By Stephen J. Vargas.
Residential mortgage foreclosure actions have dominated the trial and intermediate appellate court dockets for more than a decade. Former Presiding Justice of the Appellate Division, Second Department Alan D. Scheinkman noted that mortgage foreclosures “comprise about one third of our cases” yet “[f]or a long time, foreclosure law was unsettled.” The Court of Appeals recognized the need to clarify the law concerning the most impactful defense in foreclosure litigation – the statute of limitations – and determined interrelated appeals concerning the limitations period – Freedom Mortgage Corp. v. Engel, Ditech Financial LLC v. Naidu, Vargas v. Deutsche Bank National Trust Company, and Wells Fargo Bank N.A. v. Ferrato (2021 NY Slip Op 01090) – on February 18, 2021. In doing so, the Court established bright-line rules how a mortgagee can accelerate a mortgage after default and revoke its election to accelerate, as well as how a mortgagor can rely on equitable estoppel to prevent revocation. The rulings afford significant consumer protections to delinquent mortgagors that would otherwise be unavailable.
Engel (163 A.D. 3d 631, 2d Dept. 2018), Naidu, (176 A.D. 3d 1387, 2d Dept. 2019) and Ferrato (183 A.D. 3d 529, 1st Dept. 2020) are Real Property Actions and Proceedings Law (“RPAPL”) Article 13 foreclosure actions and Vargas (168 A.D. 3d 630, 1st Dept. 2019) is a RPAPL §1501(4) action to cancel and discharge a mortgage on the ground the statute of limitations elapsed. In each action, the intermediate appellate courts determined the mortgage could not be enforced because the limitations period passed.
CPLR §213(4) is the controlling limitation on time rule and provides “an action upon a bond or note, the payment of which is secured by a mortgage upon real property” shall be commenced within six years. Upon a default in making an installment payment and prior to acceleration, the cause of action to recover the installment begins to run when the payment is not made. The mortgage provides the mortgagee with the option to accelerate the maturity date of the loan balance to recover it in a foreclosure action, and acceleration predominantly occurs via the filing of a foreclosure complaint.
The concept of deceleration or revocation of the election to accelerate is a creature of case law and based on the inherent right of the holder of a contractual option to exercise it. In Federal National Mortgage Ass’n v. Mebane, 208 A.D. 2d 892 (2d Dept. 1994), the Second Department opined “a lender may revoke its election to accelerate all sums due under an optional acceleration clause in a mortgage provided that there is no change in the borrower’s position in reliance thereon” and New York courts recognize the mortgagee, as the holder of the option to accelerate, holds the right to revoke the acceleration and return the loan to installment payment status. Revocation serves an important public policy purpose because it is necessary to facilitate most settlement arrangements with a mortgagor such as a loan modification agreement, forbearance, or reinstatement. If the option did not exist, then a mortgagor would be obligated to tender the entire unpaid loan balance – including, but not limited to, the principal balance, accrued interest, and escrow advances – to avoid the foreclosure and sale of the mortgaged real property.
In Engel, the Court established clear guidance concerning how and when a mortgagee can exercise its contractual right to accelerate the maturity of a mortgage after default as well as revoke such election. The parties to the appeals recognized the commencement of a foreclosure action in which the mortgagee alleged in its complaint that is elected to call due the entire amount due and owing constitutes one method of effecting acceleration. However, at issue in Engel and Naidu was whether the CPLR §3217 voluntary discontinuance of a prior foreclosure within six years from its inception operated as a deceleration based on the principle that the discontinuance nullified the complaint so that the second foreclosure actions that were on appeal, commenced more than six years after the first, were timely. The intermediate appellate courts held a discontinuance, in itself, is not a revocation unless it expressly notifies the mortgagor the acceleration is being rescinded and demands the mortgagor resume making monthly installment payments, or the express notice and demand were given concurrently or subsequent to the termination of the action in supplemental documents. The Engel and Naidu discontinuance documents did not contain such notification or demand and were ineffective to rescind the prior accelerations. Consequently, the foreclosures filed more than six years after the prior actions were time-barred.
