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The United States Bankruptcy Court for the District of New Jersey recently held in In re Washington, No. 14-14573-TBA, (Bankr. D.N.J. Nov. 5, 2014) that the mortgagee and mortgage servicer (“the creditors”) are time-barred under New Jersey state law from enforcing either the note or the accelerated mortgage against the debtor, essentially entitling a defaulting borrower to a “free house.”[1]
The court’s analysis focused on the issue of whether the Fair Foreclosure Act (“FFA”), N.J.S.A. § 2A:50-56.1 (which governs statutes of limitations relative to foreclosure proceedings), and the Bankruptcy Code, specifically sections 11 U.S.C. §§ 502(b)(1) and 506(d) (which deal with allowable claims), operate to make the mortgage unenforceable because the creditor waited too long to institute a foreclosure after the maturity date of the loan was accelerated because the borrower defaulted.
Borrower Gordon Washington purchased a three-family home in Morris County, New Jersey, on Feb. 27, 2007, paying a $130,000 deposit and obtaining a 30-year mortgage and note for $520,000 with the first payment due on April 1, 2007. The debtor failed to make the July 1, 2007, mortgage payment, and the loan went into default and remained in default since that time. Id.
On Dec. 14, 2007, the creditors filed a foreclosure complaint in the Superior Court of New Jersey, Chancery Division. The complaint alleged that “[p]laintiff herein, by reason of said default, elected that the whole unpaid principal sum due on the aforesaid obligation and mortgage …. shall be now due.”
On Oct. 28, 2010, the Office of Foreclosure returned the foreclosure judgment package to the creditors for deficiencies, notably, failure to produce an attorney certified copy of the note and mortgage. On July 5, 2013, the Superior Court Clerk’s Office issued an order dismissing the creditors’ foreclosure complaint for lack of prosecution, without prejudice. Id. The foreclosure was not refiled, and on March 12, 2014, the debtor filed a petition for Chapter 7 bankruptcy. Id. On March 18, 2014, the debtor filed an adversary complaint to determine the validity of the mortgage lien on the property.
Each party moved for summary judgment in the adversary proceeding. The debtor argued that the six-year statute of limitations applicable to negotiable instruments set forth in New Jersey’s Uniform Commercial Code, N.J.S.A. § 12A:3-118(a), had expired and thus the defendants were out of time to sue on the mortgage note. Id. The debtor also argued that the FFA similarly had a six-year statute of limitations, because it required that a residential mortgage foreclosure must be commenced within “[s]ix 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.” N.J.S.A. § 2A:50-56.1(a).
In contrast, the creditors argued that they had “[t]wenty years from the date on which the debtor defaulted ...” to file a foreclosure action as set forth in § 2A:50-56.1(c) of the FAA, and since that time had not expired they may still foreclose on the mortgage.
The court’s opinion focused on the narrow issue of whether “N.J.S.A. § 2A:50-56.1(a) and 11 U.S.C. §§ 502(b)(1) and 506(d) operate to make the mortgage unenforceable, to disallow the Defendants’ claim, and to void the mortgage lien so that the Defendants have no claim against the Debtor, the property or the estate.” Id. In its analysis, the court reviewed N.J.S.A. § 2A:50-56.1, which states in relevant part the following:
An action to foreclose a residential mortgage shall not be commenced following the earliest of :
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Six years from the date fixed for the making of the last payment or the maturity date ...;
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Thirty-six years from the date of the recording of the mortgage ...
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Twenty years from the date on which the debtor defaulted … as to any of the obligations or covenants contained in the mortgage.
The court reviewed N.J.S.A. § 2A:50-56.1(a) and determined that, in this case, the maturity date for the subject loan had been accelerated to either July 1, 2007 (the date of default), or Dec. 14, 2007, (the date of the filing of the foreclosure complaint). The mortgage had an original maturity date of the year 2037. However, the court found that the maturity date had been accelerated to the year 2007[2] and held that, because the maturity date was accelerated by the creditor, the applicable statute of limitations is six years (and not the 20 years set forth in § 2A:50-56.1(c)), which statute of limitation runs from the date of the accelerated maturity date. Since the accelerated maturity date in this case was either July 1, 2007, or Dec. 14, 2007, the foreclosure had to be commenced no later than July 1, 2013 or Dec. 14, 2013, which it was not.
The court noted that even though the foreclosure complaint was originally filed on Dec. 14, 2007, it was dismissed in 2013, was never reinstated, and neither the debtor nor the creditors took any action under the mortgage instruments or the FFA to de-accelerate the maturity date.[3] The court held that therefore the creditors “are time-barred under New Jersey state law from enforcing either the note or the accelerated mortgage.”
