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

• Posted on: Feb 20 2021

This BLOG has written extensively on issues related to residential mortgage foreclosure actions.  Indeed, earlier this month, in “PRETEXTUAL DE-ACCELERATION OF MORTGAGE DEBT”, this BLOG provided an overview of the applicable statute of limitations in foreclosure, the calculation of the commencement thereof, and the acceleration and de-acceleration of mortgage debt.  The Departments of the Appellate Divisions were not in agreement on some of these related issues and, accordingly, on February 18, 2021, the Court of Appeals decided four cases (in one decision) “each turning on the timeliness of a mortgage foreclosure claim [that] involve 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.”  The four cases, with links to the related Appellate Division decisions, are as follows:

Freedom Mortgage Corp. v. Engel (Appellate Division);

Ditech Financial , LLC v. Naidu (Appellate Division);

Vargas v. Deutsche Bank National Trust Co. (Appellate Division); and,

Wells Fargo Bank, N.A. v. Ferrato (Appellate Division)

The relevant caselaw, as largely set forth in “PRETEXTUAL DE-ACCELERATION OF MORTGAGE DEBT,” is briefly reiterated herein. 

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 (2^nd Dep’t 2019); Deutsche Bank Nat. Trust Co. v. Blank, 189 A.D.3d 1678, 1679 (2^nd Dep’t 2020).  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 (2^nd 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 (3^rd Dep’t 2020) (citations omitted).  Indeed, long ago in Albertina Realty Co. v. Rosbro Realty Corp., 258 N.Y. 472 (1932), the Court found that an “unequivocal overt act” was necessary to effectuate an acceleration and that the filing of a “summons and verified complaint and lis pendens constituted a valid election” where “[t]he complaint recited that the plaintiff had elected”. Albertina, 258 N.Y. at 476.  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 (2^nd 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 (2^nd 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).

Against this backdrop, the facts in each case become important and are briefly stated as follows:

FREEDOM (facts obtained from Appellate Division, Second Department, decision)

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.  Borrower challenged the personal jurisdiction of the Court. 

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.  The 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.

DITECH (facts obtained from Appellate Division, Second Department, decision)

In 2006, the borrower executed and delivered to lender a note and mortgage, which were later amended and assigned.  In 2009, an action to foreclose on the mortgage was commenced in which the lender “declared that it ‘elected to call due the entire amount secured by the mortgage.’”  (Brackets omitted.)  In 2014, the parties discontinued the action, without prejudice, pursuant to a stipulation that did not specifically revoke lender’s election to accelerate the debt. 

A subsequent foreclosure action was commenced in 2016 and the borrower moved to dismiss same as time-barred.  The Appellate Division, reversing supreme court, held that the actions were time-barred.  As in Freedom, the Ditech Court found that the lender failed to raise questions as to whether it “revoked its election to accelerate the mortgage within six years from the commencement of the first action” and the stipulation was silent on this issue and otherwise did not provide for the resumption of monthly installment payments.

VARGAS (facts obtained from Court of Appeals and the Appellate Division, First Department, decisions)

In 2016, the borrower commenced an action pursuant to RPAPL 1501(4) to discharge the allegedly stale mortgage.  (Such actions have been treated by this BLOG [HERE].)  Borrower argued that a 2008 default letter accelerated the debt and the six-year statute of limitations expired prior to the commencement of the RPAPL 1501(4) action.  As will be discussed further herein, the Court of Appeals, described the language of the default letter insufficient to have effectuated an acceleration of the debt.

Supreme court initially granted lender’s motion to dismiss the complaint but, upon lender’s motion to renew, changed course and denied lender’s motion to dismiss and granted borrower’s motion for summary judgment declaring that borrower owned the subject property free and clear of all liens.  The Appellate Division, First Department, affirmed supreme court’s decision on the renewal motion, holding that” [w]e have held that [the language from the default letter] constitutes a clear and equivocal intent to accelerate the loan balance and commence the statute of limitations on the entire mortgage debt.”

