Discharge in Bankruptcy Does Not Accelerate Mortgage Debt

On November 19, 2018, Justice Karalunas of the Onondaga County Commercial Division issued a decision in Wilmington Sav. Fund Socy., FSB v. Fernandez, 2018 NY Slip Op. 28385, holding that a discharge in bankruptcy does not accelerate a mortgage debt, explaining:

While the unique facts of this matter appear to be a case of first impression in New York, other jurisdictions have encountered a similar factual scenario and have held that a discharge in bankruptcy does not accelerate the debt, and the statute of limitations on an in rem foreclosure action begins to run when the holder of the secured interest in the mortgaged property demands payment or commences an action to foreclose..

As the court in Kabler stated:

even after the debtor's personal obligations have been extinguished by a bankruptcy discharge, the mortgage holder still retains a right to payment in the form of its right to the proceeds from the sale of the debtor's property because a bankruptcy discharge extinguishes only one mode of enforcing a claim - namely, an action against the debtor in personam - while leaving intact another - namely, an action against the debtor in rem. The creditor still holds a right to payment because a discharge does not constitute payment or satisfaction of the debt.

Based on the foregoing, the court grants plaintiff leave to reargue and upon re-argument reverses its prior decision. Defendant's motion to dismiss based on his discharge in bankruptcy is DENIED. Likewise, defendant's cross-motion to quiet title also is DENIED.

(Internal citations omitted).

We frequently litigate disputes over the purchase and sale of commercial property. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you are involved in a dispute regarding a commercial real estate transaction.