In Case of First Impression, New York Court of Appeals Holds that Bankruptcy Stay is a “Statutory Prohibition” Under CPLR 204(a) and That the Toll of CPLR 204(a) Applies to Actions Already Commenced

• Posted on: Nov 29 2019

Statutes of limitations, which are a critical part of litigation, are designed to prevent litigants from sitting on their rights.  A brief primer on New York’s Statute of Limitations, is contained within this Blog’s post, “Second Department Finds No Issue of Fact as to Whether Defendant Should be Estopped From Asserting a Statute of Limitations Defense.”  Article 2 of New York’s CPLR addresses Statute of Limitations issues.

The CPLR contains several provisions that toll or otherwise extend applicable limitations periods.  For example, CPLR 205 provides that, under certain circumstances, when an action is timely commenced but is subsequently terminated, a new action may be commenced within six months of the termination despite the running of the applicable statute of limitations.  CPLR 208, 209 and 210 provide tolls in the event of infancy or insanity, war and death of a claimant or a person liable, respectively.  The subject of today’s post, however, is CPLR 204(a), which tolls the applicable statute of limitations, and provides:

[w]here the commencement of an action has been stayed by a court or by statutory prohibition, the duration of the stay is not a part of the time within which the action must be commenced.  [Emphasis supplied.]

In Lubonty v. U.S. Bank National Association, (November 25, 2019), the New York Court of Appeals was tasked to determine “whether the bankruptcy stay [imposed by 11 U.S.C. § 362(a)] qualifies as a ‘statutory prohibition’ under CPLR 204(a), and if so, whether a party may later avail itself of the toll where, at the time the stay was imposed, that party had a pending action asserting the same claim.”  The Lubonty Court, in affirming the decision of the Second Department, answered both questions affirmatively.

The plaintiff in Lubonty, borrowed $2.5 million secured by real property in Southampton, New York, and subsequently defaulted in his payments.  On June 11, 2007, the lender accelerated the debt and commenced a foreclosure action (the “First Foreclosure Action”), which triggerd the six year statute of limitations imposed by CPLR 213(4).  Prior to interposing his answer in the First Foreclosure Action, Lubonty filed a bankruptcy petition, which “invoke[ed] the automatic stay and barr[ed] continuation of the [F]irst [F]oreclosure [A]ction.”  Approximately 882 days after filing, Lubonty voluntarily dismissed the pending bankruptcy action and the automatic stay was lifted.  Thereafter, lender moved for a default judgment in the First Foreclosure Action and, subsequently, the trial court granted Lubonty’s ex-parte application to dismiss the First Foreclosure Action as abandoned pursuant to CPLR 3215(c), because a default judgment was not taken within a year of Lubonty’s default.  (This Blog has analyzed CPLR 3215(c) [here].)  The Lubonty Court noted that in dismissing the First Foreclosure Action, the trial court did not mention Lubonty’s bankruptcy filing, and, therefore, the automatic stay imposed thereby.

The original lender’s assignee commenced a second foreclosure action (the “Second Foreclosure Action”), which Lubonty moved to dismiss for improper service.  Prior to the return date of that motion, Lubonty filed a second bankruptcy petition, which imposed a second automatic stay.  The automatic stay of the second bankruptcy was lifted after 769 days and, thereafter, on October 21, 2014, the trial court granted Lubonty’s motion to dismiss the Second Foreclosure Action for improper service of process.

Two weeks after the dismissal of the Second Foreclosure Action, Lubonty commenced an action pursuant to RPAPL § 1501(4) to “discharge the mortgage, asserting that the statute of limitations on lender’s foreclosure claim had expired.  (This Blog has analyzed RPAPL § 1501(4) [here].)  The trial court dismissed the action because the statute of limitations was tolled for the period of time that the automatic stay imposed by the bankruptcy code.  “The Appellate Division unanimously affirmed, concluding that ‘plaintiff’s contention that CPLR 204 (a) does not apply here because the earlier foreclosure actions had already been commenced when the petitions in bankruptcy were filed is without merit.’”  (Emphasis supplied.)  The Court of Appeals granted Lubonty leave to appeal.

