September 17, 2021

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Mortgage News

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 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. Among Freedom Mortgage Corp. v. Angel, 37 NY3d 1 (NY February 18, 2021) after a mortgage is expedited, the mortgagee may retard it by performing an “affirmative” act of withdrawal within six years of the expedited option, thereby removing the six-year New York statute of limitations provided the borrower has not changed his position trusting in the acceleration; and
  2. Voluntary cessation of foreclosure is not the only way to slow down a previously accelerated mortgage.

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

After buying real estate at a foreclosure sale, Plaintiff filed a lawsuit under Article 15 of the New York Real Property Actions and Proceedings Law (“NY RPAPL”) to settle a mortgage on Plaintiff’s property. Rely on a statement in Milone v US Bank, NA, 164 AD3d 145 (2d Dep’t 2018), the court of first instance ruled that the mortgagee was unable to get the mortgage because the alleged deceleration of the mortgage loan was only motivated with the intention of avoiding the expiry of the limitation period for foreclosure slow down.

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.

Upon registration of the judgment of the court of first instance, the New York Court of Appeals, in Freedom Mortgage Corp. v. Angel, 37 NY3d 1 (NY February 18, 2021), overturned the grounds of. on Miloneon which the district court relied.

On that appeal, the mortgagee argued that the judgment of the court of first instance was based on the subsequent decision of the New York Court of Appeals in Angel. 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 an interest in the property; 2) that all necessary parties have joined the lawsuit; and 3) that the applicable limitation period for initiating enforcement proceedings has expired without enforcement proceedings being initiated. ” Gustavia Home LLC v. Environment 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 mortgage foreclosure. NY CPLR Section 213 (4); see Retemiah v Bank of NY Mellon, 195 AD3d 649, 650 (2d Dep’t 2021). In addition, “if 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, NA, 180 AD3d 1002, 1003 (2d 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 proof of the choice of the holder to use the acceleration regulation. ” 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.” ID. at 983; see also Angel, 37 NY3d at 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 by 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. Angel, 37 NY3d at 28-29.

In Milone, the court found New York law that if an alleged delay was motivated by a desire to avoid the statute of limitations expiring, it would not take effect. 164 AD3d. at 154.

However, the New York Court of Appeals has in Angel expressly “reject”[ed] theory . . . that a lender should be excluded from the withdrawal of the accelerated debt if the motive for the withdrawal was to avoid the expiry of the statute of limitations of the accelerated debt. 37 NY3d at 36 (quotes omitted).

The plaintiff here has not denied that the New York Court of Appeals made the denial Milones Assumption that a lender’s intention to avoid expiry of the statute of limitations could invalidate an attempted deceleration. Instead, the plaintiff here argued that Angel demands that a voluntary suspension of a foreclosure be the only way to decelerate a previously accelerated mortgage.

The Second Circuit found the plaintiff’s argument to be unfounded because Angel expressly considered other “affirmative acts” that would be sufficient in addition to voluntary hiring. See I would. at 29 (“For example, an explicit declaration in a deferral agreement that the bondholder cancels his previous acceleration and reinstates the borrower’s right to payment in monthly installments was viewed as an ‘affirmative act’ of deceleration.”).

In addition, the Second Circuit argued that if the plaintiff’s interpretation of Angel were correct, a mortgagee whose foreclosure proceedings were suspended by any means other than voluntarily withdrawing their action would have to resubmit their foreclosure action for immediate withdrawal. The court saw nothing in Angel that would require such lavish formalism.

Since the issuing of the summary judgment to the plaintiff by the court of first instance was primarily based on a declaration in Milone, the Second Court overturned the judgment and referred it for further consideration in the light of Angel.