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Second Department Addresses the Impact of Bankruptcy Stay Tolling on Statute Of Limitations Calculations in Mortgage Foreclosure Action

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  • Posted on: Jul 8 2022

By Jonathan H. Freiberger

This Blog has written extensively on a variety of issues related to mortgage foreclosure, including those related specifically to limitations periods (see, e.g., [here], [here], [here], [here] and [here].  As to the limitations period relevant to mortgage foreclosure actions, we have previously written that:

An action to foreclose a mortgage is governed by a six-year statute of limitations.  CPLR 213(4)See also, Fed. Nat. Mort. Assoc. v. Schmitt, 172 A.D.3d 1324, 1325 (2nd Dep’t 2019).  When a mortgage is 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.”  HSBC Bank USA, N.A. v. Gold, 171 A.D.3d 1029, 1030 (2nd Dep’t 2019).  Most mortgages, however, provide that a mortgagee may accelerate the entire debt in the event of, inter alia, a payment default by a mortgagor. Thus, “the terms of the mortgage may contain an acceleration clause that gives the lender the option to demand due the entire balance of principal and interest upon the occurrence of certain events delineated in the mortgage.”  Bank of New York Mellon v. Dieudonne, 171 A.D.3d 34, 37 (2nd Dep’t 2019) (citations and internal quotation marks omitted).  Once the mortgagee’s election to accelerate is properly made, “the borrower’s right and obligation to make monthly installments ceased and all sums became immediately due and payable.”  The statute of limitations begins to run anew on the entire debt upon acceleration.  HSBC, 171 A.D.3d at 1030 (citations omitted).

On July 6, 2022, the Appellate Division, Second Department, decided Deutsch Bank Nat. Trust Co. v. Lubonty, a decision that “turns on the interplay between subsections 362(a) and (c) of the 1978 Bankruptcy Code (11 USC), and the interpretation of that statutory scheme as applied to the circumstances of this case.”  In 2007, an action was commenced to foreclose a mortgage on property located in Southampton, New York (the “Southampton Property”), owned by Lubonty (“Borrower” or “Debtor”) in which the amounts due under the subject loan were accelerated (the “2007 Foreclosure Action”).  Shortly thereafter, Borrower filed a Chapter 11 bankruptcy petition (the “2007 Bankruptcy”).  The 2007 Foreclosure Action was dismissed in June of 2009 and the 2007 Bankruptcy was dismissed in November of 2009. 

Later, in 2011, Borrower filed another Chapter 11 petition, which was converted to a Chapter 7 liquidation (the “2011 Bankruptcy”).  In the context of the 2011 Bankruptcy, Debtor and the Chapter 7 trustee entered into a stipulation, dated November 26, 2013, that was “so ordered” by the bankruptcy court in which the Debtor agreed to purchase the Southampton Property, thus “resolving the bankruptcy estate’s interest[] in”, inter alia, the Southampton Property.  (Some brackets omitted.)  The required payments under the stipulation were made and, thereafter, on “November 3, 2014, the defendant received a ‘standard discharge’ in the [2011 B]ankruptcy…, which was subsequently marked “closed” on January 23, 2017.”

In September of 2018, lender commenced an action to foreclose the mortgage on the Southampton Property (the “2018 Foreclosure Action”).  Borrower moved to dismiss the 2018 Foreclosure Action “as barred by the statute of limitations, since the mortgage debt had been accelerated more than six years earlier on May 22, 2007, upon the commencement of the 2007 [F]oreclosure [A]ction.”  Lender opposed the motion by arguing that “the statute of limitations for the commencement of this action had been tolled by the automatic bankruptcy stays in place following the defendant’s filing of the [2007 B]ankruptcy… and the [2011 B]ankruptcy….”  Supreme court denied Borrower’s motion to dismiss, resulting in the subject appeal.

The Second Department recognized that “[r]esolution of whether this action was time-barred turns upon the date on which the automatic bankruptcy stay barring commencement of a mortgage foreclosure action against the defendant with respect to the [Southampton P]roperty, in effect following the commencement of the [2011 Bankruptcy], terminated.  Borrower argued that the automatic stay terminated on November 26, 2013, when he purchased the Southampton Property from the Debtor’s bankruptcy estate.  Lender argued that the automatic stay terminated in November of 2014 when the Debtor received his discharge in the 2011 Bankruptcy.  The Second Department agreed with Lender.

The Court explained how various provisions of section 362(a) of the Bankruptcy Code create an automatic stay of certain acts against a debtor or property of the bankruptcy estate.  The Court noted that:  (1) “the filing of a petition for protection under the Bankruptcy Code imposes an automatic stay of any mortgage foreclosure actions”; (2) “[t]he effects of the automatic stay are wide-ranging and limit virtually all judicial action against the debtor and any codebtors”; (3) “[t]he automatic stay is designed to provide blanket relief from creditor action”; (4) “any exceptions from the stay are narrowly written and ‘strictly construed; and, (5) “[t]he automatic bankruptcy stay of 11 USC § 362 is a ‘statutory prohibition’ which operates under CPLR 204(a) to stay the limitations period for commencement, or continuation, of a foreclosure action.  (Citations, internal quotation marks and brackets omitted and hyperlink added.)

