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2nd Cir. Holds De-Acceleration of Mortgage Loan Does Not Require Voluntary Discontinuance of Foreclosure Action

The U.S. Court of Appeals for the Second Circuit recently vacated a trial court’s grant of summary judgment to the plaintiff in an action to quiet title for a property subject to a mortgage. While the appeal was pending for this matter, an intervening ruling in the New York Court of Appeals undermined the reasoning of the trial court. Therefore, the Second Circuit vacated the trial court’s judgment and remanded the case for further proceedings.

In so ruling, the Second Circuit held that:

  1. Under Freedom Mortgage Corp. v. Engel, 37 N.Y.3d 1 (N.Y. Feb. 18, 2021), after a mortgage is accelerated, the mortgagee can de-accelerate it by making an “affirmative act” of revocation within six years of the election to accelerate, stopping the six-year New York statute of limitations clock, provided that the borrower has not “changed his position in reliance” on the acceleration; and
  2. A voluntary discontinuance of a foreclosure action is not the only way to de-accelerate a previously accelerated mortgage.

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

After purchasing real estate at a foreclosure auction, the plaintiff brought suit under Article 15 of the New York Real Property Actions and Proceedings Law (“N.Y. RPAPL”) to discharge a mortgage on the plaintiff’s property. Relying on a statement in Milone v. U.S. Bank, N.A., 164 A.D.3d 145 (2d Dep’t 2018), the trial court ruled that, because the mortgagee’s purported de-acceleration of the mortgage loan was motivated only by intent to avoid the expiration of the statute of limitations on foreclosure, the mortgagee did not succeed in de-accelerating the mortgage.

Accordingly, the trial court ruled that the six-year limitations period had expired and discharged the mortgage. The bank timely appealed.

After the entry of the trial court’s judgment, the New York Court of Appeals, in Freedom Mortgage Corp. v. Engel, 37 N.Y.3d 1 (N.Y. Feb. 18, 2021), abrogated the reasoning of Milone, on which the trial court relied.

In this appeal, the mortgagee argued that the trial court’s judgment here should be vacated because of the subsequent decision of the New York Court of Appeals in Engel.  The Second Circuit agreed.

The Second Circuit noted that, to discharge a mortgage pursuant to N.Y. RPAPL § 1501(4), a plaintiff must demonstrate: “1) that it has an estate or interest in the real property; 2) that all necessary parties to the action were joined; and 3) that the applicable statute of limitations for commencing a foreclosure action has expired without the commencement of a foreclosure action.” Gustavia Home LLC v. Envtl. Control Bd., 2019 WL 4359549, at *5 (E.D.N.Y. Aug. 21, 2019).

The parties did not dispute that the plaintiff satisfied the first two prongs of the test, so the only issue on appeal was whether the statute of limitations on foreclosure had expired.

In New York, an action to foreclose on a mortgage is subject to a six-year statute of limitations. N.Y. CPLR § 213(4); see Retemiah v. Bank of N.Y. Mellon, 195 A.D.3d 649, 650 (2d Dep’t 2021). Furthermore, “once a mortgage debt is accelerated, the entire amount is due and the Statute of Limitations begins to run on the entire debt.” Ditmid Holdings, LLC v. JPMorgan Chase Bank, N.A., 180 A.D.3d 1002, 1003 (2d Dep’t 2020) (internal quotation marks omitted).

Where the acceleration of a mortgage debt upon default is made optional with the holder of the note and mortgage, the debt may be accelerated by the mortgagee’s taking of “some affirmative action . . . evidencing the holder’s election to take advantage of the accelerating provision.” Wells Fargo Bank, N.A. v. Burke, 94 A.D.3d 980, 982-83 (2d Dep’t 2012). “Commencement of a foreclosure action may be sufficient to put the borrower on notice that the option to accelerate the debt has been exercised.” Id. at 983; see also Engel, 37 N.Y.3d at 22. Accordingly, the parties agreed that the foreclosure action over the property here accelerated the mortgage, triggering the start of a six-year limitations period.

After a mortgage is accelerated, the mortgagee can de-accelerate it by making an “affirmative act [of revocation] within six years of the election to accelerate,” stopping the statute of limitations clock, provided that the borrower has not “changed his position in reliance” on the acceleration. Engel, 37 N.Y.3d at 28-29.

In Milone, the court found the law of New York to be that, if a purported de-acceleration was motivated by a desire to avoid expiration of the limitations period, it would fail to take effect. 164 A.D.3d. at 154.

However, the New York Court of Appeals in Engel expressly “reject[ed] the theory . . . that a lender should be barred from revoking acceleration if the motive of the revocation was to avoid the expiration of the statute of limitations on the accelerated debt.” 37 N.Y.3d at 36 (citations omitted).

The plaintiff here did not dispute that the New York Court of Appeals repudiated Milone’s proposition that a lender’s intent to avoid the expiration of the statute of limitations could invalidate an attempted de-acceleration.  Instead, the plaintiff here argued that Engel requires that a voluntary discontinuance of a foreclosure action is the only way to de-accelerate a previously accelerated mortgage.

The Second Circuit found the plaintiff’s argument to be meritless because Engel expressly contemplated other “affirmative acts” that would suffice, in addition to voluntary discontinuance. See id. at 29 (“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.”).

Furthermore, the Second Circuit reasoned that if the plaintiff’s interpretation of Engel were accurate, a mortgagee whose foreclosure action was discontinued in any manner other than by voluntary withdrawal of its complaint would have to refile its foreclosure action for the sole purpose of immediately withdrawing it. The Court saw nothing in Engel that would require such wasteful formalism.

Thus, because the trial court’s grant of summary judgment to the plaintiff was based primarily on a now abrogated statement in Milone, the Second Circuit vacated the judgment and remanded for further consideration in light of Engel.

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Daniel Miller is an associate in the Chicago office of Maurice Wutscher LLP, practicing in the firm’s Consumer Credit Litigation and Commercial Litigation groups. Daniel has substantial experience as a litigation attorney representing clients in both individual and class action cases involving the FDCPA, TCPA, FCRA, TILA, RESPA, Illinois Consumer Fraud Act, and various other federal and state statutes. He also has experience in representing corporate clients in commercial transactions and executive compensation agreements. Daniel earned his Juris Doctor from the University of Illinois College of Law, and his Bachelor of Arts in History from Durham University in the United Kingdom. He is admitted to practice law in Illinois and the U.S. District Courts for the Northern District of Illinois and the Southern District of Illinois.

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