The court went on to determine that, because the creditors could not foreclose on the debtor’s loan, the creditors’ proof of claim in bankruptcy also was barred because the underlying lien is unenforceable. The court relied on 11 U.S.C. § 502(b)(1), which states in pertinent part that, for disputed claims, the court shall determine the amount of the claim unless, “such claim is unenforceable against the debtor and property of the debtor, under any agreement or applicable law for a reason other than because such claim is contingent or unmatured.” The court also relied on 11 U.S.C. § 506(d), which states that if the claim underlying the lien is disallowed, the lien is void.[4]
This decision is particularly relevant considering that New Jersey’s foreclosure practice has undergone recent developments that have contributed to significant delays in foreclosure filings. For example, on Dec. 20, 2010, the Honorable Mary C. Jacobson, P.J.Ch. issued an order to show cause sua sponte directing several major mortgage servicers to show cause why the court should not suspend the processing of foreclosure matters due to alleged document irregularities.[5] The order to show cause effectively brought new foreclosure filings to a standstill in New Jersey.
Additionally, there was significant delay in pending foreclosures due to litigation involving the language required in the notice of intent to foreclose under New Jersey’s Fair Foreclosure Act, N.J.S.A. 2A:50-56(c)(11). In Bank of New York v. Laks, the Appellate Division held that failure to include the name of the lender in the notice of intent rendered the notice of intent noncompliant with the statute, and therefore dismissal of the foreclosure without prejudice was required. [6] This resulted in the dismissal of a large number of pending foreclosures. That holding was eventually overturned by the New Jersey Supreme Court decision in US Bank Nat. Ass'n v. Guillaume, where the court held that dismissal of the foreclosure was not the only remedy available for a defective notice of intent. [7]
In the instant case, it does not appear that the delay in filing the foreclosure complaint was attributed to either of these factors. However, the large number of recent foreclosure dismissals makes it likely that a statute of limitations problem may arise. For the past several years lenders have operated on the assumption that they can simply refile a foreclosure action if a prior foreclosure complaint was dismissed without prejudice, without concern over a statute of limitations problem.
In light of this decision, lenders should evaluate their loan portfolios for mortgages that have been in default for five or more years. On a case-by-case basis, lenders may want to ensure that a mortgage foreclosure has been filed on the property, and if one has not been filed, expedite the foreclosure filing process to avoid running afoul of the six-year statute of limitations. Lenders should also exercise caution in dismissing foreclosures without prejudice while the loan is in default. The mortgage and note may be rendered void and unenforceable if the foreclosure is not refiled prior to the six year statute of limitations.
[1] The court expressed its distaste for rendering a decision that retreated from the long-standing admonition that “No one gets a free house.” Nevertheless, it opined that the current statutes and the facts of the case warranted summary judgment in favor of the debtor.
[2] In determining that the maturity date had been accelerated, the Court referenced the language in an Assignment of Mortgage, effective Nov. 12, 2007, that listed the accelerated balance as the amount due as of June 1, 2007, as well as the allegations contained in the Dec. 14, 2007 foreclosure complaint, which stated that the plaintiff has elected that the whole unpaid principal balance and all interest and advances made were now due. It was not relevant to the court’s decision whether the original maturity date was accelerated to the date of default or the date the foreclosure complaint was filed, because in either case, the statute of limitations had clearly expired.
[3] The court noted that the creditors argued at the Sept. 30, 2014, hearing that a foreclosure complaint filed now would “relate back” to the original complaint filed on Dec. 14, 2007. The court did not specifically rule on this issue, but merely noted that debtor opposed that argument.
[4] Even though this case involves a bankruptcy and denial of a proof of claim, the same New Jersey statutes and analysis would apply to determine if a creditor is precluded from foreclosing on a property because the statute of limitations has expired.
[5] In the Matter of Residential Mortgage Foreclosure Pleading and Document Irregularities, Superior Court of New Jersey, Chancery Division-General Equity Part, Mercer County, Docket No. F-59553-10.
[6] Bank of New York v. Laks, 422 N.J. Super. 201 (App. Div. 2011).
[7] US Bank Nat. Ass'n v. Guillaume, 209 N.J. 449 (2012).
"How Borrower Got 'Free House' In NJ Bankruptcy Case," by Daniel E. Cozzi and Donna M. Bates appeared in the December 11, 2014 edition of Law360. To learn more, please click here or visit www.law360.com. Reprinted with permission from Law360.