WELLS FARGO

The facts in Wells Fargo, as recounted by the Court of Appeals, are as follows:

Over ten years ago, borrower … allegedly defaulted on a $900,000 loan secured by a mortgage on her Manhattan condominium unit. Upon Wells Fargo’s initiation of this foreclosure action, [borrower] moved to dismiss, arguing that the debt was accelerated in September 2009 by the commencement of the second foreclosure action and the limitations period therefore expired six years later, in September 2015. Supreme Court denied [borrower]’s motion, concluding that neither the second nor the third foreclosure actions—commenced in 2009 and 2011, respectively—validly accelerated the debt because, as [borrower] had successfully argued in Supreme Court in those actions, the complaints reflected an attempt to foreclose upon the original note and mortgage even though the terms of that note had been modified (increasing the debt and changing the interest rate) in 2008. On [borrower]’s appeal, the Appellate Division (among other things) reversed and granted her motion to dismiss, reasoning that the September 2009 complaint effected a valid acceleration of the modified loan despite the failure to reference the correct loan documents. The Appellate Division granted Wells Fargo leave to appeal to this Court and, because we agree with Wells Fargo that the modified loan debt which it now seeks to enforce could not have been accelerated by the complaints filed in the second (or, for that matter, third) foreclosure action which failed to reference the modified note, we reverse the portion of the Appellate Division order granting [borrower]’s motion to dismiss the complaint in the fifth foreclosure action and deny that motion.  (Footnote omitted.)

THE RESULTS

In Freedom and Ditech, 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.  Thus, in both Freedom and Ditech, the Appellate Division Orders were reversed.  Significantly, the Court of Appeals also expressly rejected the theory espoused in the “pretextual de-acceleration” theory (which was the subject of a recent BLOG article [HERE]), which provided 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,” concluding that “[a] noteholder’s motivation for exercising a contractual right is generally irrelevant (see generally Metropolitan Life Ins. Co. v Noble Lowndes Intl., 84 NY2d 430, 435 [1994])—but it bears noting that a noteholder has little incentive to repeatedly accelerate and then revoke its election because foreclosure is simply a vehicle to collect a debt and postponement of the claim delays recovery.

In Vargas and Wells Fargo, the Court of Appeals, recognizing that “a noteholder must effect an “unequivocal overt act” to accomplish such a substantial change in the parties’ contractual relationship” rejected “the argument in Vargas that the default letter in question accelerated the debt, and similarly conclude in Wells Fargo that two complaints in prior discontinued foreclosure actions that each failed to reference the pertinent modified loan likewise were not sufficient to constitute a valid acceleration”.  As will be discussed further herein, the language in the Vargas default letter was not sufficiently unequivocal to constitute a valid acceleration. 

DISCUSSION In deciding these four cases, the Court generally discussed caselaw consistent with that which is set forth supra.  The Court then recognized that “in each case, the timeliness dispute turns on whether or when the noteholders exercised certain rights under the relevant contracts, impacting when each claim accrued and whether the limitations period expired, barring the noteholders’ foreclosure claims.”  Adding a historical backdrop, the Court stated that:

Because these cases involve the operation of the statute of limitations, we begin with some general principles. We have repeatedly recognized the important objectives of certainty and predictability served by our statutes of limitations and endorsed by our principles of contract law, particularly where the bargain struck between the parties involves real property. Statutes of limitations advance our society’s interest in giving repose to human affairs. Our rules governing contract interpretation—the principle that agreements should be enforced pursuant to their clear terms—similarly promotes stability and predictability according to the expectations of the parties. This Court has emphasized the need for reliable and objective rules permitting consistent application of the statute of limitations to claims arising from commercial relationships.

The timeliness of a foreclosure action requires “an understanding of the parties’ respective rights and obligations under the operative contracts: the note and the mortgage. The noteholder’s ability to foreclose on the property securing the debt depends on the language in these documents.”  (Citations omitted.)  The Court noted that the four cases decided are typical in terms of the underlying documentation.  Historically:

residential mortgage contracts have typically provided noteholders the right to accelerate the maturity date of the loan upon the borrower’s default, thereby demanding immediate repayment of the entire outstanding debt.  In these cases, the mortgages provide that the noteholder “may” require immediate payment of the outstanding debt—i.e., accelerate the maturity of the loan—upon the borrower’s default. It is plain from this language that whether to exercise this contractual right is a matter within the noteholder’s discretion—the noteholder is not obliged to accelerate the loan upon a default. The extended contractual relationship explains why residential mortgage agreements are generally structured in this way. Noteholders can—and often do—anticipate and tolerate defaults relating to timely payment, permitting the borrower to correct such deficiencies without a significant disturbance in the contractual relationship. Precipitous acceleration of the debt serves neither party as it works a fundamental alteration of the status quo.  (Citations and footnote omitted.)

