The Court of Appeals' new rules should make these kinds of factual inquiries irrelevant in those cases where acceleration is effected by the filing of a complaint.
On February 18, 2021, the New York Court of Appeals handed down a decision clarifying several issues involving the statute of limitations in mortgage foreclosure actions. In a consolidated opinion, the high court reversed four Appellate Division rulings and resolved widening disagreement between the lower courts as to when a mortgage loan is accelerated and how certain loans may be "deaccelerated." The court's ruling undoubtedly will have profound effects on the rights of lenders and borrowers alike, and may allow lenders to commence new foreclosure actions once thought to be time-barred.
Under New York law, mortgage foreclosure actions are subject to a six-year statute of limitations, which ordinarily runs separately on each monthly payment default. Most mortgages include an optional acceleration clause that permits the lender to call due the entire balance of the loan, including the outstanding principal, upon any of these defaults. Acceleration effectively deprives the borrower of the right to reinstate the loan by paying only the arrears and requires the borrower to make a single lump-sum payment to cure the default (though often mortgages contain nonstandard clauses which ameliorate the harshness of this rule). As a result, when a loan is accelerated, the six-year statute of limitations to foreclose on the mortgage begins to run. The clock starts ticking on the mortgage as a whole when a lender makes an "unequivocally overt act" electing to accelerate the maturity date of the loan. Acceleration often takes one of two forms: serving the borrower with a pre-litigation acceleration notice; or filing a foreclosure complaint that alleges acceleration of the loan.
Recognizing the need for "consistent application of the statute of limitations" and "stability and predictability" in business relationships involving real property, the Court of Appeals set forth the following new rules:
- A foreclosure complaint must clearly identify the loan being accelerated. Where the complaint identifies the incorrect loan (such as by failing to allege a loan modification containing new terms), a valid acceleration has not occurred.
- A pre-litigation default notice (which usually is required to trigger the lender's right to accelerate) stating that the lender "will accelerate" the loan if the borrower fails to cure the default by a certain date does not accelerate the loan, even if the default is not cured by the date set forth in the letter. Such a statement is merely an expression of the lender's future intent, and some other unequivocally overt act in the future is required to demonstrate an election to accelerate.
- Where a foreclosure complaint acts to accelerate the loan (as opposed to an acceleration notice), a voluntary withdrawal of the complaint "constitutes a revocation of that acceleration" and a resetting of the statute of limitations, unless the discontinuance expressly states that the acceleration is not being revoked. A voluntary withdrawal may take the form of a stipulation between the parties or a lender's motion to discontinue the action. The court's opinion, however, noted that the parties had not properly preserved an argument challenging the lower courts' assumption that a lender can, in fact, revoke an acceleration without the borrower's consent as a matter of contract law, leaving that issue open for further development.
- A lender may revoke an acceleration even if the sole purpose is to avoid the statute of limitations. The court expressly rejected lower court decisions to the contrary, which had held that "a lender should be barred from revoking acceleration if the motive of the revocation was to avoid the expiration of the statute of limitations on the accelerated debt."
Prior to this decision, the appellate courts had required lenders to make some "affirmative act" in addition to withdrawing the complaint to revoke an acceleration. As a result, litigation often would arise where the parties' stipulation or order discontinuing the action was silent as to its effect on the acceleration. Eventually, the appellate courts developed the law to require lenders to provide additional evidence of intent going beyond the filings made with the court, such as correspondence and payment histories. The old rule left trial courts in the difficult position of divining the intent of the parties in withdrawing the complaint―a fact-specific inquiry that could hinge on opaque or unclear post-litigation communications between the parties. This inquiry often led to inconsistent results and, in some cases, harsh consequences for lenders where the court failed to find an affirmative act deaccelerating the loan within the six-year period. The end result in those cases was an unenforceable mortgage and a "free" house for the borrower.
The Court of Appeals' new rules should make these kinds of factual inquiries irrelevant in those cases where acceleration is effected by the filing of a complaint. Where a lender serves a pre-litigation acceleration notice, an affirmative act likely is still required to deaccelerate the loan. The ruling could potentially resurrect cases where the statute of limitations was previously deemed to have expired. Accordingly, lenders should reexamine their loan files to assess whether a new claim may now be asserted.
Finally, while the court's decision involved residential mortgages, the ruling should apply to commercial mortgage transactions because they are subject to the same statute of limitations. However, before assuming the new rule applies in either the residential or commercial context, a lender should first look to the express terms of the particular note and mortgage. As the Court of Appeals stated, "different notes and mortgage instruments may incorporate their own rules for acceleration or revocation thereof." Therefore, lenders should continue to exercise care in complying with any specific notice requirements contained within the mortgage loan documents.
The consolidated opinion was issued in Freedom Mortg. Corp. v. Engel, 2021 WL 6238691 (N.Y. Feb. 18, 2021).
Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.