By Sara Manaugh.
During argument on the appeal in Freedom Mortgage v. Engel—which the Court heard along with three other cases presenting similar issues concerning the statute of limitations governing mortgage foreclosure claims—the Court questioned the rule that over recent years had developed in the First, Second, and Third Departments to delimit foreclosure plaintiffs’ ability to stop, start, and reset the clock on foreclosure claims. The judges asked the parties, in effect, whether a rule providing that a plaintiff’s voluntary discontinuance of a foreclosure action alone operates to revoke the acceleration of a mortgage and reset the statute of limitations wouldn’t make adjudication of these actions simpler than the prevailing rule that revoking acceleration requires more than mere discontinuance. Unsurprisingly, the decision in Engel answered its own question by holding that voluntary discontinuance revokes acceleration, purporting thereby to give parties and courts clarity and limit parties’ ability to game the system. The new rule, unfortunately, fixes what wasn’t broken, promotes rather than inhibits manipulation of the judicial system, and undermines the primary purpose of statutes of limitations, which is unequivocally to afford parties finality and repose.
Accrual of a mortgage foreclosure claim, which has a six-year limitations period set by CPLR § 213(4), is triggered by the lender’s affirmative and overt act of calling a defaulted mortgage immediately due and payable in full, known as acceleration. A lender can accelerate a loan through various means, including by a notice to the borrower; but acceleration most often is effected by commencement of a foreclosure action. Other appeals decided along with Engel concerned the question of what constitutes acceleration, which may hinge on, among other things, the language employed in a purported acceleration notice or the invocation of operative contractual documents in the allegations of the foreclosure complaint. Engel addressed how a lender may revoke acceleration, thereby resetting the six-year clock.
Why revocation and resetting the limitations period has become so critical to foreclosure litigants in recent years in this state arises out of the confluence of events both global and New York-specific: the development of the secondary market in mortgage debt into the tail that wagged the dog of mortgage lending, the economic collapse driven in large part by conduct and practices in that market, the resulting explosion in foreclosure cases, new statutory pre-foreclosure notice requirements enacted to protect the burgeoning numbers of financially distressed New Yorkers at risk of losing their homes, the “robo-signing” scandal and revelation that foreclosure plaintiffs very frequently could not document their security interest in the homes they sought to take, and the imposition of procedural rules and laws designed to ensure that only plaintiffs who could demonstrate their entitlement to enforce a mortgage could prosecute foreclosure actions.
These events led, beginning in 2007 or so, to a statewide foreclosure docket with idiosyncratic characteristics. Cases had been commenced (and mortgages accelerated) by plaintiffs who could not readily prove their standing to sue, or who had not met statutory or contractual pre-foreclosure notice requirements, and who struggled to comply with laws requiring that they actually prove (or at least affirm) that they could meet or had met these requirements. Those plaintiffs, burdened unexpectedly with the obligation to show that they actually had the right to auction off the encumbered homes, abandoned and allowed to languish, or voluntarily discontinued, countless actions in which they could not fulfill those obligations. In cases where the point of discontinuance was not to allow homeowners to get current again on their mortgages, but rather so that a new, procedurally proper action could be brought—often after many years of inactivity—plaintiffs sometimes articulated no reason for seeking discontinuance. Frequently, however, they conceded that they intended to start the case over if and when they could get their hands on the documents needed to establish their right to enforce the mortgage, or after they had met the contractual and statutory notice requirements that constituted conditions precedent to suit. The homeowner may then be served with papers in a new case, several years after the original action. Indeed, sometimes foreclosure plaintiffs would repeat this exercise more than once, resulting in three or more cases based upon the same alleged default.
A foreclosure defendant sued on the same alleged default upon which a prior discontinued foreclosure action had been premised would, prior to Engel, have a statute of limitations defense if the prior action had been commenced more than six years earlier. One critical question for the court adjudicating that defense is whether the clock had continued to run after the prior action was discontinued. Plaintiffs faced with this defense typically contend that the discontinuance revoked the acceleration or “de-accelerated” the mortgage debt, thereby stopping the six-year clock. Defendants, in reply, would generally note the lack of evidence of an affirmative act of revocation, and often point to evidence that the plaintiff in fact intended to continue to seek foreclosure of the mortgage whose maturity it had previously accelerated. The commencement of a successive action arguably is itself evidence that plaintiff had no intention of revoking acceleration and allowing the homeowner to resume monthly payments.
