The U.S. Court of Appeals for the Second District recently overturned a summary judgment of the plaintiff in a lawsuit for dismissal of ownership of a mortgage property. While the appeal on the matter was pending, an interim ruling by the New York Court of Appeals undermined the reasoning of the court of first instance. Therefore, the Second Circuit overturned the judgment of the court of first instance and referred the case back for further hearing.

In that decision, the Second Court found that:

  1. According to Freedom Mortgage Corp. v. Engel, 37 NY3d 1 (NY February 18, 2021), after accelerating a mortgage, the mortgagee may expedite it through a "confirmatory act" of withdrawal within six years of the election by stopping the six-year New York statute of limitations, provided the borrower did not change his position in reliance on the acceleration; and
  2. Voluntary suspension of foreclosure is not the only way to slow down a previously accelerated mortgage.

A copy of the opinion at 53rd Street, LLC v. US Bank National Association is available at: Link to Opinion.

After buying real estate in a foreclosure sale, the plaintiff filed a lawsuit under Article 15 of the New York Real Property Actions and Proceedings Law ("NY RPAPL") to settle a mortgage on the plaintiff's property. Citing a statement in Milone v US Bank, NA, 164 AD3d 145 (2nd Dep't 2018), the court of first instance ruled that the mortgagee's alleged delay in the mortgage loan was motivated only by an intention to avoid the expiry the statute of limitations on the foreclosure did not allow the mortgagee to decelerate the mortgage.

Accordingly, the court of first instance ruled that the six-year limitation period had expired and waived the mortgage. The bank appealed in good time.

Following the registration of the judgment of the court of first instance, the New York Court of Appeals in Freedom Mortgage Corp. v. Engel, 37 NY3d 1 (NY February 18, 2021) based Milone's reasoning on which the court of first instance relied.

On that appeal, the mortgagee argued that the trial court ruling should be overturned based on the subsequent ruling by the New York Court of Appeals in Engel. The Second Circle agreed.

The Second Circuit found that in order to pay off a mortgage under NY RPAPL Section 1501 (4), a plaintiff must demonstrate: "1) that he has an estate or interest in the property; 2) that all necessary parties have joined the lawsuit; and 3) that the applicable statute of limitations for initiating a foreclosure action has expired without a foreclosure action being initiated. "Gustavia Home LLC v. Envtl. Control Vol., 2019 WL 4359549, * 5 (EDNY August 21, 2019).

The parties did not deny that the plaintiff passed the first two points of the test, so the only question on appeal was whether the statute of limitations on foreclosure had expired.

In New York, there is a six-year statute of limitations on a mortgage foreclosure. NY CPLR Section 213 (4); see Retemiah v. Bank of NY Mellon, 195 AD3d 649, 650 (2d Dep't 2021). In addition, "when a mortgage debt is accelerated, the full amount is due and the statute of limitations begins to run on the entire debt." Ditmid Holdings, LLC v JPMorgan Chase Bank, NA, 180 AD3d 1002, 1003 (2nd Dep't 2020) ( internal quotation marks omitted).

If the debtor and mortgage holder are exempted from accelerating a mortgage debt in the event of late payment, the debt can be accelerated by having the mortgagee take "some positive action". . . as evidence of the holder's choice to use the acceleration scheme. "Wells Fargo Bank, NA v Burke, 94 AD3d 980, 982-83 (2nd Dep. 2012). "The start of a foreclosure may be enough to notify the borrower that the debt acceleration option has been exercised." at 983; see also Engel, 37 NY3d, 22. Accordingly, the parties agreed that the foreclosure of the property here accelerates the mortgage and thus triggers the start of a six-year limitation period.

After a mortgage has been accelerated, the mortgagee can slow it down with an "affirmative act" [of revocation] within six years of being elected to accelerate ", the statute of limitations interrupts unless the borrower has changed" his position in confidence "to accelerate. Engel, 37 NY3d at 28-29.

In the Milone case, the court found New York law that an alleged slowdown motivated by a desire to avoid expiry of the statute of limitations would not take effect. 164 AD3d. at 154.

The New York Court of Appeals in Engel "rejects" expressly[ed] theory . . . that a lender should be excluded from revocation of the expedited debt if the motive for the revocation was to avoid expiry of the expiry of the expiry of the expiry of the expiration date of the expedited debt. 37 NY3d at 36 (quotes omitted).

Plaintiff here has not denied that the New York Court of Appeals rejected Milone's suggestion that a lender's intent to avoid the statute of limitations could invalidate an attempted deceleration. Instead, the plaintiff here argued that Engel is demanding that a voluntary cessation of foreclosure is the only way to decelerate a previously accelerated mortgage.

The Second Circuit found the plaintiff's arguments to be unfounded, as Engel explicitly considered other "affirmative acts" that would be sufficient in addition to voluntary hiring. See id. at 29 ("For example, an express declaration in a deferral agreement that the bondholder cancels his previous acceleration and reinstates the borrower's right to payment in monthly installments is considered an" affirmative act "of deceleration.").

In addition, the Second Circuit argued that if the plaintiff's interpretation of Engel were correct, a mortgagee whose foreclosure proceedings were suspended other than by voluntarily withdrawing their lawsuit would have to resubmit their foreclosure lawsuit for immediate withdrawal. Judgment saw nothing in angels that would require such a lavish formalism.

Since the issuance of a summary judgment by the court of first instance to the plaintiff was primarily based on a declaration in Milone which has since been repealed, the Second Circuit overturned the judgment and referred it for further examination in the light of Engel.

source https://seapointrealtors.com/2021/08/11/2nd-cir-holds-de-acceleration-of-mortgage-loan-does-not-require-voluntary-discontinuance-of-foreclosure-action/

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