Foreclosure Procedure: Very Small Details Can Make A Very Big Difference

HSBC Bank USA, N.A. v. Crum, 907 F.3d 199 (8th Cir. 2018) –

A mortgagee brought an action in district court seeking to foreclose its mortgage. It filed a summary judgment motion that was granted by the district court. The debtor appealed, arguing among other things that the lawsuit was untimely.

The debtor had obtained a home equity loan that was secured by a lien on his house. After the debtor defaulted, the mortgagee accelerated the loan so that the loan became due on June 10, 2009. However, subsequently (1) the debtor filed for bankruptcy on June 3, 2010, obtaining a discharge on October 7, 2010, and (2) a lawsuit seeking to block foreclosure followed on July 4, 2011, which was resolved when the mortgagee obtained summary judgment.

After resolution of the bankruptcy and the debtor’s lawsuit, the mortgagee filed another foreclosure on September 29, 2014. The mortgagee obtained summary judgment, and the debtor appealed contending that (1) the mortgagee was not the holder of the note, and thus lacked standing, (2) the lawsuit was untimely, and (3) the final judgment failed to comply with court rules.

With respect to ownership of the note, the mortgagee explained that it did not assign the loan but rather delegated servicing. Furthermore, under applicable state law the note and the deed of trust were separable. So even if the mortgagee did not have any remaining interest in the deed of trust, that did not mean it no longer owned the note. The court held that the debtor failed to raise a genuine issue of material fact on this issue.

The statute of limitations issue turned on the extent to which the limitations period was tolled. Under state law a foreclosure must be brought within four years after the cause of action accrues. Normally a foreclosure action accrues on the maturity date of a note. If the deed of trust includes an optional acceleration clause, an action accrues when the acceleration option is actually exercised.

There were a series of acceleration related actions along the way:

  • Initial acceleration was on June 10, 2009.
  • A notice sent on October 15, 2013 requested less than the full amount due so that it effectively abandoned the acceleration.
  • The acceleration was affirmatively revoked in April 2014.
  • A final notice of acceleration was issued May 21, 2014.

Everyone agreed that there was an optional acceleration clause that was exercised so that the limitations period began on June 10, 2009. To reset the period, the mortgagee would normally need to abandon the acceleration by June 10, 2013. Everyone also agreed that the mortgagee abandoned the acceleration on October 15, 2013 – after the deadline. However, the limitations period was tolled by the bankruptcy. The critical question became how to calculate the number of days the period was tolled.

The debtor claimed that any one of several rules should be used that excluded the day of the triggering event (i.e. filing of the bankruptcy petition) and included the last day of the period – which would mean the limitations period was tolled for 126 days and the abandonment was untimely.

The mortgagee countered that under state common law the limitations period is suspended “when a person cannot pursue its legal remedy.” Since the automatic stay became effective immediately upon filing the bankruptcy petition, it argued the tolling period should include both the day the petition was filed and the day the bankruptcy was completed – which would mean the limitations period was tolled for 127 days and abandonment of the acceleration was timely. The court agreed with the mortgagee’s tolling analysis.

The court also rejected the debtor’s procedural objection, and accordingly affirmed the District Court’s judgment in favor of the mortgagee.

This case is a vivid reminder that: (1) Real estate law can be very state specific. A lack of familiarity with critical issues such as a strict statute of limitations period can be fatal. (2) Even a minor procedural rule, such as how to calculate a time period, can have a major impact.

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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