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 borrower 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.
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