By Kevin Dobie, Esq.

Liebo, Weingarden, Dobie & Barbee, PLLP

USFN Member (MN)

With the rise in home prices in the past several years, many servicers and investors have begun foreclosing junior mortgages. Some of these mortgages were charged off, sold, or left for dead many years ago, and borrowers are often surprised when the mortgage rises from the ashes and a servicer or investor mails a default letter or files a foreclosure action. The Consumer Financial Protection Bureau issued an advisory opinion on these loans in April 2023 highlighting issues surrounding “zombie” mortgages, and lately, news organizations and foreclosure defense attorneys have also taken an interest in these “zombie” mortgage loans. A recent court of appeals decision in Minnesota highlights a few issues to avoid liability in enforcing a so-called zombie mortgage.

In the recent case, Reed v. Westgate Investments, the Minnesota Court of Appeals determined that the state’s 15-year statute of limitations to foreclose a mortgage was not extended by the mortgagors’ prior bankruptcy filing. 2024 WL 2716034, __ N.W.3d __ (Minn. App. 2024). The Reeds filed bankruptcy in 2005 and obtained a discharge in 2010. The loan matured in 2006. The servicer sent pre-foreclosure collection letters and commenced a non-judicial foreclosure in 2022, 16 years after the maturity date. Meanwhile, the Reed’s loan balance ballooned from $19,735 to over $62,000. The Reeds filed a lawsuit to stop the foreclosure and argued that the foreclosure was time-barred by the 15-year statute of limitations. At the district court, the servicer successfully argued that a Minnesota tolling statute extended the limitations period for five years because of the bankruptcy filing.

The Court of Appeals reversed and held that the statute of limitations was not tolled as a result of the automatic stay in the Reeds’ bankruptcy case. More specifically, the Minnesota statute of limitations provides that no action to foreclose a mortgage shall be maintained unless commenced within 15 years from the maturity date and this limitation shall not be extended by “reason of any disability of any party interested in the mortgage.” Minn. Stat. § 541.03 subd. 1. The Court of Appeals explained that this “disability” language in the statute specifically applied to the servicer’s bankruptcy tolling argument and that the 15-year statute of limitations was not extended by the automatic stay in the Reeds’ bankruptcy case.[1]

The obvious take-away is that servicers and their counsel must closely review the maturity date in the mortgage to ensure that any foreclosure activity is not prohibited by the 15-year statute of limitations. In Minnesota, it is not enough, however, to simply look at the maturity date in your system of record or on the promissory note and add 15 years to the maturity date. In Minnesota, the maturity date must be listed on the recorded mortgage. If the maturity date is not listed in the recorded mortgage,[2] the 15-year statute of limitations begins to run on the date of the origination of the loan. Minn. Stat. § 541.03 subd. 2. The maturity date or a statement that the term is, for example, 30 years is sufficient. A reference to the term listed in the promissory note is not sufficient because the promissory note is not part of the recorded document.

Foreclosure defense attorneys are now focused on the statute of limitations issue and have recently filed a number of class action cases in Minnesota targeting servicers and counsel who run afoul of the statute. This most often arises where a promissory note has a 30-year repayment term, but for whatever reason, the mortgage template used by the originating lender did not include a place to list the maturity date or the term. In those situations, if the maturity date is not listed or cannot be easily ascertained from the recorded mortgage, the mortgage can become unenforceable before the maturity date listed in the promissory note.

Because many of these older loans are secured by second mortgages that were charged off, servicers of charged off loans must also heed caution when adding interest and other charges. After a loan is charged off, a servicer may stop sending monthly statements. 12 C.F.R. § 1026.41(e)(6). A servicer may not, however, add interest or other charges to a charged-off loan unless the servicer resumes sending monthly statements. And even if the mortgage remains enforceable under the statute of limitations, a servicer may not retroactively assess fees or interest on the account for the period of time during which the loan was charged off. 12 C.F.R. § 1026.41(e)(6)(ii)(B). In other words, the servicer must foreclose using the balance at the time the loan was charged off.

As a practice pointer, servicers and their counsel should take care to review the mortgage document itself for these Minnesota-specific issues regarding the 15-year statute of limitations as well as the allowable interest and charges the servicer may recover when enforcing a charged-off “zombie” mortgage that has risen from the dead.