The statute of limitations to foreclose on a mortgage in New York is six years. CPLR 213(4). This seemingly simple rule has created a great deal of confusion as to when the statute begins to run where the mortgage contains an acceleration clause – a provision that upon default, the lender may convert the entire set of payments into a single owed payment, and then foreclose on the mortgaged property.
In the recent decision of Freedom Mortgage Corp. v. Engel (2021), New York’s Court of Appeals consolidated four appeals, and issued an opinion in which it clarified the applicable law in various situations.
The Court of Appeals emphasized that the decision presented a situation where “the need for clarity and consistency are at their zenith: contracts affecting real property ownership and the application of the statute of limitations.” In each of the decision, the need for clarity, simplicity and ease of application drove the outcome.
This decision is considered a sea-change over prior law, and numerous lenders have moved to reopen cases dismissed on statute-of-limitations grounds.
General Principles
Many loans have a schedule of payments that stretch over years. Typically, when the borrower defaults, the loan agreement will provide that the lender has the option to accelerate the loan, meaning to call it in and have the entire balance due. “Acceleration in this context is a demand for payment of the outstanding loan in full that terminates the borrower’s right to repay the debt over time through the vehicle of monthly installment payments.” Acceleration is generally an option for the lender, not something that happens automatically.
In 1932, the Court of Appeals held that, to be valid, an election to accelerate must be made by an “unequivocal overt act” that discloses the noteholder’s choice, such as the filing of a verified complaint seeking foreclosure and containing a sworn statement that the noteholder is demanding repayment of the entire outstanding debt. A clear letter from the lender to the borrow also suffices. But what is crucial is that the lender make it crystal clear that acceleration is sought.
Acceleration has a major effect on the statute of limitations. When a borrower misses a payment, then the statute only begins to run with respect to the one missed payment; it does not run with respect to the rest of the payments which are not yet due. Once an acceleration happens, however, the statute of limitations begins to run as to the entire loan.
Specific Rulings
The Court of Appeals made specific rulings on various situations involving accelerated loans. In one case, the lender had previously filed foreclosure actions, but had failed to attach the proper documentation, leaving out modifications to the loan agreement that had been made in the interim. The borrower succeeded in having these actions dismissed. The Court of Appeals, reversing the Appellate Division, held that the dismissed action did not count as an acceleration, since the action was defective and the lender succeeded in having it dismissed.
In another case, the lender sent a default letter to the lender, noting the failure to make timely payments, proposing a cure period, and then stating that the lender “will accelerate” the loan if payments were not made current. Resolving a split among the Appellate Divisions, the Court of Appeals held that a future-looking “will accelerate” statement is not itself an acceleration, and does not start the statute of limitations running.
In the last two cases, the Court considered whether an acceleration can be withdrawn. The lenders each filed foreclosure actions that constituted an acceleration, but then voluntarily dismissed them. Overturing decisions of the Appellate Division, the Court of Appeals held that a voluntary discontinuance automatically revokes the 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.”
The borrower might still avoid the revocation if it can be shown that “the borrower changed his position in reliance on that election by executing a new mortgage.” It is therefore possible for an acceleration to be irrevocable. And, of course, if the lender has done other acts of acceleration, such as an acceleration letter, that might require additional acts of revocation.
In the few months since the Engel decision, several Appellate Division decisions have relied on it in various circumstances to deny dismissal or summary judgment of foreclosure complaints.
The Engel decision, as it expressly explains, is grounded on the notion that lenders need flexibility to determine whether and when to accelerate a loan. Often, it is in both the lender’s and borrower’s interest not to accelerate, to allow the parties to work out an accommodation. As in many areas of the law, parties are best served when they are clear about what they are doing and what rights they are exercising.
In the recent decision of Freedom Mortgage Corp. v. Engel (2021), New York’s Court of Appeals consolidated four appeals, and issued an opinion in which it clarified the applicable law in various situations.
The Court of Appeals emphasized that the decision presented a situation where “the need for clarity and consistency are at their zenith: contracts affecting real property ownership and the application of the statute of limitations.” In each of the decision, the need for clarity, simplicity and ease of application drove the outcome.
This decision is considered a sea-change over prior law, and numerous lenders have moved to reopen cases dismissed on statute-of-limitations grounds.
General Principles
Many loans have a schedule of payments that stretch over years. Typically, when the borrower defaults, the loan agreement will provide that the lender has the option to accelerate the loan, meaning to call it in and have the entire balance due. “Acceleration in this context is a demand for payment of the outstanding loan in full that terminates the borrower’s right to repay the debt over time through the vehicle of monthly installment payments.” Acceleration is generally an option for the lender, not something that happens automatically.
In 1932, the Court of Appeals held that, to be valid, an election to accelerate must be made by an “unequivocal overt act” that discloses the noteholder’s choice, such as the filing of a verified complaint seeking foreclosure and containing a sworn statement that the noteholder is demanding repayment of the entire outstanding debt. A clear letter from the lender to the borrow also suffices. But what is crucial is that the lender make it crystal clear that acceleration is sought.
Acceleration has a major effect on the statute of limitations. When a borrower misses a payment, then the statute only begins to run with respect to the one missed payment; it does not run with respect to the rest of the payments which are not yet due. Once an acceleration happens, however, the statute of limitations begins to run as to the entire loan.
Specific Rulings
The Court of Appeals made specific rulings on various situations involving accelerated loans. In one case, the lender had previously filed foreclosure actions, but had failed to attach the proper documentation, leaving out modifications to the loan agreement that had been made in the interim. The borrower succeeded in having these actions dismissed. The Court of Appeals, reversing the Appellate Division, held that the dismissed action did not count as an acceleration, since the action was defective and the lender succeeded in having it dismissed.
In another case, the lender sent a default letter to the lender, noting the failure to make timely payments, proposing a cure period, and then stating that the lender “will accelerate” the loan if payments were not made current. Resolving a split among the Appellate Divisions, the Court of Appeals held that a future-looking “will accelerate” statement is not itself an acceleration, and does not start the statute of limitations running.
In the last two cases, the Court considered whether an acceleration can be withdrawn. The lenders each filed foreclosure actions that constituted an acceleration, but then voluntarily dismissed them. Overturing decisions of the Appellate Division, the Court of Appeals held that a voluntary discontinuance automatically revokes the 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.”
The borrower might still avoid the revocation if it can be shown that “the borrower changed his position in reliance on that election by executing a new mortgage.” It is therefore possible for an acceleration to be irrevocable. And, of course, if the lender has done other acts of acceleration, such as an acceleration letter, that might require additional acts of revocation.
In the few months since the Engel decision, several Appellate Division decisions have relied on it in various circumstances to deny dismissal or summary judgment of foreclosure complaints.
The Engel decision, as it expressly explains, is grounded on the notion that lenders need flexibility to determine whether and when to accelerate a loan. Often, it is in both the lender’s and borrower’s interest not to accelerate, to allow the parties to work out an accommodation. As in many areas of the law, parties are best served when they are clear about what they are doing and what rights they are exercising.