As previously stated, the right to accelerate is significant because “acceleration permits the noteholder to commence an action seeking the remedy of full foreclosure—an equitable tool permitting the noteholder to take possession of the real property securing the debt.  (Citation omitted.)  Acceleration also triggers the six-year statute of limitations on the accelerated amount of the debt.  As to the efficacy of the acceleration, notice to the borrower is not the operative consideration because:

[w]hile the act evincing the noteholder’s election must be sufficient to constitute notice to all third parties of such [a] choice,” a borrower’s lack of actual notice does not as a matter of law destroy the effect of the election. Put another way, the point at which a borrower has actual notice of an election to accelerate is not the operative event for purposes of determining when the statute of limitations begins to run. Indeed, in Albertina, we held that the debt was accelerated when the verified complaint and lis pendens were filed, even though the papers had not yet been served on the borrower. The determinative question is not what the noteholder intended or the borrower perceived, but whether the contractual election was effectively invoked.  (Citations, internal quotation marks and brackets omitted.)

In Wells Fargo, the lender failed to attach the modified loan documents to the complaint “or otherwise acknowledge those documents, which had materially distinct terms.”  The borrower urged that the earlier foreclosure actions operated to accelerate the debt and, therefore, the new action was time-barred.  The Court disagreed and stated:

Under these circumstances—where the deficiencies in the complaints were not merely technical or de minimis and rendered it unclear what debt was being accelerated—the commencement of these actions did not validly accelerate the modified loan. Because [borrower] did not identify any other acceleration event occurring more than six years prior to the commencement of the fifth foreclosure action, the Appellate Division erred in granting her motion to dismiss that action as untimely.  (Citation and footnote omitted.)

In Vargas, the issue was whether lender’s default letter operated to accelerate the underlying debt. The Court recognized the disagreement amongst the Appellate Division Departments as to the sufficiency of the language required to constitute an “unequivocal” “valid election to accelerate”.  Thus, the Court stated:

In Deutsche Bank Natl. Trust Co. v Royal Blue Realty Holdings, Inc. (148 AD3d 529 [1st Dept 2017]), the First Department concluded that a letter stating that the noteholder “will” accelerate upon the borrower’s failure to cure the default constituted clear and unequivocal notice of an acceleration that became effective upon the expiration of the cure period. But the Second Department has rejected that view (see e.g., Milone v US Bank N.A.,164 AD3d 145 [2d Dept 2018]; 21st Mtge. Corp. v Adames, 153 AD3d 474 [2d Dept 2017]), reasoning that comparable language did not accelerate the debt and was “merely an expression of future intent that fell short of an actual acceleration,” which could “be changed in the interim” (Milone, 164 AD3d at 152). This disagreement is at the heart of the parties’ dispute in Vargas.  (Hyperlinks added.)

In determining that the default letter at issue in Vargas was insufficient, the Court, in analyzing the language contained therein, stated:

It is undisputed that the August 2008 default letter was sent to [borrower]—the only question is whether it effectuated a clear and unequivocal acceleration of the debt, an issue of law. The default letter informed [borrower] that his loan was in “serious default” because he had not made his “required payments,” but that he could cure the default by paying approximately $8,000 “on or before 32 days from the date of [the] letter.” It further advised that, should he fail to cure his default, the noteholder “will accelerate [his] mortgage with the full amount remaining accelerated and becoming due and payable in full, and foreclosure proceedings will be initiated at that time.” The letter warned: “[f]ailure to cure your default may result in the foreclosure and sale of your property.”

We reject [borrower]’s contention that the August 2008 letter accelerated the debt and we therefore reverse the Appellate Division order, deny plaintiff’s motion for summary judgment and grant Deutsche Bank’s motion to dismiss. First and foremost, the letter did not seek immediate payment of the entire, outstanding loan, but referred to acceleration only as a future event, indicating the debt was not accelerated at the time the letter was written. Nor was this letter a pledge that acceleration would immediately or automatically occur upon expiration of the 32-day cure period. Indeed, an automatic acceleration upon expiration of the cure period could be considered inconsistent with the terms of the parties’ contract, which gave the noteholder an optional, discretionary right to accelerate upon a default and satisfaction of certain conditions enumerated in the agreement. Although the letter states that the debt “will [be] accelerate[d]” if [borrower]failed to cure the default within the cure period, it subsequently makes clear that the failure to cure “may” result in the foreclosure of the property, indicating that it was far from certain that either the acceleration or foreclosure action would follow, let alone ensue immediately at the close of the 32-day period.

This case demonstrates why acceleration should not be deemed to occur absent an overt, unequivocal act. Noteholders should be free to accurately inform borrowers of their default, the steps required for a cure and the practical consequences if the borrower fails to act, without running the risk of being deemed to have taken the drastic step of accelerating the loan. Even in the event of a continuing default, default notices provide an opportunity for pre-acceleration negotiation—giving both parties the breathing room to discuss loan modification or otherwise devise a plan to help the borrower achieve payment currency, without diminishing the noteholder’s time to commence an action to foreclose on the real property, which should be a last resort.

