Page 14 THE BARRISTER FEBRUARY 2015

BANKRUPTCY UPDATE

How To Get A Free House

Nobody gets a free house. Except if the it could no longer require payment under the § 2A:14-1, governing “contractual claim[s]
lender fails to commence foreclosure until promissory note. However, it contended that or liability, was “neutral on acceleration
after the statute of limitations has expired— its right to foreclose on the mortgage had not and maturity,” but N.J.S.A. § 12A:3- 118,
that is, according to the Honorable Michael been extinguished due to the provisions of pertaining to negotiable instruments,
B. Kaplan, U.S.B.J. N.J.S.A. § 2A:50-56.1(c), which state that specifically provides that the time period
In In re Washington, Chapter 13 Case No. foreclosure proceedings must be commenced for action begins upon acceleration (“…an
14-14573, Adv. Proc. No. 14-1319, that’s within 20 years after the debtor’s default action to enforce the obligation of a party
how the opinion begins: “No one gets a free of any obligations contained in the mortgage to pay a note payable at a definite time must
house.” But, Judge Kaplan continues, “with a or note. be commenced within six years after the due
proper measure of disquiet and chagrin, the The Debtor argued that the applicable date or dates stated in the note or, if a due
Court now must retreat from this position.” statute of limitations was six years since the date is accelerated, within six years after the
As is no doubt evident from its opening note had been accelerated. This argument accelerated due date.”)(emphasis added).
remarks, Judge Kaplan’s opinion is quite was based on another section of N.J.S.A. § The court found this specific reference to
interesting. 2A:50-56.1, which provides as follows: “An acceleration was a strong indication that the
The case involved a debtor who purchased action to foreclose a residential mortgage legislature intended that acceleration trigger
a home in February of 2007 and almost shall not be commenced following the the commencement of the six year time
immediately defaulted on the purchase earliest of: a. Six years from the date fixed deadline in N.J.S.A. § 2A:50-56.1. With this
money loan. The original maturity date for the making of the last payment or the holding, and its finding that the note holder
under the note was 2037. However, the maturity date set forth in the mortgage or accelerated the balance due in 2007 and
mortgagee filed a foreclosure complaint on the note, bond, or other obligation secured was thus barred from foreclosing, the court
December 14, 2007 and expressly exercised by the mortgage, whether the date is itself set next addressed the effect of the mortgagee’s
its right to accelerate the amount due under forth or may be calculated from information inability to enforce the note and the mortgage.
the Note. Additionally, in an assignment contained in the mortgage or note, bond , or other The Debtor contended that the mortgagee’s
dated November 12, 2007, the mortgagee obligation…” (emphasis added). proof of claim should be stricken because it
represented that the loan was in default as Due to this provision, the Debtor argued, did not hold an allowed secured claim. The
of June 1, 2007, based on which the Debtor the mortgagee was time-barred from court thus looked to Section 502(b) of the
argued that the loan was accelerated as of foreclosing, because the maturity date was Bankruptcy Code, which states that upon
that date. accelerated when the note holder demanded objection a claim shall be allowed “except to
The foreclosure complaint was ultimately payment in full in 2007. the extent that . . . such claim is unenforceable
dismissed after a variety of procedural defects, Judge Kaplan agreed with the Debtor, but against the debtor and property of the debtor,
and accordingly, no judgment of foreclosure only after a long look at the legislative history under any agreement or applicable law for
was ever entered. relating to N.J.S.A. § 2A:50-56.1. a reason other than because such claim is
After the Debtor filed his bankruptcy N.J.S.A. § 2A:50-56.1 was enacted in 2009 contingent or unmatured.”
petition in 2014, he commenced an adversary after the Appellate Division recommended in Having concluded that the mortgagee’s
proceeding in which he sought to avoid the Security Nat’l Partners Ltd. P’shp v. Mahler, claim against the Debtor was unenforceable,
lien of the mortgage on the grounds that 336 N.J. Super. 101 (App. Div. 2000) that the court looked to Section 506 of the
the mortgagee was time-barred under state the legislature create a statute of limitations Bankruptcy Code, which provides that “to the
law from enforcing both the note and the specifically for mortgage foreclosure extent that a lien secures a claim against the
mortgage. Seemingly with great reluctance, proceedings. Judge Kaplan’s court noted that debtor that is not an allowed secured claim,
Judge Kaplan ultimately granted the relief the legislative history accompanying the such lien is void . . .” And with that, the court
sought on the Debtor’s motion for summary enactment of the statute “provides a limited was compelled to conclude that the mortgage
judgment. measure of guidance as to whether the lien on the Debtor’s residence was void.
In reaching its holding, the court maturity referenced in the statute includes In re Washington may cause many debtors’
conducted a thorough analysis of the statutes an accelerated maturity date. The Committee lawyers to look closely at the timing of their
of limitation applicable to the enforcement of Statements note that the six-year limitations clients’ mortgage defaults. Who knows how
notes and mortgages in New Jersey. period matches the six-year statute of many more debtors may be entitled to similar
N.J.S.A. § 12A:3-118(a) requires an limitations on actions based on contract law.” relief? However, lawyers should be cognizant
action on a note to be brought “within six Given this history, the court next looked at of the distaste with which courts look upon
years after the due date or dates stated in the the statutes of limitation governing contracts the notion that a debtor may end up with a
note or, if a due date is accelerated, within in New Jersey for guidance as to whether “free house.” After reading Judge Kaplan’s
six years after the accelerated due date.” Due the original maturity date or the accelerated opinion, it might be advisable to invest in
to the plain language of that statute, the maturity date is the trigger for calculating the some mouthwash.
mortgagee in In re Washington conceded that deadline for suit. The court found that N.J.S.A.