Statutes of Limitations in Residential Foreclosure Actions

Statutes of Limitations in Residential Foreclosure Actions Presented by: Sara Manaugh, Brooklyn Legal Services Randi Scherman, Staten Island Legal Services Agenda Time limitations applicable to mortgage loans When the statute runs Acceleration defined Tolling, failed acceleration and deceleration Quieting title Practice tips Addressing the free house objection 1

Background The foreclosure crisis began approximately 7 8 years ago. Yet, there are a number of homeowners who have been in default since that time and do not have current foreclosure actions pending. In some of those situations, the bank did initiate a prior foreclosure action which was later dismissed or discontinued. As a result, many homeowners have lived in a state of uncertainty for years while interest and fees continue to accrue. Good news for homeowners in limbo comes in strange packages: [W]hat has happened repeatedly is that litigation continues for something beyond six years, the action is then dismissed, the earlier acceleration (from years ago) survives and six years has run since then so that the statute of limitations now precludes any further action. Bruce Bergman, Berkman, Henoch, Peterson & Peddy P.C., Lender & Servicer Alert, Nov. 2005 2

The Statute of Limitations for Mortgages in New York The following actions must be commenced within six years:... an action upon a bond or note, the payment of which is secured by a mortgage upon real property, or upon a bond or note and mortgage so secured, or upon a mortgage of real property, or any interest therein. N.Y. C.P.L.R. 213(4) When the Statute of Limitations Begins Running [S]ix years from the due date for each unpaid installment or the time the mortgagee is entitled to demand full payment, or when the mortgage has been accelerated by a demand or an action is brought. Saini v. Cinelli Enterprises Inc., 289 A.D.2d 770, 771, 733 N.Y.S.2d 824, 826 (3d Dep t 2001) (citations omitted) (emphasis added) 3

When the Statute Begins Running on Installment Payments [F]or any mortgage payable in installments, there are separate causes of action for each installment accrued, and the Statute of Limitations begins to run, on the date each installment becomes due. Loiacono v. Goldberg, 240 A.D.2d 476, 477, 658 N.Y.S.2d 138 (2d Dep t 1997) When the Statute Begins Running on Installment Payments Where the entire mortgage has not yet come due, a mortgagee will only be barred from collecting principal & interest payments due six years prior to the commencement of the foreclosure action. See, e.g., Wells Fargo Bank, N.A. v. Cohen, 80 A.D.3d 753, 754, 915 N.Y.S.2d 569, 571 (2d Dep t 2010); Khoury v. Alger, 174 A.D.2d 918, 919, 571 N.Y.S.2d 829 (3rd Dep t 1991) 4

When the Statute Begins Running on the Entire Mortgage Debt When the entire mortgage debt comes due, the statute begins to run on the entire debt. This occurs upon the loan s maturity, Quackenbush v. Mapes, 123 A.D. 242, 107 N.Y.S. 1047 (1st Dep t 1908); OR [o]nce the mortgage debt is accelerated. Loiacono, 240 A.D.2d at 477, 658 N.Y.S.2d at 138. Minority View Some courts have held that even without acceleration, a lender is barred from foreclosing more than six years after default. See, e.g., Corrado v. Petrone, 139 A.D.2d 483, 484 85, 526 N.Y.S.2d 845 (2d Dep t 1988); Phalen Sobolevsky v. Mullin, 26 A.D.3d 806, 811 N.Y.S.2d 506 (4th Dep t 2006); LePore v. Shaheen, 32 A.D.3d 1330, 821 N.Y.S.2d 532 (4th Dep t 2006) These decisions seem to be outliers and should not be relied on in evaluating whether a foreclosure action is time barred. 5

What Constitutes Acceleration? An election to accelerate the mortgage must consist of a notice of election to the mortgagor or some overt act manifesting such an election. Goldman Sachs Mortgage Co. v. Mares, 45 Misc. 3d 1218(A) (Tompkins Cty. Sup. Ct. 2014) (citing 446 W. 44th St. v. Riverland Holding Corp., 267 A.D. 135, 137, 44 N.Y.S.2d 766 (1st Dep t 1943)) And it must be clear and unequivocal. Sarva v. Chakravorty, 34 A.D.3d 438, 439, 826 N.Y.S.2d 74 (2d Dep t 2006) (foreclosure action was not time barred because the record failed to establish that the loan had been accelerated prior to the commencement of the action even though mortgagee had admitted to sending but the record did not include a letter expressing his desire to get paid in full ) What Constitutes Acceleration? Commencement of foreclosure action Less frequently, acceleration notice NOT notice of intent to accelerate Goldman Sachs Mortgage Co. v. Mares, 45 Misc. 3d 1218(A) (Tompkins Cty. Sup. Ct. 2014) (foreclosure action was not time barred because the default letter, which demanded only the amounts then due or to become due and indicated that failure to pay the total amount past due may result in acceleration of the sums secured by the mortgage, did not constitute a clear and unequivocal acceleration of the entire mortgage debt.) 6

