Update on the New York Foreclosure Abuse Prevention Act: Challenges and Current Considerations

As more fully discussed in our previous OnPoint, the New York Legislature enacted FAPA on December 30, 2022 in response to the New York Court of Appeals’ holding, in Freedom Mortgage Corp. v. Engel, that a noteholder’s voluntary revocation of an acceleration of debt constituted an “affirmative act” that would restart the clock for the statute of limitations for mortgage foreclosure actions. 146 N.Y.S.3d 542 (2021). The New York Legislature effectively rejected this decision, which had followed years of precedent. Instead, FAPA provides that a noteholder’s voluntary discontinuance of a foreclosure is not sufficient, in and of itself, to reset the six-year statute of limitations period for mortgage foreclosure actions. As a consequence, noteholders (and anyone whom the note is subsequently transferred to) are barred from commencing a subsequent foreclosure proceeding once a debt has been accelerated if six-years have elapsed since the commencement of the original action, even if it was voluntarily discontinued. As a practical result, Borrowers are able to raise the defense of statute of limitations and leave noteholders without any protection where a prior enforcement action was filed. The retroactive application of FAPA, provided for therein, further compounds the problem and puts all noteholders on notice that their loans may not have recourse to the standard lender protections they once had.

During the past six months, a variety of challenges to the retroactive application of FAPA have been raised in federal and New York state courts. This OnPoint provides an update on these challenges and current considerations for parties that hold mortgages over property in New York state.

New York State Courts

Appellate Divisions

On May 17, 2023, the Appellate Division, Second Department decided U.S. Bank National Association v. Simon, 191 N.Y.S.3d 61 (App. Div. 2d Dep’t 2023), a case where the appellant brought into question the constitutionality of FAPA. At issue was whether the plaintiff noteholder’s voluntary dismissal of a foreclosure action in 2008 meant that it was prohibited from accelerating the mortgage debt in 2016 due to the statute of limitations being applied. At trial, the Supreme Court, Queens County, had found in favor of the noteholder, but during the appeal process FAPA was enacted and affirmatively raised by the borrower. The trial court sided with the borrower, holding that the 2008 foreclosure action did not “in form or effect, waive, postpone, cancel, toll, extend, revive or reset the limitations period to commence an action and to interpose a claim, unless expressly prescribed by statute.” 191 N.Y.S.3d at 63. On further appeal, the plaintiff noteholder argued that the retroactive application permitted by FAPA violated the Due Process Clause and the Contract Clause of the Constitution. The Second Department acknowledged those arguments and remitted the matter to the Supreme Court Queens County to consider the constitutionality of FAPA’s retroactive application.

Nevertheless, while the Simon trial court considered the constitutionality of FAPA’s retroactive application, the Second Department continued to apply FAPA to dismiss foreclosure actions as time-barred. (see e.g., Deutsche Bank Nat’l Tr. Co. v. Natal, 191 N.Y.S.3d 662 (App. Div. 2d Dep’t 2023); see also, ARCPE 1 LLC v. DeBrosse, 217 A.D.3d 999 (App. Div. 2d Dep’t 2023); U.S. Bank N.A. v. Outlaw, 191 N.Y.S.3d 436 (App. Div. 2d Dep’t 2023); SYCP, LLC v. Evans, 191 N.Y.S.3d 433 (App. Div. 2d Dep’t 2023)).

The First Department has cited and applied FAPA retroactively in two of its recent decisions. In U.S. Bank, N.A. v. Fox, 188 N.Y.S.3d 52 (App. Div. 1st Dep’t 2023), after plaintiff’s second foreclosure action was dismissed, the plaintiff appealed to the First Department. After submission of briefs and oral arguments, but before the First Department issued an order on appeal, FAPA was enacted. The First Department permitted the parties to include FAPA in their briefs. The court held that since FAPA applies in foreclosure actions “in which a final judgment of foreclosure and sale has not been enforced”, it applied to this foreclosure action. In a similar case, U.S. Bank Trust, N.A. v. Chung, 189 N.Y.S.3d 161 (App. Div. 1st Dep’t 2023), the First Department did not directly reach the issue of FAPA retroactivity because it held that the foreclosure action was timely filed within six years from the acceleration of the note.

The New York appellate divisions are likely to continue to weigh in on the questions raised by FAPA as case law is generated at the trial level, particularly as the courts sitting in different counties have diverged, as discussed below.

Supreme Courts

Although the Supreme Court, Queens County, is currently explicitly considering the constitutionality of FAPA in the remand of the Simon case, it is worth noting that recent state Supreme Court decisions are split on whether FAPA may be applied retroactively. In HSBC Bank USA, N.A., v. Besharat, No. 500836/2021, 2023 WL 3555407 (N.Y. Sup. Ct. Putnam Cnty. May 19, 2023), the Supreme Court, Putnam County held that the retroactive application of FAPA would impact the mortgagee’s substantive rights and would deprive the mortgagee of a vested right to enforce its claim on its note in violation of its due process rights, providing a presumption against retroactivity. In Wilmington Savings Fund Society v. Hack, No. 701590/2019, 2023 WL 3357242 (N.Y. Sup. Ct. Queens Cnty. Apr. 21, 2023), the Supreme Court, Queens County held that “FAPA does not explicitly provide that the newly enacted CLPR §205-a shall operate, by relation back, to invalidate conduct prior to the enactment of FAPA on December 30, 2022. Therefore, it cannot be readily determined that FAPA was intended to take away or impair rights vested under existing laws prior to its enactment.” Id. at *2. Similarly, in Newrez LLC v. Kalina, the Supreme Court, Albany County held that “there is no indication that the legislative intent was to impair already vested rights.” 185 N.Y.S.3d 651, at *2 (2023). Other courts have also held that FAPA should not be applied retroactively (see, e.g., Nestor I LLC v. Moriarty-Gentile, 187 N.Y.S.3d 580 (2023)).

