Mortgage Loans: Beware Time Bars on Enforcing a Note or Mortgage

In re Eastman, 588 B.R. 600 (Bankr. D. Colo. 2018) –

A chapter 13 debtor objected to the proof of claim filed by a mortgagee. The primary issue was whether the applicable statute of limitations precluded recovery of delinquent payments that became due prior to acceleration of the debt.

The debtor valued his residence at $152,000. The property was subject to a first mortgage in the amount of ~$81,000, and the second mortgagee filed a proof of claim for a secured claim in the amount of ~$65,000 (~$37,000 principal, ~$22,000 interest and ~$6000 in attorney fees).

The debtor’s chapter 13 plan proposed to pay the second mortgagee ~$16,000 over 50 months. The creditor objected to the plan and the debtor objected to its proof of claim.

The loan was made in April 2007. It was secured by a deed of trust and required monthly payments for 20 years. Both the note and deed of trust included acceleration clauses. The debtor’s last monthly payment was made in February 2010, and the creditor eventually filed a foreclosure action in July 2017. This caused the debtor to file bankruptcy with the sole purpose being to “save the house.”

The court identified the issue before it as whether the applicable state six year statute of limitations required disallowance of all or part of the creditor’s claim. As a preliminary matter, it noted that section 502(b)(1) of the Bankruptcy Code provides that the court shall allow a claim except to the extent it is unenforceable against the debtor or its property under applicable law.

The court also noted that a proof of claim filed in accordance with the rules is prima facie evidence of the validity and amount of the claim. An objecting party has the burden of going forward with evidence supporting the objection. Once it meets its burden, the ultimate burden of persuasion lies with the claimant. In this case the debtor raised the legal issue of whether the note was enforceable under applicable state law, which was sufficient so that the creditor had the ultimate burden of persuasion.

Under applicable state law:

  • There is a six year statute of limitations on recovering a liquidated debt.
  • A cause of action for debt accrues on the date it becomes due.
  • Any lien on real property created by a mortgage ceases to be a lien 15 years after the date the final payment is due.

The debtor argued that the six-year statute of limitations expired for delinquent payments due from March 2010 through July 2011 – i.e. the cause of action for those installments accrued more than six years before the debt was accelerated in connection with the foreclosure in July 2017. Thus, the creditor was barred from collecting those monthly installments.

In response, the creditor contended that the statute of limitations did not begin to run until it accelerated the debt in July 2017 by initiating a foreclosure. It further argued that the statute of limitations did not expire in connection with any of the installment payments, and it had 15 years to foreclose the deed of trust.

Although there was at least one case supporting the debtor’s view, the other cases addressed by the court supported the creditor’s view. In particular, the bankruptcy court found persuasive a state court opinion that laid out three options for the holder of an installment note in default:

  1. File suit on each installment within six years after the due date of the installment.
  2. Accelerate and demand payment in full.
  3. Sue for the unpaid principal balance within six years after the maturity date.

In the court’s view, the creditor in this case accelerated the debt, demanding payment in full in July 2017 (option 2), which was before the maturity date of April 2027 (option 3). Thus, the entire amount became due in July 2017, even though if the creditor had elected to sue on each payment the statute of limitations would have expired for some of the missed installment payments (option 1).

Accordingly, the court overruled the debtor’s objection to the creditor’s proof of claim.

Real estate law can be very state specific, and time bars on enforcing a note or foreclosing a mortgage are not that uncommon. Anyone involved in evaluating forbearance options would be well advised to first determine whether there are any potential time bars under any applicable local law.

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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