New York Legal Update
New York Court of Appeals Clarifies Statute of Limitations in Mortgage Foreclosures in Landmark CaseBy Joseph G. Devine, Jr., Esq., Managing Attorney for NY and NJ Foreclosure
Tromberg, Morris & Poulin, PLLC, email@example.com
For over a century, in New York foreclosure law, the application of the Statute of Limitations has led to vast confusion in the mortgage industry, the bar, and between the Appellate Departments themselves. This confusion has led to contradictory decisions in the various Supreme Courts and on appeal, and unclear information to mortgage servicers as to the requirements regarding what constitutes an acceleration, when a mortgage loan is accelerated, and how and when an acceleration is revoked and the loan de-accelerated. On February 18, 2021, the Court of Appeals has finally clarified three major issues regarding acceleration, de-acceleration, and how the Statute of Limitations should be applied.
CPLR § 213(4) establishes a six (6) year Statute of Limitations on “an action upon a bond or note, the payment of which is secured by a mortgage upon real property, or upon a bond or note and mortgage so secured, or upon a mortgage of real property, or any interest therein.” The language in the statute is vague, and has led to disagreement between the courts regarding what triggers the statute of limitations, and the definitions and triggers of acceleration and deceleration.
On February 18, 2021, the Court of Appeals released its Slip Opinion in the matter of Freedom Mortgage Corp. v. Engle, 2021 NY Slip Op 01090 (2021), which clarified multiple issues regarding the Statute of Limitations in mortgage foreclosure matters from four cases appealed from the Appellate Division (multiple departments). The Court held that an acceleration is triggered upon commencement of the suit and not on the acceleration warning, even if language such as “will accelerate” is included; that dismissal of a foreclosure action for a deficiency in the foreclosure does not trigger the acceleration; and that a voluntary dismissal by a mortgagee in a foreclosure suit constitutes an affirmative act of revocation of the acceleration.
New York has generally stated that the Statute of Limitations is triggered by acceleration or maturity, and that de-acceleration can be accomplished by revocation of the acceleration. The rule regarding acceleration was established in Albertina Realty Co. v. Rosbro Realty Corp. (258 NY 472 ), stating that the noteholder must effect an “unequivocable overt act” to accelerate the mortgage loan. First, the Court in Freedom Mortgage Corp. decided in one of the cases at issue, Wells Fargo v. Ferrato, a prior foreclosure in which the case was dismissed due to a deficiency in the mortgage complaint did not constitute a valid acceleration. In the prior foreclosure action, Plaintiff failed to include a loan modification agreement in its complaint, and was dismissed on Defendant's Motion to Dismiss. In the current action, Defendant moved to dismiss that the action was barred by the Statute of Limitations, stating that the prior foreclosure action triggered acceleration, which was not de-accelerated. The Supreme Court granted said motion, which was affirmed by the Appellate Division. The Court of Appeals, however, held that “where the deficiencies in the complaints were not merely technical or de minimus and rendered it unclear what debt was being accelerated—the commencement of these actions did not validly accelerate the modified loan.” Therefore, when a foreclosure action is dismissed due to a deficiency in the complaint, there is no valid acceleration, and the Statute of Limitations is not triggered.
Prior to the decision Freedom Mortgage Corp., there was dispute as to whether the acceleration warning could constitute an “unequivocable overt act,” specifically if the warning stated that the mortgagee “will accelerate” the debt, or similar language. The First Department has previously held that a letter stating that the noteholder “will” accelerate upon borrower's failure to cure the default constituted clear and unequivocable notice of acceleration, effective the date of the expiration of the cure period (Deutsche Bank Natl. Trust Co. v. Royal Blue Realty Holdings, Inc., 148 AD3d 529 [1st Dept. 2017]). In contrast, the Second Department previously held that this language did not accelerate debt, and that “merely an expression of future intent that fell short of an actual acceleration” (Milone v. U.S. Bank N.A., 164 AD3d 145 [2d Dept. 2018]). In the second case analyzed by the Court, Vargas v. Deutsche Bank National Trust Company, the Court settled this dispute. The Court of Appeals in this case sided with the Second Department, stating that “Noteholders should be free to accurately inform borrowers of their default, the steps required to cure and the practical consequences if the borrower fails to act, without running the risk of being deemed to have taken the drastic step of accelerating the loan.” Therefore, the Court concluded that an acceleration warning, even if it includes affirmative language such as “will accelerate,” is not an “unequivocable overt act” to accelerate, and does not trigger the Statute of Limitations.
Finally, in the last two cases analyzed, Freedom Mortgage Corporation v. Engel and Ditech Financial, LLC v. Naidu, the court clearly defined what constitutes a de-acceleration, holding that a voluntary dismissal of a foreclosure action constitutes a clear and unequivocable act of revocation of the acceleration. In a previous matter, the Third Department in CitiMortgage v. Ramirez, 59 Misc. 3d 1212[a][3d Dept. 2018] established a five-prong test regarding deceleration: 1) Revocation must be evidenced by an affirmative act; 2) The affirmative act must be clear and unequivocable; 3) The affirmative act must give actual notice to the borrower that acceleration has been revoked; 4) The affirmative action must occur before the expiration of the six (6) year statute of limitations period; and (5) The borrower must not have changed his position in reliance on the acceleration. Prior to the Freedom Mortgage Corporation decision, mortgagees would send a letter of de-acceleration to borrowers, which satisfied the requirements of the test. In Freedom Mortgage Corporation, the Court of Appeals held that the mere voluntary discontinuance of a foreclosure action constituted the revocation. The Court acknowledged that once the case is dismissed, the mortgagee can collect on a monthly basis again, and that if the exact time in which the de-acceleration occurs is not definite, that it would lead to inadvertent defaults. Finally, the Court also acknowledged that mortgages are typically long contracts, and multiple foreclosure actions on a single mortgage are common due to the length of the contract, and that financial positions often change during the course of said contract.
In its rulings in Freedom Mortgage Corporation, the court has clarified the Statute of Limitations for mortgage foreclosure actions. Essentially, an acceleration occurs when there is a valid complaint filed (the unequivocable overt action), and is decelerated once the voluntary discontinuance is granted. This case makes it clear that an acceleration warning does not trigger the Statute of Limitations, and no further notice is needed to be sent to inform the borrower that a mortgage loan is decelerated other than the discontinuance of an action.
In a year marred by federal and state moratoria due to the COVID-19 pandemic, the ruling in Freedom Mortgage Corporation is welcome good news. The Court made a commonsense decision, in which sending an acceleration warning, or a prior foreclosure will not lead to enforcement of mortgage loans being barred by the Statute of Limitations. Additionally, mortgage servicers will no longer need to send out de-acceleration letters to borrowers, or research whether a prior holder or servicer sent one to enforce a mortgage loan. These decisions by the Court send a clear message as to how the Statute of Limitations should be applied, in an area that should not be as unsettled as it had been.