by Keith Abramson, Esq.

Frenkel Lambert Weiss Weisman & Gordon, LLP

USFN Member (FL, NJ, NY)

On February 18, 2021, the New York State Court of Appeals issued an opinion in four cases involving the application of New York’s statute of limitations with respect to mortgage foreclosure claims.  This article focuses on the issues raised in two of those cases: Wells Fargo v. Ferrato and Vargas v. Deutsche Bank. 

General Principles
The central focus of the opinion in both Wells Fargo v. Ferrato and Vargas v. Deutsche Bank is on the event of acceleration, a contractual right typically enjoyed by noteholders upon a default by the borrower, whereby the noteholder may demand immediate payment in full of the entire balance of the loan, and which permits the noteholder to commence an action seeking the remedy of foreclosure. 

The option to exercise this contractual right (of acceleration) is typically a matter within the noteholder’s discretion and requires an “unequivocal overt act” such as the filing of a foreclosure complaint demanding repayment of the entire outstanding debt.  Because a cause of action to recover the entire balance of the debt accrues at the time the loan is accelerated, it is the event of acceleration that triggers the six-year statute of limitations to commence a foreclosure action.

Wells Fargo v. Ferrato and Vargas v. Deutsche Bank each involves a dispute as to whether, and when, a valid acceleration of the debt occurred, triggering the six-year limitations period to commence a foreclosure claim. 

Wells Fargo Bank N.A. v. Ferrato (Modifications and Motivations)

The central issue in Wells Fargo Bank v. Ferrato was whether the commencement of either of two prior foreclosure actions, where the plaintiff sought to foreclose upon the original note and mortgage – without reference to a 2008 loan modification – was sufficient to accelerate the mortgage debt. 

The case at bar concerns no less than five foreclosure actions involving the same property, the last of which was commenced in December 2017.  Ferrato moved to dismiss the 2017 action, arguing that the debt was accelerated by the commencement of a prior foreclosure action (the second) in September 2009, and that the statute of limitations expired in September 2015, rendering the 2017 action untimely. 

It was 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 two prior foreclosure actions (the second and third), Wells Fargo attached only the original note and mortgage to the complaint and failed to acknowledge the existence of the modification agreement (“the only oblique evidence of a modification was in an attached schedule stating a principal dollar amount consistent with the modified debt”).  Notably, Ferrato successfully moved to dismiss both prior actions based on these deficiencies. 

While it is well settled that the filing of a verified foreclosure complaint may evince an election to accelerate, the Court of Appeals, in Wells Fargo, held:

[H]ere the filings did not accelerate the modified loan (underlying the foreclosure action) because the bank failed to attach the modified agreements or otherwise acknowledge those documents, which had materially distinct terms.  Under these circumstances – where the deficiencies in the complaints were not merely technical or de minimis and rendered it unclear what debt was being accelerated – the commencement of these actions did not validly accelerate the modified loan. 

Thus, while the Wells Fargo opinion was favorable to the plaintiff in terms of statute of limitations implications, foreclosing plaintiffs should be forewarned that a failure to reference modifications to the original note and mortgage in the complaint renders the complaint subject to dismissal as insufficient to accelerate the mortgage debt.

The Court addressed one more issue in Wells Fargo v. Ferrato, where, in another prior action (the fourth), Wells Fargo had moved to both voluntarily discontinue the action and to revoke the acceleration of the loan.  The trial court granted the motion to discontinue but denied revocation, stating, without explanation, that “the acceleration of the subject loan is NOT revoked””.  Affirming the trial court’s order, the Appellate Division held “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””. 

The Court of Appeals reversed, expressly rejecting the theory reflected in several Appellate Division and Supreme Court decisions, “that a lender should be barred from revoking acceleration if the motive of the revocation was to avoid the expiration of the statute of limitations on the accelerated debt.”  To the contrary, the Court of Appeals held that a noteholder’s motivation for exercising a contractual right is generally irrelevant. 

Finally, the Court noted that a noteholder may be equitably estopped from revoking its election to accelerate, but only upon a showing that the defendant materially changed her position in detrimental reliance upon the loan acceleration. 

Juan Vargas v. Deutsche Bank National Trust Company (Statements of Future Intent)
In Vargas, an action pursuant to RPAPL 1501(4) to discharge a mortgage as time-barred, the parties disputed whether a default letter issued by the bank’s predecessor in interest validly accelerated the debt.  The Court acknowledged, consistent with settled case law, “that the acceleration of a mortgage debt may occur by means other than the commencement of a foreclosure action, such as through an unequivocal acceleration notice transmitted to the borrower.”

The issue before the Court was whether the language of the default letter was sufficiently unequivocal to constitute a valid election to accelerate.

The Court’s decision in Vargas was heavily fact-dependent and relied upon a thorough examination of the default letter.  The letter at issue informed Vargas that his loan was in serious default because he hadn’t 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.”  The letter 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” [emphasis added]. 

However, the letter went on to warn that the “[f]ailure to cure your default may result in the foreclosure and sale of your property” [emphasis added]. 

On these facts, the Court of Appeals held that the letter “did not seek immediate payment of the entire, outstanding loan, but referred to acceleration only as a future event”.  Nor, according to the Court, was the letter “a pledge that acceleration would immediately or automatically occur upon expiration of the 32-day cure period.” The Court noted that the letter “subsequently makes clear that the failure to cure “may” result in the foreclosure of the property, indicating that it was far from certain that either the acceleration or foreclosure action would follow, let alone ensue immediately at the close of the 32-day period.” 

It is clear from the holding in Vargas that acceleration may be accomplished through an unequivocal acceleration notice transmitted to the borrower, and a different result may have been reached if not for the inconsistent and somewhat ambiguous language contained in the default letter in Vargas. Accordingly, lenders must be careful to avoid the use of unequivocal language of acceleration in their default letters unless it is their intention to accelerate the debt by such notice. 

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Spring 2021 USFN Report