A Lender’s Guide To Hiking Through the Retroactive Trails of the Foreclosure Abuse Prevention Act
Lenders in New York are battling backwards to foreclose on loans that are indisputably due and owing. On Dec. 30, 2022, Governor Kathy Hochul signed into law the controversial Foreclosure Abuse Prevention Act (FAPA) in direct response to the New York State Court of Appeals’ decision in Freedom Mtge. Corp. v. Engel, 37 N.Y.3d 1 (2021), which case confirmed and established circumstances under which a lender could deaccelerate a loan and re-restart the six-year statute of limitations to foreclose it.
Under FAPA, however, among several other rockfalls, a lender can no longer unilaterally deaccelerate a debt, resulting in countless cases where a borrower, who has not made a mortgage payment or paid property taxes in over a decade, will no longer have to repay his or her loan.
This article highlights the main statutory amendments of FAPA—that took effect immediately and retroactively—and endeavors to guide lenders on adjusting its practices and procedures as needed to rightfully pursue their rights and remedies to collect on the money that was borrowed.
Savings Statute: CPLR §205
CPLR §205, commonly referred to as the savings statute, provides a six-month grace period within which an originally timely action, including a foreclosure action, that was terminated and now outside of the statute of limitations, can be timely recommenced under several circumstances.
Savings Statute: Pre-FAPA. Pre-FAPA, CPLR §205 was necessarily used by lenders to recommence an action that would otherwise be time-barred by the statute of limitations, for relevant examples, when an action is dismissed for the technical failure to prove that a pre-foreclosure notice was properly mailed, or when an action is dismissed for an accidentally missed conference or court appearance. In these cases, it is undisputed that the money was borrowed and not repaid, but because the lender did not sufficiently prove the proper mailing of a pre-foreclosure notice, or because the lender missed a conference, the actions are dismissed.
Oftentimes in these scenarios, in the time between the actions being commenced and then dismissed for these reasons, the notes and mortgages are sold and assigned to new lenders, who, as successors in interest, step into the shoes of the original plaintiff lenders and recommence the actions as needed using the Savings Statute. The Court of Appeals in Eitani confirmed for these scenarios that, for example in that case, Wells Fargo as assignee of the note and mortgage being foreclosed was entitled to the benefit of the Savings Statute, even though the prior action was commenced by and in the name of Wells Fargo’s predecessor in interest. Id. at 199.
Additionally, in dismissed cases not on the merits, so long as there was no specific finding of neglect, the Savings Statute could be used. U.S. Bank Trust, N.A. v. Moomey-Stevens, 168 A.D.3D 1169, 1170-1171 (3d Dept. 2019); Eitani, 148 A.D.3d at 195.
Savings Statute: Post-FAPA. Post-FAPA, a successor in interest or an assignee of the original plaintiff in an action is seemingly no longer permitted to use the Savings Statute. In practice, this means, for example, that now when an action is dismissed for the lender failing to prove that a pre-foreclosure notice was properly mailed (not on the merits)—and that action was already pending for more than six years for settlement conferencing, motion practice, court delays, loss mitigation efforts, and/or the like, and during that time the loan being foreclosed was sold and assigned to a new lender (as most loans are expressly permitted to be as an agreed upon term of the loan)—the action can no longer be recommenced using the Savings Statute by the new lender.
There is a carve-out, however, for an assignee to use the Savings Statute if it pleads and proves that it is acting on behalf of the original plaintiff—a standard that will become increasingly defined as the anticipated litigation over it ensues.
Also post-FAPA, the Savings Statute can no longer be used to recommence an action dismissed not on the merits, but for a missed appearance, for example, with no specific finding of neglect to prosecute. Now, “a dismissal of the complaint for any form of neglect…, for failure to comply with any court scheduling orders, or by default due to nonappearance for conference or at a calendar call, or by failure to timely submit any order or judgment…” will prevent the action from being recommenced using the Savings Statute. CPLR §205(a). Lenders in these scenarios will have to vacate the dismissal orders on a case-by-case basis in order to avoid the harsh penalty of being left with a time-barred loan for its counsel missing a court appearance.
Separate Action for Mortgage Debt: RPAPL §1301
Historically, the purpose of RPAPL §1301 was to shield a borrower from the expense and annoyance of defending two independent actions at the same time with reference to the same debt. Central Trust Co. v. Dann, 85 N.Y.2d 767 (1995); Deutsche Bank Nat’l Tr. Co. v. O’Brien, 175 A.D.3d 650 (2d Dept. 2019).
Separate Action for Mortgage Debt: Pre-FAPA. In practice, foreclosure proceedings are sometimes abandoned and left open on the dockets—especially older ones. Pre-FAPA, if a borrower raised as a defense to a foreclosure proceeding that there is a prior action pending to foreclose the same mortgage, so long as that prior action was not being actively litigated, it was well settled that Plaintiff’s failure to first move in the prior action for leave to commence the new one should be disregarded as a mere irregularity. Bank of New York Mellon v. Adam Plotch LLC, 162 A.D.3d 502, 502–03 (1st Dept. 2018).
