The Legislature in New York is clearly frustrated with the recent decision of the Court of Appeals in Freedom Mtge. Corp. v Engel, NY3d, 2021 NY Slip Op 01090 (2021). The Engel decision resolved a split between the First and Second Departments regarding whether a default letter clearly and unequivocally affirmatively accelerates a mortgage debt and provides much needed clarity on what conduct sufficiently accelerates a mortgage debt and revokes acceleration. Specifically, the Court found:
- a default letter stating that the lender “will” accelerate the debt referred to a future event and therefore did not accelerate the debt;
- the voluntary discontinuance of a foreclosure action (whether by motion or stipulation) within six years of acceleration, alone, revokes acceleration as a matter of law, unless the noteholder expressly states otherwise;
- the reason for a noteholder’s revocation is irrelevant, thereby expressly rejecting the concept that a noteholder’s revocation of acceleration cannot be “pretextual” to merely avoid the expiration of the statute of limitations; and
- a verified foreclosure complaint that accelerates the mortgage debt must clearly and accurately refer to the loan documents and debt at issue.
As a result of this decision, the Assembly and Senate of New York have both proposed legislation that would clarify and overturn the Engel decision. Assembly Bill 7737 is pending before the New York State Assembly. The Bill is the latest in a series of proposed legislation designed to limit a mortgagee plaintiff’s ability to foreclose on debt which might otherwise be time barred.
Assembly Bill 7737 amends RPAPL 1301 to now state “If an action to collect any part of the mortgage debt is adjudicated to be barred by the applicable statute of limitations, any other action seeking to recover any part of the same mortgage debt shall also be barred by the statute of limitations.” If passed, the Bill would prevent suits to recover on the note if the statute of limitations had expired on a mortgage foreclosure action and vice versa.
A7737 would also create an amended savings statute, which applies only to mortgage foreclosure matters, the new “CPLR 205-a.” Under the new statute, foreclosure plaintiffs will only get the benefit of the savings statute once and dismissals for failure to enter default within a year under CPLR 3215(c), for failure to appear, for failure to submit an order, and for failure to comply with an order of the court are now added to the list of dismissals explicitly exempt from protection under CPLR 205-a. Most recently another Assembly Bill 7922 has been proposed and mirrors the proposed Senate bill.
While some of these restrictions are certainly unwelcome, this Bill is preferable to its Senate counterpart, S5473B. While both bills include the above referenced changes, under the Assembly proposal, voluntary discontinuances can serve as a de-acceleration of the debt provided that the discontinuance is made within six years of the acceleration and provided that the discontinuance includes text which advises of the de-acceleration and explicitly notes that the defendant may resume making installment payments. By contrast, S5473B if enacted would limit the ability of a voluntary discontinuance to extend the statute of limitations to circumstances where the defendant explicitly consents to such extension.
While these bills have not exited committee or been approved by the legislature, we are highlighting them, even at this early stage, as their passage would fundamentally change foreclosure practice in New York. While it appears that some form of legislation will eventually pass that addresses and clarifies how the statute of limitations will be applied going forward, in its present form, A7737, while certainly not ideal, represents a preferable solution to its Senate counterpart. We will continue to monitor and advise on the status of this legislation. For any questions regarding these Bills please contact Richard O’Brien, Esq. (firstname.lastname@example.org) or Deborah Gallo, Esq. (email@example.com).