State of New York: New York Court of Appeals Rules Voluntary Discontinuance Revokes Prior Acceleration
Lenders seeking the foreclosure remedy in New York frequently encounter the statute of limitations defense based on a prior acceleration of the debt, usually in the form of an earlier foreclosure action. As a result of inconsistent applications of the law, trial and appellate courts across the state have differed in their interpretation of the effect of a lender’s decision to discontinue a foreclosure and whether such a withdrawal revoked acceleration of the debt. Fortunately, this matter was clarified by the New York Court of Appeals, in its February 18, 2021 decision in Freedom Mortgage Corporation v. Engel, which held that a voluntary discontinuance revokes the election to accelerate, limiting the statute of limitations defense.
In Freedom Mortg. Corp. v. Engel, 163 A.D.3d 631 (2d Dept. 2018), the Appellate Division, Second Department, reviewed whether a lender who exercises the right to accelerate can revoke the acceleration by filing a voluntary discontinuance. In Engel, the Second Department held that the stipulation to discontinue did not have any effect on acceleration because it was “silent” as to revocation. The Court of Appeals has now reversed that finding, establishing a rule that a voluntary discontinuance properly revokes a prior acceleration. With respect to the Engel case, the Court of Appeals found that whereas Freedom Mortgage had accelerated its loan through the commencement of its 2008 action, the voluntary discontinuance filed in 2013 effectively revoked the 2008 acceleration. As a result of the Court of Appeals decision, Freedom Mortgage is no longer bound by a statute of limitations running from the commencement of its 2008 action, rendering the action it had commenced in February 2015 timely.
With the bright line rule outlined by the New York Court of Appeals, litigation on the statute of limitations defense should become more streamlined as a lender would no longer need to argue as to whether a discontinuance was intended to revoke a prior acceleration. The Court of Appeals reasoned that investigating the parties’ post-discontinuance conduct and correspondence is “analytically unsound as a matter of contract law and unworkable from a practical standpoint.” Rather, the Court sensibly concluded that a voluntary discontinuance which effectively withdraws the complaint that accelerated the loan is the functional equivalent of a letter specifically revoking acceleration, or a further statement within a discontinuance expressly revoking acceleration. The Court of Appeals has added a degree of certainty to the application of the statute of limitations so that each party can be guided accordingly. This way lenders can more easily determine which loans are ripe for recommencement and borrowers will know whether they can re-commence monthly payments.
Under the new rule in Engel, lenders seeking to accelerate a loan where a prior action had been voluntarily discontinued can now file the foreclosure complaint without the same concern as to its effect on the statute of limitations. Meanwhile, in pending actions where a borrower has raised the statute of limitations defense based on a prior discontinuance, we recommend citing Engel for the proposition that the voluntary discontinuance simultaneously revoked the prior acceleration. In the event that a borrower had been successful on a dismissal motion based on a prior discontinuance, a number of options may be available to reverse an adverse decision, including a motion to renew based on the recent decision from the Court of Appeals. If you have any questions or concerns regarding these developments, please feel free to reach out to our office.
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