The Court of Appeals took exception to the Second Department’s requirement, deeming it “analytically unsound as a matter of contract law and unworkable from a practical standpoint” because it required an “exploration into the [mortgagee’s] intent, often “accomplished through an exhaustive examination of post-discontinuance acts.” The Court noted “[a] noteholder’s motivation for exercising a contractual right is generally irrelevant, but it bears noting that a noteholder has little incentive to repeatedly accelerate and then revoke its election because foreclosure is simply a vehicle to collect a debt and postponement of the claim delays recovery.” Moreover, the foreclosing party is barred from recovering unpaid installments more than six years past due in a subsequent foreclosure action. Therefore, if a mortgagee determines that discontinuance of a foreclosure within six years from its commencement is warranted – irrespective of its reasoning – then the withdrawal is a revocation of the acceleration, the loan returns to installment status, and the mortgagor can resume making monthly payments or reinstate by repaying the arrears. Based on the ruling, Freedom Mortgage Corp. and Ditech Financial LLC preserved the right to foreclose.
In Vargas, the Court opined on an issue that divided the appellate courts – whether a contractual notice of default in which the mortgagee informs the mortgagor of the total arrears, demands they be repaid by a date certain, and warns the failure to cure the default by the date provided in the notice will result in automatic acceleration of the maturity of the debt when the cure period expires. Until the Court of Appeals intervened, the First Department held acceleration occurred when the cure period expired, the Second and Fourth Departments disagreed because the notice was an expression of future intent that fell short of an acceleration, and the Third Department adopted both reasonings depending on the language contained in the notice. The Court of Appeals relied on the Second Department’s rationale and held the notice is not an acceleration of the debt as a matter of law because it “did not seek immediate payment of the entire, outstanding loan” – rather, it sought to recoup the arrears – and referred to acceleration as a future event if the conditions in the notice were not met. After years of disparate rulings, the decisional law split was resolved.
In the lower courts, mortgagor Vargas successfully argued the notice sent by mortgagee Deutsche Bank accelerated the debt and Deutsche Bank did not commence a foreclosure action within six years therefrom, and the mortgage should be cancelled and discharged from the County land records because it was unenforceable. The Court of Appeals held such an outcome was inapposite and reversed the judgment discharging the mortgage. The Court noted the important public policy considerations underlying this reasoning, specifically that “default notices provide an opportunity for pre-acceleration negotiation – giving both parties the breathing room to discuss loan modification or devise a plan to help the [mortgagor] achieve payment currency”, without diminishing the mortgagee’s rights. If the Court of Appeals reached a contrary determination, then a mortgagor would face an insurmountable obstacle to home retention – virtually immediate acceleration – after default.
The primary issue presented in Ferrato was whether filing a deficient foreclosure complaint that did not seek to enforce the governing loan documents constitutes a valid acceleration; this is a rare fact pattern. The lower courts dismissed the defective pleading that purported to accelerate the debt because the mortgagee did not acknowledge the mortgage was modified and, instead, sued to recover the loan balance at its pre-modified terms. However, those courts concluded the defective complaint was nonetheless a valid acceleration, and the subsequently filed complaint that reflected the modified loan terms was time-barred. The Court of Appeals recognized this was incongruous and held a deficient complaint cannot effectuate a valid acceleration, which preserved Wells Fargo’s right to foreclose.
A mortgage foreclosure is an equitable action and the Court recognized the long-standing equitable caveat to the mortgagee’s right to revoke its acceleration. Relying on Kilpatrick v. Germania Life Ins. Co., 83 N.Y. 163 (1905) and its progeny – including Mebane – it noted if a mortgagor relied on acceleration and materially changed position in detrimental reliance on it, then the mortgagee is equitably estopped from revoking the acceleration via a voluntary discontinuance or other means, such as by a revocation notice transmitted by the mortgagee or its loan servicer. However, the equitable estoppel analysis was not necessary in these appeals because the mortgagors did not allege they detrimentally relied on the accelerations.
ABOUT THE AUTHOR: Stephen J. Vargas is a Supervising Attorney who oversees the Westbury office of Gross Polowy LLC, a consumer finance and residential real estate law firm that represents mortgage lenders and servicers in New York and New Jersey.
Posted on 2021-03-23.