Bank Foreclosure Barred by 6-Year SOL
Banks Foreclosure Time-Barred by 6-year Statute of Limitations
In NJ, there is a six-year statute of limitations for foreclosure actions. The statute of limitations runs from the default on the loan. If a lender fails to initiate a foreclosure action until after six years from the accelerated maturity date, their claim is disallowed under state law.
- SLS Time-Barred From Foreclosing After Missing 6-Year Statute of Limitations and Mr. Washington Gets A Free Home
In a recent decision by the U.S. Bankruptcy Court for the District of New Jersey, the Court held that a lender is time-barred from foreclosing on a residential property if the complaint is not filed within six years of the date the mortgage loan was accelerated by the lender. Washington v. Specialized Loan Servicing, LLC (In re Washington), 2014 Bankr. LEXIS 4649 (Nov. 5, 2014). When the bank failed to file its complaint within the six-year limitations period, their loan was unenforceable and voided by the Bankruptcy Court.
- Six-Year Statute of Limitations Runs From Default and Acceleration of the Debt
The six-year limitations period ordinarily runs from the maturity date set forth in the mortgage and note, but when the bank "accelerates" the indebtedness, declaring the loan in default, the loan is immediately due and payable, triggering the statutory limitations period. Critical to understanding the Court's decision is the concept of "acceleration," which first requires understanding the concept of a "maturity date." Every loan has a fixed term, measured by its "maturity date." The "maturity date" is the date on which the loan must be fully repaid. An "acceleration" of that maturity date is the lender's ability, under the terms of the debt instrument, to "call" the loan if default occurs, and deem it due and payable in full as a result of the borrower's default. For a 30-year loan like Mr. Washington's, the maturity date is set forth in the Note, and the debt is due and payable in full on the first of the month, thirty years after the date the borrower receives the loan. On February 27, 2007, Mr. Washington purchased his three-family home and executed the Note, financing $520,000 of the purchase price. Thus, the maturity date was set at March 1, 2037. However, Mr. Washington failed to make his payment on July 1, 2007. This constituted a default under the default provisions of his Note, and the borrwer elected to declare the whole unpaid principal sum due on the obligations and mortgage to be immediately due and payable as of that date.
- Six Year Statute of Limitations is Set Forth in the New Jersey Fair Foreclosure Act
The homeowner argued that the New Jersey Fair Foreclosure Act (FFA), N.J.S.A. 2A:50-33, et seq. governed the loan because the loan was secured by a residential mortgage. Thus, the six year statute of limitations set forth in N.J.S.A. 2A:50-56.1(a) of the FFA applied. The statute states pertinently: "1. 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 obligations 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 of 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. N.J.S.A. 2A:50-56.1(a) (emphasis added). United States Bankruptcy Judge Michael B. Kaplan looked at the legislative history of the FFA and found that the New Jersey legislature intended to bring foreclosure actions in line with the normal six-year statute of limitations for contract claims and codify the established twenty-year statute of limitations for foreclosure actions where default and acceleration had not occurred. Judge Kaplan looked to the Notice of Intent to Foreclose ("NOI") requirement that an acceptable notice be sent "before any residential mortgage lender may accelerate the maturity of any residential obligation." N.J.S.A. 2A:50-58(a) (emphasis added).
- Lender is Held to Default Date Alleged in Its Foreclosure Complaint
In Washington v. Specialized Loan Servicing, LLC, as in most foreclosure actions, the lender could not dispute the default date. The lender's Complaint stated pertinently: "The Defendants named in Paragraphs 1 and 2 above, or their grantee or grantees, if any has failed to make the installment payment due on June 1, 2007, and all payments becoming due thereafter. Therefore the loan has been in default since July 1, 2007, and said payments have remained unpaid for more than 30 days from the date of the mailing of the Notice of Default to said obligor, and are still unpaid. Plaintiff herein, by reason of said default elected that the whole unpaid principal sum due on the aforesaid obligation and mortgage referred to in Paragraphs 1 and 2 above, with all interest and advances made, shell be now due. (Emphasis added)." 2014 Bankr. LEXIS 4649 at *13-*15 (Nov. 5, 2014).
