In our last newsletter, we discussed the recent decision of the New York Court of Appeals in Freedom Mortgage Corp. v. Engel (2021), which contained two key holdings concerning the six-year statute of limitations as it applies to mortgage foreclosure cases. The Engel court held (1) the filing of a foreclosure action accelerates all payments on a mortgage and starts the six-year clock for all payments and (2) the voluntary dismissal of the foreclosure action de-accelerates the mortgage, and stops the clock on future payments.
Since Engel, courts in New York have had to deal with new permutations of the statute of limitations in this context. One open issue is whether termination of the foreclosure action other than through voluntary dismissal has the same effect of de-accelerating the payments. The Second Department held it does not, while the Second Circuit, applying Engel, indicated in dictum that it would.
Another issue is what if the mortgagor files a foreclosure action, but never serves a summons and complaint on the owner. The Second Department has held that this still accelerates the loan, and if six years pass, the claim would be time-barred.
Engel is considered a watershed case in the mortgage industry, and certainly has spawned much litigation. As is the case with many watershed decisions, it resolved one set of issued but then spawned another.
What Kind Of Dismissal De-Accelerates The Loan?
Engel held that a voluntary dismissal of a foreclosure action ends the acceleration, and the statute of limitations clock begins anew on each payment. What if the foreclosure action is dismissed involuntarily?
In Everhome Mortgage Company v. Aber (2d Dept. 2021), the Appellate Division considered a foreclosure action where the mortgagor had brought a prior foreclosure action, but that had been dismissed by the court because counsel failed to appear at a court conference. “[G]iven that the [first-action] acceleration of the mortgage debt was neither invalidated by the court nor revoked by the plaintiff, the Supreme Court properly determined that [the second] action is time-barred.”
In contrast, the Second Circuit in 53rd Street, LLC v. U.S. Bank National Association, (2d Cir. 2021) has indicated that such a dismissal could de-accelerate the mortgage. There, the mortgagor brought a foreclosure action, and then assigned the note to another bank. The court dismissed the action for non-appearance. The new noteholder then sent several letters to the borrower “stating that the loan, which had been previously accelerated by [the] filing [of] a [foreclosure] lawsuit,” was “de-accelerated and re-instituted as an installment loan.”
The district court dismissed the suit as time-barred, but that was before the Engel decision, which was decided while the case was on appeal. The Second Circuit vacated the dismissal and remanded for further consideration in light of Engel.
The borrower contended that under Engel, only a voluntary dismissal re-accelerates the loan. The Second Circuit rejected that contention:
"[T]he Engel opinion did not suggest that such a voluntary discontinuance is the only “affirmative act” that can successfully de-accelerate a mortgage. To the contrary, Engel expressly contemplated other “affirmative acts” that would suffice. See id. at 29, 146 N.Y.S.3d 542, 169 N.E.3d 912 (“For example, an express statement in a forbearance agreement that the noteholder is revoking its prior acceleration and reinstating the borrower’s right to pay in monthly installments has been deemed an ‘affirmative act’ of de-acceleration.”). If 53rd Street LLC’s interpretation of Engel were correct, a mortgagee whose foreclosure action was discontinued in any manner other than by voluntary withdrawal of its complaint—such as involuntary dismissal for some minor procedural issue—would have no way to de-accelerate the mortgage except to refile its foreclosure action for the sole purpose of then immediately withdrawing it. We see nothing in Engel that demands such wasteful formalism."
Given both the dismissal and the later letter to the borrower, there was an open question whether the second bank “clearly, unambiguously, and affirmatively communicated the de-acceleration of the loan within the limitations period.” That was the issue the district court had to consider on remand.
Loan Accelerates Even If Summons Not Served
Suppose the mortgagor files a foreclosure action, but then never serves the summons and complaint or otherwise prosecute the action. Does that accelerate the loan and start the statute-of-limitations clock running?
In Wilmington Savings Fund Society, FSB v. Rashed (2021), the Second Department held that it does. There, the mortgagor brought three actions to foreclose. The first was voluntarily dismissed. In the second, it moved for default, but the Supreme Court denied that motion, because it failed to show the borrower had been properly served, a ruling affirmed by the Second Department.
In the third action, the Supreme Court dismissed the case as time-barred, which the Second Department affirmed. Citing to Engel, it held that the mortgage had been accelerated, even though it has not been served on the borrower. “[T]he subsequent commencement of the [second] action accelerated the loan anew regardless of whether the summons and complaint were served upon the defendants.” Since the second action was never dismissed or withdrawn, the statute of limitations still ran, and the third case was time barred.
