The New York Court of Appeals issued a groundbreaking decision last week that established clear rules around the statute of limitations in foreclosure actions. In four cases, the court sided with banks and mortgage lenders against claims by defaulted borrowers.
Chief Judge Janet DiFiore on Feb. 18 reversed four appellate division rulings related to when the clock starts ticking on the six-year statute of limitations in New York.
The 34-page decision will allow mortgage noteholders to foreclose more quickly on defaulted borrowers and may help reduce a backlog of litigation still pending from the 2008 financial crisis. Bank lawyers involved in foreclosure actions said the decision provides clarity and consistency on how the statute of limitations will be calculated going forward.
“There are many cases that are still on the court’s docket from the financial crisis,” said Schuyler Kraus, co-partner in charge of the New York office at Hinshaw & Culbertson. “The decision will factor into the willingness [of both parties] to work out a resolution and could allow noteholders to move more quickly on foreclosures where settlement is not feasible.”
Banks and other noteholders should review their inventory of loans to see if enforcement of a mortgage that was thought to be time-barred under a prior analysis can now be the subject of a timely foreclosure action, Kraus said.
The four cases were consolidated because they raised common questions about how and when to calculate the beginning date for the six-year statute of limitations in New York, which typically starts when a noteholder files a foreclosure action. A mortgage noteholder is the entity of standing to foreclose when a borrower stops paying their mortgage. Noteholders are typically banks, lenders and investors that may hold loans on balance sheet or in a securitized pool of loans.
The decision also resolved a longstanding case in which a defaulted borrower claimed a small defect in a foreclosure filing should allow them to keep their home outright due to the expiration of the statute of limitations.
In a case involving a foreclosure on a $900,000 condo in Manhattan, the court found that Wells Fargo's failure to attach a modified loan agreement to the first of five foreclosure filings — dating to 2009 — did not preclude the bank from foreclosing.
The court reversed an appellate decision in Wells Fargo Bank v. Donna Ferrato, in which the borrower had argued that the six-year statute of limitations had expired.
The decision also sought to resolve some contradictory lower court rulings as to whether prior foreclosure actions impacted the future calculation of the statute of limitations.
The court found in two cases that the withdrawal of a foreclosure action by a lender constitutes an “affirmative act” that resets the statute of limitations. The court reversed lower court decisions in Freedom Mortgage Corp. v Herschel Engel and in Ditech Financial v. Santhana Kumar Nataraja Naidu, ruling in favor of both lenders that claimed prior foreclosure filings had essentially been withdrawn.
The court also addressed disagreements in lower courts about the specific language used in default notices sent to borrowers. Letters to borrowers that state a lender “may accelerate” or “will accelerate” the requirement to repay mortgage debt cannot be used to calculate the statute of limitations, the court found.
Specifically, a default letter sent by Deutsche Bank to a borrower did not constitute a foreclosure action but rather allowed for “breathing room” for the bank and borrower to work out a loan modification or other plan to bring the note current, the court said. The court reversed an appellate division ruling in Juan Vargas v. Deutsche Bank National Trust Company, granting Deutsche Bank’s motion to dismiss.
“Noteholders should be free to accurately inform borrowers of their default, the steps required for a cure and the practical consequences if the borrower fails to act, without running the risk of being deemed to have taken the drastic step of accelerating the loan,” DiFiore wrote.
