The New York Court of Appeals, the state’s highest court, recently held that (1) a notice of default sent before a foreclosure did not accelerate the mortgage debt for statute of limitation purposes; and (2) in most circumstances, a lender decelerates mortgage debt when it voluntarily dismisses a foreclosure complaint.
The opinion resolves a conflict among New York appellate divisions on these issues, and it reverses case law that consumer attorneys have frequently used to defend mortgage foreclosures throughout the country.
A copy of the opinion in Vargas v. Deutsche Bank Natl. Trust Co.; Wells Fargo Bank, N.A. v. Ferrato is available at: Link to Opinion.
The decision resolves multiple consolidated appeals that each turned on the timeliness of a mortgage foreclosure claim. Each appeal involved notes and mortgages with standard language providing lenders the option to accelerate the debt and declare the full outstanding balance immediately due if the borrower defaults. The language did not automatically accelerate the debt upon default or otherwise obligate the lender to accelerate.
Before ruling on each individual appeal, the court confirmed the existing law governing acceleration for statute of limitation purposes. In New York, as in many judicial foreclosure states, the statute of limitation to enforce a mortgage note begins to run when the lender accelerates the loan. The Court reiterated the importance of requiring lenders to perform “an unequivocal overt act” to accelerate mortgage debt, explaining that acceleration typically replaces the borrower’s right to make manageable monthly payments with a demand for full immediate payment and courts should not presume or infer such a significant alteration of the borrower’s obligations.
Applying these principles, the Court reaffirmed that filing a foreclosure complaint can qualify as an unequivocal overt act to accelerate, but it reversed a lower court ruling that deemed the debt accelerated when the lender incorrectly filed two prior complaints seeking to enforce the loan as originally extended without acknowledging a subsequent modification.
It also reversed lower court rulings interpreting pre-filing notices of default to have accelerated the debt, resolving lower court disagreement on the issue, and finding that the “will accelerate” language in the notices at issue did not constitute the required unequivocal overt act.
More specifically, the Court considered notices stating that the lender “will accelerate” the debt if the borrower does not cure the default in the appropriate timeframe under the note and mortgage, which reflected common language used in such notices.
The Court found that the language did not qualify as an unequivocal overt act to accelerate primarily because the letter referred to acceleration as a future event, did not seek immediate payment of the entire outstanding loan balance, and did not pledge that acceleration would occur immediately or automatically when the borrower’s time to cure expired.
The Court next considered whether and under what circumstances a lender can revoke acceleration. Although a concurring opinion suggested that the Court was not deciding whether the standard language in most mortgages and notes allowed the lender to revoke acceleration, the majority opinion favorably discussed appellate division opinions holding that lenders can revoke acceleration with an affirmative act made within six years of the lender’s election to accelerate as long as the loan documents do not precisely set forth alternative procedures, and as long as the borrower did not materially alter its position in detrimental reliance on the acceleration.
Relying on these prior rulings, the Court held that when a lender accelerates the debt by commencing a foreclosure action, it revokes that acceleration by withdrawing the complaint and voluntarily discontinuing the action, unless the lender makes an express contemporaneous statement to the contrary.
The Court criticized lower court decisions that created uncertainty by examining the parties’ post-dismissal activities, and it expressed its desire to create a clear rule that voluntary discontinuance revokes acceleration unless the lender contemporaneously advises the borrower otherwise so attorneys could properly counsel their clients on statute of limitation issues.
Finally, the Court discussed its single caveat to the rule that voluntarily discontinuing a prior foreclosure generally revokes acceleration, holding that courts may equitably estop lenders from revoking acceleration where the borrower materially changes its position in detrimental reliance on the acceleration.
Nevertheless, the Court declined to equitably estop the lender in the appeal at issue, even though the lender specifically admitted that it revoked acceleration primarily to avoid the statute of limitation bar.
Noting that the motivation for exercising a contractual right is generally irrelevant, the Court reiterated that the borrower must allege a material change of position in detrimental reliance of acceleration for equitable estoppel to apply.