United States: New Jersey Bankruptcy Court Holds That Mortgage Was No Longer Enforceable And Borrower Was Entitled To A "Free House"

Consumer Finance Litigation

Action Item: In light of this decision, lenders should ensure that foreclosures in New Jersey are filed within six years of the date of default. Failure to file a foreclosure within six years may cause the action to be barred by the statute of limitations.

The United States Bankruptcy Court for the District of New Jersey recently held in In re Washington, No. 14-14573-TBA, 2014 WL 5714586 (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, essentially entitling a defaulting borrower to a "free house."

The Court's analysis focused on whether the Fair Foreclosure Act ("FFA"), N.J.S.A. § 2A:50-56.1 (governing statutes of limitations relative to foreclosure proceedings), and Bankruptcy Code sections 11 U.S.C. §§ 502(b)(1) and 506(d) (addressing 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 February 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. On December 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 October 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. The foreclosure was not re-filed, 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.

Moving for summary judgment in the adversary proceeding, the Borrower argued that the six-year statute of limitations applicable to negotiable instruments set forth in New Jersey's Uniform Commercial Code ("UCC"), N.J.S.A. § 12A:3-118(a), had expired and thus the Defendants were out of time to sue on the mortgage note. 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 FFA, 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." 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:

  1. Six years from the date fixed for the making of the last payment or the maturity date...
  2. Thirty-six years from the date of the recording of the mortgage...
  3. Twenty years from the date on which the debtor defaulted...as to any of the obligations or covenants contained in the mortgage...

Applying N.J.S.A. § 2A:50-56.1(a), the Court and determined that the maturity date for the subject loan had been accelerated to either July 1, 2007, (the date of default), or December 14, 2007 (the date of the filing of the foreclosure complaint). Thus, although the mortgage had an original maturity date of the year 2037, the Court held that because the maturity date was accelerated by the Creditor, the applicable statute of limitations is six years. Since the accelerated maturity date in this case was either July 1, 2007, or December 14, 2007, the foreclosure had to be commenced no later than July 1, 2013, or December 14, 2013, which it was not.

The Court noted that, even though the foreclosure complaint was originally filed on December 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. 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.

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 re-filed prior to the six year statute of limitations.

Mr. Streibich would like to thank Donna Bates and Daniel A. Cozzi for their assistance in developing this Alert.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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