Aftermath of the NYS Court of Appeals Landmark Decision in Freedom Mortgage Corporation v. Engel

Simon PLC Attorneys & Counselors – November 2022 Memorandum

Aftermath of the NYS Court of Appeals Landmark Decision in Freedom Mortgage Corporation v. Engel

Troy, Michigan – To overturn the impact of the New York Court of Appeals’ decision in Freedom Mtge. v. Engel, 37 N.Y.3d 1 (N.Y. 2021), the New York State Legislature introduced Senate Bill S5473D and its companion Assembly Bill A7737B, dubbed as the “Foreclosure Abuse Prevention Act (FAPA)”. On March 23, 2022, the bill passed by a vote of 107 to 40 in the Assembly and 52 to 10 in the Senate on May 3, 2022. If enacted as written, FAPA would essentially reverse existing law on such important issues as the statute of limitations, limiting the savings statute in foreclosure cases, treatment of a voluntary discontinuance of a foreclosure action and the ability to start a new foreclosure action after dismissal of an existing action. Once passed, the law is to take effect immediately and apply to not only prospective foreclosure actions, but all mortgage foreclosure actions in which a final judgment of foreclosure and sale has yet to be enforced. This means that the new law could be given retroactive application.

FAPA is in direct response to the February 18, 2021 decision from the New York Court of Appeals in Engel. In Engel, the Court found that when a bank effectuated an acceleration via the commencement of a foreclosure action, a voluntary discontinuance of that action (i.e., withdrawal of the complaint) constitutes a revocation of that acceleration. Engel involves a foreclosure commenced by the lender in 2008. The borrower subsequently moved to dismiss the foreclosure in court, citing improper service of documents. In January 2013, both parties signed an agreement, dismissing the foreclosure action. In 2015, Engel again found himself in foreclosure as a result of the same missed payment from 2008. He moved to dismiss the second foreclosure, citing that New York’s statute of limitations for foreclosure cases is six years after the missed mortgage payment. He argued that the filing of prior foreclosure actions triggered the running of the six-year statute of limitations and prevented the lender from filing a successive foreclosure action. The lender in turn argued that the prior actions had been voluntarily discontinued, which functioned as an event of de-acceleration and reset the statute of limitations timeline. In 2021, the Court of Appeals ruled in favor of the lender. The court decided that both parties’ voluntary discontinuance of the foreclosure action in 2013 counted as revocation of the action, resetting the statute of limitations. Under the Appellate Court’s decision, the bank had legally foreclosed on Engel a second time in 2015 for the missed payment in 2008. The Court determined that where the lender accelerated a loan via the filing of a foreclosure complaint, the voluntary discontinuance of the same acted as an overt, unequivocal act sufficient to show de-acceleration.

In the wake of Engel, the New York Appellate Division, First, Second, and Third Departments have now ruled in a number of cases that the statute of limitations had not expired because the voluntary discontinuance of prior foreclosure actions for the same mortgage “constituted affirmative acts of revocation of the prior elections to accelerate as a matter of law [citation omitted].”  See, Ditech Financial, LLC v. Rector, 193 A.D.3d 249 (1st Dept. 2021); Pyrce v. Nationstar Mortgage, LLC, 193 A.D.3d. 999 (2nd Dept. 2021); U.S. Bank National Association v. Creative Encounters LLC, 194 A.D.3d 1135 (3rd Dept. 2021). In August 2021, the U.S. Court of Appeals for the Second Circuit in 53rd Street, LLC v. U.S. Bank National Association, 8 F.4th 74 (2021), vacated a trial court’s grant of summary judgment to the plaintiff, a purchaser at a foreclosure auction, in an action to quiet title for a property subject to a mortgage. While the appeal was pending for this matter, the Engel ruling undermined the reasoning of the trial court. Therefore, the Second Circuit vacated the trial court’s judgment holding that under Engel, a lender can de-accelerate 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 and a voluntary discontinuance of a foreclosure action is not the only way to de-accelerate a previously accelerated mortgage.

The Engel decision has also impacted what courts consider sufficient actions by a lender to de-accelerate a previously accelerated mortgage. In U.S. Bank v. Papanikolaw, 197 A.D.3d 767 (2d Dept. 2021), using the reasoning from Engel, the Second Department overturned the trial court’s decision and held that the transmittal of a de-acceleration letter to the borrower, without more, similarly constitutes an affirmative act to revoke a lender’s acceleration. In Papanikolaw, the lender commenced a foreclosure action in July 2011. The defendant subsequently moved to dismiss the case for want of prosecution. By order dated November 17, 2016, the trial court granted the defendant’s motion. In March 2018, the lender recommenced an action in foreclosure against the defendant for failing to pay her September 1, 2012 mortgage payment. The defendant alleged that the case was barred by the statute of limitations, while the lender asserted that it sent a notice of de-acceleration to defendant on April 10, 2017. Both parties moved for summary judgment. The trial court agreed with the defendant. Before Engel was decided, the Second Department had held that a de-acceleration notice constituted a sufficient affirmative act to revoke a lender’s acceleration only if it met stringent requirements. These requirements included the lender making “a clear and unequivocal demand that the homeowner meet her prospective monthly payment obligations” as well as the lender “stat[ing] that [it] hereby de-accelerates the maturity of the Loan, withdraws its prior demand for immediate payment of all sums secured by the Security Instrument and re-institutes the loan as an installment loan.”  Milone v. U.S. Bank, N.A., 164 A.D.3d 145 (2d Dept. 2018). However, post-Engel, the Second Department in Papanikolaw did not analyze the contents of the de-acceleration letter, nor whether it was pre-textual. Instead, Papanikolaw held that the mailing of the de-acceleration letter, without more, constituted an affirmative act to revoke a lender’s acceleration of a mortgage loan, thus resetting the six-year statute of limitations.

FAPA seeks to undue the decision by the Engel Court and all decisions that followed which have been favorable to the lending industry. While it was believed that Governor Hochul would have signed it into law immediately, to date, she has not, citing that she continues to review the legislation. Simon PLC Attorneys & Counselors will continue to monitor developments of this legislation and its impact if the bill does in fact become law.

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