Finally, in Freedom and Ditech, “the issue [was] not whether or when the debt was accelerated but whether a valid election to accelerate, effectuated by the commencement of a prior foreclosure action, was revoked upon the noteholder’s voluntary discontinuance of that action.”  Although the Court of Appeals “has never addressed what constitutes a revocation in this context, the Appellate Division departments have consistently held that, absent a provision in the operative agreements setting forth precisely what a noteholder must do to revoke an election to accelerate, revocation can be accomplished by an “affirmative act” of the noteholder within six years of the election to accelerate.”  (Citations omitted.)  “[N]o clear rule has emerged with respect to the issue raised here—whether a noteholder’s voluntary motion or stipulation to discontinue a mortgage foreclosure action, which does not expressly mention de-acceleration or a willingness to accept installment payments, constitutes a sufficiently ‘affirmative act.’” The Court was troubled by the emerging rule that “require[d] courts to scrutinize the course of the parties’ post-discontinuance conduct and correspondence, to the extent raised, to determine whether a noteholder meant to revoke the acceleration when it discontinued the action” because the mere withdrawal of “a foreclosure action, “in itself,” is not an affirmative act of revocation of the acceleration effectuated via the complaint.”  (Citations omitted.)  The Court rejected an approach that “turns on an exploration into the bank’s intent, accomplished through an exhaustive examination of post-discontinuance acts,” and stated:

This approach is both analytically unsound as a matter of contract law and unworkable from a practical standpoint. As is true with respect to the invocation of other contractual rights, either the noteholder’s act constituted a valid revocation or it did not; what occurred thereafter may shed some light on the parties’ perception of the event but it cannot retroactively alter the character or efficacy of the prior act. Indeed, where the contract requires a pre-acceleration default notice with an opportunity to cure, a post-discontinuance letter sent by the noteholder that references the then-outstanding total debt and seeks immediate repayment of the loan is not necessarily evidence that the prior voluntary discontinuance did not revoke acceleration—it is just as likely an indication that it did and the noteholder is again electing to accelerate due to the borrower’s failure to cure a default. The impetus behind the requirements that an action be unequivocal and overt in order to constitute a valid acceleration and sufficiently affirmative to effectuate a revocation is that these events significantly impact the nature of the parties’ respective performance obligations. A rule that requires post-hoc evaluation of events occurring after the voluntary discontinuance—correspondence between the parties, payment practices and the like—in order to determine whether a revocation previously occurred leaves the parties without concrete contemporaneous guidance as to their current contractual obligations, resulting in confusion that is likely to lead (perhaps inadvertently) to a breach, either because the borrower does not know that the obligation to make installment payments has resumed or the noteholder is unaware that it must accept a timely installment if tendered.

Indeed, if the effect of a voluntary discontinuance of a mortgage foreclosure action depended solely on the significance of noteholders’ actions taking place months (if not years) later, parties might not have clarity with respect to their post-discontinuance contractual obligations until the issue was adjudicated in a subsequent foreclosure action (which is what occurred here); in both Freedom Mortgage and Ditech, the Appellate Division disagreed with Supreme Court’s determinations that the prior accelerations had been revoked by the voluntary discontinuance. Not only is this approach harmful to the parties but it is incompatible with the policy underlying the statute of limitations because—under the post-hoc, case-by-case approach adopted by the Appellate Division—the timeliness of a foreclosure action cannot be ascertained with any degree of certainty, an outcome which this Court has repeatedly disfavored. Further, the Appellate Division’s recent approach suggests that a noteholder can retroactively control the effect of a voluntary discontinuance through correspondence it sends to the borrower after the case is withdrawn (which injects an opportunity for gamesmanship). We decline to adopt such a rule.  (Citation omitted.)

Instead, as previously stated, the Court adopted the clear and concise rule that if a loan is accelerated by the commencement of foreclosure litigation, the simple act of discontinuing that action operates to de-accelerate the loan; an approach that “comports with our precedent favoring consistent, straightforward application of the statute of limitations which serves the objectives of finality, certainty and predictability, to the benefit of both borrowers and noteholders.”  (Citations and internal quotation marks omitted.)

TAKEAWAY

The Court’s holding with respect to Freedom and Ditech represents a dramatic and welcomed departure from the caselaw as it evolved in the lower courts.  The simple approach espoused by the Court of Appeals removes any questions about whether a loan was de-accelerated.  Now it is clear that the discontinuance of an action that accelerated a loan operates to de-accelerate the loan.  Accordingly, statute of limitations calculations can now be made with clarity and consistency.

Similarly, the Court’s decision with respect to Vargas and Wells Fargo, highlights the importance of lenders carefully choosing the language of their default/acceleration letters.