Restructuring & Finance Litigation

In Lubonty v. U.S. Bank Nat’l Ass’n, the New York Court of Appeals ruled on whether a lender’s foreclosure action became untimely when the borrower filed for bankruptcy and the lender’s action was halted by operation of the Bankruptcy Code’s automatic stay. Under section 213(4) of the New York CPLR, the statute of limitations for an action on a mortgage is six years. However, section 204(a) provides that when an action has been stayed by a court or statutory prohibition, the duration of the stay is not covered for purposes of determining the statute of limitation. In Lubonty, the issue was whether the automatic stay provisions of Bankruptcy Code § 362(a)(1) constitutes a “statutory prohibition” within the meaning of CPLR § 204(a), and if so, whether the term “commencement” within CPLR § 204(a) applies to a claimant who, when a bankruptcy stay was initiated, had already commenced an action against the debtor–later dismissed—on the claim now asserted. The court ruled it does.

This decision demonstrates that lenders are able to avail themselves of the protections of CPLR § 204(a) while a bankruptcy stay is in effect. The stay stops the clock; not only on the time required to commence an action against a debtor, but to continue an action as well. As such, lenders are protected under section 204(a) by this ruling.

Facts

In 2005 Gregg Lubonty (“Lubonty”) took out a $2.5 million mortgage on a property in Southampton, New York. Less than two years later, Lubonty defaulted and on June 11, 2007, American Home Mortgage Acceptance, Inc. (“AHMA”), commenced foreclosure. Two weeks later, Lubonty filed a bankruptcy petition, triggering the automatic stay and halting AHMA’s foreclosure action. On November 24, 2009, approximately 882 days after the bankruptcy filing, Lubonty dismissed the bankruptcy action and the stay was lifted. On January 14, 2010, AHMA filed for default judgment in the first foreclosure action, but on September 27, 2010, the trial court granted Lubonty’s ex parte application to dismiss the action as abandoned.

AHMA assigned Lubonty’s mortgage to U.S Bank National Association (“U.S. Bank”) and in June 2011, U.S. Bank commenced a new foreclosure action. On September 30, 2011, Lubonty moved to dismiss the second foreclosure action, but before the return date on the motion, Lubonty again filed for bankruptcy, with the automatic stay halting the foreclosure action for 769 days. On November 26, 2013, Lubonty purchased the property from the bankruptcy estate for $25,000. The bankruptcy trustee then notified the court in the second foreclosure action that the stay was no longer in effect. Lubonty’s motion to dismiss was still pending and U.S. Bank filed its opposition on June 2, 2014, the day following Lubonty’s final payment for the property. On October 21, 2014, the court dismissed the second foreclosure action.

Two weeks later, Lubonty filed an action under Real Property Actions and Proceedings Law (RPAPL) § 1501(4) to discharge the mortgage, claiming the statute of limitations on U.S. Bank’s foreclosure claim had expired. U.S. Bank moved to dismiss, arguing its foreclosure claim had not run because it was tolled while the bankruptcy stay was in effect. The Supreme Court agreed and Lubonty appealed.

Whether the automatic stay constitutes a “statutory prohibition”

The Court of Appeals noted that whether the bankruptcy stay constitutes a “statutory prohibition” under CPLR § 204(a) was an issue of first impression. Holding that the bankruptcy stay prohibits the “‘commencement or continuation’ of any covered action (11 U.S.C. § 362(a)(1)—it is a blanket ban on filing or continuing lawsuits against the debtor.” Thus, the court noted that it is “therefore clear” that section 362(a) is a “statutory prohibition” within the meaning of CPLR § 204(a).

Does the term “commencement” apply to the facts at hand?

The next issue for the Court of Appeals was 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 reasserted. In ruling in the affirmative, the court held that Lubonty’s “cramped” reading of CPLR § 204(a) was one that produces “inequitable and potentially absurd results.”

Lubonty argued that it was impossible for U.S. Bank to be prohibited from “commencing” an action because a foreclosure action had been commenced prior his bankruptcy filing. The court rejected this argument, holding that neither New York’s highest court nor the legislature have restricted the term “commencement” to the first time a party asserts a cause of action—the term may also include the commencement of subsequent actions asserting the same claim.

The Court of Appeals then looked to the statute of limitation for a foreclosure and stated that the bankruptcy stays here prevented U.S. Bank from commencing a foreclosure for at least 1651 days, as such, U.S. Bank was not required to assert an action during that time “regardless of whether an earlier action on the same claim had been initiated or was pending when the stay was imposed.”

The Court of Appeals relied on the history of the tolling statute, noting that the statute “is an old one, reaching back into the days of equity..., modified first to reflect the merger of law and equity with the enactment of the Field Code in 1848…” Thus, the Court emphasized the “strong roots” in 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.

Lastly, the Court emphasized the “inequity and gamesmanship” that plaintiff’s interpretation would encourage. For example, under the “pending action” rule, where an unasserted claim that the creditor “slept on,” arising out of the same transaction or series of transactions as an initial claim, would be benefited by the toll, whereas the claim previously asserted would not.

Takeaway

The court’s ruling that Bankruptcy Code § 362(a)(1) constitutes a “statutory prohibition” for purposes of CPLR § 204(a) makes sense because it is clear and equitable that claims should be tolled while a stay is in effect. However, the Court’s application of “commencement” to the facts in Lubonty may lead to inconsistencies in the interpretation of the CPLR—specifically, section 304 which states “[a]n action is commenced by filing a summons and complaint or summons with notice…”

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For more information on this alert or other restructuring & bankruptcy matters please contact:

Stephen Selbst at +1 212 592 1405 or [email protected]
Daniel A. Field at +1 212 592 1476 or [email protected]

© 2019 Herrick, Feinstein LLP. This alert is provided by Herrick, Feinstein LLP to keep its clients and other interested parties informed of current legal developments that may affect or otherwise be of interest to them. The information is not intended as legal advice or legal opinion and should not be construed as such.