In a ground-breaking case for lenders, the New York Court of Appeals recently added critical guidance and comfort for lenders as to what constitutes a proper de-acceleration of a loan after the filing of a foreclosure complaint. Namely, the Court of Appeals held that where the acceleration of a loan is triggered by the filing of a foreclosure complaint, a noteholder’s voluntary discontinuance of that action serves to revoke that acceleration unless it is accompanied by an “express, contemporaneous statement to the contrary,” and resets the six-year statute of limitations period for New York foreclosure actions. Freedom Mortg. Corp. v. Engel, 2021 WL 6238697 (N.Y. Feb. 18, 2021).
In Freedom Mortg., four cases were consolidated by New York State’s highest court on appeal: Engel, Ditech Financial, LLC v. Naidu (“Naidu”), Wells Bank v. Ferrato (“Ferrato”), and Vargas v. Deutsche Bank Natl. Trust Co. (“Vargas”). In Engel and Naidu, the cases revolved around the issue of whether a noteholder’s voluntary discontinuance of a foreclosure action after a complaint had been filed served to “revoke” the acceleration of the loan which occurred by virtue of the initial filing. In each case, the Appellate Division found that plaintiff lenders were time-barred from asserting a foreclosure action in situations where the lender had filed a complaint, voluntarily withdrew said complaint, and then filed a new complaint more than six years later, holding that such a withdrawal was not an affirmative action sufficient to revoke the initial acceleration. Ferrato and Vargas, relatedly, dealt with issues of whether specific actions taken by lenders were sufficient to accelerate a loan and “start the clock” on the statute of limitations in the first place.
Reconciling the four cases into one decision and most relevantly reversing the Appellate Division’s decisions in Engel and Naidu, the Court of Appeals held that plaintiff lenders’ voluntary discontinuance of their first foreclosure within the statute of limitations period was a valid revocation of the loan acceleration, and that the statute of limitations period was functionally “reset” when a later action was filed. The Court stated that a “post-hoc, case-by-case approach” evaluating whether any given discontinuance exhibited a valid intent on the part of a lender to decelerate a loan was “harmful to the parties . . . [and] 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.” Rather, the Court decided to adopt “a clear rule that voluntary discontinuance evinces revocation of acceleration,” which “makes it possible for attorneys to counsel their clients accordingly,” as well as for “borrowers to take advantage of the opportunity afforded by the de-acceleration,” such as being given the opportunity to pay arrears or make installment payments as opposed to the entire outstanding principal amount. The Court also stressed that absent an “express, contemporaneous statement” that the voluntary discontinuance did not constitute a deceleration, the lender’s intent in filing the discontinuance (for example, to simply reset the statute of limitations) does not matter, as “a noteholder’s motivation for exercising a contractual right is generally irrelevant.”
This decision provides some much needed uniformity and clarity to both lenders and mortgagees in New York concerning the acceleration and deceleration of a loan, in addition to the attendant statute of limitations issues. Both now have a bright-line rule to follow: a loan is accelerated and the statute of limitations begins to run when a foreclosure action is filed, but, absent a statement to the contrary, decelerated when a voluntary discontinuance is filed, resetting the statute of limitations in the event another foreclosure complaint is filed later.
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