Freedom Mortgage Corporation v. Herschel Engel, et al.; Ditech Financial, LLC v. Santhana Kumar Nataraja Naidu, et al.; Juan Vargas v. Deutsche Bank National Trust Company; Wells Fargo Bank, N.A. v. Donna Ferrato, et al.
Nos. 1, 2, 3, 4
State of New York Court of Appeals
February 18, 2021
OPINION. This memorandum is uncorrected and subject to revision before publication in the New York Reports.
Freedom Mortgage Corporation,
Appellant,
v.
Herschel Engel,
Respondent,
et al.,
Defendants.
No. 2
Ditech Financial, LLC, &c.,
Appellant,
v.
Santhana Kumar Nataraja Naidu,
Respondent,
et al.,
Defendants.
No. 3
Juan Vargas,
Respondent,
v.
Deutsche Bank National Trust Company,
Appellant.
Wells Fargo Bank, N.A., &c.,
Appellant,
v.
Donna Ferrato,
Respondent,
The Simon & Mills Building Condominium Board, et al.,
Defendants.
Wells Fargo Bank, N.A., &c.,
Appellant,
v.
Donna Ferrato,
Respondent,
Capital One Bank (USA) N.A., et al.,
Defendants.
Case No. 1:
Brian A. Sutherland, for appellant.
Anthony R. Filosa, for respondent.
Legal Services NYC, et al., American Legal and Financial Network, New York State Foreclosure Defense Bar, New York Mortgage Bankers Association, USFN - America‘s Mortgage Banking Attorneys, United Jewish Organizations of Williamsburg, Inc., amici curiae.
Case No. 2:
Christina A. Livorsi, for appellant.
Holly C. Meyer, for respondent.
New York State Foreclosure Defense Bar, United Jewish Organizations of Williamsburg, Inc., Adam Plotch, amici curiae.
Case No. 3:
Patrick Broderick, for appellant.
Justin F. Pane, for respondent.
Francis M. Caesar, New York State Foreclosure Defense Bar, United Jewish Organizations of Williamsburg, Inc., Adam Plotch, amici curiae.
Case No. 4:
Brian S. Pantaleo, for appellant.
M. Katherine Sherman, for respondent.
Francis M. Caesar, New York State Foreclosure Defense Bar, amici curiae.
These appeals—each turning on the timeliness of a mortgage foreclosure claim—involve the intersection of two areas of law where the need for clarity and cоnsistency are at their zenith: contracts affecting real property ownership and the application of the statute of limitations. In Vargas v Deutsche Bank Natl. Trust Co. and Wells Fargo Bank, N.A. v Ferrato, the primary issue is when the maturity of the debt was accelerated, commencing the six-year statute of limitations period. Applying the long-standing rule derived from Albertina Realty Co. v Rosbro Realty Corp. (258 NY 472 [1932]) that a noteholder must effect an “unequivocal overt act” to accomplish such a substantial change in the parties’
The parties do not dispute that under
Whether a foreclosure claim is timely cannot be ascertained without an understanding of the parties’ respective rights and obligations under the operative contracts: the note and the mortgage. The noteholder‘s ability to foreclose оn the property securing the debt depends on the language in these documents (see Nomura Home Equity Loan, Inc., Series 2006-FM2 v Nomura Credit & Capital, Inc., 30 NY3d 572, 581 [2017]; W.W.W. Assoc. v Giancontieri, 77 NY2d 157, 162-163 [1990]). In the residential mortgage industry, the use of standardized instruments is common, as reflected here where the relevant terms of the operative agreements are alike,1 facilitating a general discussion of
For over a century, residential mortgage contracts have typically provided notеholders the right to accelerate the maturity date of the loan upon the borrower‘s default, thereby demanding immediate repayment of the entire outstanding debt (see e.g., Odell v Hoyt, 73 NY 343, 345 [1878]). In these cases, the mortgages provide that the noteholder “may” require immediate payment of the outstanding debt—i.e., accelerate the maturity of the loan—upon the borrower‘s default.2 It is plain from this language that whether to exercise this contractual right is a matter within the noteholder‘s discretion—the noteholder is not obliged to accelerate the loan upon a default (Adler v Berkowitz, 254 NY 433, 436 [1930]). The extended contractual relationship explains why residential mortgage agreements are generally structured in this way. Noteholders can—and often do—
Indeed, a noteholder‘s election to accelerate the entire debt has multiple, significant effects. Particularly relevant to these appeals, under the typical contract, acceleration permits the noteholder to commence an action seeking the remedy of full foreclosure (see Odell, 73 NY at 345)—an equitable tool permitting the noteholder to take possession of the real property securing the debt (Copp v Sands Point Mar., 17 NY2d 291, 293 [1966]). Accordingly, a cause of action to recover the entire balance of the debt accrues at the time the loan is accelerated, triggering the six-year statute of limitations to commence a foreclosure action (see
I.
