On two issues where the intermediate state appellate courts in New York are divided, Bankruptcy Judge Robert E. Grossman of Central Islip, N.Y., ruled that the statute of limitations barred the holder of a mortgage from foreclosing.
Although mortgagees have “an absolute right to exercise all available remedies to the fullest extent of the law,” Judge Grossman said in his November 27 opinion that “they must abide by the rules, just as borrowers must play by the rules.” He concluded that the mortgage holder was not “entitled to a do-over in order to negate the consequences . . . of its own failures to either understand the law or failure to abide by the law . . . .”
The Facts
The holder of a home mortgage and the debtor’s chapter 7 trustee lodged cross motions for summary judgment. They agreed on undisputed facts.
The debtors failed to make payments on their mortgage beginning in June 2006. The servicer sent a first notice of default one month later, stating that the loan “will be accelerated” if the default was not cured by August 7, 2006. The debtors did not cure by the deadline.
In October 2006, the servicer began a foreclosure proceeding in state court. Ostensibly because the servicer was unable to verify that it had been assigned the note and mortgage at the time the action began, the servicer and the debtors signed a stipulation of discontinuance of the foreclosure proceeding in October 2012, almost six years after the foreclosure had begun.
New York has a six-year statute of limitations to bring foreclosure of a mortgage or to sue on a mortgage note. The servicer began a second foreclosure in December 2012, but the second foreclosure would have been time-barred if the acceleration in 2006 were not revoked as part of the dismissal of the first foreclosure action.
The servicer and the debtors stipulated to the discontinuance of the second foreclosure action in 2014, but the servicer filed a third foreclosure in early 2017, which was halted when the debtors filed their chapter 7 petition one month later.
Using his status as a bona-fide purchaser of the real property under Section 544(a)(3), the chapter 7 trustee initiated an adversary proceeding several months after filing to declare, among other things, that the note and mortgage were rendered unenforceable by the statute of limitations. The trustee naturally sought to preserve the note and mortgage for the estate under Section 551.
The Decision on Summary Judgment
Under New York law, the statute of limitations begins to run when a mortgage note is accelerated. For an acceleration to occur, Judge Grossman said that New York courts require some “clear” and “unequivocal” affirmative action to evidence the lender’s election to accelerate.
Intermediate appellate courts in New York are split on the question of whether a notice of default “can constitute a ‘clear and unequivocal’ assertion of the option to accelerate the debt,” Judge Grossman said.
According to Judge Grossman, the New York Appellate Division, First Department, holds that a notice of default stating that the lender “will accelerate” after the expiration of a cure period does accelerate maturity of a loan if the default is not cured by the deadline. The First Department covers Manhattan and the Bronx.
On the other hand, the Appellate Division, Second Department, rejected the decision from the First Department and held that the “will accelerate” language is not “clear and unequivocal” and does not accelerate a debt. The Second Department includes Long Island, where Judge Grossman sits.
In the federal sphere, the Southern and Eastern Districts of New York follow the First Department, Judge Grossman said. The New York Court of Appeals, the highest court in the New York State court system, has not ruled on the question.
Judge Grossman decided to follow the First Department. He therefore concluded that the loan was accelerated as of August 7, 2006. As a result, the statute of limitations had already lapsed before the servicer began the second foreclosure action in December 2012, “unless it was revoked or tolled by some action of the parties.”
The Effect of Discontinuing the 2006 Foreclosure
New York law is “clear,” Judge Grossman said, that “once a debt underlying a note and mortgage is accelerated, the statute of limitations can be restarted by an affirmative act of the lender during the statute of limitations period.”
The servicer therefore argued that the discontinuance of the first foreclosure action in 2012 revoked the notice of acceleration and restarted the clock on the statute of limitations.
Again, New York State courts are split, and the New York Court of Appeals has not ruled.
Because the stipulation of discontinuance in 2012 did not refer to revocation of acceleration, Judge Grossman ruled that the servicer had not revoked acceleration. Consequently, the statute had already run when the servicer began the second foreclosure.
The Servicer’s Argument on Lack of Standing
Hoping to avoid the consequences of acceleration in 2006, the servicer contended that the acceleration in 2006 was a nullity because it had not been assigned the mortgage at the time.
Judge Grossman rejected the argument, since the undisputed facts showed that the servicer did have an assignment of the mortgage note. Under New York law, rights under a mortgage automatically pass to an assignee along with the note, even if the mortgage has not been assigned.
Therefore, the servicer did have rights under the mortgage and had accelerated the mortgage in 2006.
The Relief
Judge Grossman granted summary judgment in favor of the trustee, holding that the mortgage and the note were unenforceable as a matter of law. He preserved the note and mortgage for the benefit of the estate and held that the trustee has title to the home free and clear of the mortgage.
Note: If the case does not settle, and if an appeal reaches the Second Circuit, the appeals court can certify the questions to the New York Court of Appeals. Under New York law, a bankruptcy court or district court cannot certify a question to the state’s highest court.
The Second Circuit will frequently certify a question to the New York Court of Appeals rather than make a so-called Erie guess about how the New York court would rule on an important issue of state law.
On two issues where the intermediate state appellate courts in New York are divided, Bankruptcy Judge Robert E. Grossman of Central Islip, N.Y., ruled that the statute of limitations barred the holder of a mortgage from foreclosing.
Although mortgagees have “an absolute right to exercise all available remedies to the fullest extent of the law,” Judge Grossman said in his November 27 opinion that “they must abide by the rules, just as borrowers must play by the rules.” He concluded that the mortgage holder was not “entitled to a do-over in order to negate the consequences . . . of its own failures to either understand the law or failure to abide by the law . . . .”
The holder of a home mortgage and the debtor’s chapter 7 trustee lodged cross motions for summary judgment. They agreed on undisputed facts.
The debtors failed to make payments on their mortgage beginning in June 2006. The servicer sent a first notice of default one month later, stating that the loan “will be accelerated” if the default was not cured by August 7, 2006. The debtors did not cure by the deadline.