Discharge does not automatically accelerate the debt

We are pleased to share a recent decision, on an issue of first impression, of a case handled by Friedman Vartolo, LLP entitled Wilmington Sav. Fund Socy., FSB v. Fernandez, et al. Supreme Court Ct., Appellate Decision, Fourth Department 11/15/19, 2019 WL 6042376, 2019 NY Slip Op 08290. The borrower argued that a “bankruptcy operates as the acceleration of the principal amount of all claims against the debtor” (House Report at 353, U.S.Code Cong. & Ad.News at 6309; In Re Schweitzer, 19 B.R. 860, 867-868 [Bankr. E.D.N.Y. 1982]; see also In Re Oakwood Homes Corp., 449 F.3d 588 [3d Cir. 2006]; In Re Amr Corp., 485 B.R. 279 [Bankr. S.D.N.Y. 2013] and that six-years after discharge in bankruptcy, Plaintiff’s loan was barred by the statute of limitations. The Court found that the bankruptcy did not automatically accelerate the debt, Plaintiff’s complaint was not time-barred because separate cause of action accrue for each installment payment that was not made, and the Court properly denied defendant’s motion to dismiss the complaint.

On August 17, 2007, defendant executed a note 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, defendant filed a petition for chapter 7 bankruptcy in Bankruptcy Court. Defendant received a discharge in bankruptcy on March 15, 2010, and obtained a final bankruptcy decree on April 1, 2010. On May 26, 2017, plaintiff, the successor to the lender, sent defendant notice that he was in default and that defendant 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, defendant raised the statute of limitations as an affirmative defense.

Defendant moved to dismiss the complaint pursuant to CPLR 213 (4) and 3211 (a) (5). Supreme Court initially 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 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 re-argument, the 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 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. The appellate division rejected defendant’s contention that the discharge in bankruptcy automatically accelerated the debt. The Court found, that Chapter 7 discharge removes the “mode of enforcement” against the debtor in personam, but the obligation otherwise remains intact and does not impact an action in rem (Johnson, 501 US at 84).

The Court had 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.

A great job by Zachary Gold, Esq. of our firm! For more information regarding this case, please contact Deborah Gallo, Director of Operations at dgallo@friedmanvartolo.com