We have had few occasions to address how a lender may effectuate an acceleration of the maturity of a debt secured on real property. However, in Albertina Realty Co., we made clear that any election to accelerate must be made in accordance with the terms of the note and mortgage and that the parties are free to include provisions detailing what the noteholder must do to accelerate the debt (258 NY at 475-476). We further held that, to be valid, an election to accelerate must be made by an “unequivocal overt act” that discloses the noteholder‘s choice, such as the filing of a verified complaint seeking foreclosure and containing a sworn statement that the noteholder is demanding repayment of the entire outstanding debt (id. at 476). Although the Court did not otherwise decide “just what a holder of a mortgage must do to exercise the right of election, under an acceleration clause,” it did clarify that “[t]he fact of election should not be confused with the notice or manifestation of such election” (id.). While the act evincing the noteholder‘s election must be sufficient to “constitute[] notice to all third parties of such [a] choice,” a borrower‘s lack of actual notice “d[oes] not as a matter of law destroy” the effect of the election (id.). Put another way, the point at which a borrower has actual notice of an election to accelerate is not the operative event for purposes of determining when the statute of limitations begins
There are sound policy reasons to require that an acceleration be accomplished by an “unequivocal ovеrt act.” Acceleration in this context is a demand for payment of the outstanding loan in full that terminates the borrower‘s right to repay the debt over time through the vehicle of monthly installment payments (although the contracts may provide the borrower the right to cure) (see Federal Natl. Mtge. Assn. v Mebane, 208 AD2d 892, 894 [2d Dept 1994]). Such a significant alteration of the borrower‘s obligations under the contract—replacing the right to make recurring payments of perhaps a few thousand dollars a month or less with a demand for immediate payment of a lump sum of hundreds of thousands of dollars—should not be presumed or inferred; noteholders must unequivocally and overtly exercise an election to accelerate. With these principles in mind, we turn to the two appeals before us in which the parties dispute whether, and when, a valid acceleration of the debt occurred, triggering the six-year limitations period to commence a foreclosure claim.
Wells Fargo
The central issue in Wells Fargo is whether the commencement of either of two prior, dismissed foreclosure actions constituted a valid accеleration, impacting the
It is undisputed that the parties modified the original loan in 2008 after Ferrato‘s initial default, changing the terms by altering the interest rate and increasing the principal amount of the loan by more than $60,000. Nevertheless, in the second foreclosure action оn which Ferrato relies, Wells Fargo attached only the original note and mortgage (stating a principal amount of $900,000) to the complaint and failed to acknowledge that the parties entered into a modification agreement altering the amount and terms of the loans (the only oblique evidence of a modification was in an attached schedule stating a principal dollar amount consistent with the modified debt). Although Ferrato successfully moved to dismiss both prior actions on the basis that these deficiencies precluded Wells Fargo from foreclosing on her property, she now asserts that the filing of those complaints validly accelerated the debt. It is well-settled that the filing of a verified foreclosure complaint may evince an election to accelerate (see Albertina, 258 NY at 476), but here the filings did not accelerate the modified loan (underlying the current foreclosure action) because the
Vargas
In Vargas, an action under
Vargas commenced this quiet title action against Deutsche Bank in July 2016, seeking to cancеl a $308,000 mortgage on residential property in the Bronx, contending the statute of limitations for any claim to foreclose on the mortgage had expired. Deutsche Bank moved to dismiss and, in opposition, Vargas argued that an August 2008 default letter sent by the bank‘s predecessor-in-interest8 had accelerated the debt and that the limitations period had expired before commencement of the quiet title action. Supreme Court initially
It is undisputed that the August 2008 default letter was sent to Vargas—the only question is whether it effectuated a clear and unequivocal accelerаtion of the debt, an issue of law. The default letter informed Vargas that his loan was in “serious default” because he had not made his “required payments,” but that he could cure the default by paying approximately $8,000 “on or before 32 days from the date of [the] letter.” It further advised that, should he fail to cure his default, the noteholder “will accelerate [his] mortgage with the full amount remaining accelerated and becoming due and payable in full, and foreclosure proceedings will be initiated at that time.” The letter warned: “[f]ailure to cure your default may result in the foreclosure and sale of your property.”
