New York Court Slams Door on Lender's Revocation of Acceleration of Entire Mortgage Debt by Voluntary Discontinuance—but Leaves Latch Ajar

The State of New York's Appellate Division for the Second Department has now addressed the issue of whether a lender's voluntary discontinuance of a judicial foreclosure action, whether by court order or stipulation of the parties, is sufficient evidence of a lender's intent to revoke the acceleration of the entire mortgage debt. Unfortunately for mortgage lenders, the court determined voluntary discontinuance is not sufficient.

The Second Department has wrestled with this issue in a number of decisions over the past several years. First, in NMNT Realty Corp. v. Knoxville 2012 Trust, the Court found that a voluntary discontinuance order could revoke the lender's election to accelerate the mortgage debt, but on the record of evidence found it was a question of fact. Just months after NMNT Realty Corp., and at the beginning of this year, the Court could have made a determination on this issue in Deutsche Bank Natl. Trust Co. v. Adrian. Instead, the Court found that since the voluntary discontinuance came after the applicable statute of limitations period had expired, there was no revocation. Then, in Freedom Mtge. Corp. v. Engel, the Court found that a lender's stipulation of discontinuance by itself was insufficient to revoke the election to accelerate the entire mortgage debt. The stipulation was silent on the issue of the revocation of the election to accelerate, and did not otherwise indicate that the lender would accept payments from the borrower.

The Second Department was again confronted with the issue in U.S. Bank Trust, N.A. v. Aorta. In that case, the lender argued its judicial foreclosure action was not time-barred because the lender voluntarily discontinued the prior action and served the borrower with several notices, including the statutory pre-foreclosure notices under which revoked the lender's election to accelerate the entire mortgage debt. In fact, the lender served notices of default that included less than the amount owed, which evidenced the lender's intent to revert to installments payments. The Court disagreed with the lender and found that its action was time-barred. In affirming summary judgment, the Court relied upon the same rationale from Engel finding that the order discontinuing the 2008 action upon its motion "was insufficient, in itself, to evidence an affirmative act to revoke the election to accelerate the mortgage debt." The Court also concluded that statutory and other notices sent to the borrower, by themselves, were insufficient to affirmatively revoke the lender's election to accelerate the mortgage debt.

For lenders, the Aorta decision is not all bad news. The Second Department left an opening for lenders to substantiate their intent by stating that "[t]he plaintiff failed to demonstrate the basis for that motion, since it did not submit the motion papers in opposition to defendant's cross motion." In doing so, the Court hinted that a voluntary discontinuance with language demonstrating the lender's intent to revoke the election to accelerate might alter the decision. This hint was also present in Engel, where the Court struggled to find any language in the stipulation that would evidence the lender's intent to revoke the election to accelerate the mortgage debt. Going forward, lenders, and their attorneys, should proceed with caution when submitting voluntary discontinuance motions or stipulations in New York judicial foreclosure actions, particularly with the revoking language used in these documents.

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