Follow-up: Freedom Mortgage Corp. v. Engel

• Posted on: Oct 22 2021

By Jonathan H. Freiberger 

In its February 20, 2021, article entitled: “The New York Court of Appeals Decides Four Cases, In One Opinion, Addressing and Clarifying Issues Related to the Timeliness of the Commencement of Mortgage Foreclosure Actions” (the “Prior Article”), this Blog discussed, Freedom Mortgage Corp. v. Engel, 37 N.Y.3d 1 (2021), a February 18, 2021, decision by the New York Court of Appeals.  In Freedom, the Court of Appeals decided four cases “each turning on the timeliness of a mortgage foreclosure claim” and each of which “involve[d] the intersection of two areas of law where the need for clarity and consistency are at their zenith: contracts affecting real property ownership and the application of the statute of limitations.”  Freedom, 37 N.Y.3d at 19.  The law on statute of limitations and acceleration in mortgage foreclosure actions is discussed in the Prior Article and will not be recounted here.

The facts of Freedom, as obtained from the related Appellate Division, Second Department, decision dated July 11, 2018 (163 A.D.3d 631), and as set forth in the Prior Article, are simple.  In 2005, borrower borrowed $225,000 from lender, which obligation was evidenced by a note and secured by a mortgage.  Thereafter, the loan was modified.  Borrower defaulted in March of 2008 and a foreclosure action was commenced in July of 2008.  In 2013, the parties entered into a stipulation in order to “amicably resolve” the dispute.  As part of the stipulation, the action was discontinued, without prejudice, and the Notice of Pendency was cancelled.  Two years later, lender commenced a new action to foreclose the mortgage.  Borrower moved to dismiss the new action as time-barred because by the first action, the debt was accelerated but never de-accelerated, and the second action was commenced more than six years thereafter.  Supreme court held that the stipulation was an affirmative act by which the lender revoked its election to accelerate the loan.  The Appellate Division reversed because “the stipulation was silent on the issue of the revocation of the election to accelerate, and did not otherwise indicate the plaintiff would accept installment payments from the defendant.”  Freedom, 163 A.D.3d at 633.

On lender’s appeal, the Court of Appeals reversed and, agreeing with supreme court, found that the lender’s discontinuance of the first action was an “affirmative act” sufficient to deaccelerate the loan.  In so doing, the Court of Appeals in “[a]dopting a clear rule that will be easily understood by the parties and can be consistently applied by the courts, [held] that where the maturity of the debt has been validly accelerated by commencement of a foreclosure action, the noteholder’s voluntary withdrawal of that action revokes the election to accelerate, absent the noteholder’s contemporaneous statement to the contrary.”  Freedom, 37 N.Y.3d at 19.  

In light of the reversal, and because the Second Department decided Freedom on statute of limitations grounds only, the Court of Appeals remitted “the case for consideration of issues raised but not determined on the appeal to [the Second Department].”  Freedom, 37 N.Y.3d at 34.  Upon remittitur from the Court of Appeals, on October 20, 2021, the Second Department decided the issues left unresolved in its original decision, by addressing some affirmative defenses asserted by borrower in its answer, which included lender’s “lack of standing and lack of compliance with section 22 of the mortgage, which required the plaintiff to give notice of default prior to demanding payment in full” (collectively, the “Remaining Issues”). [Here]

On the Remaining Issues, the Second Department determined that lender failed to meet its burden of proof and held that “the Supreme Court should have denied those branches of the plaintiff’s cross motion which were for summary judgment on the complaint insofar as asserted against the defendant, to strike his answer and affirmative defenses, and to appoint a referee, regardless of the sufficiency of the defendant’s opposing papers.”  (Citation omitted.)

The issue of lender’s standing (an issue that this Blog has discussed, inter alia, [here], [here], [here] and [here]) was addressed first.  The Court reiterated that “[w]here, as here, the plaintiff’s standing has been raised by a defendant in a mortgage foreclosure action, the plaintiff must prove, by tender of evidence in admissible form, its standing as part of its prima facie showing on a motion for summary judgment.”  (Citations omitted.)  While in support of its cross-motion, lender submitted an affidavit of an employee of its loan servicer who made numerous averments based on her review of her employer’s records, the employee failed to identify or annex to her affidavit the relevant business records.  The Court noted that “evidence of the contents of business records is admissible only where the records themselves are introduced [because] it is the business record itself, not the foundational affidavit, that serves as proof of the matter asserted”.  (Citations, internal quotation marks and internal brackets omitted.)  Without producing the business records with the cross-motion, the affidavit of the loan servicer’s employee was “inadmissible hearsay”.  

The Court also found that “the unsworn allegations of fact contained in counsel’s memorandum of law regarding counsel’s physical possession of a note, either the original note or the original consolidated note, are, likewise, without probative value.  (Citations omitted.)  In light of these evidentiary shortcomings, the Court found that lender failed to “meet its prima facie burden of establishing its standing to commence this action.”

The same was true with respect to lender’s compliance with the mortgage’s notice of default provision.  While the employee submitted a copy of the notice of default with her affidavit, the “statements in her affidavit regarding the mailing of the notices were derived from unproduced business records and, therefore, were inadmissible hearsay and without probative value.”  (Citation omitted.) 

Jonathan H. Freiberger is a partner and co-founder of Freiberger Haber LLP.

This article is for informational purposes and is not intended to be and should not be taken as legal advice.