In Bank of New York Mellon v. Dieudonne, 2019 WL 1141973 (2d Dept. 2019), the Appellate Division, Second Department determined that a mortgage is accelerated by the filing of a complaint to foreclose the mortgage with an election to accelerate. This is true even though a provision in the mortgage preserves the borrower's right to make installment payments rather than the full debt. Dieudonne will reverberate nationally and through New York.

In the throes of the Great Recession, many foreclosure actions were commenced and ultimately dismissed or abandoned. Among the causes were an overwhelming volume, fluctuating laws, and new regulatory requirements. Financial institutions are now seeking to foreclose those loans and finding that they are barred by the statute of limitations because those old lawsuits accelerated the mortgages years earlier. Courts are giving out free houses but not to homeowners—to real estate speculators who are paying pennies to the homeowner for the right to fight foreclosure.

Acceleration

The six-year limitations period on a mortgage payable in installments begins running on the due date of each unpaid installment, until the entire debt is accelerated. Once accelerated, the entire mortgage debt becomes due and the statute of limitations begins to run on the entire debt. See CPLR §213(4); EMC Mortg. v. Patella, 279 A.D.2d 604 (2d Dept. 2001).

The election to accelerate is at the mortgage holder's option and requires some affirmative action evidencing the election to accelerate. Wells Fargo Bank, N.A. v. Burke, 94 A.D.3d 980 (2d Dept. 2012). The Second Department has previously held that the filing of a foreclosure complaint with an election to accelerate in the allegations may be sufficient to accelerate. See, e.g., U.S. Bank Tr., N.A. v. Aorta, 167 A.D.3d 807 (2d Dept. 2018); Beneficial Homeowner Serv. v. Tovar, 150 A.D.3d 657 (2d Dept. 2017). This line of authority stems from the seminal mortgage acceleration case, Albertina Realty Co. v. Rosbro Realty (Albertina).

'Albertina'

Albertina was a foreclosure action and the mortgage contained the strict statutory acceleration clause found in Real Property Law §258, Schedule M. That clause states that the “whole of said principal sum shall become due after default in the payment of any installment of the principal or of interest for thirty days …” Albertina, 258 N.Y. 472 (1932).

In Albertina, the borrower defaulted on an installment of principal. Three days later, a foreclosure action was brought by filing the summons and complaint containing an election to accelerate. Three days after the action was commenced, the borrower tendered the amount for the past-due installment, which was rejected by the plaintiff because it had accelerated and the entire debt was due. Id. The borrower asserted that he had the right to pay only the back-due installment.

Based on the construction of the clause in the mortgage, the Court of Appeals held that the debt was accelerated by filing the verified complaint and, therefore, borrower's tender of the installment only was lawfully rejected by plaintiff. The Court of Appeals stressed that had the default been on a payment of interest, the result would have been different because the acceleration clause provided a 30-day grace period for an interest default. In other words, had the borrower's default been on an interest payment, his tender of that past-due sum even after the action was commenced would have “destroy[ed] the effect of the sworn statement [in the complaint] that plaintiff had elected [to accelerate].” Id.

'MacPherson'

As noted by the Court of Appeals in Albertina, the parties to a mortgage are not limited to the strict statutory form; they can instead choose to use an optional acceleration clause, like the clause in the Fannie Mae/Freddie Mac (Fannie/Freddie) form mortgage.

In the Fannie/Freddie optional acceleration clause, after a payment default, the borrower still has a right to reinstate the loan by tendering all past due installments up until entry of judgment, which differs from the strict statutory acceleration clause in Albertina. The borrower maintains this right even after lender has demanded payment in full by commencing a foreclosure action.

Under the Fannie/Freddie optional acceleration clause, the borrower's “grace” period to pay all past due installments is until judgment enters. Until that point, the borrower may still pay all past-due installments, reinstate the loan, and force the lender to discontinue its foreclosure action. This is unlike Albertina, where there was no grace period for payment of a past-due principal installment and the loan accelerated upon the election in the verified complaint.

Based on this distinction, in Nationstar Mortg., v. MacPherson, 54 N.Y.S.3d 825 (Sup. Ct., Suffolk Cty. 2017), Justice Whelan determined that under the Fannie/Freddie acceleration clause, acceleration does not occur until entry of judgment, despite the election. This reading agrees with a decision interpreting the same provision by the Florida State Supreme Court in Bartram v. U.S. Bank National Association, 211 So.3d 1009 (Fla. 2016). MacPherson and Bartram reasoned that because the borrower maintains a right to reinstate the mortgage, the mortgage remains an installment contract until judgment enters. MacPherson held that where the Fannie/Freddie optional acceleration clause is at issue, filing the complaint is not enough to accelerate the loan. Numerous lower courts in New York came into agreement.

