The U.S. Bankruptcy Court for the Middle District of Florida recently overruled a debtor's objection to a mortgagee's secured claim and denied the debtor's motion to determine secured status, holding that the issues should have been brought by adversary proceeding, and in any event neither Florida's statute of limitations nor its statute of repose barred enforcement of the note and mortgage.  A copy of the opinion is attached.

A mortgagee filed a mortgage foreclosure action in Florida state court in 2009. The complaint contained a paragraph accelerating the note. The mortgagee also recorded a notice of lis pendens in the public records.  The foreclosure action was dismissed without prejudice at trial in 2013.

The borrower filed a Chapter 13 bankruptcy and the mortgagee filed a secured claim, to which the borrower as bankruptcy debtor objected. The debtor filed a motion to determine the secured status of the mortgage. The basis for both the objection and motion was the debtor's argument that the note and mortgage were unenforceable and any new foreclosure action was barred by Florida's statute of limitations and statute of repose.

The bankruptcy court held an evidentiary hearing on May 13, 2015 on the debtor's objection and motion to determine secured status.

The bankruptcy court characterized the dispute as whether the mortgagee held a secured claim that was enforceable against the debtor's real property, and began by explaining that under Florida's statute of limitations, a mortgage foreclosure action must be filed within 5 years after a default. Florida's statute of repose provides that if the final maturity date of a mortgage is "ascertainable from the record of it," the mortgage lien terminates 5 years after the maturity date.

The mortgagee argued in opposition that the debtor's arguments have been adopted by only a minority of Florida and federal courts, and that the majority of courts that have considered the issues presented, including the Florida Supreme Court and federal courts, disagree. In addition, the mortgagee argued that the proper vehicle to resolve the dispute was through an adversary proceeding rather than the claims process in the main bankruptcy case.

The bankruptcy court first addressed the procedural question of whether the dispute was a contested matter that could be resolved in the main case or must be resolved by an adversary proceeding. It explained that, while objections to claims and determinations of secured status normally are contested matters that can be resolved in the main bankruptcy case, Federal Rule of Bankruptcy Procedure 7001(2) requires that certain contested matters—those to "to determine the validity, priority or extent of a lien or other interest in property"—must be brought as an adversary proceeding.

The bankruptcy court rejected the debtor's argument that Rule 7001 did not apply because he was not seeking to determine the validity of the lien, but to determine the enforceability of the note, as an attempt to "repackage" the substance of the relief sought, which clearly involved the validity and extent of the mortgage lien in question.

The bankruptcy court then explained that even if it was wrong on the procedural question, the result would be the same – the bankruptcy court quickly disposed of the debtor's second argument that the mortgage was barred by the statute of repose.

First, the bankruptcy court held that the recording of the lis pendens did not change the maturity date because on its face it said nothing of the sort and just provided notice of a pending foreclosure lawsuit involving the property. Second, because the face of the note reflected a maturity date of December 1, 2035, the statute of repose did not expire for another 25 years.

The bankruptcy court then rejected the debtor's first argument under the Florida Third District Court of Appeal's decision in Deutsche Bank Trust Co. v. Beauvais, which held that once the note is accelerated, the 5-year statute of limitations begins to run on the entire debt.  The court noted that Beauvais conflicts with several federal decisions applying Florida law and the Florida Supreme Court's decision in Singleton v. Greymar Associates.

As you may recall, federal courts in Florida have uniformly held that "when mortgagees accelerate the note and mortgage and bring unsuccessful foreclosure actions, the clock on the statute of limitations does not begin to running as to the entire mortgage (or later defaults), and all of these cases implicitly hold that a dismissal without prejudice does not affect this. And those cases that discuss the distinction between dismissals with and without prejudice reject the argument that it makes a difference."

Moreover, the bankruptcy court held that in Singleton, the Florida Supreme Court narrowed the application of res judicata in foreclosure cases, holding that '[w]hile it is true that a foreclosure action and an acceleration of the balance due based upon the same default may bar a subsequent action on that default, an acceleration and foreclosure predicated upon a subsequent default presents a separate and distinct issue.'"

The court reasoned that the debtor's argument and the Beauvais ruling's "approach to the statute of limitations issue is simply too parochial and creates too great a risk of windfalls to mortgagors. The better view is that dismissals with and without prejudice operate in the same matter with respect to the statute of limitations in mortgage foreclosures, and that a lender in [the plaintiff's] position here does not lose its right to enforce its note and mortgage merely because the statute of limitations has run as to earlier payment defaults."

Concluding that "[t]he note and mortgage are enforceable against the debtor and his property", the bankruptcy court indicated it would "reconsider these questions should the debtor file an adversary proceeding", overruled the debtor's objection without prejudice, and denied his motion without prejudice.