Scott E. Mollen

Foreclosure—Timeliness and Required Proofs for a Valid De-Acceleration of Note Obligations Underlying Residential mortgage Foreclosure Actions—Appellate Division Second Department Disagreed with the First Department as to Acceleration Language—Standing is Required for Both an Acceleration and a De-Acceleration

A plaintiff appealed, in an action commenced pursuant to RPAPL 1501(4) to cancel and discharge a mortgage and note, from a trial court order which granted the defendant lender's motion pursuant to CPLR 3211(a) to dismiss the complaint with prejudice and denied the plaintiff's cross motion for summary judgment on the complaint. The court addressed the “the timeliness and required proofs for the valid de-acceleration of note obligations underlying residential mortgage foreclosure actions.”

In connection with the purchase of a home, the plaintiff had executed a note in the amount of $1,235,000, which was secured by a mortgage. The lender identified on the note was “A”. The mortgage was assigned to defendant lender “B”. The plaintiff thereafter defaulted on the note obligations. By letter dated Nov. 16, 2008, a loan servicing company, “C,” advised the plaintiff that her account was in default and that if the delinquent amount and fees were not paid with 30 days, “the circumstances 'will result in the acceleration of your mortgage note…and that once acceleration has occurred, a foreclosure action, or any other remedy permitted under the terms of your mortgage or deed of trust, may be initiated.” The plaintiff did not remedy the default and on Jan. 13, 2009, “B” commenced a foreclosure action.

“B's” standing appeared to “have been an issue…in the foreclosure action,” since a Supreme Court preliminary conference order directed “B” “to produce the original note by Oct. 5, 2011. No original note was thereafter produced, and on Feb. 29, 2012, the foreclosure action was dismissed.”

The matter remained dormant until Oct. 21, 2014. On that day, “D” sent a letter to plaintiff, wherein “D,” as B's “loan servicer,” noted the plaintiff's continued default and stated that “D” hereby “deaccelerates the maturity of the Loan, withdraws its prior demand for immediate payment of all sums secured… and re-institutes the loan as an installment loan.” More than four months thereafter, in March 2015, the plaintiff commenced the subject action. The plaintiff asserted that more than six years had elapsed from “C's” letter of November 16, 2008, by which the note was accelerated; that “B's” foreclosure action had been dismissed; and that “no new foreclosure action had been timely commenced.”

“B” had moved pursuant to CPLR 3211(a)(1) and (7) to dismiss the complaint. “B” argued that “payment of the note, which had previously been accelerated, was de-accelerated by “D's” letter to the plaintiff dated Oct. 21, 2014. “B” contended that since the de-acceleration was communicated within six years of the prior acceleration, there had been no violation of the statute of limitations “(SOL)” and a new six-year (SOL) period would commence if “B” accelerated the note in the future.

The plaintiff cross-moved for summary judgment and opposed “B's” motion on the grounds that “no right of deacceleration was contained in the note or mortgage; “(“B's”) decision to de-accelerate rather than to commence a new action within the original six years is a tacit admission” that it lacked possession of the original note; “once an acceleration option is exercised, it cannot be revoked; in construing the note and mortgage as allowing a de-acceleration and extending the (SOL) would violate public policy; and…the purported de-acceleration was per se prejudicial to the borrower.”

The trial court had granted “B's” motion to dismiss the complaint with prejudice and denied the plaintiff's cross motion for summary judgment. The Appellate Division (court) modified the trial court order. The court agreed that the plaintiff's cross-motion for summary judgment should be denied. However, the court held “B's” motion to dismiss the complaint should also be denied. The court noted the different standards of proof apply to motions to dismiss based on documentary evidence, motions to dismiss for failure to state a cause of action and motions for summary judgment. The court also explained that when a mortgage is payable in installments, “an acceleration of the entire amount due begins the running of the (SOL) on the entire debt….” Thus, it must be determined exactly when a mortgage was accelerated when determining an action or proceeding commenced pursuant to RPAPL 1501(4).

The court further stated that mortgages may be accelerated in different ways, e.g., by an acceleration notice to the borrower which is clear and unequivocal sent by the creditor, the obligation of certain borrowers to make a balloon payment under the terms of the note at the end of the pay-back period or when a creditor commences a foreclose action upon a note and mortgage and seeks, in the complaint, payment of the full balance due.

Here, both parties had been under a “mistaken impression” that the Nov. 16, 2008 letter sent to the plaintiff by “C” “fixed the date of the acceleration for (SOL) purposes.” The court held that it did not. The court reasoned that since the language stated that if the plaintiff failed to cure her delinquency within 30 days that “will result in the acceleration” of the note, it was “merely an expression of future intent that fell short of an actual acceleration.” The court found that the notice was “not clear and unequivocal, as future intentions may always be changed in the interim.” The court acknowledged that its conclusion was different than that of the Appellate Division, First Dept., which “addressed similar language and held otherwise in Deutsche Bank Natl. Trust Co. v. Royal Blue Realty Holdings (148 AD3d 529).

