Prior to this decision, the appellate courts had required lenders to make some “affirmative act” in addition to withdrawing the complaint to revoke an acceleration. As a result, litigation often would arise where the parties’ stipulation or order discontinuing the action was silent as to its effect on the acceleration. Eventually, the appellate courts developed the law to require lenders to provide additional evidence of intent going beyond the filings made with the court, such as correspondence and payment histories. The old rule left trial courts in the difficult position of divining the intent of the parties in withdrawing the complaint―a fact-specific inquiry that could hinge on opaque or unclear post-litigation communications between the parties. This inquiry often led to inconsistent results and, in some cases, harsh consequences for lenders where the court failed to find an affirmative act deaccelerating the loan within the six-year period. The end result in those cases was an unenforceable mortgage and a “free” house for the borrower.
The Court of Appeals’ new rules should make these kinds of factual inquiries irrelevant in those cases where acceleration is effected by the filing of a complaint. Where a lender serves a pre-litigation acceleration notice, an affirmative act likely is still required to deaccelerate the loan. The ruling could potentially resurrect cases where the statute of limitations was previously deemed to have expired. Accordingly, lenders should reexamine their loan files to assess whether a new claim may now be asserted.
Finally, while the court’s decision involved residential mortgages, the ruling should apply to commercial mortgage transactions because they are subject to the same statute of limitations. However, before assuming the new rule applies in either the residential or commercial context, a lender should first look to the express terms of the particular note and mortgage. As the Court of Appeals stated, “different notes and mortgage instruments may incorporate their own rules for acceleration or revocation thereof.” Therefore, lenders should continue to exercise care in complying with any specific notice requirements contained within the mortgage loan documents.
The consolidated opinion was issued in Freedom Mortg. Corp. v. Engel, 2021 WL 6238691 (N.Y. Feb. 18, 2021).
If you have any questions about this Alert, please contact Brett L. Messinger, Brian J. Slipakoff, Steven T. Knipfelberg, any of the attorneys in our Trial Practice Group, attorneys in our Real Estate Practice Group, attorneys in our Banking and Finance Industry Group, attorneys in our Business Reorganization and Financial Restructuring Practice Group or the attorney in the firm with whom you are regularly in contact.
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