New York’s Foreclosure Abuse Prevention Act

Simon PLC Attorneys & Counselors – August 2023 Memorandum

New York’s Foreclosure Abuse Prevention Act

Freedom Mortgage Corporation v. Engel Revisited

On December 30, 2022, New York State Governor Kathy Hochul signed into law the “Foreclosure Abuse Prevention Act” (“FAPA”). FAPA applies to both residential (not only owner-occupied properties) and commercial foreclosures and became effective immediately. The passing of FAPA is significant because it essentially reverses long established judicial precedent that permitted a lender, after a borrower’s default, to undo the acceleration of a mortgage and stop the running of the statute of limitations in a foreclosure action through voluntary dismissal, discontinuance of foreclosure actions, or even de-acceleration letters. 

FAPA was in direct response to the February 18, 2021 decision from the New York Court of Appeals in Freedom Mtge. Corp. v Engel, 37 N.Y.3d 1 (2021) (which addressed four separate cases). New York law establishes a six-year statute of limitations for the commencement of a mortgage foreclosure action, triggered when the borrower defaults on the obligation and the lender accelerates the obligation to pay the secured debt. 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 constitutes a revocation of that acceleration, thereby resetting the statute of limitations period for any future default payments and returning the parties to their pre-acceleration rights. In the wake of Engel, other New York Courts found that a voluntary discontinuance of a foreclosure action was not the only way to de-accelerate a previously accelerated mortgage but rather a lender that has accelerated a loan can de-accelerate by making an “affirmative act” of revocation (i.e., notice of reinstatement) within six years of the election to accelerate, thereby stopping and resetting the six-year New York statute of limitations clock.

As FAPA was enacted to specifically overturn the Engel case, it targeted specific provisions of the New York Real Property Actions and Proceedings Law (RPAPL), the General Obligations Law (“GOL”) and the Civil Practice Law and Rules (“CPLR”) as it relates to the rights of the parties in a foreclosure action. The key amendments to FAPA include:

  1. Voluntary discontinuance of a mortgage foreclosure action will no longer reset the statute of limitations. 
  2. No  other  action  shall  be  commenced or maintained to recover any part of the mortgage debt, including an action to  foreclose, while another foreclosure action to recover part of the mortgage debt is already pending or after final judgment has been made for the plaintiff without leave of court. The procurement of such leave shall be a condition precedent to the commencement of such other action and the failure  to  procure  such leave  shall  be  a  defense  to such other action. In the event such other action is commenced  without  leave of  the  court,  the former action shall be deemed discontinued upon the commencement of the other action.
  3. Acknowledgments, waivers, promises, or agreements cannot be used to extend the statute of limitations beyond the law’s provisions unless strict compliance to the requirements of Section 17-105 of the GOL is adhered to. This ensures the six-year limitation period is consistently applied in all cases.
  4. Lenders are prohibited from filing a new action on the same debt once a foreclosure action is deemed beyond the six-year limitations period. As a result, once a foreclosure action is adjudicated to be barred by the statute of limitations, FAPA prohibits a lender from bringing any other action to recover the same part of the debt, whether it be a new foreclosure action or a note action.
  5. Mortgage lenders are barred from asserting that the statute of limitations did not expire due to a lack of valid acceleration of the loan, further limiting their available defenses in foreclosure actions. An exception exists if the prior action “was dismissed based on an expressed judicial determination, made upon a timely interposed defense, that the instrument was not validly accelerated.” The lender is also prevented from asserting this argument as a defense in a quiet title action in which a party having an interest in the subject property seeks a court order to cancel or discharge a mortgage on the grounds that foreclosure of said mortgage is barred by the statute of limitations.
  6. A new “savings” statute allows for a new foreclosure action to be commenced under certain conditions but limits a mortgage lender’s use of the saving statute to just one time. Moreover, it eliminates the ability for a lender to recommence a foreclosure following dismissal based upon a neglect to prosecute, which was previously possible under the prior statute. Also, the statute allows a borrower who asserted affirmative defenses and/or counterclaims in a prior foreclosure action to assert the same defenses and/or counterclaims in the second foreclosure action, even if they are untimely in the second action. Further, it also imposes greater conditions under which the new action would be permitted and in fact requires that an assignee of a mortgage cannot utilize the savings clause unless it pleads and proves that it is acting on behalf of the original plaintiff. 

The enactment of FAPA poses a number of potential issues for lenders from loan workouts to sales to foreclosures. However, the most troublesome aspect of FAPA is its potential retroactive application, specifically on those mortgage foreclosure actions in New York that were pending in which a final judgment of foreclosure and sale had yet to be enforced. Specifically, §10 of FAPA provide that “[t]his act shall take effect immediately and shall  apply  to  all actions  commenced  on an instrument described under subdivision four of section two hundred thirteen of the civil  practice  law  and  rules  in which a final judgment of foreclosure and sale has not been enforced.” 

Currently, the New York Courts have seen a split in its application of FAPA, whether it should be applied only prospectively or also retroactively. Those Courts that have applied it retroactively have acknowledged “that retroactive legislation is frowned upon by courts, due to the potential for unfairness and inequity to unsuspecting citizens, who conduct themselves based upon the laws then existing. See Eastern Enterprises v. Apfel524 U.S. 498, 532 [1998][“Retroactivity is generally disfavored in the law, in accordance with ‘fundamental notions of justice’ that have been recognized throughout history”].) However, the courts will defer to the legislature when it creates retroactive legislation, ‘unless it reaches so far into the past or so unfairly as to constitute a deprivation of property without due process. (Varrington Corp. v. City of New York Dep’t of Fin., 85 NY2d 28, 32 [1995].)” See Deutsche Bank Nat’l Trust Co. v. Dagrin, 2023 N.Y. Misc. LEXIS 1650 (Sup Ct. Queens County Apr. 12, 2023) (J. Catapano-Fox). In contrast, Courts that have refused to apply the legislation retroactively but only prospectively have held that by doing so a party “would wrongfully be divested of its right of action which this Court recognized in accord with the precedent established in Freedom Mtge. Corp. v Engel, supra., i.e., that the discontinuance of the action in 2018 revoked the election to accelerate the loan for limitations purposes. Accordingly, retroactive application of the amendment is not permitted (see Jacobus v. Colgate217 NY 235, 240 [1916] (Cardozo, J.).” See e.g.Newrez LLC v. Kalina, 2023 N.Y. Misc. LEXIS 1342 (Sup. Ct. Albany County Mar. 22, 2023) (J. Lynch); MTGLQ Invs., L.P. v. Gross, 2023 N.Y. Misc. Lexis 1280 (Sup. Ct. Westchester County Mar. 16, 2023) (J. Greenwald).

It should be expected that there will be an influx of litigation in pending foreclosure actions by borrowers that will seek dismissal of their foreclosure due to the enactment of FAPA. Ultimately, FAPA’s interpretation may again be decided by the New York Court of Appeals. Given the evolving nature of this area of the law, Simon PLC Attorneys & Counselors will continue to monitor any critical developments.

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