On February 14, 2023, the New York Court of Appeals overturned the Appellate Division, Second Department’s Kessler decision, which had applied a strict application of Real Property Actions and Proceedings Law § 1304, also known as a 90-day notice. In 2017, the Lender moved for summary judgment against Mr. Kessler on its foreclosure complaint. Mr. Kessler cross-moved to dismiss, arguing that the inclusion of the final two paragraphs in his 90-day notice, addressing bankruptcy status and military membership, violated section 1304’s “separate envelope” provision. The trial court agreed and dismissed the complaint. The Appellate Division affirmed on the same ground, holding that including in the envelope sent to the borrower any language not required by the statute violates its separate envelope provision.

On appeal to New York’s highest court, the Lender challenged whether the inclusion of concise and relevant additional information voids an otherwise proper notice to borrowers sent under section 1304, thus barring a subsequently filed foreclosure action. In reversing the Appellate Division, the Court of Appeals found that accurate statements that further the underlying statutory purpose of providing information to borrowers that is or may become relevant to avoiding foreclosure do not constitute an “other notice” in violation of the statute. Instead, the Court of Appeals found that the paragraph relating to bankruptcy proceedings may be particularly useful to avoid confusing borrowers subject to the automatic stay in bankruptcy court and to avoid potential violation of such stays by the lender. Moreover, the Court of Appeals warned that a bright-line rule against any additional language in the same envelope might conflict with specific disclosure requirements under federal law. Instead, the Court of Appeals was in favor of a workable rule that balances the practical considerations of the lender and borrower in a way that best advances the clear statutory purpose, which is to alert the borrower in default to their current status under their loan agreement and steps they may take to avert the filing of a foreclosure action.

The decision is an important and welcomed relief for many lenders and servicers within the state. Following the Appellate Division’s ruling in Kessler, many trial courts dismissed foreclosure complaints for failure to strictly comply with the 90-day notice requirements because of the inclusion of the language regarding bankruptcy and military membership. The Court of Appeals has now clarified issues related to the 90-day notice for lenders and servicers to follow.

Troutman Pepper will continue to monitor the decision’s impact and report on any relevant updates as they happen.