- Disallowance of Lender's Proof of Claim and Avoidance of the Underlying Mortgage Under Sections 11 U.S.C. 502(b)(1) and 506(a)(1) and (d).
Under the Bankruptcy Code, a claim is a "right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured." 11 U.S.C. 101(5)(A). Claims are allowed in Bankruptcy proceedings unless they are objected to. 11 U.S.C. 502(a). Once an objection is filed, the Court reviews the enforceability of the claims in question. 11 U.S.C. 502(b). For secured claims, like mortgages, Section 506 controls the allowance/disallowance of these claims - if the claim underlying the lien is disallowed, the lien is void. 11 U.S.C. 506(a)(1). Judge Kaplan held that, by application of N.J.S.A. 2A:50-56.1(a) and (c), Specialized Loan Servicing was time-barred under New Jersey state law from enforcing either the note or the accelerated mortgage. As a result, Specialized Loan Servicing's proof of claim was subject to disallowance under 11 U.S.C. 502(b)(1) and deemed unenforceable against the debtor or the debtor's property under applicable state law. As a result, the lender's claim was unsecured, and the underlying lien was deemed void pursuant to 11 U.S.C. 506(a)(1) and (d). The result of Judge Kaplan's decision is that Mr. Washington retains the house free of any claim by Specialized Loan Servicing. Mr. Washington received a free house due to the bank's inexcusable and egregious delay in asserting its rights.
NOTE: Washington Decision Was Reversed!! (*I Think Wrongly)
The Bankruptcy Judge cited the maxim that “no one shall get a free house” before finding, in fact, that he ruled to the contrary. The dispute over N.J.S.A. 2A:50-56.1 cooled some when, in August 2015, the U.S. District Court overruled the Bankruptcy Court in Washington. See Washington v. Specialized Loan Servicing, LLC, 2015 U.S. Dist. LEXIS 105794 (D.N.J. August 12, 2015).
N.J.S.A. § 2A:50-56.1, bars commencement of an action to foreclose on a residential mortgage “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; (Emphasis added)
b. Thirty-six years from the date of recording of the mortgage, or, if the mortgage is not recorded, 36 years from the date of execution, so long as the mortgage itself does not provide for a period of repayment in excess of 30 years; or
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. (Emphasis added)
- When The action is time barred by the six-year limit under N.J.S.A. § 2A:50-56.1(a) à This makes the statute expiration date maturity date + 6 years…
- When the 20-year limit under N.J.S.A. § 2A:50-56.1(c) applies
The plain language of N.J.S.A. § 2A:50-56.1 sets the statute of limitation at the earliest of the dates provided for. See Anim Inv. Co. v. Shaloub, 2016 N.J. Super. Unpub. LEXIS 2777, 18 (Sup. Ct. Ch. Div., J. Jerejian, Jun. 30, 2016). In Anim, the Plaintiff, Anim Investment Company, filed an action to foreclose on Defendants George and Kathleen Shaloub’s home. Id. at 1-2. The Shaloub’s had executed a note and mortgage to Mina Investment Company on September 19, 1990. Id. The Shaloub’s immediately defaulted on November 1, 1990. Id. The Plaintiff commenced the foreclosure action on September 2, 2015. Id. The term of the mortgage was twenty (20) years. Id.
Plaintiff argued that the maturity date was the date of default and that the twenty-year period in N.J.S.A. § 2A:50-56.1(c) ran from October 1, 1995, requiring an action be commenced by October 1, 2015. Id. at 2-3. Defendants argued that they defaulted on November 1, 1990 and that the period in N.J.S.A. § 2A:50-56.1(c) ran from that twenty days from that date, requiring an action be commenced by November 22, 2010. Id. at 3. However, the Court found that N.J.S.A. § 2A:50-56.1(c) and the date of default were “irrelevant” because the maturity date on the Note and Mortgage was October 1, 1995. Id. at 18. The Court applied the “plain language” of N.J.S.A. § 2A:50-56.1 which required the application of the earliest limitations period which was in subsection (a), six years from the maturity date, or October 1, 2001. Id.
Since Anim Investment Company filed their complaint on August 31, 2015, the Court held that Plaintiff was time-barred from filing a foreclosure. Id.
