NYC’s New Laws and Recent Opinions Affecting Foreclosures Creates Nationwide Split And Raises Questions of Partiality

RESIDENTIAL MORTGAGE FORECLOSURE REVIEW AND UPDATE

Albany County Bar Association Continuing Legal Education (CLE)

MAY 20, 2021 | REPUBLISHED BY LIT: SEP 8, 2021

[2nd] Court of Appeals Addresses Statute of Limitations Where A Prior Action Was Discontinued

On February 18, 2021, the Court of Appeals decided a quartet of cases under the lead case of Freedom Mortgage Corp v Engel, 2021 NY Slip Op 01090 [2021] BY CHIEF JUDGE DIFIORE.

The other three cases are: Ditech Financial v Naidu, Vargas v Deutsche Bank National Trust and Wells Fargo Bank, N.A. v Ferrato. In each of the four cases the Court, in a decision authored by Chief Judge DiFiore, with a dissent from Judge Rivera and a concurrence from Judge Wilson, addressed a statute of limitations issue in a foreclosure matter.

The Court summarized the issues as follows:

“In Vargas v Deutsche Bank Natl. Trust Co. and Wells Fargo Bank, N.A. v Ferrato, the primary issue is when the maturity of the debt was accelerated, commencing the six-year statute of limitations period. Applying the long-standing rule derived from Albertina Realty Co. v Rosbro Realty Corp. (258 NY 472 [1932]) that a noteholder must effect an “unequivocal overt act” to accomplish such a substantial change in the parties’ contractual relationship, we reject 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.

The remaining cases turn on whether the noteholder’s voluntary discontinuance of a prior foreclosure action revoked acceleration of the debt, reinstating the borrower’s contractual right to repay the loan over time in installments.

Adopting a clear rule that will be easily understood by the parties and can be consistently applied by the courts, we hold 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.”

“The central issue in Wells Fargo is whether the commencement of either of two prior, dismissed foreclosure actions constituted a valid acceleration, impacting the timeliness of this foreclosure action (the fifth involving this property), which was commenced in December 2017.”

Noting that the loan had been modified after the commencement of the prior actions, the Court held – “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 Ferrato’s motion to dismiss the complaint in the fifth foreclosure action and deny that motion.”

“In Vargas, an action under RPAPL 1501(4) to discharge a mortgage on real property commenced by borrower Juan Vargas against noteholder Deutsche Bank, the parties dispute whether a default letter issued by the bank’s predecessor-in-interest validly accelerated the debt.

New York courts have observed, consistent with Albertina, that the acceleration of a mortgage debt may occur by means other than the commencement of a foreclosure action, such as through an unequivocal acceleration notice transmitted to the borrower

(see Mejias v Wells Fargo N.A., 186 AD3d 472, 474 [2d Dept.2020]; Lavin, 302 AD2d at 638-639).

However, the Appellate Division departments disagree on the language necessary to render a letter sufficiently unequivocal to constitute a valid election to accelerate.

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.”

“In Freedom Mortgage and Ditech, the issue is 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.”

… “Determining whether, and when, a noteholder revoked an election to accelerate can be critical to determining whether a foreclosure action commenced more than six years after acceleration is time-barred. In opposition to motions to dismiss, Freedom Mortgage and Ditech asserted that their foreclosure actions were timely because they had revoked prior elections to accelerate by voluntarily withdrawing those actions. In response, the borrowers did not dispute the noteholders’ right to revoke but contended a voluntary discontinuance does not revoke an acceleration.”

“Rather, we are persuaded that, when a bank effectuated an acceleration via the commencement of a foreclosure action, a voluntary discontinuance of that action–i.e., the withdrawal of the complaint–constitutes a revocation of that acceleration.

In such a circumstance, the noteholder’s withdrawal of its only demand for immediate payment of the full outstanding debt, made by the “unequivocal overt act” of filing a foreclosure complaint, “destroy[s] the effect” of the election (see Albertina, 258 NY at 476).

We disagree with the Appellate Division’s characterization of such a stipulation as “silent” with respect to revocation (Freedom Mtge. Corp., 163 AD3d at 633).

A voluntary discontinuance withdraws the complaint and, when the complaint is the only expression of a demand for immediate payment of the entire debt, this is the functional equivalent of a statement by the lender that the acceleration is being revoked.

Accordingly, we conclude that where acceleration occurred by virtue of the filing of a complaint in a foreclosure action, the noteholder’s voluntary discontinuance of that action constitutes an affirmative act of revocation of that acceleration as a matter of law, absent an express, contemporaneous statement to the contrary by the noteholder.”