A year ago, pending in New York were nearly 26,000 legacy foreclosures—foreclosures arising from mortgages originated between 2004 and 2008. Many of these mortgages went into default shortly after origination, which was common among toxic mortgages from that period.

Legacy foreclosures are running up against New York's six-year foreclosure statute of limitations, CPLR §213(4). Once the statute of limitations has expired, “any person having an estate or interest in the real property” may sue to discharge the mortgage. RPAPL §1501(4). Thus, the New York foreclosure statute of limitations is both a shield and sword.

Lenders' counsel must be vigilant. Mortgages are routinely being discharged under the statute of limitations. In Ventures Trust 2013-I-H-R by MCM Capital Partners v. Chitbahal, — N.Y.S.3d —, 2018 WL 6332341 (2d Dept. Dec. 5, 2018), the Second Department discharged a mortgage by review of “a copy of the complaint in the prior action,” which the court found acted to accelerate the loan.

True understanding of the foreclosure statute of limitations starts at understanding acceleration.

Installment Mortgages and Why Acceleration Matters

Where a mortgage loan is payable in installments, separate causes of action accrue for each unpaid installment. A new statute of limitations period begins as each unpaid installment becomes due. Wells Fargo Bank, NA v. Burke, 94 A.D.3d 980, 982-83 (2d Dept. 2012). Once the mortgage debt is accelerated, the entire principal balance is due and the statute of limitations period starts running on the entire debt.

An installment mortgage does not have to be accelerated to be foreclosed. A mortgagee may conduct a “partial foreclosure” and foreclose on only part of the mortgage debt. Goldon v. Ramapo Imp., 78 A.D.2d 648, 651 (2d Dept. 1980).

Six years after an installment default, an individual installment may become time-barred, whereas other installments and the principal are recoverable. Reliance Fed. Sav. Bank v. Altman, 269 A.D.2d 380, 380 (2nd Dept. 2000). Because acceleration makes the entire principal due, and the statute begins to accrue on the entire debt, pinpointing when acceleration in-fact occurs is critical.

What Is Acceleration and the Equitable Right of Redemption

Acceleration occurs when borrower's right to pay installments terminates and borrower can pay only the full debt. Albertina Realty Co. v. Rosbro Realty, 258 N.Y. 472, 475-76 (1932). “Once the mortgage debt was accelerated, the borrowers' right and obligation to make monthly installments ceased and all sums became immediately due and payable.” Fed. Nat. Mortg. Ass'n v. Mebane, 208 A.D.2d 892, 894 (2d Dept. 1994).

Albertina is the seminal Court of Appeals acceleration case. There, when borrower did not pay a principal installment, lender commenced foreclosure and elected to accelerate the loan in the verified complaint. 258 N.Y. at 474. Three days later, borrower tendered the installment, but lender rejected it on grounds that the loan was accelerated. The Court of Appeals held that borrower's tender was ineffective because it came after acceleration and all sums due.

Following acceleration, the borrower's remaining right is the common law equitable right of redemption. “The equity of redemption, which long predates the RPAPL, allows property owners to redeem their property by tendering the full sum at any point before the property is actually sold at a foreclosure sale.” NYCTL 1999-1 Trust v. 573 Jackson Ave. Realty, 13 N.Y.3d 573, 579 (2009). The purpose of foreclosure is to forever bar and foreclose the equitable right of redemption. Nutt v. Cuming, 155 N.Y. 309, 313 (1898).

The Right to Reinstate

After acceleration, generally there is no right to reinstate a mortgage by paying past-due installments. Dime Sav. Bank of New York v. Dooley, 84 A.D.2d 804, 805 (2d Dept. 1981). The Second Department has stated that “[a]s a general rule, a tender must include everything to which the creditor is entitled, including interest to the time the tender is made, or else it is not legally effective.” Home Sav. of Am., FSB v. Isaacson, 240 A.D.2d 633, 633-34 (2d Dept. 1997).