The lesson for lenders is clear: don’t leave foreclosure actions pending. If not proceeding with them, then formally dismiss them.
Since Engel, courts in New York have had to deal with new permutations of the statute of limitations in this context. One open issue is whether termination of the foreclosure action other than through voluntary dismissal has the same effect of de-accelerating the payments. The Second Department held it does not, while the Second Circuit, applying Engel, indicated in dictum that it would.
Another issue is what if the mortgagor files a foreclosure action, but never serves a summons and complaint on the owner. The Second Department has held that this still accelerates the loan, and if six years pass, the claim would be time-barred.
Engel is considered a watershed case in the mortgage industry, and certainly has spawned much litigation. As is the case with many watershed decisions, it resolved one set of issued but then spawned another.
What Kind Of Dismissal De-Accelerates The Loan?
Engel held that a voluntary dismissal of a foreclosure action ends the acceleration, and the statute of limitations clock begins anew on each payment. What if the foreclosure action is dismissed involuntarily?
In Everhome Mortgage Company v. Aber (2d Dept. 2021), the Appellate Division considered a foreclosure action where the mortgagor had brought a prior foreclosure action, but that had been dismissed by the court because counsel failed to appear at a court conference. “[G]iven that the [first-action] acceleration of the mortgage debt was neither invalidated by the court nor revoked by the plaintiff, the Supreme Court properly determined that [the second] action is time-barred.”
In contrast, the Second Circuit in 53rd Street, LLC v. U.S. Bank National Association, (2d Cir. 2021) has indicated that such a dismissal could de-accelerate the mortgage. There, the mortgagor brought a foreclosure action, and then assigned the note to another bank. The court dismissed the action for non-appearance. The new noteholder then sent several letters to the borrower “stating that the loan, which had been previously accelerated by [the] filing [of] a [foreclosure] lawsuit,” was “de-accelerated and re-instituted as an installment loan.”
The district court dismissed the suit as time-barred, but that was before the Engel decision, which was decided while the case was on appeal. The Second Circuit vacated the dismissal and remanded for further consideration in light of Engel.
The borrower contended that under Engel, only a voluntary dismissal re-accelerates the loan. The Second Circuit rejected that contention:
"[T]he Engel opinion did not suggest that such a voluntary discontinuance is the only “affirmative act” that can successfully de-accelerate a mortgage. To the contrary, Engel expressly contemplated other “affirmative acts” that would suffice. See id. at 29, 146 N.Y.S.3d 542, 169 N.E.3d 912 (“For example, an express statement in a forbearance agreement that the noteholder is revoking its prior acceleration and reinstating the borrower’s right to pay in monthly installments has been deemed an ‘affirmative act’ of de-acceleration.”). If 53rd Street LLC’s interpretation of Engel were correct, a mortgagee whose foreclosure action was discontinued in any manner other than by voluntary withdrawal of its complaint—such as involuntary dismissal for some minor procedural issue—would have no way to de-accelerate the mortgage except to refile its foreclosure action for the sole purpose of then immediately withdrawing it. We see nothing in Engel that demands such wasteful formalism."
Given both the dismissal and the later letter to the borrower, there was an open question whether the second bank “clearly, unambiguously, and affirmatively communicated the de-acceleration of the loan within the limitations period.” That was the issue the district court had to consider on remand.
Loan Accelerates Even If Summons Not Served
Suppose the mortgagor files a foreclosure action, but then never serves the summons and complaint or otherwise prosecute the action. Does that accelerate the loan and start the statute-of-limitations clock running?
In Wilmington Savings Fund Society, FSB v. Rashed (2021), the Second Department held that it does. There, the mortgagor brought three actions to foreclose. The first was voluntarily dismissed. In the second, it moved for default, but the Supreme Court denied that motion, because it failed to show the borrower had been properly served, a ruling affirmed by the Second Department.
In the third action, the Supreme Court dismissed the case as time-barred, which the Second Department affirmed. Citing to Engel, it held that the mortgage had been accelerated, even though it has not been served on the borrower. “[T]he subsequent commencement of the [second] action accelerated the loan anew regardless of whether the summons and complaint were served upon the defendants.” Since the second action was never dismissed or withdrawn, the statute of limitations still ran, and the third case was time barred.
The lesson for lenders is clear: don’t leave foreclosure actions pending. If not proceeding with them, then formally dismiss them.