Landmark New York Court of Appeals Decision Clarifying Calculation of Statute of Limitations in Mortgage Foreclosure Actions

The New York Court of Appeals reversed four Appellate Division decisions and decided in favor of the mortgagees in a consolidated decision issued on February 18, 2021, ruling, inter alia, that:

• a demand letter which includes language that the debt "will be" accelerated expresses a possible future event and therefore does not constitute an unequivocal overt act which would accelerate the mortgage debt; 
• a defective pleading which incorrectly references only the original terms of a loan – not the operative modification agreement – is insufficient to accelerate the mortgage debt;
• a mortgagee's voluntary discontinuance of a foreclosure action is sufficient to revoke the acceleration created by the filing of that complaint; and
• a mortgagee's motivation for the discontinuance and revocation of the acceleration is irrelevant to the Court's analysis.

The Court's decision immediately impacts the legal landscape as it provides bright-line rules for both mortgagors & mortgagees to follow in future litigation in how to calculate the statute of limitations.

In addressing what constitutes an acceleration of a mortgage debt for purposes of calculating the statute of limitations, the Court decided Vargas v. Deutsche Bank National Trust Company and Wells Fargo v. Ferrato. In Vargas, the Court considered whether a demand letter which states that the failure to repay by a date certain "will" result in the acceleration of the mortgage debt was sufficient to accelerate the mortgage debt. New York's highest Court found that a letter that discusses a possible future event is insufficient to accelerate the entire mortgage debt. In its decision, the Court re-affirmed its prior findings in Albertina Realty Co. v. Rosbro Realty Corp. that the acceleration of the mortgage debt requires an "unequivocal overt act" by the mortgagee. Despite the letter stating the mortgagee "will" accelerate the mortgage debt, "it later makes clear that the failure to cure 'may' result in the foreclosure of the property, indicating that it was far from certain that either the acceleration of foreclosure action would follow, let alone ensue immediately. . ." Similarly, in deciding Ferrato, the Court rejected the Appellate Division First Department's finding that the mortgage debt was accelerated by a complaint which only referenced the original terms of the loan, which had since been modified. Accordingly, the defective pleading did not constitute the acceleration of the mortgage debt.

Most notably, the Court addressed the murky and often contradictory precedent by the four Appellate Divisions related to whether a discontinuance of a prior foreclosure action revokes the acceleration of the mortgage loan, thus impacting a future calculation of the statute of limitations on the accelerated debt. In Freedom Mortgage v. Engel, Ditech v. Naidu and Ferrato the Appellate Divisions had decided that the mortgagees' prior voluntary discontinuances did not revoke the acceleration of the mortgage debt, thereby making subsequent actions time barred as they were brought more than six years from commencement of those prior actions. In deciding these cases, the Court of Appeals detailed the contractual relationships between the parties, the language in the mortgage instrument itself, and analyzed (and rejected) the different standards adopted by the intermediate appellate courts. 

The Court rejected the Appellate Division's holding that specific language stating the intent to revoke its acceleration and revert to installment payments must be included in a voluntary discontinuance in order to effectuate a deceleration of the loan. Additionally, the Court soundly rejected a standard which would require an evidentiary finding, post-discontinuance, concerning the motivation behind the revocation. i.e., a showing that the discontinuance was not "pre-textual". The Court also criticized the rationale of the lower courts, finding that such a standard would create inconsistent results and cause confusion between the parties. Accordingly, the Court set forth a simple rule concerning a mortgagee's voluntary discontinuance (whether by stipulation or motion):

"[W]here acceleration occurred by virtue of the filing of a complaint in a foreclosure action, the noteholder's voluntary discontinuance of the action constitutes an affirmative act of revocation of the acceleration as a matter of law, absent an express contemporaneous statement to the contrary by the noteholder." 

As to the pretextual analysis, the Court outright rejected the standard created by an intermediate appellate court and held that: "A noteholders' motivation for exercising a contractual right is generally irrelevant. . ." noting that, as a practical matter, a mortgagee has little incentive to accelerate and de-accelerate the mortgage debt as it will just delay recovery.

The consolidated decision of these cases brings much needed clarity to the application of the statute of limitations and restores the long held precedent that a discontinuance of an action nullifies any action that resulted from the filing. Mortgagees should review their cases carefully and consider whether the consolidated decision changes any prior analysis related to whether a foreclosure action is barred by the statute of limitations.