All Tolled Section 108(c) Preserves a Mortgagees Option to Commence a Foreclosure Until After the Automatic Stay is Lifted

By: Matthew W. Silverman

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

In Shamus Holdings, LLC v. LBM Financial, LLC (In re Shamus Holdings, LLC),[1] the United States Court of Appeals for the First Circuit held that the tolling provisions of section 108(c)[2] of the Bankruptcy Code preserved a mortgagee’s right to enforce an obsolete mortgage despite failing to seek an extension available under Massachusetts state law.[3] The Massachusetts statute required holders of a mortgage, on pain of forfeiture, to take action against the mortgagor within five years after the end of the mortgage’s stated term, but granted mortgagees the right to seek an extension of that five-year period.[4] Prior to the expiration of the five-year deadline, Shamus filed a chapter 11 petition.[5] After the five year statute of limitations had expired and without having sought an extension of that period, LBM Financial, the mortgagee, took action to enforce its mortgage, relying on the tolling provisions of section 108(c) to preserve its foreclosure rights. Shamus argued that LBM Financial’s failure to seek an extension rendered the mortgage time-barred,[6] but the First Circuit found LBM Financial’s right to enforce its mortgage protected by the tolling provision of section 108(c).[7]

Section 108(c) provides “if applicable nonbankruptcy law . . . fixes a period for commencing or continuing a civil action . . . such period does not expire until” the later of the end of such period or 30 days after notice of the termination of the stay under section 362.[8] Shamus argued, in light of the availability of an extension under state law, section 108(c) was inapposite. Under this reasoning Shamus posited that the Massachusetts statute did not “fix[] a period for commencing or continuing a civil action”[9] because the mortgagee was not prevented from taking action to extend the mortgage while the automatic stay remained in effect. The court rejected this textual argument and instead determined that the critical consideration was whether the automatic stay prohibited the mortgagee from initiating a foreclosure action regardless of the mortgagee’s option to file for an extension while the automatic stay was in effect.[10] In determining whether the tolling provision of section 108(c) controlled, the First Circuit assessed “the interplay between a state statute placing temporal limitations on the enforcement of stale mortgages and the automatic stay provisions of the Bankruptcy Code.”[11] In enacting section 108(c) Congress sought to preserve the rights of creditors prevented from commencing an action against a debtor due to the automatic stay.[12] In finding section 108(c) applicable, the Shamus court focused on the inability of the creditor to enforce its rights during the duration of the automatic stay. At the time a mortgagor defaults on its mortgage, the mortgagee may either foreclose or extend the duration of the enforcement period.[13] Consistent with preserving a stayed party’s right to choose the appropriate remedy, “[t]he question is not whether the [mortgagee] was prevented from taking action to extend the relevant enforcement period . . . but rather whether the [mortgagee] was prohibited from taking action to enforce its rights.”[14] 

The First Circuit’s decision in Shamus reinforced the notion that the tolling provisions of section 108 act as a compromise between creditor and debtor.[15] The protection from creditors afforded to debtors in bankruptcy must be balanced against the creditor’s ability to enforce its rights against the debtor. Where the ability of a creditor to enforce its rights has been curtailed by operation of the automatic stay before the expiration of the limitations period, the tolling provisions of section 108(c) assure the creditor an opportunity to exercise its rights once the stay has been lifted. This is the case regardless of the creditor’s failure to take action to preserve those rights under state law.[16] Any other result would cause the debtor to gain an unfair advantage through the opportunistic filing of a bankruptcy petition.[17]  

[17] See Morton v. Nat’l Bank of N.Y.C. (In re Morton), 866 F.2d 561, 566 (2d Cir. 1989) (recognizing inherent unfairness in allowing debtor to remain under protection of automatic stay until limitation period expired).