A&B ABstract:
Effective on approval by Governor Kathy Hochul on December 30, 2022, New York Assembly Bill 7737b – the Foreclosure Abuse Prevention Act (the “Act”) became law. The Act is signifcant because it reverses judicial precedent that permitted a lender, after 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 de-acceleration letters. Notably, the Act applies both prospectively and to any foreclosure action filed prior to its effective date that had not been resolved through a final judgment and order of sale. Further, unlike other provisions of New York law, the Act applies to all properties (and not only those that are owner-occupied). Public reaction has been mixed as to whether the measure will benefit consumers – but, regardless, it changes the rules of the game for lenders and servicers in New York State.
Background
Existing 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 2021, the New York Court of Appeals considered whether a lender can de-accelerate a loan and reset the statute of limitations.
The court decided four cases (with the opinion rendered in Freedom Mtge. Corp. v Engel, 37 N.Y.3d 1 (2021)), “each turning on the timeliness of a mortgage foreclosure claim.” The court held that the lender’s voluntary dismissal of a foreclosure suit constituted a revocation of the lender’s election to accelerate. Such revocation returned the parties to their pre-acceleration rights, reinstated the borrower’s right to repay via installments, and established a new statute of limitations period for any future default payments. According to the court, “[w]here the maturity of the debt has been validly accelerated by commencement of a foreclosure action,” the court opined, “the noteholder’s voluntary withdrawal of that action revokes the election to accelerate, absent the noteholder’s contemporaneous statement to the contrary.”
In the course of deciding Engel, the court also considered what constituted an “overt unequivocal act” sufficient to trigger a valid acceleration of debt and the six-year statute of limitations. Here, the court held that neither the issuance of a default letter nor the filing of complaints in prior discontinued foreclosure actions that failed to reference the pertinent modified loan were sufficient methods to validly accelerate debt.
The Act
Since the Engel decision, mortgagees in New York State have relied on their ability to voluntarily discontinue a foreclosure action – and effectively reset the statute of limitations– in order to engage distressed borrowers in loss mitigation efforts. However, the Act appears to eliminate a mortgagee’s ability to unilaterally reset the limitations period by voluntarily discontinuing a foreclosure action and deaccelerating the loan.
With the express intent of overturning the Engel decision, the Act amends provisions of New York’s Real Property Actions and Proceedings Law (“RPAPL,” N.Y. Real Prop. Acts. Law §§ 1301 et seq.), General Obligations Law (“GOL,” N.Y. Gen. Oblig. Law §§ 1-101 et seq.), and Civil Practice Law and Rules (“Rules,” N.Y. C.P.L.R. §§ 101 et seq.) relating to the rights of parties involved in foreclosure actions.
RPAPL:
Under previous law, Section 1301 of the RPAPL prohibited the commencement or maintenance of any action to recover any part of a mortgage debt while another action to recover part of the mortgage debt is already pending or after final judgment has been made for the plaintiff without leave of the court in which the first action was brought. Beyond clarifying that a foreclosure action falls within the scope of that prohibition, the Act provides that procurement of leave from the first court must be a condition precedent to commencing or maintaining the new action. Thus, failure to comply with the leave of court condition precedent may no longer be excused by finding that the prior action was “de facto discontin(ued)” or “effectively abandoned” (see U.S. Bank Trust, N.A. v. Humphrey, 173 AD3d 811, 812 (2d Dept 2019)); or that the defendant was not prejudiced thereby (see Wells Fargo Bank, N.A. v. Irizarry, 142 AD3d 610, 611 (2d Dept 2016)); nor by deeming the pre-action failure a mistake, omission, defect, or irregularity that could be overlooked or disregarded (see id.).
Moreover, failure to obtain leave is a defense to the new action. If a party brings a new action without leave of the court, the section declares that the previous action is deemed discontinued unless prior to the entry of final judgment in the original action the defendant: (a) raises the failure to comply with the condition precedent, or (b) seeks dismissal of the action based upon one of the grounds set forth in Section 3211(a)(4) of the Rules.
Section 1301 of the RPAPL is further amended to provide that if the mortgage securing the bond or note representing the debt so secured by the mortgage is adjudicated as time barred by a court of competent jurisdiction, any other action to recover any part of the same mortgage debt is equally time barred. As a result, if the statute of limitations acts to bar a foreclosure action or any other action to recover on mortgage debt, an investor or servicer cannot bring any other action to recover the same part of the mortgage debt, including another foreclosure action or an action to recover a personal judgment against the borrower on the note.
GOL:
Under Section 17-105 of the GOL, an agreement to waive the statute of limitations to foreclose on a mortgage is effective if expressly set forth in writing and signed by the party to be charged.
The Act amends Section 17-105 by: (1) clarifying that the GOL is the exclusive means by which parties are enabled to postpone, cancel, reset, toll, revive or otherwise effectuate an extension of the limitations period for the commencement of an action or proceeding upon a mortgage instrument; (2) clarifying that unless effectuated in strict accordance with Section 17-105, the discontinuance of an action upon a mortgage instrument, by any means, shall not, in form or effect, function as a waiver, postponement, cancellation, resetting, tolling, or extension of the statute of limitations; and (3) codifying certain judicial rulings holding as much.