Whether this interpretation of legislative intent will serve to protect the rights of lenders who have voluntarily withdrawn enforcement actions in the past remains to be seen. For example, the Supreme Court, Westchester County wrote in MTGLQ Investors, L.P. v. Gross, 190 N.Y.S.3d 244, 250 (2023) that “as courts begin to apply FAPA in foreclosure actions, the court shall encounter varied arguments by both parties in furtherance of their positions. However, the legislative intent of FAPA seeks to remedy foreclosure abuse in actions where plaintiffs have used voluntary discontinuances to alter the statute of limitations in its favor in a particular action. FAPA was not intended to be used as a means to reach back in the case history and bypass determinations rendered by courts, who have evaluated the facts and evidence within an action, and dismantle such determinations upon a discontinuance that previously had no bearing and now alter the substantive rights of a party.” This finding seems to be drawing a distinction between voluntary dismissal and a court sanctioned apportioning of the rights of the parties with respect to a prior enforcement, and there are an increasing number of decisions where New York courts have retroactively applied FAPA. In U.S. Bank Trust, N.A. v. Miele, No. 51023/2016, 2023 WL 4112924 (N.Y. Sup. Ct. Westchester Cnty. June 21, 2023), the court held that FAPA was intended to apply to all pending actions in which a judgment of foreclosure and sale has not been enforced and the court applied FAPA retroactively, based on the absence of such an enforcement. Similarly, in Deutsche Bank v. Cheng, No. 608466/2017, 2023 WL 3327444 (N.Y. Sup. Ct. Nassau Cnty. May 1, 2023), the Supreme Court, Nassau County held that FAPA is constitutional and does not impair a plaintiff’s ability to contract. See also, HSBC Bank USA, N.A. v IPA Asset Mgmt., LLC, 190 N.Y.S.3d 622 (2023), Deutsche Bank Nat’l Trust Co. v. Dagrin, 190 N.Y.S.3d 582 (2023), U.S. Bank N.A. v. Pierre, 184 N.Y.S.3d 890 (2023), Wilmington Sav. Fund Soc’y, FSB v. Madden, 186 N.Y.S.3d 910 (2023); Aspen Props. Grp., LLC v. Santoro, 181 N.Y.S.3d 460 (2023).

New York Federal District Courts

FAPA has also been the subject of challenges at the federal district court level, and several of the decisions have been appealed to date. The following is a brief summary of some of the more recent decisions.

In East Fork Funding LLC v. U.S. Bank N.A., 20-cv-3404, 2023 WL 2660645 (E.D.N.Y. Mar. 23, 2023), the Eastern District of New York held that FAPA was constitutional and applied it retroactively in favor of the borrower. The court stated “Because FAPA precludes mortgagees from resetting the limitations period by voluntarily discontinued [sic] a foreclosure action § 3217(e), or by any unilateral waiver, § 203(h), the statute necessarily overrules Engel’s holding that a unilateral ‘discontinuance of a foreclosure action acts to de-accelerate a loan.’” Id. at *4. Further, the court stated that this is how New York courts are now interpreting FAPA, citing another case GMAT Legal Title Trust 2014-1 v. Kator, 184 N.Y.S.3d 805 (App. Div. 2d Dep’t 2023), which held that FAPA had the effect of nullifying Engel’s holding that a voluntary discontinuance “serve[s] to reset the statute of limitations.” Id. at 808. The Eastern District of New York also held that FAPA does not violate the Contracts Clause of the Constitution because the state of New York did not enact a law that violated the parties’ freedom of contract. The court also noted that nothing in § 3217(e) prohibits parties from agreeing in their mortgage contract that a stipulation or another action will deaccelerate the mortgage and reset the statute of limitations. Thus, “if they so agree, it will be their agreement, not the ‘voluntary discontinuance’ alone, that resets the limitations clock.” East Fork Funding, 2023 WL 2660645, at *5.

In Windward Bora, LLC v. Sotomayor, 21-cv-7161, 2023 WL 2575582 (S.D.N.Y. Mar. 20, 2023), the Southern District of New York also applied similar reasoning and held FAPA to be constitutional.

Plaintiffs have appealed in both cases.

Where Does This Leave Mortgage Noteholders?

New York state courts are continuing to work through the retroactive application of FAPA, wrestling with how the act impacts a mortgagee's substantive rights and might deprive them of a vested right to enforce their claim on a note, in violation of their due process rights. Until we have more certainty, it is of the utmost importance for lenders to carefully review their loan portfolios to assess the potential impact of FAPA on their ability to enforce their historically afforded rights. If, for example, a lender voluntarily discontinued a prior foreclosure matter, it might be the case that any future acceleration and foreclosure is or soon will be time barred. Having a good understanding of where the loans in one’s portfolio stand in relation to FAPA’s retroactive application will permit a noteholder to better quantify its risk in the event the courts coalesce around acceptance of the retroactive application of FAPA.

Given the current legal landscape, it is also prudent for lenders to consider including language in their mortgage contracts that addresses the issue of discontinuing foreclosure actions and the potential impact on the statute of limitations. By doing so, lenders can better protect their interests and minimize the risk of losing their ability to enforce their rights due to the varying interpretations of FAPA in courts. Until the New York courts on the federal and state levels provide further clarification on how they intend to interpret and apply FAPA, lenders should remain vigilant and closely monitor their decisions, as well as ongoing developments in the space.

Dechert continues to monitor new developments regarding FAPA and will provide further updates as legal challenges and other news continue to develop.