New York Court of Appeals Issuing Rulings Clarifying Foreclosure Law
On February 18, 2021, the New York Court of Appeals issued a joint decision on four separate appeals related to New York’s statute of limitations on foreclosure. Pursuant to CPLR 213(4), mortgage foreclosures in New York are governed by a six-year statute of limitations, which begins to run at the time the note holder accelerates the underlying loan and demands immediate repayment of all amounts owed. The decisions rendered by the New York Court of Appeals struck down several borrower-friendly rulings in the New York Court of Appeals relating to the statute of limitations on mortgage foreclosures and have alleviated some of the confusion related to New York mortgage foreclosure litigation.
Vargas v. Deutsche Bank Natl. Trust Co.
In Vargas, the Court addressed an issue that had caused disagreement in the Appellate Division and found that pre-foreclosure notices required by RPAPL 1304 that include “will accelerate” language are insufficient to prove acceleration. In Vargas, the borrower commenced a quiet title action seeking to cancel a mortgage on residential property, contending that the statute of limitations on the underlying mortgage had expired. The borrower argued that the pre-foreclosure notice sent by the lender had accelerated the debt. Specifically, borrower argued that the pre-foreclosure notice stated that if the borrower failed to cure their default, the lender “will accelerate [his] mortgage.”
On a motion to dismiss from the lender, the Supreme Court, while initially rejecting the borrower’s argument, on renewal granted summary judgment in favor of the borrower. The Appellate Division affirmed the Supreme Court’s ruling citing the ruling in Deutsche Bank Natl. Trust Co. v. Royal Blue Realty Holdings, Inc., which also found that “will accelerate” language in a pre-foreclosure notice constitutes a valid acceleration of the underlying debt.
The Court noted the need for clarification on this issue given the diverging opinions of the Appellate Division in Royal Blue and Milone v. U.S. Bank N.A., where the Appellate Division found “will accelerate” language in a pre-foreclosure notice insufficient to prove acceleration of a debt. The Court ultimately sided with the reasoning in Milone, that “will accelerate” language in the pre-foreclosure notice was insufficient to prove acceleration. The Court noted that acceleration requires an overt, unequivocal act by the lender. Although the pre-foreclosure notice said that failure to cure would result in acceleration, the letter did not seek immediate payment of the entire loan balance. Acceleration was only a future event, not that the debt was accelerate as a result of the letter.
Wells Fargo Bank v. Ferrato
The Court addressed two separate issues through its ruling in Ferrato. First, the Court found that a material defect in a foreclosure complaint will not validly accelerate a loan. Second, the Court addressed the issue of a lender’s motive for deacceleration of a loan.
Regarding the issue of material defect in a foreclosure complaint, in Ferrato, the foreclosing bank had filed two prior foreclosure actions in 2009 and 2011 respectively. Both of these prior actions were dismissed as a result of the foreclosing bank’s failure to allege a loan modification agreement in the complaints. When the lender attempted to file a subsequent foreclosure in 2017, the borrower moved to dismiss arguing the two prior foreclosure actions accelerated the underlying debt and thus a subsequent action was barred by the six-year statute of limitations. The Supreme Court denied borrower’s motion on the grounds that the loan modification agreement fundamentally altered the underlying debt making it impossible for the lender to foreclose the original loan but must instead foreclose the loan as modified. On appeal, the Appellate Division reversed and granted the borrower’s motion to dismiss arguing that the prior actions had accelerated the underlying debt.
The Court however, reversed the Appellate Division’s ruling and denied borrower’s motion to dismiss. The Court found that, while filing a foreclosure complaint may evidence an acceleration, because the prior complaints failed to include the loan modification agreement, it was unclear what debt was being accelerated. Therefore, the Court reasoned that “where the deficiencies in the complaints were not merely technical or de minmis and rendered it unclear what debt was being accelerated – the commencement of these actions did not validly accelerate the modified loan.”