Separate Action for Mortgage Debt: Post-FAPA. Post-FAPA, RPAPL §1301 was amended to expressly clarify that actions to foreclose a mortgage where there is a prior action pending or after final judgment for the plaintiff cannot be commenced without leave of the court in the prior action, and now adds that “the procurement of such leave shall be a condition precedent to the commencement of such other action and the failure to procure such leave shall be a defense to such other action”. RPAPL §1301.
Lenders must take heed of this change most urgently on all loans with pending actions and approaching statute of limitations expiration dates. In these actions, should a restart be anticipated for any reason, immediately seeking leave to do so should be considered on a case-by-case basis.
Revocation of Acceleration: CPLR §203, Rule 3217, NY GOL §17–105
In New York, it was well settled that an election of mortgage acceleration could be revoked by an affirmative act of the lender occurring during the six-year statute of limitations period.
Revocation of Acceleration: Pre-FAPA. Pre-FAPA, defaulted loans were often deaccelerated by lenders in many cases to stop foreclosure proceedings and offer loss mitigation alternatives to the benefit of the borrowers. The Court of Appeals in Engel clearly reiterated that “a voluntary discontinuance of an action—i.e. the withdrawal of the complaint—constitutes a revocation of that acceleration.” Engel, 37 N.Y.3d at 7.
Revocation of Acceleration: Post-FAPA. Post-FAPA, the discontinuance of a foreclosure proceeding no longer deaccelerates the loan being foreclosed. FAPA amended CPLR §203 to add a subdivision that “no party may, in form or effect, unilaterally waive, postpone, cancel, toll, revive, or reset the accrual thereof, or otherwise purport to effect a unilateral extension of the limitations period prescribed by law to commence an action and to interpose the claim, unless expressly prescribed by statute.” CPLR §203(h).
This was coupled with amending CPLR Rule 3217 regarding the effect of a discontinuance adding a subdivision that a “voluntary discontinuance of such action, whether on motion, order, stipulation or by notice, shall not, in form or effect, waive, postpone, cancel, toll, extend, revive or reset the limitations period to commence an action and to interpose a claim, unless expressly prescribed by statute.” CPLR Rule 3217(e).
Lenders must ensure that the requirements of NY GOL §17–105 and/or NY GOL §17–107 are met in order to renew the statute of limitations in these scenarios. If a borrower acknowledges the debt in writing and expressly confirms the intent to repay it without conditions, the statute of limitations on the mortgage debt will reset to the date of that promise. National Loan Investors, LP v. Piscitello, 21 A.D.3d 537, 538 (App. Div. 2d Dept. 2005).
Guidance can also be taken from the recent Court of Appeals decision in Federal National Mortgage Association v. Jeanty, 39 N.Y.3d 951 (2022), where a borrower made seven payments, and while the first three payments were required pursuant to a trial modification plan, the other four payments were not and found to have “established circumstances amounting to ‘an absolute and unqualified acknowledgement by the debtor of more being due, from which a promise may be inferred to pay the remainder’,” thereby restarting the statute of limitations to foreclose the debt.
Prior Invalid Accelerations: CPLR §213
It is well settled law in the State of New York that “service of a complaint is ineffective to constitute a valid exercise of the option to accelerate a debt where the plaintiff does not have the authority to accelerate the debt or to sue to foreclose at that time”. 2lst Mortgage Corporation v. Rudman, 20l AD3d618,62l (2d Dept. 2022).
Prior Invalid Accelerations: Pre-FAPA. A prior foreclosure action commenced by a plaintiff who was not the holder of the underlying note and mortgage at the time of commencement could not operate to accelerate the mortgage debt. 21st Mortgage Corporation v. Adames, 153 A.D.3d 474, 475 (App. Div. 2d Dept. 2017).
Oftentimes, with standing to foreclose being so heavily litigated of recent, lenders are now reviewing full note possession records from prior servicers of the loans and learning, for example, that a prior foreclosure action was commenced to foreclose a loan by a lender that was not in possession of the note at the time, and, therefore, was without standing to foreclose. In these situations, pre-FAPA, a lender could defeat a borrower’s statute of limitations defense to a new foreclosure proceeding by proving that the prior plaintiff did not have standing to commence that action or accelerate the debt.
Prior Invalid Accelerations: Post-FAPA. FAPA now amended CPLR §213 to add that: “if the statute of limitations is raised as a defense, and if that defense is based on a claim that the instrument at issue was accelerated prior to, or by way of commencement of a prior action, a plaintiff shall be 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.”
It is anticipated that lenders with loans burdened by a prior action invalidly accelerated due to the plaintiff not having standing to commence it, but without a specific court order dismissing the action for invalid acceleration due to lack of standing, will be moving within those prior actions, as needed and appropriate.
When purchasing loans that are already non-performing, investors must immediately expand their due diligence procedures to consider the statutory amendments of FAPA and how they will affect each loan on a case-by-case basis.
Furthermore, all pending foreclosure actions must urgently be reviewed and assessed for any needed litigation plan adjustments considering these changed pathways that a lender must now navigate in order to foreclose a debt and be repaid the funds it lent.
Adam Leitman Bailey is the founding partner of Adam Leitman Bailey, P.C., Jackie Halpern Weinstein is a partner and the head of the firm’s Foreclosure Litigation Group, and Danny Ramrattan is a partner of the firm.