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Mortgage Statute of Limitations Construed: In re Washington

Although it is said that “no one gets a free house”, In re Washington (Washington v. Specialized Loan Servicing), 2014 WL 5714586 (Bankr. D.N.J. 2014), illustrates the proposition that there is an exception to every rule. This Chapter 13 adversary proceeding involved cross-motions by the debtor-mortgagor and the mortgage lender regarding the validity and enforceability of a $520,000 purchase-money mortgage encumbering the debtor’s 3-family home, purchased in February 2007. The debtor defaulted on the loan in July 2007. A mortgage assignment in November 2007 contained wording which implied that the lender had elected to accelerate the mortgage debt upon default, so that the entire loan of $520,000 was then due.

In December 2007, the lender commenced suit to foreclose the mortgage. But the Office of Foreclosure administratively dismissed the suit in July 2013. Debtor filed a Chapter 7 bankruptcy petition in March 2014, which was later converted to a Chapter 13 case.

The Fair Foreclosure Act [FFA], N.J.S.A.2A:50-53 et seq., was amended in 2009 by N.J.S.A. 2A:50-63.1, which provides a statute of limitations for foreclosure of mortgages covered by the FFA. Under this section, an action to foreclose a mortgage may not be commenced once the earliest of the following three events has occurred: (a) six years from the date the last payment is due or the mortgage has matured; or (b) thirty-six years from the date of recording of the mortgage; or (c) twenty years from the date of default by the mortgagor.

Since the mortgage was made in 2007 and N.J.S.A. 2A:50-63.1 was not enacted until 2009, the court was first required to decide if it was applicable to the case at bar. Judge Kaplan found that the statute applied retroactively to mortgages created before its enactment. The next question to be answered was whether the maturity date of the mortgage had been reached. The court held that the mortgage debt (consistent with the wording of the assignment) had been accelerated upon default, which had occurred in July 2007, and thus the mortgage had matured at that time. Since the original foreclosure suit had been dismissed, the court determined that the lender had not commenced suit to foreclose within six years of the mortgage’s maturity date. Thus, the mortgage was unenforceable under the first prong of N.J.S.A. 2A:50-63.1. Accordingly, the lender’s claim was disallowed under 11 U.S.C. §502(b) and the mortgage was avoided under 11 U.S.C. §506(a).

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