The Lubonty Court quickly resolved the “issue of first impression” of “whether the automatic bankruptcy stay constitutes a ‘statutory prohibition’ under CPLR 204 (a)” by determining that it was.  The Court then moved onto the next question of “whether the toll provided in CPLR 204 (a) is available to a claimant who, when the bankruptcy stay was imposed, had already commenced an action against the debtor – later dismissed – on the claim now asserted.”  (Emphasis supplied.)

In his action to discharge the mortgage, Lubonty made the “cramped” argument that CPLR 204(a) could not apply because the bankruptcy stay could not have prevented lender from “commencing” a foreclosure action because at the time that the respective automatic stays were imposed, the foreclosure actions were already commenced.  (Emphasis supplied.)  The Court of Appeals, like the trial court and the Second Department, flatly rejected Lubonty’s literal reading of CPLR 204 (a).  Indeed, the Court noted that “[p]laintiff’s brand of literalism quickly loses sight of the forest for the trees, producing an outcome antagonistic to the purpose and design of the tolling provision.”  (Citation omitted.) The Court recognized that in ruling on Lubonty’s RPAPL 1501 claim to determine if the mortgage should be discharged, it “must look to whether the ‘applicable statute of limitations for the commencement of an action to foreclose’ had expired.”  In reaching its conclusion that the statute of limitations had not expired, the Court determined that:

Because the two bankruptcy stays prevented defendant from commencing a foreclosure action for at least 1651 days, that time is not part of the time within which such an action must be commenced. Put another way, in determining whether the statute of limitations on a foreclosure action had expired when plaintiff filed this RPAPL action, the duration of any bankruptcy stay must be excluded, regardless of whether an earlier action on the same claim had been initiated or was pending when the stay was imposed. This interpretation of “commencement” promotes the purpose of CPLR 204 (a) and, unlike plaintiff’s proposed rule, is reconcilable with both the bankruptcy stay’s effect, and the policies underlying the enforcement of limitations periods.  (Footnote omitted; emphasis supplied.)

The historical roots of New York’s tolling statutes springs from the “equitable principle that plaintiffs should not be penalized for failing to assert their rights when a court or statute prevents them from doing so.”  The bankruptcy stay’s effect on litigation is far-reaching “and limit[s] virtually all judicial action against the debtor and any co-debtors … [and] not only prevents an action from being continued, but also from being discontinued and recommenced.”  (Citations omitted.)  Moreover, the commencement of the automatic stay is controlled by the debtor and “brings any potential and ongoing litigation to a standstill at a debtor’s behest.”  Thus, the Court found that lender was “prevented from asserting its rights as a direct result of the actions of Lubonty” in filing his bankruptcy petitions. 

In finally concluding that Lubonty’s action pursuant to RPAPL 1501 should be dismissed, the Court stated:

Applying the above rule to the instant action, defendant’s claims were not time-barred when Supreme Court granted defendant’s motion to dismiss.  The statute of limitations for a foreclosure claim is six years (CPLR 213 [4]). Here, the limitations period began to run on June 11, 2007, upon AHMA’s acceleration of plaintiff’s mortgage. The property was subject to bankruptcy stays for at least 1651 days, during which defendant was statutorily prohibited from commencing any action concerning the property. Adding the duration of the stay to the six-year statute of limitations period, defendant had until on or about December 18, 2017 to commence the foreclosure action. Dismissal of plaintiff’s action to discharge the mortgage was thus proper.  [Footnote omitted.]

In his lengthy dissent, Judge Stein shared Lubotny’s view that CPLR 204(a) is unambiguous and only applies when a stay prevents the “commencement” of an action – which is not the case in the subject action.  Therefore, the majority’s view is not consistent with the legislature’s intent.  The dissent’s position is bolstered, Judge Stein argues, by, inter alia, the existence of CPLR 205(a), which provides a remedy “where an action is timely commenced, but subsequently terminated after the statute of limitations expires.”