Recently, the New York Court of Appeals issued decisions in four cases related to applying the statute of limitations to foreclose on a mortgage in New York. Most notably, in Freedom Mortgage Corporation v. Engel, the Court of Appeals established a bright-line rule that when the acceleration of a mortgage debt occurs by filing a foreclosure complaint, a lender’s voluntary discontinuance of that action constitutes a revocation of acceleration as a matter of law, absent an express, contemporaneous statement to the contrary by the lender.
Both Engel and Ditech Financial, LLC v. Naidu questioned whether a voluntary discontinuance of a prior foreclosure action revoked the lender’s acceleration of the mortgage debt. Under New York law, a foreclosure action commenced more than six years after acceleration is time barred.
The plaintiffs in Engel and Naidu argued their subsequent foreclosure actions were timely commenced because they had affirmatively revoked prior elections to accelerate the mortgage debt by voluntarily withdrawing those complaints. Despite the trial court holding that the respective accelerations were revoked by a voluntary discontinuance of the preceding foreclosure action, the Appellate Division reversed in each case, dismissing the actions as time barred.
The Court of Appeals rejected the Appellate Division’s approach and noted that it is both “analytically unsound as a matter of contract law” and “unworkable from a practical standpoint.” The Court of Appeals reasoned the Appellate Division’s decision suggested that the “revocation inquiry turns on an exploration into the bank’s intent, accomplished through an exhaustive examination of post-discontinuance acts.” The Court of Appeals found this approach inconsistent with the policy underlying the statute of limitations because under this rejected interpretation, timeliness “cannot be ascertained with any degree of certainty,” an outcome repeatedly disfavored by the court.
Instead, the Court of Appeals adopted a “clear rule” that when acceleration occurs by the filing of a foreclosure complaint, the lender’s voluntary discontinuance of that action constitutes an affirmative act of revocation as a matter of law, absent an express, contemporaneous statement to the contrary by the lender. This decision adheres to precedent favoring consistent, straightforward application of the statute of limitations, which serves the objectives of “finality, certainty, and predictability,” to the benefit of both borrowers and lenders.
In Wells Fargo Bank v. Ferrato and Vargas v. Deutsche Bank Natl. Trust Co., the Court of Appeals addressed whether specific actions on behalf of a lender constitute acceleration of mortgage debt, thereby commencing the six-year statute of limitations period.
In Vargas, the borrower commenced an action under RPAPL 1501(4) seeking to discharge a mortgage on real property based upon the statute of limitations’ expiration. The borrower alleged that the lender’s default letter sent in August 2008 accelerated the debt. The trial court found that the default letter was insufficient to accelerate the loan, but upon borrower’s motion to renew, denied the lender’s motion to dismiss and granted summary judgment in favor of borrower to discharge the mortgage. The Appellate Division affirmed. The Court of Appeals reversed, holding that the default letter did not accelerate the mortgage debt because it did not seek immediate payment of the entire balance, but rather “referred to acceleration only as a future event, indicating the debt was not accelerated at the time the letter was written.”
In Ferrato, the Court of Appeals held that the lender’s prior foreclosure action did not serve to accelerate the borrower’s modified loan because lender did not reference the loan modification or attach the modified loan agreements, which had materially distinct terms, stating that “the deficiencies in the complaints were not merely technical or de minimis and rendered it unclear what debt was being accelerated — the commencement of these actions did not validly accelerate the modified loan.”
These decisions are a clear win for lenders and servicers operating in New York. For several years now, New York courts have grappled with statute of limitations issues in foreclosure actions and what constitutes a revocation of the acceleration of mortgage debt. These decisions serve to create a clear rule in New York regarding the statute of limitations in foreclosure actions.