By Karen Sheehan, Esq.

Frenkel Lambert Weiss Weisman & Gordon, LLP*

USFN Member (NY, FL, NJ)

New York’s Foreclosure Abuse Prevention Act (“FAPA”) has implications well beyond the Engel decision that may impact the language servicers seek to include in bankruptcy plans and/or orders. Signed into law by the governor of New York on December 30, 2022, FAPA was initiated to overturn the decision rendered by the New York Court of Appeals in Freedom Mortgage Corporation v. Engel, 37 N.Y.3d 1 (2021). The Court in Engel held that voluntary discontinuance of a foreclosure proceeding constituted deacceleration of a loan and reset the statute of limitations.

Under FAPA, CRPL §203 was amended to provide that once a cause of action for foreclosure has accrued, no party may unilaterally waive, postpone, cancel, toll, revise, or reset the accrual thereof or otherwise purport to affect a unilateral extension of the statute of limitations period prescribed by law to commence an action and to interpose the claim unless prescribed by statute.  As such, a party may not unilaterally change or reset the time at which a cause of action in foreclosure accrues, nor the time limit for commencement of an action.

CPLR §213(4) was also amended by FAPA to provide that if the statute of limitations is raised as a defense based upon a claim that the loan was previously accelerated, a plaintiff is estopped from asserting that the instrument was not validly accelerated, 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. As such, an express judicial determination that a loan was not validly accelerated is now required to proceed with a new action on grounds that the loan was not previously accelerated.

In Chapter 11 Bankruptcy cases, pursuant to 11 U.S.C. §1124(2), a debtor may cure debt that was accelerated pre-petition. Although the Bankruptcy Code does not define “cure,” the courts in the 2nd District have held that a plan under 11 U.S.C. §1124(2) which provides for the curing of a default effectuates a “reversal” of the event that triggered the default and returns the parties to a pre-default status quo. See In Re: Depietto 2021 WL 3287418 (S.D.N.Y), citing In Re: FCC, 208 F.3d 137 (2d Cir. 2000); In Re Next Wave Personal Communications, Inc., 244 B.R. 253 (S.D.N.Y. 2000).

As such, secured creditors should carefully review any plan that affects a pre-petition accelerated loan, a foreclosure action, or cures a default under §1124(2). The confirmed plan becomes a new binding contract between the debtor and secured creditor pursuant to 11 U.S.C. §1141 and will establish the parties’ rights and obligations. Secured creditors may want to consider having language included in the Chapter 11 plan and/or confirmation order which provides that confirmation will be an express judicial termination that the loan is deaccelerated to avoid any future defense based upon the statute of limitations.

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USFNews - October 4, 2023

*Denotes firm is a 2022 USFN Award of Excellence recipient.