'Dieudonne'

In Dieudonne, the Second Department addressed and rejected MacPherson. The Dieudonne mortgage contained the Fannie/Freddie optional acceleration clause. The foreclosure action was commenced in October 2016. Defendant moved to dismiss the action as time-barred based on a prior foreclosure action commenced in 2010 (the Prior Action). Defendant alleged that the complaint in the Prior Action, filed more than six years earlier, accelerated the loan. Citing MacPherson in opposition, the plaintiff argued that by the terms of the mortgage, acceleration could not occur until judgment entered, so the mortgage had never been accelerated and was not time-barred. The plaintiff argued that entry of judgment was an additional “condition precedent” to acceleration.

The Second Department analyzed the various conditions precedent, enumerated in Section 22 of the mortgage and noted that Section 19, the borrower's right to reinstate, was not referenced in Section 22. The Second Department additionally observed that Section 19 itself did not provide that it was a condition precedent to acceleration. As a result, in expressly rejecting MacPherson, the Second Department found that the mortgage loan was accelerated upon satisfaction of the Section 22 requirements and commencement of the Prior Action. Specifically, the Second Department held that the defendant's Section 19 right to reinstate was a “contractual right to de-accelerate the maturity of the debt,” and the extinguishment of that right “was not a condition precedent to the plaintiff's acceleration of the mortgage.” Id. at *4.

De-Acceleration and 'Milone'

The Second Department discussed de-acceleration in Milone v. US Bank Nat'l Ass'n, 164 A.D.3d 145 (2d Dept. 2018) and for the first time imposed new requirements to de-accelerate a mortgage loan. The court also created a new standard, requiring lenders to demonstrate that de-acceleration letter is not a mere “pretext to avoid the onerous effect of an approaching statute of limitations.”

The Second Department held that for a de-acceleration letter to not be pretextual, in addition to expressly revoking the prior election, the letter must contain “an express demand for monthly payments on the note or, in the absence of such express demand, [the letter must be] accompanied by copies of monthly invoices transmitted to the homeowner for installment payments, or [be] supported by other forms of evidence demonstrating that the lender was truly seeking to de-accelerate and note attempting to achieve another purpose under the guise of de-acceleration.” Id.

Prior to Milone, the controlling law since 1905 was that a lender may revoke its election to accelerate all sums due under an optional acceleration clause by an affirmative act of revocation during the six-year statute of limitations so long as the borrower has not changed position in reliance on acceleration. Kilpatrick v. Germania Life Ins. Co., 183 N.Y. 163 (1905); Fed. Nat. Mortg. Ass'n v. Mebane, 208 A.D.2d 892 (2d Dept. 1994); NMNT Realty v. Knoxville 2012 Tr., 151 A.D.3d 1068 (2d Dept. 2017).

This pretext standard for de-acceleration is new and no prior case has examined the lender's intentions in de-accelerating. In Kilpatrick, the lender accelerated and the borrower arranged a refinance but did not account for a pre-payment bonus that only became due if the principal was paid early. The lender discontinued the action and tried to de-accelerate, thereby claiming the pre-payment bonus was due and the loan was being paid early. Rejecting the lender's attempt and finding lender could not de-accelerate, the Court of Appeals did not focus on the intention of the lender but on the borrower having relied on the acceleration to procure a refinance. The word “pretext” is not in the decision.

Conclusion

The law of mortgage acceleration in the Second Department is inconsistent. As it stands, a mortgage accelerates when lawyers file a complaint alleging that the “plaintiff elects to call due the entire amount secured by the mortgage” even though the borrower can still make only installment payments. In contrast, to de-accelerate under Milone, the court examines the lender's intentions and the lender must send written notice to the borrower of its election to de-accelerate and make a demand for the monthly payment.

Dieudonne does not comport with the way a Fannie/Freddie residential mortgage is treated during foreclosure. During foreclosure, a borrower continues to receive monthly statements that show the aggregate unpaid installments that are due. The monthly statements do not demand payment of the full principal, interest, and other charges because those sums are not yet due.

Milone makes it onerous to de-accelerate a mortgage loan. Acceleration is a contractual right of the mortgage holder and just as the mortgage holder should be free to exercise this right, it should also be free to de-exercise this right. New York law in Kilpatrick already adequately protects a borrower from harm because a holder can lose that right to de-accelerate if the borrower relies on acceleration to his or her detriment.

The Court of Appeals needs to bring clarity to these issues. Although it appears that these decisions benefit homeowners, all the benefits are going to real estate speculators while these decisions chill mortgage lending in New York.

Adam M. Swanson is a partner and Jessie D. Bonaros is an associate the bankruptcy and commercial litigation group of McCarter & English, focusing their practice on consumer financial services and real estate litigation.