New Jersey Bankruptcy Court holds that failure to file foreclosure within 6 years of acceleration effectively voids mortgage

A retroactive application of New Jersey law setting a time limit to enforce mortgage defaults resulted in a free house for the mortgagor In re Washington, No. 14-14573-TBA, (Bankr. D.N.J. Nov. 5, 2014). [W]ith figurative hand holding the nose a New Jersey Bankruptcy court granted a debtor’s motion for summary judgment on a mortgagee’s proof of claim. The case began in state court where the mortgagee accelerated the loan on June 1, 2007 and filed a foreclosure on December 14, 2007. The foreclosure was dismissed on July 5, 2013 without prejudice due to defects with the filing papers. It was never re-filed. In the bankruptcy action, the debtor argued that under a 2009 amendment to a state statute, which provides that the statute of limitations for bringing an action on the note as a negotiable instrument runs from the date the note is accelerated, the debt is now time-barred and cannot be enforced. The statute does not state whether the effective date is measured against the date of the mortgage, the date of the default, or the date on which the foreclosure action is filed. But the parent law appl[ied] to foreclosure actions commenced on or after the effective date. So if the amendment is presumed to measure effectiveness in the same manner, then the statute should apply retroactively. After a detailed analysis of the law pertaining to retroactive application of amendments, the court found that acceleration of the note and mortgage advanced the maturity date so that N.J.S.A. § 2A:50-56.1(a) cuts off the mortgagee’s cause of action. The mortgagee accelerated the note on June 1, 2007, took no action to de-accelerate the debt, and failed to file a foreclosure within six years of the accelerated maturity date. On the last point, the debtors argued that a new foreclosure action would not relate back to the original proceeding because the mortgagees discharged the _lis pendens_ and failed to appeal the dismissal order. The mortgagee did not respond to this argument. Accordingly, the court found that the mortgagee was time-barred from filing a foreclosure complaint and from obtaining a final judgment of foreclosure. It had no choice but to disallow the mortgagee’s proof of claim under 11 U.S.C. § 502(b)(1) as unenforceable against the Debtor or against Debtor’s property under applicable state law and deemed the indebtedness void.

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