Discharge in Bankruptcy did not Automatically Accelerate Mortgage Debt, Affecting Statute of Limitations

On November 15, 2019, the Fourth Department issued a decision in Wilmington Sav. Fund Socy., FSB v. Fernandez, 2019 NY Slip Op. 08290, holding that a discharge in bankruptcy did not automatically accelerate a mortgage debt, affecting the statute of limitations, explaining:

With respect to a mortgage payable in installments, separate causes of action accrue for each installment that is not paid, and the statute of limitations begins to run, on the date each installment becomes due. Nevertheless, even if a mortgage is payable in installments, once a mortgage debt is accelerated, the entire amount is due and the Statute of Limitations begins to run on the entire debt" (EMC Mtge. Corp. v Patella, 279 AD2d 604, 605 [2d Dept 2001]; see Ditech Fin., LLC, 166 AD3d at 1568). Where the acceleration is made optional with the holder of the note and mortgage, some affirmative action must be taken evidencing the holder's election to take advantage of the accelerating provision, and until such action has been taken the provision has no operation. Here, the mortgage provided plaintiff the option to accelerate the debt under certain circumstances, but did not state that the debt would be automatically accelerated if defendant obtained a discharge in bankruptcy.

We reject defendant's contention that the discharge in bankruptcy automatically accelerated the debt and thus triggered the statute of limitations with respect to the entire debt. In the event of a default, a creditor in an action for a mortgage foreclosure is entitled to pursue both an action against a debtor for in personam liability against the debtor's assets, or for in rem liability seeking foreclosure of the specific real property that secured the creditor's right to repayment. Thus, a defaulting debtor can protect himself or herself from personal liability by obtaining a discharge in a Chapter 7 liquidation, but a creditor's right to foreclose on the mortgage survives or passes through the bankruptcy. 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. Even after the debtor's personal obligations have been extinguished by chapter 7 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, and a bankruptcy proceeding does not impair the mortgage holder's right to commence an action against the debtor in rem to seek payment from the proceeds of a foreclosure sale. In other words, as established by the above, chapter 7 discharge removes the mode of enforceme]" against the debtor in personam, but the obligation otherwise remains intact and does not impact an action in rem.

Although this Court has not previously addressed the specific impact a discharge in bankruptcy has on the ability to commence a foreclosure proceeding over six years after a discharge in bankruptcy, the application of the above rules regarding the survival of in rem actions suggests that, absent terms in the mortgage to the contrary, a discharge in bankruptcy does not automatically accelerate the debt and that the terms of the mortgage survive bankruptcy. Because the terms of the mortgage survive, causes of action would thus continue to accrue with respect to each installment payment as the payments become due, although a note holder would only be able to commence an action in rem. Other jurisdictions have reached a similar conclusion. Thus, contrary to defendant's contention, we conclude that the discharge in bankruptcy did not automatically accelerate the debt, plaintiff's complaint is not time-barred because separate causes of action accrued for each installment payment that was not made, and therefore, upon reargument, the court properly denied defendant's motion to dismiss the complaint. For the same reasons, the court also properly denied defendant's cross motion seeking to quiet title.

(Internal quotations and citations omitted) (emphasis added).

It is not unusual for the statute of limitations to be an issue in complex commercial litigation. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding whether a claim is barred by the statute of limitations.