by Richard P Haber, Esq. and Brian P. Scibetta, Esq.
McCalla Raymer Leibert Pierce, LLC
USFN Member (AL, CA, CT, FL, GA, IL, MS, NJ, NV, NY, OR, TX, WA)

The recent New York Court of Appeals decision in Freedom Mortgage Corp. v. Engel, and three related matters, provided welcome relief to servicers and investors. The central holding provides that the voluntary discontinuance of a foreclosure action automatically revokes the acceleration and de-accelerates the debt, where the filing of the foreclosure complaint was the act of acceleration.

This is critical because a significant number of loans with statute of limitations concerns follow that fact pattern – a prior foreclosure complaint that served to accelerate the debt ultimately resulted in a voluntarily discontinuance. If the loan was not separately de-accelerated during the six-year period starting with the filing of the earlier foreclosure complaint, and a new complaint was either filed after the expiration of the six-year period or not at all, total lien loss was a common result.

For years, servicers and their law firms have struggled to save as many liens as possible, through creative arguments for tolling, resetting of the limitations period, de-acceleration and/or that the loan was never accelerated in the first place, based on the unique facts of any given case. Much of that maneuvering will no longer be required as the Engel decision provides a clear path to foreclosure for many loans that were either at risk for total lien loss or thought to be heading down that path.    

There are three populations of loans that should be reviewed. First, cases pending in the trial or appellate courts potentially need action, such as supplemental briefing or a new motion addressing the impact of the Engel decision. Next, you should look at any cases that were dismissed on statute of limitations grounds to determine if the Engel decision compels a different result, and whether it would still be timely to have that dismissal reversed by either the trial or appellate court. Finally, consideration should be given to any loans where foreclosure was never started because there was previously no viable argument or good faith basis to proceed. In instances where the Engel decision now alters that analysis, foreclosure may again be an option.

In addition to the main holding, the decision also overturns two Appellate Division rulings concerning whether acceleration has actually happened. The Court held that acceleration does not occur automatically after a servicer sends a default notice containing language that the servicer “will accelerate” the mortgage debt if the default is not cured by the specific date provided in the letter. And further, the Court held that a foreclosure complaint that fails to plead that the loan had been modified similarly does not serve to accelerate the mortgage debt. These aspects of the landmark decision provide additional relief to servicers insofar as they further limit the population of loans potentially suffering from a statute of limitations bar.

While the import of the decision cannot be understated for servicers, investors, and their law firms, statute of limitations litigation will not simply cease in New York. Questions have already arisen as to whether the voluntary discontinuance must occur within the initial six-year limitations period in order for Engel to apply. Issues also persist with cases that were not voluntarily discontinued by the lender, but rather were dismissed by the court for lack or prosecution or some other reason. And, in concurring and dissenting opinions issued in Engel, two justices raised the question of whether the right to revoke actually exists, something not directly decided because that issue was not before the Court. Notwithstanding the inevitability that litigation will continue, the industry should nevertheless take joy in being on the right side of the Engel decision, and having leverage in many situations moving forward.

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Spring 2021 USFN Report