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Bankruptcy Court for the Northern District of Ohio Contests an Ohio Appellate Court’s Interpretation of Holden and Applies the Six-Year Statute of Limitations to Bar Foreclosure

Posted By USFN, Tuesday, June 19, 2018
Updated: Monday, June 18, 2018

June 19, 2018

by Ellen Fornash
Anselmo Lindberg & Associates, LLC – USFN Member (Illinois)

After considering state court precedent on the same issue, the U.S. Bankruptcy Court for the Northern District of Ohio has ruled that enforcement of both a note and foreclosure of a mortgage are time-barred by the six-year statute of limitations. In re Fisher, Case No. 17-40457, 2018 Bankr. LEXIS 1275 (Apr. 27, 2018).

Background: State Statutory and Case Law
The Ohio Revised Code limits an action to enforce an obligation of a party to pay a note to six years after the acceleration of the debt. R.C. 1303.16(A). However, Ohio law is well-settled that an action to collect on a note is separate and distinct from one to foreclose a mortgage. Deutsche Bank Nat’l Trust Co. v. Holden, 147 Ohio St.3d 85, 2016-Ohio-4603, 60 N.E.3d 1243 (Ohio 2016). In Holden, the Supreme Court of Ohio held that the bar of suit on the note does not necessarily prevent an action upon the mortgage securing the debt, citing Kerr v. Lydecker, 51 Ohio St. 240, 253, 37 N.E. 267 (1894). Holden has been interpreted by the Ohio Court of Appeals as permitting foreclosure of a mortgage even when a note has become time-barred. Bank of New York Mellon v. Walker, 2017-Ohio-535, 78 N.E.3d 930 (Ohio Ct. App. 8th Dist. 2017).

In Walker, relying on Holden, the appellate court (Eighth District) determined that a mortgage is no longer simply incident to the note and, therefore, the statute of limitations as set forth in R.C. 1303.16(A) is not applicable to a suit to foreclose the mortgage. Instead, the statute of limitations to foreclose a mortgage is governed by the more generous time frame set forth in R.C. 2305.06, which governs contracts. The Eighth District reaffirmed this interpretation of Holden in another 2017 ruling, wherein the court held that: “As a matter of law, R.C. 1303.16(A) does not apply to actions to enforce the mortgage lien on the property after the payment on the note becomes unenforceable through the running of the statute of limitations.” U.S. Bank N.A. v. Robinson, 2017-Ohio-5585 (Ohio Ct. App. 8th Dist. 2017). Holden, as interpreted by the Eighth District, is the prevailing law in Ohio.

Bankruptcy Court’s Review
The U.S. Bankruptcy Court for the Northern District of Ohio disagrees with the Eighth District’s interpretation of Holden. In In re Fisher, the bankruptcy court was asked to determine whether a proof of claim filed by The Bank of New York Mellon Trust Company (BONY)1 was disallowed on the basis that its underlying claim was barred by the six-year statute of limitations under R.C. 1303.16(A). The request stems from an August 2002 note and mortgage, which became the subjects of a 2006 foreclosure action in the Trumbull County, Ohio Court of Common Pleas.

Bankruptcy #1 — Following the filing of the 2006 foreclosure, the debtors commenced a Chapter 13 bankruptcy case in 2007. Based upon BONY’s proof of claim, the Chapter 13 plan required the debtors to make regular payments on the note and mortgage. In 2012 the Chapter 13 trustee filed a Notice of Final Cure Payment on Residential Mortgage, and the debtors subsequently received a discharge. Shortly thereafter, BONY filed a Motion to Vacate Bankruptcy Stay, seeking to reactivate the 2006 foreclosure action in order to proceed with the foreclosure. Judgment was obtained, but in 2013 BONY voluntarily moved to vacate the foreclosure judgment and dismiss the action. BONY’s motion was granted; the 2006 foreclosure action was dismissed without prejudice.