We reject Vargas‘s contention that the August 2008 letter accelerated the debt and we therefore reverse the Appellate Division order, deny plaintiff‘s motion for summary judgment and grant Deutsche Bank‘s motion to dismiss. First and foremost, the letter did not seek immediate payment of the entire, outstanding loan, but referred to acceleration only as a future event, indicating the debt was not accelerated at the time the lettеr was written. Nor was this letter a pledge that acceleration would immediately or automatically
This case demonstrates why acceleration should not be deemed to occur absent аn overt, unequivocal act. Noteholders should be free to accurately inform borrowers of their default, the steps required for a cure and the practical consequences if the borrower fails to act, without running the risk of being deemed to have taken the drastic step of accelerating the loan. Even in the event of a continuing default, default notices provide an opportunity for pre-acceleration negotiation—giving both parties the breathing room to discuss loan modification or otherwise devise a plan to help the borrower achieve payment currency, without diminishing the noteholder‘s time to commence an action to foreclose on the real property, which should be a last resort.
II.
In Freedom Mortgage and Ditech, the issue is not whether or when the debt was accelerated but whether a valid election to accelerate, effectuated by the commencement
Practically, the noteholder‘s act of revocation (also referred to as a de-acceleration) returns the parties to their pre-acceleration rights and obligations—reinstating the borrowers’ right to repay any arrears and resume satisfaction of the loan over time via installments, i.e., removing the obligation to immediately repay the total outstanding balance due on the loan, and provides borrowers a renewed opportunity to remain in their homes, despite a prior default. Thus, following a de-acceleration, a payment default could give rise to an action on the note to collect missed installments (an action with a six-year statute of limitations that runs on each installment from the date it was due). Or the noteholder might again accelerate the maturity of the then-outstanding debt, at which point a new foreclosure claim on that outstanding debt would accrue with a six-year limitations period. Determining whether, and when, a noteholder revoked an election to accelerate can be critical to determining whether a foreclosure action commenced more than six years after acceleration is time-barred. In opposition to motions to dismiss, Freedom Mortgage and Ditech asserted that their foreclosure actions were timely because they had revoked
Although this Court has never addressed what constitutes a revocation in this context, the Appellate Division departments have consistently held that, absent a provision in the operative agreements setting forth precisely what a noteholder must do to revoke an election to accelerate, revocation can be accomplished by an “affirmative act” of the noteholder within six years of the election to accelerate (NMNT Realty Corp. v Knoxville 2012 Trust, 151 AD3d 1068, 1069 [2nd Dept 2017]; Lavin, 302 AD2d at 639; Federal Natl. Mtge. Assn. v Rosenberg, 180 AD3d 401, 402 [1st Dept 2020]). For example, an express statement in a forbearance agreement that the noteholder is revoking its prior acceleration and reinstating the borrower‘s right to pay in monthly installments has been deemed an “affirmative act” of de-acceleration (see U.S. Bank Trust, N.A. v Rudick, 172 AD3d 1430, 1430-1431 [1st Dept 2019]). However, no clear rule has emerged with respect to the issue raised here—whether a noteholder‘s voluntary motion or stipulation to discontinue a mortgage foreclosure action, which does not expressly mention de-acceleration or a willingness to accept installment payments, constitutes a sufficiently “affirmative act.” Prior to 2017, without guidance from the Appellate Division, multiple trial courts had concluded that a noteholder‘s voluntary withdrawal of its foreclosure action was an affirmative act of revocation as a matter of law (see e.g., 4 Cosgrove 950 Corp. v Deutsche Bank Natl. Trust Co., 2016 WL 2839341, *1-4, 2016 NY Misc LEXIS 44901,
In 2017, the Second Department first addressed this issue in NMNT Realty (151 AD3d 1068), denying a borrower‘s summary judgment motion to quiet title on the rationale that the noteholder‘s motion to discontinue a prior foreclosure action raised a “triable issue of fact” as to whether the prior acceleration had been revoked.9 The First Department has, at times, articulated the same rule (see Capital One, N.A. v Saglimbeni, 170 AD3d 508, 509 [1st Dept 2019]; U.S. Bank N.A. v Charles, 173 AD3d 564, 565 [1st Dept 2019]). However, more recently, as reflected in the Second Department‘s decisions in Freedom Mortgage and Ditech (among other cases), a different rule has emerged—that a noteholder‘s motion or stipulation to withdraw a foreclosure action, “in itself,” is not an affirmative act of revocation of the acceleration effectuated viа the complaint (see Freedom Mtge. Corp. v Engel, 163 AD3d 631, 633 [2d Dept 2018]; Ditech Fin., LLC v Naidu, 175 AD3d 1387, 1389 [2d Dept