On the issue of lender’s motivation in de-acceleration, the lender moved to discontinue the pending foreclosure action following service-related issues and sought to de-accelerate the loan. The Supreme Court granted the motion to discontinue but expressly stated that the loan at issue would not be de-accelerated. On appeal, the Appellate Division affirmed this decision, noting that the bank could not de-accelerate because it had admitted its primary reason for revoking acceleration was to avoid the statute of limitations bar. This rule stems from several rulings, such as the Second Department’s ruling in Milone v. U.S. Bank, N.A., finding that a lender should be barred from revoking acceleration if the motive of the revocation was to avoid the expiration of the statute of limitations on an accelerated debt.
The Court however, rejected the findings in Milone and similar rulings, finding that the lender’s motivation in de-accelerating an accelerated debt is generally irrelevant. The Court correctly noted that the lender has little incentive to repeatedly accelerate and then revoke acceleration as this only further delays the lender’s ultimate goal, recovery of amounts owed on an underlying debt.
Freedom Mortgage Corporation v. Engle & Ditech Financial, LLC v. Naidu
Finally, in Engle and Naidu, the Court found that a voluntary discontinuance of a foreclosure action by a lender acted as a de-acceleration of the underlying debt. In both Engle and Naidu, the borrowers filed motions to dismiss arguing that the filing of prior foreclosure actions triggered the running of the six-year statute of limitations and prevented the lenders from filing a successive foreclosure action. The lenders in turn argued that the prior actions had been voluntarily discontinued, which acted as an event of de-acceleration and reset the statute of limitations timeline. This issue had also caused disagreement in the lower courts, with several courts finding that the voluntary discontinuance created a “triable issue of fact” as to whether an acceleration had been revoked. However, more recent decisions, like the Appellate Divisions’ rulings in Engle and Naidu, determined that a voluntary discontinuance “in itself” was not an event of de-acceleration. Rather, the court must undertake an examination of the post-discontinuance actions of the parties to determine the validity of the de-acceleration.
The Court rejected this assertion, and again reiterated the importance that de-acceleration by the lender is made by an overt, unequivocal act on the part of the lender. To that end, the Court determined that where the lender accelerated a loan via the filing of a foreclosure complaint, the voluntary discontinuance of the same acted as an overt, unequivocal act sufficient to show de-acceleration. It should be noted that the Court did find that “[t]o be sure, there may be cases in which the question of whether an acceleration was validly revoked involves an ‘issue of fact,’ such as where the operative facts surrounding a purported acceleration or revocation are disputed, and the court may be unable to decide whether the statute of limitations has run as a matter of law.” Thus, there may still be instances where if the discontinuance is unclear from an order, a court may need to proceed to trial to parse out whether that order was a dismissal or a discontinuance.
The Court’s rulings in these four cases mark a sea change in the field of New York foreclosure litigation in favor of lenders. Refreshingly, in a year that has seen lenders bound by various moratoriums and additional regulations on both the state and federal level, the Court appears to have, in part, taken a practical approach to the issue of foreclosure litigation in New York. For example, regarding the “will accelerate” language issue, the Court noted that “[D]efault notices provide an opportunity for pre-acceleration negotiation—giving both parties the breathing room to discuss loan modification or otherwise devise a plan to help the borrower achieve payment currency, without diminishing the noteholder’s time to commence an action to foreclose on the real property, which should be a last resort.”
Additionally, the Court noted that a post-discontinuance review of the lender’s actions in determining de-acceleration
[I]s both analytically unsound as a matter of contract law and unworkable from a practical standpoint. . . A rule that requires post-hoc evaluation of events occurring after the voluntary-discontinuance . . . in order to determine whether a revocation previously occurred leaves the parties without concrete contemporaneous guidance as to their current contractual obligations, resulting in confusion that is likely to lead (perhaps inadvertently) to breach . . .
The Court noted the need for a “clear rule” on the effect of voluntary discontinuance to provide those seeking to “purchase notes . . . the opportunity to assess, based on clear, objective inidica and without the aid of an appellate court, the nature of the instrument they look to buy . . . and value it accordingly.”
Servicers and investors are advised to reevaluate their portfolios in light of these decisions as many loans previously written-off or marked as uncollectible may now be viable once again. Additionally, these decisions may have an impact on currently pending foreclosure involved in contested litigation. For any questions relating to these decisions or general questions related to New York foreclosures, please contact Eric P. Kelner or Keith M. Salmeri.
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