The Appellate Division, having reckoned with this question in dozens of foreclosure appeals[1] and having seen that plaintiffs discontinue and file new cases to avoid getting time-barred, has generally held that a discontinuance without an affirmative act evidencing a clear intent to revoke the acceleration and put the parties back where they were prior to acceleration does not restart the clock. Evidence of such intent has been construed to require, at a minimum, “an express demand for monthly payments on the note, or, in the absence of such express demand, . . . copies of monthly invoices transmitted to the homeowner for installment payments, or . . . other forms of evidence demonstrating that the lender was truly seeking to de-accelerate and not attempting to achieve another purpose under the guise of de-acceleration.” Milone v. U.S. Bank N.A., 164 A.D.3d 145, 154 (2d Dep’t 2018). See also, e.g., Wells Fargo Bank, N.A. v. Portu, 179 A.D.3d 1204, 1207 (3d Dep’t 2020); Wells Fargo Bank, N.A. v. Liburd, 176 A.D.3d 464, 464-65, 107 N.Y.S.3d 858 (1st Dep’t 2019).[2] The Appellate Division has held that letters from lenders purporting to revoke acceleration are a mere pretext for seeking to extend the six-year clock when not accompanied by some clear indication that it will resume accepting periodic payments. See, e.g., Trust v. Barua, 184 A.D.3d 140, 146 (2d Dep’t 2020); Portu, 179 A.D.3d at 1207.
In holding that a voluntary discontinuance constitutes an affirmative act revoking acceleration, the Engel Court rejects the jurisprudence of the lower appellate courts whose decisions proceeded from intimate familiarity with the reality of plaintiffs’ belated efforts to salvage their moribund and defective cases. The Court bases that rejection on several dubious grounds. First, it asserts that the Appellate Division rule relies unduly on the plaintiff’s “post-discontinuance” conduct, making the rule difficult to administer compared with a rule that discontinuance itself is the only relevant act. This would make sense if not for the fact that post-discontinuance conduct very frequently demonstrates that discontinuance was not intended to revoke acceleration. In most cases, even if not developed in the factual record before the Court of Appeals in Engel, lender’s assertions that by discontinuing they intended to revoke acceleration are belied by what happens after discontinuance: loans continue to be reported to credit reporting agencies as in foreclosure, installment payments tendered by a lender are rejected, trial modification agreements offered to borrowers expressly disclaim de-acceleration, and statements sent to borrowers demand payment of fully-accelerated amounts and do not signal reinstatement or willingness to resume acceptance of monthly installment payments.
By way of analogy, where a plaintiff alleges that her employer fired her based on age discrimination, evidence that after terminating the plaintiff the employer had hired someone younger to replace her is clearly relevant to the question of discriminatory intent. We would consider it naïve in the extreme for the court to rule that the trier of fact could not consider the employer’s post-termination conduct in determining whether discrimination had occurred. Still less would we accept a court’s ruling that the employer’s offering a non-discriminatory reason for the firing is, on its own, enough to defeat a discrimination claim. Just as employers may and sometimes do offer pretexts to conceal discriminatory intent, so may lenders discontinue to avoid the consequences of their delay in prosecuting a foreclosure while purporting to permit a homeowner to resume making payments. Courts should not be barred from considering whether a lender claiming revocation of acceleration to evade the statute of limitations in fact behaved consistently with that assertion, or whether the borrower had any reason to know that the lender was no longer treating the loan as accelerated. To examine post-discontinuance conduct to determine whether an unambiguous revocation had been effected is neither “unworkable”—the appellate courts and the trial courts have been able to address scores of these cases on summary judgment motion records—nor does it violate contractual principles. The Appellate Division has rightly observed that discontinuance can serve more than one purpose, and the Engel Court’s suggestion that the act of discontinuance is contractual in nature conflates discontinuance with revocation, thereby assuming what the appellate courts recognized could not be assumed. Moreover, in a world where the majority of foreclosure defendants lack counsel, the pronouncement in Engel that its ruling will somehow provide clarity to foreclosure defendants that a voluntary discontinuance will permit them to resume making installment payments, while saying nothing about the treatment of the accrued arrears, is perplexing.
Beyond its failure to recognize that discontinuance is often not a clear or unambiguous act of revocation, the Engel rule will allow lenders to avoid the harsh consequences of their own delay in prosecuting foreclosures by repeatedly discontinuing and file new actions, thereby drawing out foreclosure proceedings, and keeping homeowners in an intolerable state of instability and fear indefinitely while permitting interest and fees to mount with each passing month. Equitable principles will constrain no plaintiff’s serial foreclosure litigation unless the defendant has the knowledge or representation that would lead her to raise them (or unless the court, on its own initiative, looks back through the records of prior cases). This outcome would have been completely avoidable had the Engel Court adopted the clear and easily administrable rule that the lower courts have heretofore applied.
[1] The Fourth Department had not addressed this issue.
[2] These decisions did not create new law; they merely applied longstanding principles requiring that both acceleration and de-acceleration be clear and unequivocal. The Court of Appeals’ decision to take up the issue when there had been no divergence on this issue among the appellate courts was surprising.
ABOUT THE AUTHOR: Sara Manaugh is the Director of the Homeowner Defense Project at Staten Island Legal Services.
Posted on 2021-03-23.