Illustrating the Effect of Acceleration Homeowner defaults on loan November 1, 2007 Lender brings foreclosure action on May 1, 2015 If the loan was accelerated before May 1, 2009, the action is time barred and should be dismissed with prejudice; but If the loan is accelerated only upon the commencement of the foreclosure action, the mortgagee is barred only from collecting principal & interest payments due before May 1, 2009. What Constitutes Acceleration? Complaint will generally allege either that plaintiff accelerates and calls the entire debt due by the very commencement of the foreclosure, or identify an earlier acceleration point based on the mortgagee s election. 7

Acceleration by a Predecessor In Interest Acceleration by a predecessor in interest constitutes valid acceleration as long as the predecessor in interest properly accelerated the mortgage and had standing to do so (we will get to this later). Goldman Sachs Mortgage Co. v. Mares, 45 Misc. 3d 1218(A) (Tompkins Cty. Sup. Ct. 2014) (commencement of a prior foreclosure action by plaintiff s predecessor in interest constituted an acceleration of the underlying mortgage debt) (citing EMC Mortgage Corp. v. Patella, 279 A.D.2d 604 (2d Dep t 2001)) Can Acceleration Be Revoked? If the mortgagor has changed its position based on the acceleration, the mortgagee can t revoke: The election made by defendant at that time to treat the mortgage debt as due became final and irrevocable after plaintiff s change of position and assumption of legal obligations, the direct result of that election. Kilpatrick v. Germania Life Ins. Co., 183 N.Y. 163, 168 (1905). 8

Can Acceleration Be Revoked? Assuming no reliance on the acceleration, it may theoretically be revoked by an affirmative and unambiguous act. Tovar, NYLJ 1202725043582, at *1 (citing UMLIC VP, LLC v. Mellace, 19 A.D.3d 684, 684, 799 N.Y.S.2d 61 (2d Dep t 2005); Clayton Nat l, Inc. v. Guldi, 307 A.D.2d 982, 763 N.Y.S.2d 493 (2d Dep t 2003); Lavin, 302 A.D.2d at 639) Theoretically, because no court has found such a revocation resulting from a mortgagee s act. Can Acceleration Be Revoked? Courts have not clearly defined what an affirmative act is, but it is emphatically NOT: Voluntary discontinuance: Saini, 289 A.D.2d at 770; Petito, 85 N.Y.2d 1 Court s sua sponte dismissal after mistrial or failure to appear at certification conference: Fed. Nat l Mortgage Ass'n v. Mebane, 208 A.D.2d 892, 894, 618 N.Y.S.2d 88, 89 (2d Dep t 1994); EMC Mortgage Corp., 279 A.D.2d at 605 Court s dismissal for ineffective service: Citibank, N.A. v. McGlone, 270 A.D.2d 124, 125, 704 N.Y.S.2d 576, 577 78 (1st Dep t 2000) Acceptance of partial payment: UMLIC VP, LLC, 19 A.D.3d at 684 Delivery of new 90 Day Notice: Tovar, NYLJ 1202725043582, at *1 9

Can Acceleration Be Revoked? To be valid, revocation must occur[] within the statute of limitations period. Lavin, 302 A.D.2d at 639, 754 N.Y.S.2d at 741 (citing EMC Mortg. Corp., 279 A.D.2d at 605 606; Mebane, 208 A.D.2d at 894) (emphasis added) When Acceleration Is Not Acceleration Courts have rejected the Statute of Limitations defense upon a finding that the lender s purported acceleration was ineffective and therefore failed to start the clock running. 10

When Acceleration Is Not Acceleration Wells Fargo Bank, N.A. v. Burke, 94 A.D.3d 980, 943 N.Y.S.2d 540 (2d Dep t 2012): June 2002: Bank brings foreclosure action August 2002: Bank is assigned Note & Mortgage July 2008: Defendant s successor alerts bank to apparent lack of standing; bank voluntarily discontinues 2002 action August 2009: Bank s successor brings new action Holding: [S]ervice of the 2002 complaint was ineffective to constitute a valid exercise of the option to accelerate the debt since the [bank] did not have the authority to accelerate the debt or to sue to foreclose at that time. When Acceleration Is Not Acceleration EMC Mortgage Corp. v. Suarez, 49 A.D.3d 592, 593, 852 N.Y.S.2d 791 (2d Dep t 2008): Another entity attempted to accelerate the mortgage debt on April 8, 1997 by commencing a foreclosure action. However, the note was never assigned to that entity and it therefore never had authority to accelerate the debt or to sue to foreclose. Holding: Therefore, the purported acceleration was a nullity and the sixyear statute of limitations, which ordinarily would commence running on the date of acceleration, did not begin to run on the entire debt at that time and the plaintiff's commencement of this mortgage foreclosure action on October 12, 2005 was not time barred. (citations omitted) But noting that recovery is limited to only those unpaid installments which accrued within the six year period immediately preceding its commencement of this action. 11

