Following mounting public pressure in November and December of last year, on December 30, 2022, Governor Kathy Hochul signed into law the Foreclosure Abuse Prevention Act (“FAPA”) (A7737B). Originally introduced by Senator James Sanders, Jr. of the 10th Senate District on March 8, 2021, FAPA spent nearly two years making its way through New York’s legislative process. FAPA was proposed in direct response to the Court of Appeal’s decision in Freedom Mtge. Corp. v. Engel (37 NY3d 1 ) which was issued on February 18, 2021. Indeed, less than three weeks after the decision in Engel, FAPA was introduced as proposed legislation, and since that time has been commonly referred to as the “Anti-Engel Bill.”
Although FAPA only went into effect on December 30, 2022, it was generally accepted that FAPA would be signed into law following an overwhelmingly favorable vote of 51-11 by the Senate on May 3, 2022. On December 30th, the fears of lenders and mortgage investors alike were realized, and with its passage, FAPA has overnight rendered countless mortgage liens time-barred under the six-year statute of limitations governing mortgage foreclosures in New York.
This article will address the current state of law affecting the statute of limitations under New York foreclosure law and how FAPA has changed the status quo.
I. How the Statute of Limitations Functions Under New York Foreclosure Law
If you’ve watched your fair share of lawyer movies (A Few Good Men, To Kill a Mockingbird, A Civil Action, etc.), you are familiar with what a statute of limitations is. But in case you have not, a statute of limitations directs when a lawsuit must be commenced after a triggering event has occurred. If you hit someone with your car, they have three years to sue, if you breach a contract, they have six years to sue, and so on. Under New York Law (CPLR § 213), the statute of limitations for mortgage foreclosure is six years. It is common for our office to receive puzzled looks from clients when we describe how the statute of limitations can impact a mortgage agreement that calls for monthly payments over the course of 15–30 years, with the last scheduled payment not taking place until 10–20 years from now. The confusion is not only understandable but warranted given the volatility affecting New York foreclosure law since 2016. But the simplest way to explain it is that the statute of limitations affects mortgage foreclosures in two distinct ways.
First, a mortgage is known as an installment contract. Meaning the courts will treat each monthly installment as its own contract (e.g., January 1, 2010, February 1, 2010, March 1, 2010, etc.). So if the borrower misses their January 1, 2010 payment, then the mortgage company (lender or mortgagee) has six years from the date of that missed payment to sue for foreclosure on that missed payment (i.e., January 1, 2016).
However, the second way in which the statute of limitations affects mortgage foreclosure is if the lender or mortgagee “accelerates” the mortgage debt. The supermajority of residential mortgage agreements provide the lender with the option to “accelerate” the amounts due to it if a default under the mortgage persists. So, taking the prior example, the borrower defaults on their January 1, 2010 monthly payment and all payments after that. Due to this default, rather than sue on each individual missed payment, the lender can accelerate the loan and declare all amounts due and owing as of now. If the lender elects to exercise its option to accelerate, then all payments due under the mortgage loan are due now and the mortgage agreement is no longer treated as an installment contract as discussed above. This latter scenario is the focus of FAPA’s impact.
Once a lender accelerates the mortgage debt, then the six-year statute of limitations begins to run on the entire debt. The result being that if the lender fails to commence a foreclosure action within that six-year period, then the entire mortgage debt is time-barred and the mortgage can be stripped off the property.
II. How Can a Lender Accelerate the Mortgage Debt
Since 2016, a common basis for dispute between lenders and borrowers is whether the lender has accelerated the debt. This brings into question whether the method the lender used is sufficient to accelerate the mortgage debt, and then, assuming the method was proper, whether the lender had the authority to accelerate in the first place. For the most part, FAPA leaves this portion of the statute of limitations law undisturbed.
However, what is important to note is that it is settled, under both Engel and FAPA, that the filing of a complaint by a lender seeking to foreclose on a mortgage in which the lender seeks payment for all amounts due and owing is sufficient to accelerate the mortgage debt.
