The New York State Court of Appeals recently provided much needed guidance to mortgagees on the issue of acceleration and determining the commencement date for the statute of limitation after acceleration in the decision Freedom Mortgage Corp. v. Engel, et al. on February 18, 2021.  Prior to the decision, which decided similar issues raised in four separate cases, the case law was at best unclear.  The overarching issue in each case involved the timeliness of the commencement of a mortgage foreclosure and acceleration.

The Court of Appeals determined that a noteholder must conduct an “unequivocal overt act” to accelerate payment under the note, and in two of the cases, considered whether language contained in the respective default letters constituted such an unequivocal overt act to accelerate the respective loans.  The other two cases addressed the issue of whether the voluntary discontinuance of a prior foreclosure action revoked the acceleration contained in the foreclosure action, thereby reinstating the borrower’s right to repay the loan over time through maturity.

In considering what constitutes an overt act, the Court noted that acceleration is “a significant event for statute of limitations purposes and, in two of these appeals the timeliness dispute turns on whether certain acts…effectuated an acceleration of the indebtedness, starting the clock on the noteholders’ claims.”  This requirement is based on the recognition that through acceleration, the rights of the contract parties are being modified.

Importantly, the issue of acceleration raises the attendant issue of the statute of limitations because acceleration of the debt triggers the six (6) year statute of limitations within which the mortgagee must commence a foreclosure action.  The Court addressed the issue of whether a default letter issued by a lender was a valid acceleration that advised the borrower that the loan was in default.  The letters advised the borrowers that “[failure] to cure your default may result in the foreclosure and sale of your property.”   The Court concluded that the demand letter did not accelerate the debt because it did not seek immediate payment of the entire outstanding loan, but instead offered an opportunity to cure the default.  Moreover, while the lender stated that the debt will be accelerated if the default is not cured, it also used qualifying language that failure to cure “may result in the foreclosure of the property.”  This was determined not to be an unequivocal overt act.

The Court also considered whether the voluntary discontinuance of a pending foreclosure action revoked the acceleration.  It was recognized that the intent of revoking the acceleration was to return the contract parties to the pre-acceleration position.  Just as with the demand letters, “revocation can be accomplished by an “affirmative act” of the noteholder within six (6) years of the election to accelerate.”

The Court considered the issue of “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’”.  In rejecting various prior decisions that turned on evaluating the bank’s intent that was conducted after the discontinuance was filed, the Court concluded that the approach was “both analytically unsound as a matter of contract law, and unworkable from a practical standpoint.”  Indeed, the Court noted that “a rule that requires post-hoc evaluation of events occurring after the voluntary discontinuance correspondence between the parties, payment practices and the like in order to determine whether a revocation previously occurred, leaves the parties without concrete contemporaneous guidance as to their current contractual obligations, resulting in confusion that is likely to lead (perhaps inadvertently) to a breach, either because the borrower does not know that the obligation to make installment payments has resumed, or the noteholder is unaware that it must accept a timely installment if tendered.”  The Court therefore held that “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.  The Court found “that where the maturity of the debt has been validly accelerated by commencement of a foreclosure action, the noteholder’s voluntary withdrawal of that action revokes the election to accelerate, absent the noteholder’s contemporaneous statement to the contrary.”  Notably, however, the Court clarified 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.

A question remains, however, whether an acceleration made through a prior communication with the borrower would necessarily be revoked by the filing of a discontinuance.  From a practical standpoint, and as noted in Judge Rivera’s dissent in part, it is recommended to provide a copy of the stipulation of discontinuance or a letter to the borrower confirming that the stipulation was filed and that the withdrawal constitutes a revocation of the acceleration.

This alert does not purport to be a substitute for advice of counsel on specific matters.

Harris Beach has offices throughout New York State, including Albany, Buffalo, Ithaca, Long Island, New York City, Rochester, Saratoga Springs, Syracuse and White Plains, as well as New Haven, Connecticut and Newark, New Jersey.