Maryland Court of Special Appeals Confirms That Foreclosure Actions Are Not Subject to Statute of Limitations
During the COVID-19 pandemic, a patchwork quilt of statutes, regulations, executive orders, and court orders have imposed on again, off again, restrictions on the filing and prosecution of foreclosure cases. Few of these specify how applicable statutes of limitations are affected, if at all, and whether a purported extension of a statute of limitations by executive order or court order is valid is an open question. A recent decision of Maryland’s second highest court, the Court of Special Appeals, provides some comfort to lenders that their right to foreclose will not expire before we return to “normal.”
In 1947, the Court of Appeals, Maryland’s highest court, held that “[t]here is no Statute of Limitations in Maryland applicable to foreclosure of mortgages.” Although the process for foreclosing on commercial real property in Maryland remains largely unchanged from 1947, there have been significant statutory and rule changes, many implemented as a result of the “Great Recession,” governing foreclosure of residential real property in Maryland. Borrowers argued in Daughtry v. Nadel that foreclosure actions are now subject to a three-year statute of limitations as a result of those changes. In a December 16, 2020 decision, the Court of Special Appeals rejected that argument.
In 2007, Wanda and Nathaniel Daughtry borrowed $918,900 from Liberty Mortgage Corporation to refinance the mortgage on their home. The Daughtrys defaulted in their loan payments in 2012. Liberty sold the Daughtrys’ loan to the Stanwich Mortgage Loan Trust, Series 2013-7, in 2016. Stanwich later sold the loan to MTGLQ Investors.
In 2018, MTGLQ sent the Daughtrys a “notice of intent to foreclose” informing them that their loan payments were 6 ½ years in arrears and notifying them that foreclosure proceedings would be instituted if the default was not cured. The requirement that a lender give borrowers notice of an intent to foreclose an instrument secured by residential real property was imposed in 2008 in response to the wave of foreclosures during the Great Recession. A lender must wait until a loan secured by residential real property has been in default for at least 90 days before it can send such a notice and the lender must wait at least 45 days after giving the notice before filing a foreclosure case.
In 2019, MTGLQ appointed foreclosure trustees who initiated proceedings to foreclose on the Daughtrys’ home. The Daughtrys moved to dismiss the case. They asserted that foreclosure cases are now subject to Maryland’s general three-year statute of limitations due to a series of changes in the law since 1947. Because seven years elapsed between their default and the filing of the case, the Daughtrys argued that MTGLQ could no longer foreclose.
The Daughtrys pointed to changes made by the Maryland General Assembly as part of a general overhaul of the Maryland Code in 1973. Those changes included enacting Section 5-101 of the Courts and Judicial Proceedings Article which establishes a three-year statute of limitations applicable to a “civil action at law” “unless another provision of the Code provides a different period of time within which an action shall be commenced” and Section 5-102, which establishes a 12-year statute of limitations applicable to certain “specialties.” Since Section 5-102 does not provide for a different period of time to initiate foreclosure actions, the Daughtrys argued that Section 5-101 governed.
The Court of Special Appeals rejected that argument. The Court noted that Section 5-101 applies only to actions “at law.” Foreclosure proceedings, the Court said, are not actions at law because they are “equitable in nature.”
The Daughtrys countered that the distinction between actions at law and equitable remedies was eliminated in 1984 when the Maryland Court of Appeals enacted Rule 2-301. That Rule provides: “There shall be one form of action known as ‘civil action.’” The Rules Committee note to Rule 2-301 states that the effect of the merger “is to eliminate distinctions between law and equity for purposes of pleadings, parties, court sittings, and dockets.”
The Court of Special Appeals rejected this argument too. The Court said that the merger of law and equity merely “abolished the distinction between different courts.” It did “not extend to the elimination of distinctions between what defenses may be available to a legal claim as opposed to an equitable claim” and thus did not convert foreclosure proceedings into actions at law.
Undaunted, the Daughtrys pointed to a 2014 amendment to Section 5-102 of the Courts and Judicial Proceedings Article to exempt from the 12-year statute of limitations for specialties “[a] deed of trust, mortgage, or promissory note that has been signed under seal and secures or is secured by owner occupied residential property, as defined in § 7-105.1 of the Real Property Article.” Since Section 5-101 subjects all actions at law to a three-year statute of limitations unless another section provides a different period of limitations and the amendment specifically carved instruments secured by owner occupied residential real property from the list of specialties subject to a twelve-year statute of limitations, the Daughtrys argued that the three-year statute of limitations must apply.
The Court of Special Appeals disagreed. The Court said, “At the outset, we observe that nowhere in either of those sections is there any mention of a period of limitations applicable to mortgage foreclosure actions. If the General Assembly had intended to impose a statute of limitations on mortgage foreclosure actions for the first time—and, in doing so, to overrule a six-decade-old Court of Appeals precedent that was directly on point—we would expect it to do so explicitly.”
Moreover, the Court noted that in exempting instruments secured by owner-occupied residential real property from Section 5-102, the General Assembly substituted a time limit on “any cause of action to collect the unpaid balance due . . . at the time the property was transferred” of three years after ratification of the auditor’s report in a foreclosure case The highlighted language, the Court said, “unambiguously refers to post-transfer causes of action—i.e., post-foreclosure actions—not foreclosure actions themselves.” The statutory change was enacted in response to the Great Recession with the “exclusive focus on reducing the statute of limitations applicable to post-foreclosure deficiency judgments” to “help foreclosed homeowners move on with their lives more quickly.”
The benefit to lenders of the Daughtry decision are readily apparent. However, it is not all bad news for borrowers either. After all, had the Daughtrys prevailed in their arguments, lenders would have no alternative but to foreclose much earlier than their lender did.