By David P. Case.
The Engel decision came to the right result and settles a recent question on revoking an acceleration through discontinuance. Up until recently, it was clear that a lender or creditor of an installment contract may, in accordance with the terms of the contract, accelerate the loan through a clear, overt, and unequivocal act. Much like any other contractual right, the party to the contract may also waive that right or reverse their position as long as the other party is not detrimentally prejudiced. However, while the Courts in New York confirmed what must be done to accelerate a contract that requires the installment payments on a loan and that an acceleration may be revoked, the Court of Appeals has not spoken on how such a revocation occurs. Thus, we saw the Appellate Divisions determine the retroflected review of the circumstances that the Court of Appeal rightly rejected in Engel.
While the Engel decision comes to the right result, there is another reason under a different legal concept: nullification. It is well established and settled law that when an action is voluntarily discontinued, all actions, orders (unless stated otherwise), and events that occurred within that action become a nullity—as if they had never happened. See, Newman v. Newman, 245 A.D.2d 353, 354 (2d Dept. 1997). In the Newman case, one spouse sued the other for divorce, but voluntarily discontinued the case before the defendant joined issue and tried to assert a counterclaim. The Second Department held that in voluntarily discontinuing the action, “it is as if it had never been; everything done in the action is annulled and all prior orders in the case are nullified.” Id. citing Brown v. Cleveland Trust Co., 233 N.Y. 399 (1922)(a divorce action); Weldotron Corp. v. Arbee Scales, 161 A.D.2d 708 (2d Dept. 1990)(a fraud action); and Miehle Printing Press & Mfg. Co. v. Amtorg Trading Corp, 278 A.D.682 (1st Dept. 1951)(type of action unclear, but the First Department, in a Memorandum Opinion simply says, “As the discontinuance annuls all that has taken place in the action, there is no occasion for the concern which appellant expresses as to its rights of appeal from the order of summary judgment.”).
The Queens County Supreme Court also adopted the nullification theory in one of the other cases heard and decided with Engel: Ditech Financial v. Naidu. However, while the Supreme Court, Queens County, held that the voluntary discontinuance nullified the acceleration, the Appellate Division did not discuss nullification.
If a mortgage loan is accelerated by the commencement of the action, the voluntary discontinuance of that action nullifies the acceleration as if it were never accelerated. The aggrieved party to a contract has long held the reigns on when (with some limitations) and how (again with some limitations) they wish to petition the government for a redress of wrongs, as is their First Amendment right. Since acceleration of a debt is a matter of contract, the contracting party ought to have the same right to revoke or nullify that acceleration as long as principles of estoppel do not apply. It does not bode well for a free society—or for borrowers in foreclosure—to deprive the aggrieved party to a contract the legal right to change their mind.
To suggest that Engel allows a foreclosing lender to avoid a statute of limitations is misplaced. In many states throughout the United States, including our neighbors in Vermont and New Jersey, the statute of limitations to recover on a defaulted mortgage runs out a certain number of years after the mortgage matures. Engel does provide litigants, not just in the foreclosure context, the ability to re-address burden of proof issues as well a settlement negotiations outside of the construct of the litigation.
ABOUT THE AUTHOR: David P. Case is a partner at Fein, Such & Crane, L.L.P.
Posted on 2021-03-23.