Some mortgages, like the NY standard form Fannie Mae / Freddie Mac mortgage, contain a contractual right to reinstate the loan, even after an election to accelerate. The Fannie/Freddie Form, used for many residential mortgages, provides:

19. Borrower's Right to Have Lender's Enforcement of this Security Instrument Discontinued. Even if Lender has required Immediate Payment in Full, I may have the right to have enforcement of this Security Instrument stopped. I will have this right at any time before the earliest of: (a) five days before sale of the Property under any power of sale granted by this Security Instrument; (b) another period as Applicable Law might specify for the termination of my right to have enforcement of the Loan stopped; or (c) a judgment has been entered enforcing this Security Instrument. In order to have this right, I will meet the following conditions:

(a) I pay to Lender the full amount that then would be due under this Security Instrument and the Note as if Immediate Payment in Full had never been required;

(b) I correct my failure to keep any of my other promises or agreements made in this Security Instrument;

(c) I pay all of Lender's reasonable expenses in enforcing this Security Instrument including, for example, reasonable attorneys' fees, property inspection and valuation fees, and other fees incurred for the purpose of protecting Lender's interest in the Property and rights under this Security Instrument; and

(d) I do whatever Lender reasonably requires to assure that Lender's interest in the Property and rights under this Security Instrument and my obligations under the Note and under this Security Instrument continue unchanged.

Under the Fannie/Freddie Form, the contractual right to pay only back-due installments persists until the earlier of (a) five days before sale of the property by power of sale; (b) another period by law; or (c) entry of a judgment enforcing the mortgage.

Equitable Right of Redemption vs. Contractual Right to Reinstate

The contractual right to reinstate should not be confused with the equitable right of redemption. The equitable right of redemption is borrower's common law right to pay the full debt and have the mortgage lien discharged. Mackenna v. Fid. Tr. Co. of Buffalo, 184 N.Y. 411, 416-17 (2d Dept. 1906). The equitable right of redemption persists until “an actual sale under a judgment of foreclosure.” Belsid Holding v. Dahm, 12 A.D.2d 499, 500 (2d Dept. 1960).

The right to reinstate exists only under the contract between borrower and lender and persists as long as the terms of the mortgage contract allow. Under the Fannie/Freddie Form, the contractual reinstatement right may be exercised “[e]ven if Lender has required Immediate Payment in Full” (i.e., elected to accelerate).

'MacPherson' and 'Bartram'

In Nationstar Mortg. v. MacPherson, 56 Misc.3d 339 (N.Y. Sup. Ct. April 3, 2017), the court determined that the contractual right to reinstate in the Fannie/Freddie Form prevents actual acceleration until judgment enters. There is disagreement—and no New York appellate guidance—over MacPherson. Compare U.S. Bank Nat. Ass'n v Nail, No. 70652/2017, 2018 WL 6172080, at *2 (N.Y. Sup. Ct. Oct. 9, 2018) and Persaud v. U.S. Bank Nat'l, No. 710060/2017, 2018 WL 5117212, at *2 (N.Y. Sup. Ct. Oct. 19, 2018).

The Florida Supreme Court found the contractual reinstatement right prevents actual acceleration. In Bartram v. U.S. Bank Nat. Ass'n, 211 So. 3d 1009 (Fla. 2016), the Florida high court reasoned “the installment nature of a loan secured by such a mortgage continues until a final judgment of foreclosure is entered and no action is necessary to reinstate it via a notice of 'deceleration' or otherwise.”

MacPherson's detractors say New York's courts consistently state, “[t]he filing of the summons and complaint and notice of pendency … constitute[s] a valid election to accelerate the maturity of the debt.” Beneficial Homeowner Serv. v. Tovar, 150 A.D.3d 657, 658 (2d Dept. 2017). As recently as October 2018, the Second Department reiterated, “[a]n acceleration of the full amount of the debt occurred in this instance upon the filing of the summons and complaint in the foreclosure action.” Milone v. US Bank Nat'l Ass'n, 164 A.D.3d 145, 152 (2d Dept. 2018).

MacPherson's proponents argue the distinction between electing to accelerate and actually accelerating. They point to cases like Albertina and argue that the Court there examined the statutory form mortgage, without a contractual reinstatement right (RPL §258 (Sch. M)). Therefore, proponents say, in the Albertina cases, the election to accelerate coincided with actual acceleration because upon election borrower had no right to pay less than the whole debt. In contrast, where borrower has contractual reinstatement rights, even after the election to accelerate, the loan is not actually accelerated until judgment enters—because that is the first moment when borrower may pay no less than the full debt.

The cases that will resolve this debate are percolating to the Appellate Divisions for 2019. Stay tuned.

Adam M. Swanson is a partner in McCarter & English's bankruptcy and restructuring practice group, focusing on consumer financial services and real estate litigation.