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In Case of First Impression, Fourth Department Holds That Discharge in Bankruptcy Does Not Bar Ability to Commence Foreclosure Proceeding

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  • Posted on: Nov 18 2019

On November 15, 2019, the Appellate Division, Fourth Department, issued a decision involving the impact, if any, of a bankruptcy discharge on a subsequent foreclosure proceeding – an issue, the Court observed, it had not previously addressed. In Wilmington Sav. Fund Socy., FSB v. Fernandez, 2019 N.Y. Slip Op. 08290 (4th Dept. Nov. 15, 2019) (here), the Court held that, absent terms in the mortgage to the contrary, a discharge in bankruptcy does not automatically accelerate the debt owed by the mortgagor and that the terms of the mortgage survive the bankruptcy.


On August 17, 2007, defendant, Julian M. Fernandez (“Fernandez”), executed a note in favor of a lender in the amount of $94,400, plus interest, payable in successive monthly installments with the final payment to be made on January 4, 2031. Defendant secured payment of the note with a mortgage encumbering certain real property.

On December 8, 2009, Fernandez filed a petition for Chapter 7 bankruptcy protection. Approximately three months later, on March 15, 2010, Fernandez received a discharge in bankruptcy. On April 1, 2010, Fernandez obtained a final bankruptcy decree.

On May 26, 2017, plaintiff, the successor to the lender, sent Fernandez notice that he was in default and that Fernandez had 90 days to cure the default. After receiving no payment during the following 90 days, plaintiff accelerated the remaining balance due under the note and, on November 1, 2017, plaintiff commenced an action seeking to foreclose on the mortgage. In his answer, Fernandez raised, inter alia, the statute of limitations as an affirmative defense.

Thereafter, defendant moved to dismiss the complaint pursuant to CPLR § 213(4) and CPLR § 3211(a)(5). The motion court granted defendant’s motion, reasoning that defendant’s March 15, 2010 discharge in bankruptcy triggered the six-year statute of limitations (see CPLR § 213(4)), and that plaintiff failed to commence its foreclosure action within that period.

Plaintiff then moved for leave to reargue, and defendant cross-moved to quiet title. The motion court granted plaintiff’s motion for leave to reargue, and ultimately held that defendant’s discharge in bankruptcy did not extinguish plaintiff’s right to commence an in rem foreclosure proceeding against defendant, that the statute of limitations began to run from the date each unpaid installment became due unless plaintiff accelerated the debt, and that plaintiff’s action was therefore timely because the debt had not been accelerated prior to 2017. Thus, on reargument, the motion court reversed its prior determination, denied defendant’s motion to dismiss the complaint, reinstated the complaint, and denied defendant’s cross motion to quiet title. The Fourth Department affirmed.

The Court’s Decision

As an initial matter, the Court discussed the rules governing the statute of limitations involving a mortgage payable in installments:

“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” (Wells Fargo Bank, N.A. v Burke, 94 AD3d 980, 982 [2d Dept 2012]; see Ditech Fin., LLC v Corbett, 166 AD3d 1568, 1568 [4th Dept 2018]). 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” (Wells Fargo Bank, N.A., 94 AD3d at 982-983).

Slip Op. at **1-2.

Applying these principles, the Court held that the statute of limitations had not run because “the mortgage [at issue] provided plaintiff the option to accelerate the debt under certain circumstances, [it] did not state that the debt would be automatically accelerated if defendant obtained a discharge in bankruptcy.” Id. at *2.

The Court “reject[ed] 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.” Id. The Court did so based on the distinction between an in personam action against the debtor’s assets and an in rem action seeking foreclosure of the real property that secured the creditor’s right to repayment. Id. This distinction is significant in the bankruptcy context, said the Court.

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.”

Id. (citations omitted).

“In other words,” said the Court, a bankruptcy discharge under Chapter 7 of the Bankruptcy Code removes the “mode of enforc[ement]” against the debtor in personam, but the obligation otherwise remains intact and does not impact an action in rem. Id., quoting Johnson v. Home State Bank, 501 U.S. 78, 84 (1991). Thus, “‘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.’” Id., quoting Deutsche Bank Trust Co. Ams. v. Vitellas, 131 A.D.3d 52, 63 (2d Dept. 2015) (internal quotation marks omitted).

Noting that the issue had not been “previously addressed” by the Department, the Court concluded 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.” Slip Op. at *2. “Because the terms of the mortgage survive [a bankruptcy discharge], 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.” Id. Thus, held the Court, defendant’s “discharge in bankruptcy did not automatically accelerate the debt” and “plaintiff’s complaint [was] not time-barred because separate causes of action accrued for each installment payment that was not made.…” Id.


As this Blog has noted in many of the articles we post, the terms of the document at issue are often dispositive of the outcome of the issue before the court. Wilmington Sav. Fund is no different.

Wilmington Sav. Fund is notable because of the potential impact of a bankruptcy filing and subsequent discharge on a lender’s ability to initiate foreclosure proceedings. In that scenario, as the Court concluded, the lender may pursue such relief in an in rem action because the terms of the mortgage survive. And, because the mortgage at issue in Wilmington Sav. Fund provided for separate causes of action for each missed installment payment, the statute of limitations did not bar the foreclosure action.

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