When “B” commenced its foreclosure action on January 13, 2009, the complaint expressly “elected to call due the entire amount secured by the mortgage.” Thus, the full amount of the debt had been accelerated on the filing of the summons and complaint in the foreclosure action. Therefore, the court measured the applicable six-year (SOL) “from the date the foreclosure action was commenced ….” Since “B” withdrew its original foreclosure action and did not commence a new action before January 13, 2015, the plaintiff had “submitted evidence establishing, prima facie, that the six-year (SOL) had expired and that she was entitled to summary judgment on the RPAPL 1501(4) claim.”

However, an acceleration is only “valid if the party making the acceleration had standing at that time to do so….” Theoretically, “B” “could have attempted to defeat the plaintiff's action by arguing” that it lacked “standing to accelerate the full amount of the plaintiff's debt, which would explain its failure to produce the original note resulting in the dismissal of the foreclosure action on Feb. 29, 2012.” The absence of a valid acceleration means that (SOL) had never even begun to run on the complete debt, and that would defeat the plaintiff's RPAPL 1501(4) claim in its entirety. However, “any such argument would have the additional and perhaps unpalatable effect of rendering untimely any claim of (“B's”) for missed mortgage payments older than six years and counting.”

“B” relied on “D's” de-acceleration letter dated Oct. 21, 2014. De-acceleration notices “must also be clear and unambiguous to be valid and enforceable.” Here, the court found that the de-acceleration language met that test.

The court acknowledged that a bank may issue a de-acceleration letter “as a pretext to avoid the onerous effect of an approaching (SOL) and to defeat the…owner's right pursuant to RPAPL 1501 to cancel and discharge a mortgage and note.” However, the subject de-acceleration letter embodied a “clear and unequivocal demand that the homeowner meet her prospective monthly payment obligations” and that constituted a valid de-acceleration and cannot be “viewed as pretextual in any way.”

The court further noted that a de-acceleration letter “is not pretextual if, as here, it contains an express demand for monthly payments on the note, or, in the absence of such express demand, it is accompanied by copies of monthly invoices transmitted to the homeowner for installment payments, or, is supported by other forms of evidence demonstrating that the lender was truly seeking to de-accelerate and not attempting to achieve another purpose under the guise of de-acceleration….” “In contrast, a 'bare' and conclusory de-acceleration letter, without a demand for monthly payments toward the note, or copies of invoices, or other evidence, may raise legitimate questions about whether or not the letter was sent as a mere pretext to avoid the (SOL).” Lenders may revoke their election to accelerate a mortgage, but they must do “so by an affirmative act of revocation occurring during the six-year (SOL) period subsequent to the initiation of the prior foreclosure action….”

Here, the de-acceleration occurred within six years measured from the commencement of the foreclosure action on Jan. 13, 2009 and thus, although the plaintiff established her prima facie entitlement to summary judgment on her RPAPL 1501(4) claim, “B's” “timely de-acceleration notice raises a triable issue of fact requiring the denial of the plaintiff's cross motion.” The court reasoned that “B's” de-acceleration notice failed to “utterly refute” the plaintiff's allegations as a matter of law.

The court then held “for the first time in the Appellate Division, Second Department, that just as standing, when raised, is a necessary element to a valid acceleration, it is a necessary element, when raised, to a valid de-acceleration as well.” The de-acceleration notice dated Oct. 21, 2014 did not establish that “B” had standing to de-accelerate the earlier acceleration and no other evidence demonstrated that “B” had such standing. That such issue was “particularly germane…where (“B”) had been directed to provide the original note” by a preliminary “conference order dated Sept. 20, 2011, and the foreclosure action was thereafter dismissed on Feb. 29, 2012.” The court further stated that absent “B's” documentary evidence establishing its standing to accelerate and de-accelerate the mortgage debt, the motion to dismiss was not supported by documents “utterly refuting the allegation in the plaintiff's complaint that (“B's”) efforts to collect on the debt were time-barred.”

The plaintiff also argued that the note which permitted acceleration, lacked a provision permitting the lender to revoke any such acceleration and a de-acceleration is not “contractually permitted.” The court found that the acceleration language was “discretionary rather than mandatory” and “B” retained the right to “later revoke the acceleration….” The plaintiff had further asserted that even if the lender could revoke a prior acceleration, it should not be permitted to do so since the plaintiff would be “substantially prejudiced” as a result. However, the court found that plaintiff was not substantially prejudiced. The plaintiff had been living in a home “likely valued at more than $1 million,” “without paying the mortgage,” rent or property taxes and “with each passing month,” “the (SOL) continues to expire as to missed payments due more than six years ago on a rolling monthly basis.”

