, as long as the debt is accelerated, no new payments are due, and thus there are no new payment defaults.

However, the bankruptcy court noted that this case conflicted with several other federal court cases which held that in the event of acceleration and an unsuccessful foreclosure action, the statute of limitations does not begin running for the whole mortgage or for later defaults.

In addition, the decision conflicted with a state supreme court case narrowing application of res judicata in foreclosure cases based on the overriding equities: Although foreclosure and acceleration based upon a default can bar subsequent litigation of that default, acceleration and foreclosure based on a subsequent default is a separate and distinct action that is not barred. The state supreme court justified this approach by the “‘unique nature of the mortgage obligation’, the risk of ‘unjust enrichment or other inequitable results’, and the fact that ‘foreclosure is an equitable remedy.'” To hold otherwise would mean that if a mortgagee failed to prevail in an action based on a default, the mortgagor would be insulated from any consequences for a subsequent default.

Taking these equities into account, the bankruptcy court concluded that the debtor’s position on the statute of limitations issue “is simply too parochial and creates too great a risk of windfalls to mortgagors.” According to the court, the better view is that a mortgagee does not lose the right to enforce a mortgage loan when the statute of limitations runs as to early defaults, but instead can accelerate and foreclose on the basis of later defaults.

Thus, the court concluded that the note and mortgage were enforceable against the debtor and his property – although it stated that it would reconsider the issues if the debtor filed an adversary proceeding.

Real estate law can be very state specific. A lender obtains a mortgage and pursues enforcement of a mortgage loan without advice of competent local counsel at its peril.

Vicki R Harding, Esq.

About BankruptcyRealEstateInsights

Vicki R. Harding was a partner in the Detroit office of Pepper Hamilton LLP who moved to Arizona seeking warmer weather. Ms. Harding continues to handle commercial transactions with an emphasis on real estate and bankruptcy issues (but no longer owns a snow shovel).
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