5th Circuit: Repeated Bankruptcy Tolled Foreclosure Statute of Limitations
The U.S. Court of Appeals for the Fifth Circuit recently held that Section 362(c)(3)(a) of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) does not terminate bankruptcy stays related to property belonging to a bankruptcy estate, which means that those bankruptcy stays do toll the state statute of limitations for purposes of a judicial foreclosure.
Leading up to this case, the defendant issued notices of default, acceleration, and foreclosure proceedings to the plaintiff after nonpayment on a mortgage. When the defendant sought to foreclose on the property in 2014, the plaintiff obtained a temporary restraining order blocking the foreclosure. After the restraining order expired, the defendant attempted to foreclose on the property in 2015. In response, the plaintiff began bankruptcy proceedings in 2016 preventing the foreclosure. Once that proceeding was dismissed, the defendant sought to foreclose on the property for the next three years. Each time, the plaintiff instituted bankruptcy proceedings to block the foreclosure. In total, the bankruptcy proceedings were pending for “at least 269 days.”
In the case underlying the appeal, the plaintiff sought a declaratory judgment and to quiet title to the property, arguing that a state statute of limitations provision barred foreclosure. The defendant counterclaimed for judicial foreclosure. The plaintiff argued that the statute of limitations began to run in 2014 and expired in 2018. As a repeat filer under the bankruptcy code, the plaintiff argued that she was only entitled to a stay of 135 days, and therefore the defendant’s counterclaim, brought after four years and “179 days,” was time-barred. The district court agreed with the defendant and entered a judgment of foreclosure on summary judgment.
The dispute centers around the application of the BAPCPA to either terminate the automatic stay or not terminate the automatic stay with respect to the subject property when the plaintiff made repeated bankruptcy filings. The state statute of limitations requires bringing a foreclosure action within 4 years of accrual of a claim, and that period is tolled during bankruptcy proceedings. However, the BAPCPA has certain provisions that apply to repeat filers. Section 362(c)(3)(a) of the BAPCPA provides that when a debtor files for bankruptcy at least twice in the same year, “the stay . . . with respect to any action taken with respect to a debt or property securing such debt or with respect to any lease shall terminate with respect to the debtor on the 30th day after the filing of the later case.” The phrase “with respect to the debtor” has generated diverging opinions within the courts. As the Fifth Circuit explains, “the majority view . . . interprets the provision to terminate the stay as to actions against the debtor but not as to actions against the bankruptcy estate.” Meanwhile, other courts find that Section 362(c)(3)(a) terminates the entire stay. Noting that other provisions within the BAPCPA carefully delineated whether actions were against the debtor or against the debtor’s property, the Fifth Circuit held that Section 362(c) terminates the stay only for actions against the debtor and not for actions against the bankruptcy estate. Because Section 362(c) does not mention the bankruptcy estate, the court declined to read the provision broadly to include such property.
Therefore, the court held that the plaintiff’s “successive [bankruptcy] filings did not terminate the action with respect to the property of the bankruptcy estate.” Because the stay was not terminated under the BAPCPA, the stay lasted throughout the bankruptcy proceedings. This means that the statute of limitations period was tolled for the entire 269-day period during which the bankruptcies were pending. Thus, the defendant was not time-barred and could seek a judicial foreclosure.
