On May 3, the New York State Senate passed S5473D (Bill), which will apply immediately in all actions “in which a final judgment of foreclosure and sale has not been enforced.” (See S5473D at Section 10.) This means that the new law applies retroactively, affecting future foreclosure actions and existing foreclosures, including those in which a judgment of foreclosure and sale has been entered, but the auction has not yet occurred.
Essentially, the Bill seeks to overturn the New York Court of Appeals’ well-reasoned decision in Freedom Mtge. v. Engel, 37 N.Y.3d 1 (2021), and retroactively annul lenders’ longstanding right to revoke their option to accelerate mortgage loans after default. The Engel decision brought uniform clarity to the right of mortgagees to exercise their contractual rights and unilaterally de-accelerate a mortgage loan through the discontinuance of a foreclosure action and thereby re-set the six-year statute of limitations. The Bill sets out to accomplish this by amending several statutes that govern foreclosures under New York law.
The next step is to deliver the Bill to Governor Hochul for her signature. Governor Hochul may veto the Bill and ask for further edits, but that seems unlikely. Governor Hochul took office in August 2021, and her early actions in office have been aimed at preventing a flood of foreclosures. She signed a moratorium (which expired in January) and established the state’s participation in the Homeowners Assistance Fund.
The Bill may result in the dismissal of many existing foreclosure cases with prejudice, including cases restored based on the Engel decision. For example, under the Bill, a voluntary discontinuance of a current foreclosure action will no longer constitute an act of revocation and will not stop the running of the statute of limitations. Lenders that previously restored foreclosures that were dismissed pre-Engel for failure to revoke acceleration properly will likely immediately face motions to dismiss.
We anticipate substantial litigation should the Bill pass as written and suspect that lenders facing dismissal after enactment will argue the Bill is unconstitutional given its retroactive effect, particularly for lenders already involved in foreclosure actions.
Troutman Pepper will continue to monitor the Bill’s passing and any relevant updates as they happen.