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New York’s Highest Court Considers Statute of Limitations

Posted By USFN, Tuesday, February 4, 2020
Updated: Monday, February 3, 2020

by Richard P. Haber, Esq.
McCalla Raymer Leibert Pierce, LLC
USFN Member (AL, CA, CT, FL, GA, IL, MS, NV, NJ, NY)

Since the financial crisis, servicers and their counsel have struggled with statute of limitations (“SOL”) challenges in New York. Longer timelines, frequently dismissed cases, and tougher proof standards – even in uncontested cases – have created a toxic mix that can lead to total lien loss. Even worse, inconsistent and sometimes contradictory application of the law by different trial and appellate courts has led to confusion and uncertainty. The same fact pattern might yield different results in Brooklyn than it would a mile away in Manhattan because they are subject to different governing appellate divisions even though both are part of New York City. But relief may be on the way, or at least perhaps some clarity and consistency, because the Court of Appeals (New York’s highest court) has one SOL case before it on the merits and a second case seeking permission to appeal.

The case already pending is Freedom Mtge. Corp. v. Engel, 163 A.D.3d 631 (2d Dep’t 2018), lv. app. granted 103 N.Y.S.3d 12 (APL-2019-00114). At issue in Engel is whether a lender who exercises the right to accelerate through the initiation of foreclosure may revoke that election by voluntarily discontinuing the action at a later date. The Appellate Division, Second Department, found that a lender cannot, by discontinuance alone, revoke the election to accelerate a mortgage debt.

Offering no explanation or reasoning, the Second Department held that “the plaintiff’s execution of the January 23, 2013 stipulation did not, in itself, constitute an affirmative act to revoke its election to accelerate, since, inter alia, the stipulation was silent on the issue of the revocation of the election to accelerate, and did not otherwise indicate that the plaintiff would accept installment payments from the defendant.” 163 A.D.3d at 633.

But this conclusion is not consistent with precedent from the Court of Appeals that goes back well over a hundred years. Addressing the legal effect of the voluntary discontinuance of a prior foreclosure in Loeb v. Willis, 100 N.Y. 231 (1885), the Court of Appeals said “[t]he foreclosure action was discontinued and all the proceedings therein thus annulled…By the discontinuance of the action the further proceedings in the action are arrested not only, but what has been done therein is also annulled, so that the action is as if it never had been.” 100 N.Y. at 235.

The legal principle of annulment through discontinuance has been reiterated in subsequent decisions. For example, in Yonkers Fur Dressing Co. v. Royal Ins. Co., 247 N.Y. 435, 444 (1928), the Court of Appeals affirmed that cases that are discontinued are “as if they had never begun.” And, in Brown v. Cleveland Trust Co., 233 N.Y. 399, 406 (1922), the Court noted that “no adjudication” in a discontinued action “b[inds] anyone.”

Given that a significant number of cases with SOL implications involve earlier foreclosures that were voluntarily discontinued, it would go a long way in the industry’s battle with the SOL if the Court reverses Engel and holds that a voluntary discontinuance annuls a prior election to accelerate.

While Engel deals with de-acceleration, there is another case that the Court will potentially consider that deals with whether the mere filing of a foreclosure complaint serves to accelerate the entire debt in the first place. In a trial court decision issued in the Spring of 2017, Nationstar Mortgage, LLC v. MacPherson, 56 Misc. 3d 339 (Supreme Court, Suffolk County, April 3, 2017), the Court held that the terms of the mortgage contract govern acceleration, and when the mortgage is drawn on the Freddie/Fannie Uniform Instrument, acceleration could not actually be accomplished until a final judgment of foreclosure is entered. This is because under paragraph 19 of the Freddie/Fannie Uniform Instrument, the borrower retains the right to reinstate the loan until judgment is entered. The Court held that “the lender bargained away its right to demand payment in full simply upon a default in an installment payment or the commencement of an action and has afforded the borrower greater protections than that set forth in the statutory form of an acceleration clause under Real Property Law § 258 or under the holding [of prior controlling New York law regarding acceleration].”

The Court reasoned that the loan could not be deemed accelerated, so long as the right to reinstate exists and that “the mortgage remains, in essence, an installment contract until a judgment is entered.” In other words, the loan could not be deemed accelerated until the right to reinstate was extinguished. “Under the express wording of the mortgage document, plaintiff has no right to reject the borrower’s payment of arrears in order to reinstate the mortgage, until a judgment is entered.” As a result, “plaintiff does not have a legal right to require payment in full with the simple filing of a foreclosure action.”

Because the vast majority of old, dismissed foreclosure cases involve Freddie/Fannie Uniform Mortgage Instruments, with dismissals that occurred pre-judgment, many potential SOL problems could be solved by the MacPherson argument. But, the utility of the case was short-lived – less than two years – because on March 13, 2019, the Appellate Division, Second Department, abrogated the decision in its opinion in Bank of New York Mellon v. Dieudonne, 171 A.D.3d 34 (NY App. Div. Second Dept., March 13, 2019).

In Dieudonne, the Court determined that the lender’s right to accelerate is independent of the borrower’s right to reinstate. The Court held that “[c]ontrary to the plaintiff’s contention, the reinstatement provision in paragraph 19 of the mortgage did not prevent it from validly accelerating the mortgage debt.” Even though “[t]hat provision effectively gives the borrower the contractual option to de-accelerate the mortgage when certain conditions are met” the lapsing of that right is not a condition precedent to acceleration. Rather, the conditions required for acceleration are all set forth in paragraph 22 of the mortgage and the “reinstatement provision in paragraph 19 of the mortgage was not referenced in, or included among, those conditions listed in paragraph 22.” The Court further observed that the reinstatement provision in paragraph 19 does not include any language indicating that it serves as a condition precedent to the plaintiff's right to accelerate the outstanding debt, but instead, “the language of paragraph 19 indicates that the plaintiff’s right to accelerate the entire debt may be exercised before the defendant’s rights under the reinstatement provision in paragraph 19 are exercised or extinguished.”

As a result, the Court concluded that acceleration occurs with the filing of the earlier foreclosure complaint, irrespective of the borrower’s right to reinstate until the entry of judgment. In reaching this conclusion, the Court specifically referenced MacPherson, along with four post-MacPherson decisions that followed its logic and stated: “[t]o the extent that decisional law interpreting the same contractual language holds otherwise, it should not be followed.” As a result, the MacPherson argument (that acceleration does not occur until the entry of judgment) is an arrow that has been lost from the industry’s SOL quiver – at least for now.

Bank of America (the servicer of the Dieudonne loan) recently filed a motion for permission to appeal with the Court of Appeals. USFN has filed a motion for permission to file an amicus brief in support of Bank of America’s petition and hopes that the Court will take the Dieudonne case, consider it together with Engel, and provide a decision addressing acceleration, de-acceleration and policy issues involving SOL. Separately, USFN will be moving for permission to file an amicus brief in support of Freedom Mortgage in the Engel case.


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Tags:  amicus brief  Bank of New York Mellon v. Dieudonne  Freedom Mtge. Corp. v. Engel  statute of limitations 

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