In Security Nat. Partners Ltd. Partnership v. Mahler, the Court held that a twenty-year statute of limitations, running from the date of the last payment, applies to mortgage foreclosure actions. 336 N.J. Super. 101, 107 (App. Div. 2000).
The Court further elaborated that the running of the limitation period stops only when, “the mortgagor makes one or more payments under the mortgage.” Id. (emphasis added).
The New Jersey Supreme Court encourages the use of “extrinsic aids” to aid statutory interpretation whenever the text is not clear and unambiguous. Nat’l Waste Recycling, Inc. v. Middlesex City Improvement Auth., 150 N.J. 209, 224 (1997); U.S. Bank Nat’l Ass’n v. Guillaume, 209 N.J. 449, 469-70 (2012).
As pointed out by Judge Kaplan at *27 in In re Washington, guidance on the operative statute of limitations for foreclosure actions exists in the form of the Assembly Financial Institutions and Insurance Committee Statement, Senate No. 250-L. 2009, c. 105 (“the Committee Statement”) accompanying the bill which became N.J.S.A. § 2A:50-56.1. The statute “in part, codifies the holding in Security National Partners Limited Partnership v. Mahler, 336 N.J. Super. 101 (App. Div. 2000).” The Committee Statement in the October 6, 2008 report stated:
“This bill supplements the “Fair Foreclosure Act,” P.L. 1995, c.244 (C. 2A:50-53, et seq.) by applying a statute of limitations to residential mortgage foreclosure actions. The bill is intended to address some of the problems caused by the presence on the record of residential mortgages which have been paid or which are otherwise unenforceable. These mortgages constitute clouds on title which may rende real property titles unmarketable and delay real estate transactions.
The bill provides that a foreclosure action must be commenced by the earliest of: (1) six years from the date of maturity on the mortgage or other obligation secured by the mortgage, matching the six-year statute of limitations on actions based on contract law; (2) 36 years from the date of recording or execution of the mortgage, provided the mortgage itself does not provide for a period of repayment in excess of 30 years, again relying upon the six-year statute of limitations for contract law; or (3) 20 years from the date of default by the debtor on the mortgage or other obligation secured by the mortgage, matching the 20-year statute of limitations on adverse possession actions. Thus the bill allows a determination that certain mortgages are not clouds on title because a party can no longer bring an action to foreclose them beyond the bill’s expressly stated statute of limitations, as borrowed from actions in contract law on adverse possession, as applicable.”
The bill, in part, codifies the holding in Security National Partners Limited Partnership v. Mahler, 336 N.J. Super. 101 (App. Div. 2000) which applied a 20-year statute of limitations to a residential mortgage foreclosure action based on a default due to nonpayment. In its decision, the court noted that since there is currently no statute of limitations expressly applicable to mortgage foreclosures in these situations, courts have resorted to drawing analogies to adverse possession statute which bar rights of entry onto land after 20 years. This bill would resolve the uncertainties surrounding this area of law by providing a specific statute of limitations of 20 years form the due date of default by the debtor.
(cited at N.J.S.A. § 2A:50-56.1 (West 2000 and Supp. 2013), cited with approval by, In re Washington, supra, at *30 (Emphasis taken from Judge Kaplan’s decision in In re Washington).
In In Re Washington, Judge Kaplan relied on the extrinsic aids above to make sure that he was following the legislative intent in making a finding as to when acceleration of the maturity date occurred for purposes of calculating the statute of limitations bar date. Ibid. at *33. Judge Kaplan found that the June 1, 2007 default date accelerated the maturity date. Ibid. Judge Kaplan did, however, note in fn10 that if acceleration instead ran from the filing date of the foreclosure action on December 14, 2007—since filing a foreclosure is unquestionably an election to accelerate the maturity on the loan and seek Final Judgment--the statute of limitations period would still have run. Ibid.