The court also held that “B's” motion to dismiss the complaint under CPLR 3211(a)(7) for failure to state a cause of action should be denied. Accordingly, the court held that the plaintiff's cross motion for summary judgment on the complaint should be denied and the defendant's motion pursuant to CPLR 3211(a) to dismiss the complaint should also be denied.

Milone v. US Bank Nat'l Ass'n, App. Div., 2nd Dept., Case No. 2016-02068, decided Aug. 15, 2018, Dillon, J, Chambers, Sgroi and Connolly, JJ. concur.

Landlord–Tenant—Tenant Awarded Partial Summary Judgment on Laches' Defense

This decision involved a non-payment proceeding. The landlord sought $10,395.04. The claim included all amounts that had become due in owing to the landlord after a stipulation of settlement had been signed by the parties in February 2015, in a prior non-payment proceeding. The tenant had moved for a partial summary judgment, seeking to dismiss part of the landlord's claim for rent which pre-dated the petition “in excess of one year.” The tenant sought such relief based on the equitable defense of laches. The court granted the tenant's motion.

The subject non-payment proceeding had been filed on Sept. 21, 2017. The tenant's answer asserted that she had been harmed because the landlord had waited “too long to bring this case”. The tenant also claimed that “public assistance” owes the amount sought and that she had been “forced to sign two redeemed leases under duress for a verification letter.” The tenant further argued that any arrears that had accrued before September 2016 “should be severed for a plenary action on the basis of laches.” The tenant emphasized that the landlord had “unreasonably delayed in bringing this proceeding some thirty (30) months after a prior non-payment proceeding was settled; that in delaying, petitioner did so to the detriment of the (tenant) by allowing the rent arrears to accrue; and that (landlord) failed to provide notice to the (tenant) that it would be pursuing its claim for rent.”

The landlord countered that the tenant should have been on notice of the rent claims since monthly bills were provided. The landlord further explained that any delay was attributable to a “change in personnel staff” at the landlord's office.

Since the tenant is a “Section 8 recipient, [the landlord] had to comply with the Williams Consent Decree and obtain permission from NYCHA before commencing the subject proceeding. The landlord argued that “staff changes” “contributed to the delay in seeking compliance with the Williams Consent Decree” and that had delayed commencement of the subject proceeding. “To establish laches, a party must show: (a) conduct by an offending party giving rise to the situation complained of; (b) delay by the complainant in asserting his or her claim for relief despite the opportunity to do so; (c) lack of knowledge or notice on the part of the offending party that the complainant would assert his or her claim for relief; and (d) injury or prejudice to the offending party in the event that relief is accorded the complainant. All four elements are necessary for the proper invocation of this equitable doctrine based upon fairness…”

The court held that the tenant was entitled to partial summary judgment on her affirmative defense of laches. The tenant had not paid rent from March 2015 through September 2017. The landlord had delayed “approximately thirty (30) months or two and a half (2 1/2) years in commencing this proceeding.” The parties had previously appeared in a non-payment proceeding which had been settled by the Stipulation and “no other legal action was commenced by the (landlord) to collect past rent due until the incident proceeding.” The court further held that the lack of notice element was satisfied “by the fact that no rent was demanded prior to the demand that predicated the incident non-payment proceeding.”

The landlord argued that the tenant had received monthly bills. However, the court explained that decisional precedent held that “an ordinary rent bill, delivered in the normal course of business, does not satisfy the requirements of a rent demand.” The court also found that the tenant was prejudiced because she is a “recipient of public assistance; has no income other than public assistance…; and lacks any significant resources to pay the rental arrears that have now accumulated.”

After the tenant established the requisite elements of laches, the landlord had the burden of coming forward with a “reasonable excuse for the delay” in order to avoid being barred from obtaining accessory judgment for arrears which are stale.

The court found that the landlord's excuse i.e. that there was turnover in its office staff and such turnover impeded the landlord's ability to comply with the Williams consent decree and caused delay in bringing the incident proceeding, was solely based on an affirmation of the landlord's counsel and was unsupported by statements made in the affidavit submitted by the landlord managing member. The court noted that the landlord's counsel lacked personal knowledge of the essential facts and “unsupported statements are insufficient to create a material issue of fact to defeat against the (tenant's) summary judgment motion.”

Accordingly, the court held that the landlord's claims for rent arrears and other charges amounting to $6,385.30 from March 2015 through and including August 2016 should be “severed to a plenary action.” Finally, the court held that the landlord may pursue all claims for extending rent which accrued from September 2016 to date in the instant proceeding and seek a final judgment.

Webster Ave. Holdings v. Pough, Civil Court, Bronx, Case No. 052920/2017, decided Aug. 15, 2018, Lach, J.

Scott E. Mollen is a partner at Herrick, Feinstein.