Acceleration Clauses in Foreclosure Proceedings: New Guidelines

The rules surrounding acceleration clauses in mortgage foreclosure actions have recently undergone changes that are worth exploring. In this article, we will examine recent case law developments and discuss the advantages and potential challenges associated with acceleration clauses. We will also provide insights on how to overcome these obstacles.

Electing to Accelerate

When it comes to choosing acceleration, mortgagees have two options; either acceleration happens automatically or it is at the lender’s discretion. In standard form residential mortgages, acceleration is typically the lender’s prerogative. In such cases, the lender must take affirmative action to accelerate and strictly adhere to the terms specified in the mortgage. Additionally, the borrower must be provided with clear and unambiguous notice of the decision to accelerate.

Notice of Acceleration

Notice of acceleration can be given informally through written communication with the borrower or formally by initiating a foreclosure lawsuit. A court ruling in the case of “Wells Fargo Bank v. Burke” emphasized the significance of serving the borrower with the necessary notice for acceleration to be valid and for the statute of limitations to commence.

To ensure that acceleration does not occur prematurely, mortgagees should wait until the foreclosure action has commenced. It is crucial to word any notice of default meticulously, as failure to do so may inadvertently trigger acceleration. The notice should clearly state that failure to pay the total amount past due, including future amounts due on or before a specific date, ‘may’ result in acceleration, rather than ‘will’ result in acceleration.

Dismissed Lawsuits

When a mortgagee acquires a mortgage or servicing rights, they may discover prior dismissed foreclosure lawsuits or dormant foreclosure lawsuits that have never been filed. It is essential to conduct due diligence before recommencing any action to ensure that the statute of limitations has not expired.

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In a recent case, “Kashipour v. Wilmington Savings Fund Society,” borrowers initiated an action to discharge their first mortgage, asserting that the statute of limitations had expired. However, they failed to perform due diligence by submitting proof of a prior foreclosure action that had been dismissed for failure to serve statutory notices. Although the lower court originally deemed the prior dismissal irrelevant, the appellate court reversed this decision. The appellate court ruled that, since more than six years had passed since the acceleration clause was exercised, the mortgage needed to be canceled.

Pro-Active Strategies

To prevent outcomes like the one in Kashipour, mortgagees should adopt pro-active strategies for safeguarding mortgage securities. Many of these strategies can be applied as best practices when dealing with any defaulted mortgage loan. The first step involves determining if the mortgage has been accelerated based on its terms, notice to the borrower, or the commencement of a foreclosure lawsuit. If acceleration has occurred and the mortgage is still within the six-year statute of limitations, the mortgagee may revoke acceleration as long as there has been no change in the borrower’s position in reliance on acceleration. Revocation typically requires delivering a clear and unequivocal notice to the borrower, similar to the notice required for acceleration.

Partial Payment of Debt

To prevent the nullification of a mortgage that is on the brink of expiration, it is advisable to incorporate terms that comply with Sections 17-105(1) and 17-101 of the General Obligations Law into loss mitigation documents. These terms can be included in various agreements, such as loan modification applications, temporary payment plans, forbearance agreements, settlement agreements, or loan modification agreements.

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These agreements must ensure that the borrower expressly acknowledges the debt and promises to repay it. Anything less than a clear and explicit acknowledgment and promise may create a new obligation that will not save a time-barred mortgage. The provisions outlined in Sections 17-105(1) and 17-101 of the General Obligations Law must be followed to have an enforceable contract.

Voluntary Discontinuance

It’s important to note that dismissal of a foreclosure action by the court does not revoke acceleration, including when the dismissal is voluntary. The impact of voluntary discontinuance on the revocation of acceleration is currently a subject of litigation. If a mortgagee has a pending foreclosure action with a defect that may prevent a favorable judgment, it may be best to allow the case to be dismissed. After dismissal, the mortgagee has six months to re-commence the action under CPLR §205.

If a pending foreclosure action is to be dismissed by stipulation, the stipulation should explicitly state that the mortgagee’s acceleration is revoked and include an acknowledgment of the debt by the borrower, along with a statement affirming the borrower’s intention to repay the debt.

Emerging Legal Theories

In addition to traditional tools like equitable estoppel, new and lesser-known defenses have emerged to defeat the statute of limitations. Here is a list of some of these defenses:

  • Standing: Standing has seen a resurgence in favor of mortgagees. When prior foreclosure actions were initiated by the wrong party (e.g., MERS), acceleration may have been void. If the party that commenced the previous foreclosure action was not the holder or assignee of the note, it never had the authority to accelerate the debt or sue to foreclose. Consequently, the prior foreclosure action did not accelerate the debt, and the statute of limitations has not yet begun.

  • Service of Process on the Borrower: In the “Burke” case, the court clarified that acceleration is only effective when the complaint is served on the borrower. If the complaint is not served, there are cases where courts have found that acceleration was ineffective. Another scenario involves filing the complaint without serving it, which does not trigger acceleration until the borrower has notice of the lawsuit.

  • Mortgagee in Possession: The statute of limitations does not run against a “mortgagee in possession” of the collateral property. Possession must be actual, and the mortgagor’s acquiescence to the mortgagee’s possession is considered a continuing acknowledgement of the debt. If a mortgagee has taken measures to secure, improve, or remediate the property, they may argue that they were a mortgagee in possession, thus tolling the statute of limitations.

  • Pre-Acceleration Notices: Acceleration must comply with the contractual requirements specified in the note or mortgage. A notice of default may be deemed a condition precedent to the enforcement of the mortgage. Failure to provide proper notice of default may nullify acceleration, bringing the mortgage back within the statute of limitations. Courts also view notices required under RPAPL §§1303 and 1304 as conditions precedent that require strict compliance. Failure to provide these notices may also nullify acceleration.

  • Bankruptcy Plan: Filing a Chapter 13 petition in Bankruptcy Court and adhering to a Chapter 13 plan can renew the limitations period. The Chapter 13 plan requires the debtor to acknowledge the debt and commit to repayment. This explicit acknowledgment and agreement fall under Section 17-105(1) of the General Obligations Law, effectively renewing the limitations period.

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Recent court decisions have provided valuable guidance for borrowers and lenders embroiled in foreclosure battles. This article aims to help practitioners and in-house counsel navigate the complexities of triggering acceleration clauses in mortgage foreclosures.

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