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PRETEXTUAL DE-ACCELERATION OF MORTGAGE DEBT

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  • Posted on: Feb 5 2021

[EDITOR’S NOTE.  On February 18, 2021, the New York Court of Appeals decided Freedom Mortgage Corp. v. Engel, in which it, inter alia, expressly rejected the “pretextual de-acceleration” theory.  This BLOG’s treatment of Freedom can be found here.]

This Blog has written extensively on issues related to residential mortgage foreclosure.  [For example, HERE, HERE, HERE, HERE, HERE, HERE, HERE, HERE.]

There is no dispute that an action to foreclose a mortgage is governed by a six-year statute of limitations.  CPLR 213(4)See also, Fed. Nat. Mort. Assoc. v. Schmitt, 172 A.D.3d 1324, 1325 (2nd Dep’t 2019); Deutsche Bank Nat. Trust Co. v. Blank, 189 A.D.3d 1678, 1679 (2nd Dep’t 2020).  Much litigation, however, has centered on when the statute of limitations begins to accrue. 

When a mortgage is payable in installments, “separate causes of action accrue for each installment that is not paid and the statute of limitations begins to run on the date each installment becomes due.”  HSBC Bank USA, N.A. v. Gold, 171 A.D.3d 1029, 1030 (2nd Dep’t 2019).  

Most mortgages, however, provide that a mortgagee may accelerate the entire debt in the event of, inter alia, a payment default by a mortgagor. Thus, “the terms of the mortgage may contain an acceleration clause that gives the lender the option to demand due the entire balance of principal and interest upon the occurrence of certain events delineated in the mortgage.”  Bank of New York Mellon v. Dieudonne, 171 A.D.3d 34, 37 (2nd Dep’t 2019) (citations and internal quotation marks omitted).  When the provisions of a mortgage provide that “the acceleration of the maturity of a mortgage debt on default is made optional with the holder of the note and mortgage, some affirmative action must be taken evidencing the holder’s election to take advantage of the accelerating provision, and until such action has been taken the provision has no operation.”  BONY Mellon, 171 A.D.3d at 37 (citations and internal quotation marks omitted).  This may be done by a clear and unequivocal demand or the commencement of an action.  U.S. Bank Nat. Assoc. v. Catalfamo, 189 A.D.3d 1786 (3rd Dep’t 2020) (citations omitted).  Similarly, the Second Department noted several ways by which a lender may accelerate a mortgage debt:

One way is in the form of an acceleration notice transmitted to the borrower by the creditor or the creditor’s servicer. To be effective, the acceleration notice to the borrower must be clear and unequivocal.  A second form of acceleration, which is self-executing, is the obligation of certain borrowers to make a balloon payment under the terms of the note at the end of the pay-back period.  A third form of acceleration exists when a creditor commences an action to foreclose upon a note and mortgage and seeks, in the complaint, payment of the full balance due.

Milone v. US Bank Nat. Assoc., 164 A.D.3d 145, 152 (2nd Dep’t 2018) (citations omitted).

Once the mortgagee’s election to accelerate is properly made, “the borrower’s right and obligation to make monthly installments ceased and all sums became immediately due and payable.”  Fed. Nat. Mort. Assoc. v. Mebane, 208 A.D.2d 892, 894 (2nd Dep’t 1994) (citation omitted).  The statute of limitations begins to run anew on the entire debt upon acceleration.  HSBC, 171 A.D.3d at 1030 (citations omitted).

For any number of reasons, a lender may wish to revoke its election to accelerate and de-accelerate a loan, but “it must do so by an affirmative act of revocation occurring during the six-year statute of limitations period subsequent to the initiation of the prior foreclosure action.”  NMNT Realty Corp. v. Knoxville 2012 Trust, 151 A.D.3d 1068, 1070-71 (2nd Dep’t 2017) (citation omitted).  See also, Christiana Trust v. Barua, 184 A.D.3d 140, 145 (2nd Dep’t 2020) (citations omitted) (revocation must be made “within six years of the earlier acceleration”).  As with an acceleration notice, “the de-acceleration of note balances must also be clear and unambiguous to convey the fact that the previous demand for full payment of the note has been affirmatively revoked.”  Christiana, 184 A.D.3d at 146 (citations omitted).  Further, the revocation notice “revives the borrower’s right to make the monthly payments that became due between the time the loan was accelerated and the time the acceleration was revoked, together with the right to make future monthly installment payments.”  Christiana, 184 A.D.3d at 148.  Accordingly, “in order to effectively rescind the acceleration, [the lender] should be required to notify the borrower that the right to make monthly payments is restored and that the lender will accept the tender of such payments.”  Christiana, 184 A.D.3d at 148 (citation omitted).  

On January 27, 2021, the New York Supreme Court, Kings County, decided Carter v. U.S. Bank Trust, N.A.  In Carter, plaintiff mortgagor brought an action pursuant to Real Property Actions and Proceedings Law 1501(4) to discharge a mortgage of record because the “applicable statute of limitations for the commencement of an action to foreclose [the] mortgage … has expired….”  [Note that this BLOG has addressed RPAPL 1501 HERE and HERE.]  An interesting aspect of the Court’s analysis on issues such as acceleration, de-acceleration and addressing statute of limitations calculations was the mention of pretextual de-accelerations “to avoid the onerous effect of an approaching statute of limitations.”  Carter (quoting, Milone, 164 A.D.3d at 145).  Simply stated, when faced with the possibility of missing a statute of limitations deadline of an accelerated loan, a lender may simply choose to de-accelerate rather than take the time to commence an action.  Thus, the Milone Court stated:

Courts must, of course, be mindful of the circumstance where a bank may issue a de-acceleration letter as a pretext to avoid the onerous effect of an approaching statute of limitations and to defeat the property owner’s right pursuant to RPAPL 1501 to cancel and discharge a mortgage and note. Here, however, the de-acceleration letter containing a clear and unequivocal demand that the homeowner meet her prospective monthly payment obligations constitutes a de-acceleration in fact and cannot be viewed as pretextual in any way. Specifically, a de-acceleration letter is not pretextual if, as here, it contains an express demand for monthly payments on the note, or, in the absence of such express demand, it is accompanied by copies of monthly invoices transmitted to the homeowner for installment payments, or, is supported by 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 (cf. Deutche Bank Natl. Trust Co. Ams. v. Bernal, 56 Misc.3d at 923–924, 59 N.Y.S.3d 267). In contrast, a “bare” and conclusory de-acceleration letter, without a demand for monthly payments toward the note, or copies of invoices, or other evidence, may raise legitimate questions about whether or not the letter was sent as a mere pretext to avoid the statute of limitations.

Milone, 164 A.D.3d at 154.  Relying on Milone, the Christiana Trust Court recognized that because “the foreclosure of mortgages encumbering residential properties involves elements of equity … the declaration of a de-acceleration cannot be utilized as a mere pretext to avoid the onerous effect of the statute of limitations.”  Christiana Trust, 184 A.D.3d at 146.

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