While not included or otherwise referenced in the Act, it is also worth noting that Part 419 of the New York Department of Financial Services’ mortgage loan servicer business conduct rules prohibit a mortgage servicer from requiring a homeowner to waive legal claims and defenses as a condition of a loan modification, reinstatement, forbearance or repayment plan. It is unclear whether Part 419 would be interpreted to prohibit servicers from seeking a waiver of the limitations period pursuant to Section 17-105, especially with respect to loans where the limitations period has already run. To further complicate matters, the New York legislature is currently considering a bill that would (1) create an express private right of action for violations of Part 419; (2) make compliance with Part 419’s requirements a condition precedent to commencing a foreclosure action; and (3) render failure to materially comply with Part 419 to be a defense to a foreclosure action or an action on the note, even if servicing of the loan has been transferred to a different servicer when a foreclosure action or action on the note is commenced.
Rules:
The Act amends and adds several provisions of the Rules relating to the application of the statute of limitations in actions relating to mortgage debt.
First, the Act adds Section 203(h) to the Rules, which terminates the ability of a lender or servicer to extend the statute of limitations on a foreclosure action by any form of unilateral action. No voluntary discontinuation of an action to enforce a mortgage may “in form or effect, waive, postpone, cancel, toll, extend, revive or reset the limitations period to commence an action and to interpose a claim, unless expressly prescribed by statute.” In other words, the amended section appears to prohibit a mortgagee from “de-accruing” a cause of action or otherwise effectuating a unilateral extension of the limitations period by suspending a foreclosure action – and providing loss mitigation opportunities to the borrower – once the six-year statute of limitations has begun to run after the loan is accelerated. The methods by which the statute of limitations in a mortgage foreclosure action can be waived or extended are exclusively set forth in Article 17 of the GOL (see GOL 17-105 (express written agreement to extend, waive or not plead as a defense the statute of limitations); 17-107 (unqualified payment on account of mortgage indebtedness effective to revive statute of limitations)). Accordingly, a bare stipulation of discontinuance or a lender’s unilateral decision to revoke its demand for full payment is no longer a permissible method for waiving, extending, or modifying the statute of limitations.
Second, the Act adds Section 205-a to the Rules, limiting reliance on the savings statute for time-barred claims. After termination of an action, the new section permits the original named plaintiff to commence a new action upon the same transaction or occurrence or series of transactions only if: (a) the plaintiff brings the new action within six months of the termination; and (b) the termination of the prior action occurred in any manner other than a voluntary discontinuance, a failure to obtain personal jurisdiction over the defendant, dismissal for any form of neglect, for violation of any court rules or individual part rules, failure to comply with any court scheduling orders, failure to appear for a conference or at a calendar call, failure to timely submit any order or judgment, or a final judgment upon the merits. Further, only one six-month extension will be available to the plaintiff.
Under new Section 205-a, a successor-in-interest or an assignee of the original plaintiff can only commence a new action if such party pleads and proves that the assignee is acting on behalf of the original plaintiff. Further, if the defendant has served an answer and the action has been terminated, in a new action based on the same transaction or occurrence or series of transactions (whether brought by the original plaintiff or a successor-in-interest or assignee thereof) any cause of action or defense that the defendant asserts will be considered timely “if such cause of action or defense was timely asserted in the prior action.” Section 205-a also provides that, where applicable, the original plaintiff (or a successor-in-interest acting on behalf of the original plaintiff) may only receive one six-month extension and no court shall allow the original plaintiff to receive more than one six-month extension.
Third, the Act amends Section 213(4) of the Rules to clarify that in any action where the statute of limitations is raised as a defense – and if that defense is based on a claim that the indebtedness was accelerated prior to or through commencement of a prior action – a plaintiff will be estopped from asserting that a mortgage instrument was not validly accelerated prior to or by way of commencement of a prior action. 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.”
Further, in any quiet title action seeking cancellation and discharge of record of a mortgage instrument, a defendant will be estopped from asserting that the applicable statute of limitations period for commencement of an action has not expired because instrument was not validly accelerated prior to or by way of commencement of a prior action, “unless the prior action was dismissed based on an expressed judicial determination, made upon a timely interposed defense, that the instrument was not validly accelerated.”
Finally, the Act amends Section 3217 of the Rules, by adding a new Subsection (e), which clarifies that if the statute of limitations is raised as a defense in an action, and if the defense rests on a claim that the instrument was accelerated prior to or by virtue of the commencement of a prior action, the plaintiff cannot stop the tolling of the statute of limitations by asserting that the instrument was not validly accelerated unless the prior action was dismissed based on an express judicial determination regarding invalid acceleration.
Takeaway
In light of the Act’s curtailment of a servicer’s or investor’s ability to unilaterally suspend a foreclosure action, we recommend that mortgagees carefully review their pending mortgage foreclosure actions in New York state. At a minimum, the Act removes the ability of a holder or servicer in New York state to voluntarily discontinue a foreclosure action after acceleration of the indebtedness triggers the running of the statute of limitations.
Whether this will interfere with servicers’ contractual rights and ability – and obligations under the CFPB rules and New York Part 419 – to offer meaningful loss mitigation opportunities to borrowers remains to be seen. At least one judge thinks so. In a recent Order to Show Cause, a New York Supreme Court judge concluded that the Act violates the Contracts Clause of the U.S. Constitution and included an invitation for the New York Attorney General to weigh in.