Practically, how this applies in today’s market, is that if a loan has a prior action for foreclosure on its record (which is common in the wake of the subprime mortgage crisis from 2007–2010), then it is exceedingly likely that the mortgage debt has been accelerated and the six-year statute of limitations began to run when that complaint was filed. This, in and of itself, is perplexing to lenders and borrowers. Typically, an event occurs and the time period in which a plaintiff must file a complaint is calculated from the date of that event. Under New York foreclosure law, the filing of the complaint is the event that triggers the running of the statute of limitations. So a lender will commence a lawsuit and have the statute of limitations clock run currently with its lawsuit for foreclosure.
Another commonly accepted method for acceleration is that if the lender provides notice to the borrowers that it has accelerated the mortgage debt (it’s intent to do so in the future is not sufficient).
III. Revocation of the Election to Accelerate Prior to FAPA
Prior to FAPA, it was settled law since February 2021 that although a lender can accelerate the mortgage debt, and start the running of the statute of limitations, it could also revoke its election to accelerate the debt, and thereby stop the running of the statute of limitations as if it never started.
Prior to Engel, this principle was not so easily defined. Rather, when Engel was decided by the Appellate Division, Second Department, the appellate court added a question of the lender’s intent to determine whether the lender had actually revoked its acceleration. Understandably, this led to quite a lot of confusion for the trial level courts in New York.
The Court of Appeal’s decision in Engel removed this confusion and provided much-needed clarity. Rather than engage in an inquiry as to the lender’s intent, the Court of Appeals held that all that is needed to revoke an election to accelerate is “an affirmative act of the noteholder within six years of the election to accelerate.” Even more clarifying, is the Court of Appeals held that a lender’s voluntarily discontinuance of its own action (dismissing its own action) is a sufficient affirmative act to revoke the acceleration and further inquiry is not needed.
So, even if a lender files a complaint and lets it sit there for 5.9 years, under Engel, it can voluntarily discontinue its action within the six year period and its like the statute of limitations never began to run on the entire debt and the lender is free to commence a new action whenever it wants without fear of the statute of limitations being raised as a defense.
FAPA completely does away with this portion of the ruling from Engel.
IV. Affect of FAPA on the Statute of Limitations Moving Forward
From a legislative perspective, FAPA amends different statutes under the Real Property Actions and Proceedings Law (“RPAPL”), Civil Practice Law and Rules (“CPLR”) and General Obligations Law (“GOL”) to achieve its desired goal. All of these different laws have an impact on the statute of limitations inquiry in New York foreclosure law.
Without delving into the procedural nuances (we will delve into this in a later post), the effect of FAPA is that it does away with Engel’s ruling that the statute of limitations in New York foreclosure law can be turned on and off at the lender’s discretion. Under FAPA, once a lender elects to accelerate, it cannot unilaterally revoke that acceleration (and thereby undo the running of the clock) simply by discontinuing its own action.
Another vital change is that FAPA drastically limits the applicability of what is known as the “saving statute”. CPLR 205(a) allows a plaintiff, who previously timely commenced a lawsuit within the statute of limitations, to re-file its case outside the statute of limitations if it re-files and serves its complaint within the six months following the dismissal of its prior action. The one caveat being, prior to FAPA, that the prior action must not have been dismissed for lack of personal jurisdiction or was not decided on the merits.
Now, in addition to the already existing caveat, the saving statute is only available to the plaintiff/lender who originally commenced the prior lawsuit. This is exceptionally problematic for most lenders in today’s market because loans can be, and are often, assigned from lender to lender two, three or four times throughout the course of a foreclosure action. So, if a case is dismissed for any reason, then the only lender able to timely commence its new lawsuit is the lender who owned the loan 2–3 assignments ago.
V. End Result
Since 2016, the state of foreclosure statute of limitations law has been in flux, with lenders and borrowers jumping from hoop to hoop ever since. Although FAPA may seem to be the final resolution to this ongoing dispute, it is likely that extensive litigation on statute of limitations issues will persist for years to come.
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The Frank Law Firm P.C. are foreclosure experts who regularly litigate a full scope of foreclosure-related issues in the trial, appellate, and federal courts of New York. Whether you are a lender, junior lien holder, or borrower, contact our office today to discuss the impact of FAPA or other foreclosure-related issues.