The legislative intent was clearly to stop defaulted mortgage interest from standing as clouds on title indefinitely, to make sure “fair foreclosure” actions were being undertaken, and to enforce a 6-year statute of limitations on par with other consumer contract/debt actions. Judge Wigenton’s appellate decision in In re Washington, in reliance on Wells Fargo Bank v. Jackson, No. F-29217-14 (N.J. Super. Ct. Ch. Div. May 6, 2015), found that a complaint that does not expressly recite an election of acceleration of the maturity date (making the full sum due and owing), does not therefore accelerate the maturity date. Washington v. Specialized Loan Servicing, LLC (In re Washington), 2014 Bankr. LEXIS 4649 (Nov. 5, 2014), reversed on appeal, In re Washington, 2:14-cv-8063-SDW, 2015 U.S. Dist. LEXIS 105794, Pgs. 9-10 (N.J. Dist. Ct. Aug. 11, 2015)(slip op.). Judge Wigenton goes on to state that she finds the result of respecting the 6-year statute of limitations to be “inequitable” and “depriving Appellant’s of any remedy for Appellee’s default” and would “ignore the intended purpose of the statute.” Ibid. at Pg. 11. To put it bluntly, Judge Wigenton’s rather cursory review of the matter proceeds from an outcome-determinative mode of analysis, and rests on (in my view) faulty assumptions about legislative intent and public policy, but is nonetheless the law of the land.
In enacting the Fair Foreclosure Act, the Legislature made explicit findings that “the public policy of this State [requires] that [residential] homeowners should be given every opportunity to pay their home mortgages, and thus keep their homes . . . .” N.J.S.A. 2A:50-54. Judge Wigenton cited this very language at Page 8 of her decision at the end of the first paragraph. Ibid. Judge Kaplan’s decision points out that the Fair Foreclosure Act utilized a statute of limitations similar to that of contract actions in order to place beleaguered borrowers on an even footing with large banking institutions, to encourage permanent loss mitigation, and to discourage windfall profits gained from adhesion-style arrangements like the one at bar. The title of the Act itself, and its policy pronouncement, both bespeak that intent.
The legislature did not intend to further disadvantage homeowners by subjecting them to interminable persecution by lenders with greater bargaining power, allowing lenders to string borrowers along indefinitely for their own purposes, extracting confiscatory interest-only payments of pure profit, without either modifying their loans or instituting foreclosure.
In my view, Judge Wigenton’s reading of the statutes in question is incorrect under a plain reading analysis, and is unwise from a policy standpoint, because it encourages a delay of resolution in foreclosure matters on both sides and leads to clogging court dockets with matters better resolved privately by the parties.
The shadow docket is already one of the biggest problems driving real estate values down in this state.
It is worth noting that, where a Plaintiff’s Foreclosure Complaint is subject to dismissal. A Lender still has a lien on the house. The homeowner would not be able to sell the home and receive any proceeds without first quieting title by paying the mortgage balance in full. Thus, the homeowner would still have to negotiate a deal with their Lender or pay that lien when the home is sold.
 In this case, and every foreclosure case, a statutory Notice of Entry of Final Judgment (Notice to Cure) (Da230) is sent to the homeowner alerting the homeowner that they may de-accelerate the indebtedness by providing notice “that there is a reasonable likelihood [the delinquent homeowner] will be able to provide payments to cure the default of the mortgage [paying the loan in full] within 45 days of the date of the notice.” This would not be so if the Final Judgment did not cut off the right to cure the default. Thus, the maturity date is unquestionably accelerated by the filing of a foreclosure complaint, which should it proceed to final judgment, has as one of its primary features a barring of the right of redemption.
The procedural protections of the FFA first that a foreclosing lender provide thirty (30) days’ notice of its intention to commence a foreclosure to a “residential mortgage debtor,” a borrower/debtor who is a person, who owns the mortgaged property, and is obligated to pay the obligation secured by the residential mortgage. N.J.S.A. 2A:50-55, 2A:50-56 (a)-(c). The notice of intention includes information to enable the borrower/debtor to exercise a right to “cure,” de-accelerate, and reinstate the mortgage throughout the entire foreclosure process and up to the entry of a final judgment as if a default had not occurred. N.J.S.A. 2A:50-56 (c), 2A:50-57.
The FFA then requires that a foreclosing lender provide the debtor/borrower with the additional “cure” notice prior to the filing of a request for final judgment in the foreclosure action to the effect that upon entry of the final judgment, the debtor will lose the right to cure the default. N.J.S.A. 2A:50-58 (a) (1). A lender’s failure to provide the requisite notices and to implement the FFA’s other procedural safeguards may prove fatal by requiring dismissal of the residential foreclosure action.
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