Second Circuit Reverses Judgment Against Mortgagee in De-Acceleration Case

The United States Court of Appeals for the Second Circuit recently vacated and remanded a decision by a lower court that found that a defendant bank's de-acceleration of a mortgage was invalid because it was motivated solely by a desire to avoid the expiration of a statute of limitations. See 53rd St., LLC v. U.S. Bank Nat'l Ass'n, 8 F.4th 74 (2d Cir. 2021). In 2006, a borrower executed a note and mortgage in favor of Downey Savings and Loan Association ("Downey"). Downey sued to foreclose the mortgage on June 30, 2008, and while it was pending, assigned the note and mortgage to U.S. Bank. The foreclosure was dismissed.  In June 2014, within six years of Downey's suit to foreclose, U.S. Bank sent letters to the borrower stating that the loan, which had previously been accelerated by the filing of foreclosure, was de-accelerated and reinstituted as an installment loan. However, a few weeks later, U.S. Bank notified the borrower by letter that the mortgage could be re-accelerated for non-payment. In 2018, a junior mortgagee sued for foreclosing on the subject property, and 53rd St, LLC ("53rd Street") purchased the property at the foreclosure sale.  53rd Street then filed this action to cancel and discharge U.S. Bank's mortgage because the statute of limitations to foreclose expired on June 30, 2014. Relying on a statement in Milone v. U.S. Bank, N.A., 164 A.D.3d 145 (2d Dep't 2018), the District Court ruled that, because the bank's purported de-acceleration of the mortgage was motivated only by intent to avoid expiration of the statute of limitations, the bank did not succeed in deaccelerating the mortgage and ruled that the six-year limitations period had expired and discharged the mortgage.

On appeal, the Court observed that under New York law, when acceleration of a mortgage is made optional in a mortgage agreement, the debt may be accelerated by the mortgagee's taking of "some affirmative action . . . evidencing the holder's election to take advantage of the accelerating provision, including commencing a foreclosure action." The Court further noted that in Milone, on which the District Court relied, the court observed that "[c]ourts must be mindful of the circumstance where a bank may issue a de-acceleration letter as a pretext to avoid the onerous effect of an approaching statute of limitations" and interpreted this to mean that, if a de-acceleration was motivated by desire to avoid expiration of the limitations period, it would fail to take effect. In 2021, however, the New York Court of Appeals in Freedom Mortgage Corp. v. Engel, 37 N.Y.3d 1 (N.Y. Feb. 18, 2021) ("Engel") expressly "reject[ed] the theory . . . that a lender should be barred from revoking acceleration if the motive of the revocation was to avoid the expiration of the statute of limitations on the accelerated debt," and that instead, a court must simply ask whether the mortgagee took an unambiguous affirmative act to de-accelerate the mortgage within the six-year limitations period. The Court rejected 53rd Street's argument that Engel means that a voluntary discontinuance of a foreclosure is the only way to de-accelerate an accelerated mortgage, and that instead, Engel expressly contemplated other "affirmative acts" that would suffice. Since the District Court's finding for 53rd Street was based primarily on Milone's now-abrogated intent rationale, the Court vacated the judgment and remand for further consideration of U.S. Bank's "affirmative acts" in light of Engel.