Resetting the Limitations Period N.Y. General Obligations Law 17 105 (1): A waiver of the expiration of the time limited for commencement of an action to foreclose a mortgage of real property or a mortgage of a lease of real property, or a waiver of the time that has expired, or a promise not to plead the expiration of the time limited, or not to plead the time that has expired, or a promise to pay the mortgage debt, if made after the accrual of a right of action to foreclose the mortgage and made, either with or without consideration, by the express terms of a writing signed by the party to be charged is effective, subject to any conditions expressed in the writing, to make the time limited for commencement of the action run from the date of the waiver or promise. If the waiver or promise specifies a shorter period of limitation than that otherwise applicable, the time limited shall be the period specified. Resetting the Limitations Period: The Bankruptcy Context N.Y. General Obligations Law 17 105 (1) might not be implicated if the mortgagee rejected the promise to pay. Albin v. Pearson, 266 A.D.2d 487, 698 N.Y.S.2d 732 (2d Dep t 1999) (affirming judgment cancelling and discharging mortgages and finding that the mortgagor s bankruptcy plan, which provided that the mortgagor make payments on the mortgages, did not constitute a promise to pay the mortgage debt within the meaning of NY General Obligations Law 17 105 (1) and thus did not extend the statute of limitations because the mortgagee rejected the plan) Albin v. Dallacqua, 254 A.D.2d 444, 444 45, 679 N.Y.S.2d 402 (2d Dep t 1998) (affirming dismissal of mortgagor s complaint to cancel and discharge mortgage because the mortgagor s bankruptcy plan, which was signed by the mortgagor, expressly promised to pay the mortgage after the accrual of the mortgagee s right to foreclose on the mortgage, and thus satisfied the criteria of NY General Obligations Law 17 105 (1), extending the statute of limitations) 12

Resetting the Limitations Period: Loss Mitigation Payments and Agreements Lenders may argue that entry into a forbearance agreement or trial plan restarted the clock In order for a promise to pay to restart the limitations period, it must be an express promise to pay the mortgage debt per se, or an express acknowledgment of the indebtedness. Petito, 85 N.Y.2d 1, 4 5, 647 N.E.2d 732, 733 (1994) In order for a payment to restart the limitations period, it must be accompanied by circumstances amounting to an absolute and unqualified acknowledgment of more being due, from which a promise may be inferred to pay the remainder. Saini v. Cinelli Enters. Inc., 289 A.D.2d 770, 772, 733 N.Y.S.2d 824, 827 (2001) The Effect of Post Acceleration Payments At least one court has held that an acceleration is not revoked by the mortgagee s acceptance of additional payments. Lavin v. Elmakiss, 302 A.D.2d 638, 639, 754 N.Y.S.2d 741 (3rd Dep t 2003) (finding that the acceptance of additional mortgage payments after the mortgagee accelerated the loan was not inconsistent with its insistence that the entire debt immediately be paid, and thus the mere acceptance of such payments does not, in our view, constitute proof of an affirmative act of revocation ) 13

Tolling of Statute under C.P.L.R. 204 N.Y. C.P.L.R. 204(a): Where the commencement of an action has been stayed by a court or by statutory prohibition, the duration of the stay is not a part of the time within which the action must be commenced. See In re Strawbridge, No. 11 CIV. 6759 PAE, 2012 WL 701031, at *9 10 (S.D.N.Y. Mar. 6, 2012) (even though approximately 11 years had passed since the mortgagee accelerated the mortgage, the statute of limitations had been tolled for all but 2 of those years because of the numerous bankruptcy and state court stays) Tolling of Statute under C.P.L.R. 204 But [t]he tolling of a statute of limitation period pursuant to CPLR 204 (a) only applies when a stay affects the commencement of an action. Beneficial Homeowner Service Corp. v. Tovar, Index No. 61092/2014, NYLJ 1202725043582, at *1 (Sup., SUF, Decided December 22, 2014) (finding that the mortgagor s chapter 13 bankruptcy petition did not stay the mortgagee s ability to commence an action, and thus it did not toll the statute of limitations). 14

