Mortgage lenders should be aware of the New Jersey statute of limitations on mortgage foreclosure complaints. In In re Washington, 2014 Bankr. LEXIS 4649 (Bankr. D.N.J. Nov. 5, 2014), the United States Bankruptcy Court for the District of New Jersey held that a mortgagee and its servicer were time-barred from enforcing their rights under a note and accelerated mortgage more than six years after the borrower's default pursuant to the New Jersey Fair Foreclosure Act, N.J.S.A. § 2A:50-56.1. As a result, the Bankruptcy Court concluded that the borrower would effectively receive a "free house."

In 2007, the borrower in Washington purchased a three-unit residential property in Morris County, New Jersey. The borrower financed the purchase, in part, by a note for $520,000, which was secured by a 30-year mortgage, maturing in March 2037. However, after making only three monthly payments on the note and mortgage, the borrower defaulted in July 2007. Thereafter, pursuant to the note and mortgage, the lender accelerated the maturity date.[1]

In December 2007, the lender filed a foreclosure complaint in New Jersey Superior Court, which averred that the lender "by reason of said default, elected that the whole unpaid principal sum due on the aforesaid obligation and mortgage … shall be now due." Three years later, in October 2010, the Superior Court notified the lender of various filing deficiencies and returned the foreclosure complaint packet for supplementation. Another three years later, in July 2013, the Superior Court issued an order dismissing the foreclosure complaint for lack of prosecution, without prejudice. The lender never re-filed the foreclosure complaint, and in March 2014, the borrower filed a petition for relief under chapter 7 of the Bankruptcy Code. Thereafter, the borrower (now a bankruptcy debtor) initiated an adversary proceeding in the Bankruptcy Court to determine the validity of the lender's mortgage lien.

The borrower sought summary judgment in the adversary proceeding on the grounds the lender was foreclosed from enforcing the loan documents by the relevant state statutes of limitations. Specifically, the borrower claimed that the six-year statute of limitations applicable to negotiable instruments precluded the lender from initiating suit for the borrower's default on the note. See N.J.S.A. § 12A:3-118(a) (establishing a six-year statute of limitations for negotiable instruments). Likewise, the borrower claimed that any action on the mortgage was time-barred after six years because the state Fair Foreclosure Act required any such enforcement within "[s]ix years from the date fixed for the making of the last payment or the maturity date[.]." See N.J.S.A. § 2A:50-56.1.[2]

Incredibly, the lender conceded that the six-year statute of limitations for enforcement of the note had run. In re Washington, 2014 Bankr. LEXIS 4649 at *20. However, the lender countered that enforcement of the mortgage was subject to the 20-year limitation period recognized under New Jersey common law. Id. Though neither party disputed that the loan was accelerated to 2007, the lender argued that the maturity date – as stated in the loan documents – remained March 2037 for purposes of the Fair Foreclosure Act.

Following exhaustive discussion of the relevant section of the Fair Foreclosure Act and its legislative history, the Bankruptcy Court concluded that the lenders had in fact accelerated the maturity date of the loan to the 2007 default date. Id. at *35. The Bankruptcy Court further noted that neither party had made any effort to de-accelerate the debt and that the lender had failed to file a valid foreclosure complaint within six years of the accelerated maturity date as required under the Fair Foreclosure Act.[3] Accordingly, the Bankruptcy Court held that the lender was now time-barred from filing a foreclosure complaint and from obtaining a final judgment of foreclosure. Id. at 36.

Given its conclusion that the lender could no longer pursue a valid foreclosure action against the borrower, the Bankruptcy Court was also compelled to disallow the lender's secured claim against the borrower's bankruptcy estate pursuant to section 502 of the Bankruptcy Code. See 11 U.S.C. § 502(b)(1) (providing that a claim should be allowed "except to the extent that [it] is unenforceable against the debtor and property of the debtor, under any agreement or applicable law[.]"). Moreover, because the lender lacked an allowed secured claim, the underlying lien was deemed void pursuant to section 506 of the Bankruptcy Code. The end result, to the clear displeasure of the Bankruptcy Court, was for the borrower to retain the subject property free and clear of any claim of the lender.[4]