Foreclosure Action #2 and Bankruptcy #2 — On April 9, 2015 BONY filed a second foreclosure action on the note and mortgage, acknowledging therein the lack of personal liability of the debtors because of their Chapter 13 discharge. Next, the debtors filed a second Chapter 13 petition. In this second Chapter 13 case, BONY, again, filed a proof of claim upon the note and mortgage, to which the debtors objected, asserting that the claim was barred by the statute of limitations. This issue was then put before the Northern District for consideration.

After determining in BONY’s favor that BONY was able to assert a claim in the Chapter 13 case based solely upon the mortgage, the Northern District then reckoned that (1) the note was in fact accelerated with the filing of the 2006 foreclosure, (2) the note was not brought current through the 2007 Chapter 13 bankruptcy, and (3) the note was not “de-accelerated” for purposes of foreclosure. The court noted that nowhere does the Bankruptcy Code nor Black’s Law Dictionary define “de-acceleration.” Further, BONY did not have the ability to unilaterally reinstate the loan, and the debtors had not met the requirements of reinstatement as defined by the terms of the mortgage. The sole remaining issue for the Northern District to consider was whether the statute of limitations under R.C. 1303.16(A) not only applies to a suit upon a note but also operates to bar foreclosure of the mortgage.

Turning to Ohio state law, the bankruptcy court considered Holden and, in doing so, asserted that in permitting separate actions upon a note and mortgage, the Ohio Supreme Court did not address which statute applied to each of the available actions. While BONY used Walker and Robinson to argue that R.C. 1303.16(A) does not apply to a suit purely to foreclose a mortgage, the bankruptcy court noted that such an interpretation appeared limited to the Eighth District. Instead, the Northern District bankruptcy court found favor with the debtors’ position that “when the note is time-barred, the mortgage is also barred.” Bruml v. Herold, 14 Ohio Supp. 123, 125 (Ohio C.P. Geauga Cty. June 29, 1944); see also, Hopkins v. Clyde, 71 Ohio St. 141, 149, 72 N.E. 846, 2 Ohio L. Rep. 342 (Ohio 1904).

In Fisher, the bankruptcy court stressed the fact that Holden did not overturn Ohio law that the same statute of limitations applied to both collection of a note and foreclosure of a mortgage. The bankruptcy court particularly noted that in deciding Holden the Ohio Supreme Court favorably cited Kerr v. Lydecker, 51 Ohio St. 240, 253, 37 N.E. 267 (1894), and Kerr held that, “when a note is secured by the mortgage, the statute of limitations as to both is the same[.]” The fact that Kerr was decided one hundred years before R.C. 1303.16 was enacted had no bearing on the bankruptcy court’s decision and was only mentioned in a footnote (Fisher, n.17). The bankruptcy court thereby held that BONY was barred by the six-year statute of limitations from foreclosing the debtors’ mortgage. This decision now acts as res judicata as to the same parties and issues in the 2015 foreclosure action.

While not binding on state court foreclosure actions, In re Fisher is a blow to mortgagee rights in bankruptcy court proceedings. This decision of the Northern District, as well as the limitation of contrary precedence to the Eighth District, may be persuasive and may lend to foreclosure defense in state courts outside of the Eighth District. Moreover, Fisher provides debtors in default with a strategy to avail themselves of the encumbrance of their mortgage by effectively extinguishing mortgage liens through bankruptcy that have not been pursued within the confines of R.C. 1303.16(A).

1The Bank of New York Mellon Trust Company, National Association fka The Bank of New York Trust Company, N.A. as successor to JP Morgan Chase Bank, as Trustee for Residential Asset Securities Corporation, Home Equity Mortgage Asset-Backed Pass Through Certificates Series 2002-KS6 (“BONY”). On March 26, 2018, Specialized Loan Servicing LLC as servicing agent for U.S. Bank, N.A., not in its individual capacity, but solely as trustee of the NRZ Pass-Through Trust X (“U.S. Bank”) filed Transfer of Claim Other than for Security (Doc. 68), which gave notice that Claim 14 had been transferred by BONY to U.S. Bank. In the memorandum opinion issued in In re Fisher that is discussed in this article, the bankruptcy court referred to BONY as the claimant with respect to the subject Claim 14.

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