Tolling of Statute under C.P.L.R. 204 See also Saini, 289 A.D.2d at 772 ( With regard to the claimed effect of defendant s bankruptcy filing on the Statute of Limitations, we find that it neither renewed nor tolled the six year Statute of Limitations. The first action had been discontinued prior to the time that defendant filed its bankruptcy petition in December 1997 and the bankruptcy petition was dismissed in December 1998, long before this second foreclosure action was commenced and, thus, the bankruptcy proceeding never operated to toll a pending foreclosure action. ) Mercury Capital Corp. v. Shepherds Beach, Inc., 281 A.D.2d 604, 605, 723 N.Y.S.2d 48, 48 49 (2d Dep t 2001) (reversing trial court and dismissing complaint as time barred the bankruptcy stay only tolled the statute of limitations from the filing of the bankruptcy petition to the confirmation of the chapter 11 plan, a period of 1 year and 4 months and the plaintiff waited 7 years and 7 months to commence the foreclosure action) Tolling of Statute for Chapter 13 If a lender accelerates a mortgage debt, the consequent running of the time period may be tolled if the homeowner subsequently files for bankruptcy protection, and therein acknowledges the debt and promises to pay within a set time pursuant to a Chapter 13 plan. See Nat l Loan Investors, L.P. v. Piscitello, 21 A.D.3d 537, 801 N.Y.S.2d 331 (2d Dep t 2005) Unless the lender rejects the plan! (Albin v. Pearson) 15

Effect of Fraud on Tolling the Statute of Limitations A defendant may be estopped from pleading the Statute of Limitations as a defense where a defendant s affirmative wrongdoing produced the long delay in bringing suit but not where the defendant s fraudulent conduct was not aimed at the plaintiff and did not in any way prevent the plaintiff from commencing a timely action. Petito v. Piffath, 85 N.Y.2d 1, 6 7, 647 N.E.2d 732 (1994) (internal quotations and citations omitted). Tolling Between Dismissal of First Action and Filing of Second Action C.P.L.R. 205(a) tolls the statute of limitations, and permits commencement of a second action within six months of the termination of the first action. The safe harbor is not available where the first action was terminated By voluntary discontinuance Because of failure to obtain personal jurisdiction over the defendant Upon neglect to prosecute the action. 16

Tolling Between Dismissal of First Action and Filing of Second Action Tolling under C.P.L.R. 205(a) applies where first action is dismissed due to plaintiff s failure to establish standing. U.S. Bank Nat l Ass'n v. Dellarmo, N.Y.S.3d, 2015 WL 2075777 (2d Dep t May 6, 2015) A plaintiff may be able to invoke C.P.L.R. 205(a) s tolling provision, even if the first case was dismissed for neglect to prosecute, if the court failed to make a record of the specific conduct constituting the neglect required under C.P.L.R. 205(a). 21 st Mortgage Corp. v. Rodriguez Cardona, Index No. 504178/2014, Order and Decision dated March 13, 2015 (Sup. Ct. Kings Cty.) Cancelling and Discharging Mortgage upon Expiration of the Limitations Period N.Y. R.P.A.P.L. 1501(4): Where the period allowed by the applicable statute of limitation for the commencement of an action to foreclose a mortgage... has expired, any person having an estate or interest in the real property subject to such encumbrance may maintain an action... to secure the cancellation and discharge of record of such encumbrance, and to adjudge the estate or interest of the plaintiff in such real property to be free therefrom.... In any action brought under this section it shall be immaterial whether the debt upon which the mortgage or lien was based has, or has not, been paid. 17

R.P.A.P.L. 1501(4) A prima facie showing of entitlement to judgment as a matter of law under 1501(4) requires a demonstration that the six year time limit on enforcing a mortgage has expired. Where the mortgagor makes this showing, and the mortgagee fails to raise a triable issue of fact as to the expiration of the limitations period, the mortgagor is entitled to cancelation and discharge of the subject mortgage. Rack v. Rushefsky, 5 A.D.3d 753, 753 54, 773 N.Y.S.2d 569 (2d Dep t 2004). R.P.A.P.L. 1501(4) Can be asserted in a stand alone quiet title action seeking declaratory and injunctive relief JBR Const. Corp. v. Staples, 71 A.D.3d 952, 897 N.Y.S.2d 223 (2d Dep t 2010) LePore, 32 A.D.3d at 1331 (4th Dep t 2006) Rack, 5 A.D.3d 753 Notarnicola v. Lafayette Farms, Inc., 288 A.D.2d 198, 199, 733 N.Y.S.2d 91, 92 (2d Dep t 2001) Westbury Properties v. Produce Distributors, Inc., 4430/14, NYLJ 1202725492559, at *1 (Sup. Ct. Nassau Cty. April 8, 2015) 18