This approach is both analytically unsound as a matter of contract law and unworkable from a practicаl standpoint. As is true with respect to the invocation of other contractual rights, either the noteholder‘s act constituted a valid revocation or it did not; what occurred thereafter may shed some light on the parties’ perception of the event but it cannot retroactively alter the character or efficacy of the prior act. Indeed, where the contract requires a pre-acceleration default notice with an opportunity to cure, a post-discontinuance letter sent by the noteholder that references the then-outstanding total debt and seeks immediate repayment of the loan is not necessarily evidence that the prior voluntary discontinuance did not revoke acceleration—it is just as likely an indication that
Indeed, if the effect of a voluntary discontinuance of a mortgage foreclosure action depended solely on the significance of noteholders’ actions taking place months (if not years) later, parties might not have clarity with respect to their post-discontinuance contractual obligations until the issue was adjudicated in a subsequent foreclosure action (which is what occurred here): in both Freedom Mortgage and Ditech, the Appellate Division disagreed with Supreme Court‘s determinations that the prior accelerations had been revoked by the voluntary discontinuance. Not only is this approach harmful to the parties but it is incompatible with the policy underlying the statute of limitations because—under the post-hoc, case-by-case approach adopted by the Appellate Division—the timeliness of a foreclosure action “cannot be ascertained with any degree of certainty,” an
Rather, we are persuaded that, when a bank effectuated an acceleration via the commencement of a foreclosure action, a voluntary discontinuance of that action—i.e., the withdrawal of the complaint—constitutes a revocation of that acceleration. In such a circumstance, the noteholder‘s withdrawal of its only demand for immediate payment of the full outstanding debt, made by the “unequivocal overt act” of filing a foreclosure complaint, “destroy[s] the effect” of the election (see Albertina, 258 NY at 476). We disagree with the Appellate Division‘s characterization of such a stipulation as “silent” with respect to revocation (Freedom Mtge. Corp., 163 AD3d at 633). A voluntary discontinuance withdraws the complaint and, when the complaint is the only expression of a demand for immediate payment of the entire debt, this is the functional equivalent of a statement by the lender that the acceleration is being revoked. Accordingly, we conclude that where acceleration occurred by virtue of the filing of a complaint in a foreclosure action, the noteholder‘s voluntary discontinuance of that action constitutes an affirmative act of revocation of that acceleration as a matter of law, absent an express, contemporaneous statement to the contrary by the noteholder.
The impact of the noteholder‘s voluntary discontinuance of the action should be evident at the moment it occurs. A clear rule that a voluntary discontinuance evinces revocation of acceleration (absent a noteholder‘s contemporaneous statement to the contrary) makes it possible for attorneys to counsel their clients accordingly, allowing borrowers to take advantage of the opportunity afforded by the de-acceleration—reinstatement of the right to pay arrears and make installment payments, eliminating the obligation to immediately pay the entire outstanding principal amount in order to avoid
Freedom Mortgage & Ditech
The appeals in Freedom Mortgage and Ditech are easily resolved by application of this rule. In both cases, the borrowers’ motions to dismiss on statute of limitations grounds were predicated on the argument that an acceleration effectuated by a prior foreclosure action had never been revoked and the six-year limitations period expired prior to commencement of the instant action. In both cases, Supreme Court essentially applied the rule we adopt today—the acceleration was revoked by a voluntary discontinuance of the prior action—but the Appellate Division reversed in each case, dismissing the actions as time-barred. In Freedom Mortgage, the Appellate Division reasoned that the acceleration was not revoked because the stipulation was “silent” as to revocation. Applying the rule
A reversal is also warranted in Ditech, where the Appellate Division reasoned that the voluntary withdrawal of the prior action “did not, in itself constitute an affirmative act” of revocation.12 The February 2014 stipulation discontinuing the prior foreclosure action revoked the acceleration effectuated by the commencement of that action, and the record contains no contemporaneous statement by Ditech to the contrary. That Ditech sent Naidu, the borrower, a payoff letter in March 2015—more than a year later—communicating the