Finally, in analyzing section 362 of the Bankruptcy Code as related to its ruling in Deutsch Bank, the Court stated:

The stay imposed by 11 USC § 362(a) is terminated upon the happening of certain events proscribed by 11 USC § 362(c). Pursuant to 11 USC § 362(c)(1), “the stay of an act against property of the bankruptcy estate under subsection (a) of 11 USC § 362 continues until such property is no longer property of the bankruptcy estate.” The legislative history of 11 USC § 362(c) explains that 11 USC § 362(c)(1) “terminates a stay of an act against property of the estate when the property ceases to be property of the estate, such as by sale, abandonment, or exemption. It does not terminate the stay against property of the debtor if the property leaves the estate and goes to the debtor” (HR Rep 95-595, 95th Cong, 1st Sess at 343, reprinted in 1978 US Code Cong & Admin News at 6299 [emphasis added]).

Where the act stayed is not one against “property of the estate,” 11 USC § 362(c)(2) provides that a stay under 11 USC § 362(a) “continues until the earliest of the time the case is closed; the time the case is dismissed; or the time a discharge is granted or denied” (id. § 362[c][2]). A bankruptcy court may also grant relief from the stay on request of a party in interest with respect to a stay of an act against property under 11 USC § 362(a) if such property is not necessary to an effective reorganization.  [Some citations, internal quotation marks, brackets and ellipses omitted.]

The Court noted, inter alia, that the “statutory text is the clearest indicator of legislative intent and courts should construe unambiguous language to give effect to its plain meaning” (citation and internal quotation marks omitted) and that the language of section 362 was clear as related to the Deutsch matter.  Accordingly, the Court found that:

the defendant’s purchase of the [Southampton P]roperty from the bankruptcy estate pursuant to the November 26, 2013 order did not terminate the automatic bankruptcy stay barring commencement of the instant foreclosure action, but rather, under the circumstances of this case, the automatic bankruptcy stay terminated when the defendant received a discharge from the Bankruptcy Court on November 3, 2014.

Pursuant to the plain language of 11 USC § 362(c)(1), the discharge of the [Southampton P]roperty from the bankruptcy estate pursuant to the November 26, 2013 order terminated the stays of an act against “property of the estate,” which stays are established by 11 USC § 362(a)(3) and (4). Here, however, upon the defendant’s purchase of the [Southampton P]roperty from the bankruptcy estate pursuant to November 26, 2013 order, ownership of the [Southampton P]roperty returned to the defendant, as debtor in the bankruptcy proceeding (see id. § 101[13]). Consequently, the termination of the stay of an act against “property of the estate” provided for by 11 USC § 362(c)(1) has no bearing on the stays established by 11 USC § 362(a)(1) and (5), which expressly apply to acts taken against “the debtor” or “property of the debtor,” and which continued in effect. To find otherwise, as the defendant wishes, would impermissibly render the statutory distinction between stays of acts against “the debtor” and “property of the debtor” under 11 USC § 362(a)(1) and (5), and stays of acts against “property of the estate” under 11 USC § 362(a)(3) and (4), meaningless.  [Citations omitted.]

Moreover, pursuant to the plain language of 11 USC § 362(c)(2), the stays established by 11 USC § 362(a)(1) and (5) with respect to actions against “the debtor” or “property of the debtor” continue “until the earliest of . . . the time the case is closed; . . . the time the case is dismissed; or . . . the time a discharge is granted or denied” (id. § 362[c][2]. Thus, so long as the [Southampton P]roperty remained the property of the defendant, the debtor in the bankruptcy proceeding, the automatic bankruptcy stay barring commencement of the instant foreclosure action, and therefore the limitations toll provided by CPLR 204(a), remained in effect until the earliest of the time the second bankruptcy proceeding was closed or dismissed, or a discharge was granted or denied (see 11 USC § 362[c][2].  The earliest of these dates is November 3, 2014, the date on which a discharge in the second bankruptcy proceeding was granted.

The Court concluded that the action was timely commenced.  Even though the underlying loan was accelerated by the commencement of the 2007 Foreclosure Action and the subject action was commenced in 2018 because “the limitations period against commencement of the instant action was tolled by the automatic bankruptcy stay when the defendant commenced the [2007 B]ankruptcy [P]roceeding on June 26, 2007, and began to run again when that proceeding was voluntarily dismissed on November 24, 2009 (see 11 USC § 362[a]). The 2007 [F]oreclosure [A]ction was terminated on June 25, 2009, while the limitations period was tolled. The [Lender]’s evidence also established that the limitations period was thereafter again tolled by the automatic bankruptcy stay when the defendant commenced the [2011 B]ankruptcy [P]roceeding on October 19, 2011 (see id.), and, as stated above, did not begin to run again until the defendant received a discharge in the [2011 B]ankruptcy [P]roceeding on November 3, 2014 (see id. § 362[c][2].” The period of the bankruptcy tolls were approximately 5.5 years and, accordingly, the action was timely commenced.


Jonathan H. Freiberger is a partner and co-founder of Freiberger Haber LLP.

This article is for informational purposes and is not intended to be and should not be taken as legal advice.

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