R.P.A.P.L. 1501(4) Can be asserted as a counterclaim in a latefiled foreclosure action 21 st Mortgage Corporation v. Nweke, Richmond County Index No. 130282/2014 U.S. Bank National Association v. Harewood, Kings County Index No. 503533/2014 R.P.A.P.L. 1501(4) Caliguri v. JPMorgan Chase Bank, N.A., 121 A.D.3d 1030, 800 N.Y.S.2d 847 (2d Dep t 2014) 2009 foreclosure action dismissed in March 2012 for failure to demonstrate standing Mortgagor commences declaratory action seeking to cancel and discharge mortgage Apparently the issue was that plaintiff re filed within six months, although unclear from decision (safe harbor under C.P.L.R. 205(a)?) Also, dismissal was based on lack of standing, so no acceleration? 19

Some Questions to Ask: How to Screen for Statute of Limitations Issues 1) When did the borrower default? Was it more than six years ago? 2) If so, did the bank send an acceleration letter? Did the letter clearly and unequivocally accelerate the loan? Was the acceleration letter sent more than 6 years prior to the commencement of the foreclosure action? 3) Did the bank commence a prior foreclosure action more than 6 years before commencing a new case (if a new case is pending)? i. If so, was the case dismissed for lack of standing? If yes, then your statute of limitation defense is weak, especially in the Second Department. 4) Has the bank affirmatively and unambiguously revoked acceleration? 5) Did the borrower file for bankruptcy or would a stay have prevented the bank from timely commencing a foreclosure action? 6) Has the bank commenced a new foreclosure action? 7) Has the borrower filed an answer asserting a statute of limitations defense? Practice Tip #1 Assert SOL Defense in a Timely Answer A STATUTE OF LIMITATIONS DEFENSE MAY BE WAIVED IF NOT TIMELY ASSERTED. Wells Fargo Bank, N.A. v. Ali, 35278/2014E, NYLJ 1202713915317, at *1 (Sup., BX, Decided December 15, 2014) (denying mortgagor s motion to dismiss foreclosure action as time barred because he waived the statute of limitations defense by failing to assert it in his answer to the complaint, and even if the defense is not waived, mortgagor failed to establish that the mortgage was properly accelerated by the commencement of the prior action) (citing Eke v. City of New York, 116 A.D.3d 403 (1st Dep t 2014); CPLR 3211 [e]). 20

Practice Tip #2 Assert a Counterclaim Under R.P.A.P.L. 1501(4) This is necessary to assert to have the mortgage lien canceled and discharged. Practice Tip #3 Include a Claim for Attorneys Fees Under N.Y. R.P.L. 282(1) N.Y. R.P.L. 282(1) provides that a mortgagor who successfully defends against any action or proceeding commenced by the mortgagee against the mortgagor arising out of the contract is entitled to seek reasonable attorneys fees and costs from the mortgagee, provided that the mortgage expressly allows the mortgagee to collect reasonable attorney s fees and costs for enforcing the mortgage. But Tovar court said not earned under 282 not clear why 21

The Free House Objection The Statute of Limitations for foreclosure actions has been in the news recently: See, e.g., Corkery, Michael, Foreclosure to Home Free, as 5 Year Clock Expires, N.Y. TIMES, March 29, 2015, available at: http://www.nytimes.com /2015/03/30/business/foreclosure to home free as 5 year clock expires.html?_r=0 Many critics and courts have strong opinions about whether it is fair for a homeowner to get a free house because a bank s foreclosure action is time barred. They view it as a windfall for the homeowner. The Free House Objection The law is clear that mortgages are unenforceable and voidable after the statute runs, criticisms and courts squeamishness notwithstanding. Moreover, banks are sophisticated parties, invariably represented by counsel, with the capacity to avoid allowing claims to expire Finally, the notion of statute of limitations is an essential part of our judicial system and is not unique to foreclosure law. 22

Plaintiff s Possible Unjust Enrichment Claim Even though a mortgagee might be time barred from collecting on the mortgage debt, it might have a valid unjust enrichment claim for property taxes and insurance paid in the six year period prior to the foreclosure action. Mebane, 208 A.D.2d at 894 95, 618 N.Y.S.2d at 89 (foreclosure action was dismissed as time barred but mortgagee stated a valid cause of action sounding in unjust enrichment to recover sums advanced for property taxes and insurance within the six year period prior to the commencement of this action) 23