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Foreclosure Statute of Limitations
In a set of foreclosure cases decided in late February, the Court of Appeals resolved some of the questions that have plagued New York's court system in the aftermath of last decade's mortgage crisis. When borrowers defaulted on their mortgage loans, immediate foreclosure was not always the best option for mortgagee banks, especially in what was, for a number of years, a weak housing market. Suppose, however, the bank delayed in bringing a foreclosure action. When would the statute of limitations bar a foreclosure action or an action on the underlying mortgage debt, leaving the defaulting mortgagor with title free and clear of the mortgage? In the last few years, hardly a week has gone by without a case involving the application of the statute of limitations to defaulted mortgages. In Freedom Mortgage Corp. v. Engel and its companion cases, the Court of Appeals provided a road map for resolution of these cases.
Acceleration of the Mortgage Debt
Mortgage agreements invariably allow the mortgagee to accelerate the entire mortgage debt upon default by the borrower. When the mortgagee accelerates the mortgage debt, the mortgagor becomes liable for the entire mortgage balance rather than the monthly payment. There has been no dispute that acceleration of the mortgage triggers commencement of the six year statute of limitations on the entire mortgage debt. Courts have struggled, however, with what act by the mortgagee suffices to accelerate the mortgage debt. Commencement of a foreclosure action clearly accelerates the mortgage debt, but the Appellate Divisions had divided over the effect of threatening language. For instance, in the Vargas case — one of the cases before the Court of Appeals — Deutsche Bank, as mortgagee, had sent Vargas a letter notifying him that he was in serious default, which he could cure by making payments within 32 days of the date of the letter, and also providing that should he fail to cure the default, the mortgagee "will accelerate [his] mortgage with the full amount remaining accelerated and becoming dues and payable in full, and foreclosure proceedings will be initiated at that time." Eight years after mortgagee sent the letter, mortgagor brought a quiet title action seeking to cancel the mortgage. The First Department, following its precedent in Deutsche Bank Nat'l Trust Co. v. Royal Blue Realty Holdings, Inc., 148 A.D.3d 529, quieted title in the mortgagor, holding that the letter accelerated the debt and triggered the statute of limitations.
The Court of Appeals reversed, focusing on language in the mortgagee's letter providing that "[f]ailure to cure your default may result in foreclosure and sale of your property" — language indicating that acceleration and foreclosure was not to be automatic, but remained within the discretion of the mortgagee. As the Second Department had earlier held in Milone v. U.S. Bank, N.A., 164 A.D.3d 145, the court held that expressions of future intent were not sufficient to accelerate the mortgage. The court emphasized the importance of default notices as a vehicle for starting pre-acceleration negotiations without diminishing the noteholder's time to commence a foreclosure action.
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