Wells Fargo
Finally, we return to Wells Fargo to address an additional issue relating to de-acceleration that arose in a prior foreclosure action, the fourth action. Although Wells Fargo properly referenced the modified loan in that complaint, Ferrato moved to dismiss that action, alleging a lack of proper service. Supreme Court denied the motion but, on Ferrato‘s appeal, the Appellate Division determined a question of fact was raised and remitted for a traverse hearing. Wells Fargo then moved both to voluntarily discontinue that action and to revoke acceleration of the loan. Supreme Cоurt granted the motion to discontinue but stated, without explanation, that “the acceleration of the subject loan is NOT revoked.” On the bank‘s appeal of that portion of the order, the Appellate Division affirmed, indicating that Wells Fargo could not de-accelerate because it “admitted that its primary reason for revoking acceleration of the mortgage debt was to avoid the statute of limitations bar.”13
Accordingly, in Freedom Mortgage and Ditech, the orders of the Appellate Division should be reversed, with costs, and the Supreme Court orders reinstated; in Vargas, the order of the Appellate Division should be reversed, with costs, defendant‘s motion to dismiss the complaint granted and plaintiff‘s cross motion for summary judgment denied; and in Wells Fargo, the order of the Appellate Division should be reversed, with costs,
I fully concur in the majority opinion but write to make one caveat clear. We have not decided whether the notes and mortgages at issue here permit a lender to revoke an
For the reasons discussed by the majority, I agree that there was no effective acceleration in Vargas v Deutsche Bank National Trust Co. and Wells Fargo Bank, N.A. v
The question of whether the noteholders effectively revoked acceleration in Freedom Mortgage Corp. v Engel and Ditech Financial LLC v Naidu—an issue of material significance in both appeals—is another matter.
As Judge Wilson notes, only the borrower in Freedom Mortgage has challenged the revocation on the ground that the noteholder does not have a contractual right to unilaterally revoke an acceleration (concurring op at 2). I agree with my colleague that because the borrower raises this challenge for the first time on appeal, it is unpreserved for our review (see Bingham v New York City Tr. Auth., 99 NY2d 355, 359 [2003]).
Depending on whether and when we resolve that question, the rule adopted by the majority in these appeals may stand without further consideration, or be affirmed, modified, or discarded in the future. Nevertheless, if we are going to impose a “deceleration” rule based on the noteholder‘s voluntary withdrawal of a foreclosure action (majority op at 2), I would require that the noteholder provide express notice to the borrower regarding the effect of that withdrawal. I see no reason why an acceleration requires an unequivocal overt act—one that leaves no doubt as to the noteholder‘s intent—but revocation may be assumed by implication, requiring only that the noteholder affirmatively disavow an intention to revoke (id.). As the Second Department has recognized, there are many reasons for a noteholder to voluntarily withdraw an action (see Christiana Trust v Barua, 184 AD3d 140, 147 [2d Dept 2020], lv denied 35 NY3d 916 [2020]). Application of the rule requiring notice is simple and not at all burdensome. The noteholder need only inform the borrower in the stipulation or a letter that withdrawal constitutes a revocation of the acceleration. Such notice ensures transparency in a high-stakes relationship.
Because appellants provided no evidence of notice, I would affirm the Appellate Division in Freedom Mortgage and Ditech.
For No. 1: Order reversed, with costs, and order of Supreme Court, Orange County, reinstated. Opinion by Chief Judge DiFiore. Judges Stein, Fahey, Garcia, Wilson and Feinman concur, Judge Wilson in a concurring opinion. Judge Rivera dissents and votes to affirm in an opinion.
For No. 2: Order reversed, with costs, and orders of Supreme Court, Queens County, reinstated. Opinion by Chief Judge DiFiore. Judges Stein, Fahey, Garcia, Wilson and Feinman concur, Judge Wilson in a concurring opinion. Judge Rivera dissents and votes to affirm in an opinion.
For No. 3: Order reversed, with costs, defendant‘s motion to dismiss the complaint granted and plaintiff‘s cross motion for summary judgment denied. Opinion by Chief Judge DiFiore. Judges Rivera, Stein, Fahey, Garcia, Wilson and Feinman concur, Judge Rivera in a concurring opinion and Judge Wilson in a separate concurring opinion.
For No. 4: Order reversed, with costs, defendant Ferrato‘s motion to dismiss denied, plaintiff‘s motion to revoke acceleration of the mortgage loan granted and certified question not answered as unnecessary. Opinion by Chief Judge DiFiore. Judges Rivera, Stein, Fahey, Garcia, Wilson and Feinman concur, Judge Rivera in a concurring opinion and Judge Wilson in a separate concurring opinion.
Decided February 18, 2021