New York Clarifies Mortgage Loan Acceleration and De-Acceleration: Starting and Stopping the Limitations Clock

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On February 18, 2021, the New York Court of Appeals’ consolidated resolution of four cases that answered two critical questions concerning the application of the statute of limitations in New York mortgage foreclosure actions: What constitutes a valid acceleration such that the six-year “clock” is started and what actions constitute a valid “de-acceleration” of a loan?

Question 1: What starts the clock?

The opinion discussed two cases, Wells Fargo Bank, N.V. v. Ferrato and Vargas v. Deutsche Bank National Trust, addressing acts that do — or do not — constitute valid acceleration.  Like a majority of states, New York requires lenders to accelerate loans via an “unequivocal overt act.” In Ferrato, the court analyzed whether a loan had been accelerated in 2009, when the lender filed a complaint but failed to attach the parties’ loan modification agreement. Ultimately, the court held the lender’s failure to attach, acknowledge, or otherwise reference the operative loan documents were fatal to the prior foreclosure and thus the loan was never accelerated.

In Vargas, the court analyzed whether a notice of default could constitute valid acceleration. The letter’s language advised the borrower that “failure to cure the default ‘may’ result in foreclosure and sale” and that the lender “will accelerate” the loan. The court held that because the letter did not seek immediate payment and referred to acceleration as a “future event” the letter could not be deemed an act of acceleration.

Though potentially not as significant as the bright-line de-acceleration rule discussed below, resolution of the Ferrato and Vargas cases provides lenders with greater clarity about exactly what constitutes acceleration, especially in the default letter context, where there was some disagreement among the New York lower courts. The cases signal that while language must be carefully considered, lenders can be assured that a standard default letter can be sent to a New York borrower without having to risk the letter being automatically deemed acceleration.

Question 2: What stops the clock?

In the two other cases in the opinion, Freedom Mortgage Corp. v. Engel and Ditech Financial, LLC v. Naidu, the court resolved the long-contested issue of automatic de-acceleration of a mortgage loan following voluntary dismissal of a prior foreclosure action. The general consensus in New York courts, similar to trial level courts across many states, is that de-acceleration only can occur via an overt act, which provides a borrower with clear and unequivocal notice. New York courts, however, were split as to whether this applied in cases where the prior foreclosure had been voluntarily dismissed.

In both Engel and Naidu, the court ultimately clarified that a lender’s voluntary discontinuance of a foreclosure action serves to affirmatively revoke the prior acceleration. In adopting this bright-line rule, the court rejected prior, conflicting holdings requiring subjective inquiry into the noteholder’s intent or motivation in discontinuing the foreclosure action, eliminating the need for case-by-case review. Now, unless the lender makes an “express, contemporaneous statement to the contrary” when voluntarily dismissing a foreclosure action, the dismissal alone will automatically de-accelerate the loan.

Takeaway

On its face, Engel and Naidu provide lenders with a clear rule concerning de-acceleration via voluntary dismissal, and the holding presents an opportunity for lenders to review and potentially “revive” New York cases that were voluntarily dismissed and, until now, considered to be potentially barred by the statute of limitations. As noted above, the de-acceleration question still is unsettled in several other states, and it remains to be seen whether the courts in those states will follow New York’s lead.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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