As we explained in our summaries for Wells Fargo, Vargas, Freedom Mortgage, and Ditech, these cases involve the interplay between the acceleration of a mortgage debt and the statute of limitations for foreclosure actions. The Court (DiFiore, C.J.) held that a noteholder accelerates a debt only through clear, unequivocal acts; that discontinuing a foreclosure action will ordinarily de-accelerate a debt; and that a noteholder’s intent is irrelevant to the limitations inquiry.
Wells Fargo and Vargas
If a noteholder accelerates a mortgage debt, its claim for foreclosure immediately accrues, and the noteholder has six years to bring its claim. Whether the noteholder has accelerated a loan may therefore determine whether a later foreclosure action is timely.
In Wells Fargo and Vargas, the Court reaffirmed its 1932 holding in Albertina Realty Co. v. Rosbro Realty Corp. that a noteholder must take an “unequivocal overt act” to accelerate a mortgage debt—i.e., to require immediate payment in full. That overt act may be the commencement of a lawsuit to foreclose on the debt or it may be some other act that lets the borrowers know that they must repay the entire debt at once. Because acceleration is “a significant alteration of the borrower’s obligations under the [mortgage contract]”—which typically spans decades—acceleration “should not be presumed or inferred.”
Applying that standard, the Court held that the lender in Wells Fargo had not accelerated the debt due under the operative note by suing to foreclose on a prior version of the note. Because the prior note had “materially distinct terms” from the operative note, the borrower’s attempt to accelerate the debt under the original note was not an “unequivocal” act accelerating the under the operative note.
The Court also held that the noteholder in Vargas had not unequivocally notified the borrower that it intended to accelerate the loan. The noteholder in Vargas sent the borrower a letter stating that the noteholder “will accelerate [his] mortgage” if the borrower failed to cure his default within 32 days. The letter also noted that failure to cure “may result in the foreclosure and sale of your property.” Despite the warning that the noteholder “will accelerate” the loan, the Court held, the language stating “that the failure to cure ‘may’ result in the foreclosure of the property” left it “far from certain that either the acceleration or foreclosure action would follow, let alone ensue immediately at the close of the 32-day period.”
Freedom Mortgage, Ditech, and Wells Fargo
A noteholder that has accelerated a debt can revoke acceleration (known as “de-accelerating”), restoring the parties to their pre-acceleration positions. A foreclosure action is therefore timely even if brought more than six years after the acceleration of a loan that has been de-accelerated.
In Freedom Mortgage and Ditech, the Court held that when a noteholder accelerates a debt solely by bringing a foreclosure action, the noteholder may de-accelerate the debt by voluntarily discontinuing the foreclosure action. “A voluntary discontinuance withdraws the complaint,” the Court explained, and “when the complaint is the only expression of a demand for immediate payment of the entire debt, this is the functional equivalent of a statement by the lender that the acceleration is being revoked.” The Court thus held that the noteholders in Freedom Mortgage and Ditech each de-accelerated the borrowers’ debts by voluntarily discontinuing the foreclosure actions they had brought. (The Court noted that the parties are free to contract around this rule by specifying precisely what a noteholder must do to de-accelerate a debt.)
In so holding, the Court rejected the Appellate Division’s approach, which required the lender not only to voluntarily discontinue the action but also to demand that the borrower resume making monthly payments. As the Court observed, an inquiry that focuses on the noteholder’s post-discontinuance communications with the lender, which may occur “months (if not years) later,” would deprive parties of “clarity with respect to their post-discontinuance contractual obligations until the issue was adjudicated in a subsequent foreclosure action.” That approach would be at odds with the aim of statutes of limitations: allowing parties to “ascertain[]” with “certainty” when a cause of action accrues and expires.
Finally, in Wells Fargo, the Court held that the noteholder’s subjective reason for discontinuing a foreclosure action is irrelevant to de-acceleration. There, Supreme Court and the Appellate Division held that the noteholder’s voluntary discontinuance of a foreclosure action did not de-accelerate the debt, because the noteholder’s “primary reason” for discontinuing the action “was to avoid the statute of limitations bar.” Invoking general contract-law principles, the Court observed that “[a] noteholder’s motivation for exercising a contractual right is generally irrelevant” to whether the noteholder has validly exercised that right.
The Concurrence and Partial Dissent
Judge Wilson concurred in full. He wrote separately “to make one caveat clear”: that the Court did not decide “whether the notes and mortgages at issue here permit a lender to revoke acceleration.” In three of the cases, the parties did not dispute that the documents allowed for de-acceleration, and in the fourth case, Freedom Mortgage, the borrower contested the noteholder’s ability to revoke for the first time on appeal, meaning that the Court of Appeals lacked jurisdiction to consider it. Animating Judge Wilson’s concurrence was the fact that some of the notes and mortgage contracts were standard forms. He thus clarified that the Court’s decision shed no light on whether those forms allow de-acceleration.
Judge Rivera dissented in part. She agreed that noteholders in Wells Fargo and Vargas did not accelerate the debt and that the noteholder in Wells Fargo de-accelerated its prior acceleration by discontinuing its foreclosure, regardless of its subjective intent. But she disagreed on the rule for de-acceleration. In her opinion, merely withdrawing a foreclosure action is not enough to de-accelerate a debt. To de-accelerate, in Judge Rivera’s view, a noteholder must also “inform the borrower in the stipulation or a letter that withdrawal constitutes a revocation of the acceleration.” Judge Rivera explained that such a rule would mirror the rule for acceleration by requiring “an unequivocal overt act” by the noteholder. Under that rule, Judge Rivera would have ruled against the noteholders in Freedom Mortgage and Ditech, who “provided no evidence” that they informed the borrowers that their discontinuance of the foreclosure actions constituted de-acceleration.
By Scott on 2021-02-22.
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