News & Insights

Measuring the Reach of New York’s Foreclosure Abuse Prevention Act, Co-Authors Brian P. Scibetta & Richard Haber

May 10, 2023


On December 30, 2022, the day the industry had long feared became unfortunate reality—New York Governor Kathy Hochul signed the Foreclosure Abuse Prevention Act, L. 2022, ch. 821 (“FAPA”) into law. FAPA takes aim at an array of New York statutes and court rules governing the statute of limitations to foreclose, with the centerpiece being the legislative reversal of the landmark Court of Appeals decision in Freedom Mortg. Corp. v. Engel, 37 N.Y.3d 1 (2021) (“Engel”). The Engel decision had reaffirmed longstanding New York law that where a lender accelerates the debt by way of foreclosure and starts the running of the six (6) year limitations period, the subsequent voluntary discontinuance of the action revokes the acceleration and stops the limitations period running. Claiming that this constituted an unfair “manipulation” of the limitations period to borrowers’ detriment, the N.Y. Legislature within FAPA added a subprovision to the Rule governing discontinuances, CPLR § 3217(e), which states that “the voluntary discontinuance of [a foreclosure action], whether on motion, order, stipulation or by notice, shall 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.” The Legislature further designed FAPA to apply even to foreclosures filed before its passage, as the act “shall take effect immediately and shall apply to all actions . . . in which a final judgment of foreclosure and sale has not yet been enforced.”

Many pending New York foreclosures share a fact pattern with that at issue in Engel—they are foreclosure restarts filed more than six (6) years after the commencement of a previous foreclosure that had been voluntarily discontinued. One such case is U.S. Bank Nat. Assn.. v. Simon, Docket No. 2020-09391, pending before the Appellate Division, Second Department on an appeal by the plaintiff from a dismissal of the action on statute of limitations grounds. In Simon, the plaintiff had previously filed a foreclosure in 2008 that it voluntarily discontinued the same year. When the borrower failed to bring the loan current, the plaintiff brought a second foreclosure years later in 2016, only for the trial court to find, in reliance on the reversed version of Engel from the Appellate Division, that the action had been filed outside of the limitations period and should be dismissed. On appeal, the Simon plaintiff cited the reversal of Engel and the discontinuance of the 2008 action, which it argued rendered the action timely. But prior to the appeal being calendared for argument, FAPA was passed, and then at argument, its potential applicability to the case was raised by the Second Department justices. After plaintiff’s counsel responded by raising the issue of FAPA’s constitutionality, the New York Attorney General (the “AG”) was permitted to intervene and defend the new law, and filed its intervenor’s brief the last week of March.

In arguing for FAPA retroactivity, the AG has gone in an unexpected direction. Asserting the reversed version of Engel (issued in 2018) and related decisions from the Appellate Division around that time constituted “settled” and “longstanding” New York law on this issue, the AG argues that the Court of Appeals decision in Engel was rogue and had disturbed the status quo, justifying that FAPA be retroactively applied to remedy the judicial error. That is a curious interpretation of historical precedent on the issue, because at the time Engel issued in early 2021, it did not in any way constitute new law or a new rule. Rather, Engel clarified for foreclosure litigants what the law had been recognized to be dating back well more than a century—that a lender could revoke an acceleration of the debt through discontinuing an action, and that the discontinuance returns the parties to the positions they had held as if the action had never been filed at all. See Kilpatrick v. Germania Life Ins. Co., 183 N.Y. 163 (1905) (recognizing lender’s common law contractual right to revoke an election to accelerate); Loeb v. Willis, 100 N.Y. 231 (1885) (discontinuance of action means everything done is “annulled” and “as if it had never been”). In this way, Engel is properly viewed as a restatement of longstanding legal principles, and a correction of certain erroneous decisions rendered by the Appellate Division during the brief time period between 2018 through 2020. The Simon plaintiff has aggressively opposed the AG’s flawed position, and further support for the lender/servicer side has been offered through a proposed joint amicus filing by the New York Bankers Association, New York Mortgage Bankers Association, American Bankers Association, Mortgage Bankers Association and Housing Policy Council.

Already, certain New York trial-court level judges have rejected the AG’s line of reasoning and declined to apply FAPA retroactively in that manner. In Newrez LLC v. Kalina, 2023 N.Y.Misc. LEXIS 1265 (Sup. Ct. Albany Cty., Mar. 22, 2023), Judge Lynch found that to apply FAPA to undo the legal effect of the voluntary discontinuance of a prior foreclosure action would be “to impair already vested rights” inconsistent with precedent regarding when statutes may be retroactively applied. And, from a common-sense standpoint, Judge Lynch also noted that a previously discontinued action is not “pending” such that FAPA’s retroactivity provision could even plausibly apply. Similarly, in MTGLQ Investors, L.P. v. Gross, Index No. 64020/2019 (Sup. Ct. Westchester Cty., Mar. 16, 2023), Judge Greenwald found that when the prior action had been voluntarily discontinued a decade ago, “there was no FAPA or law that existed to assert that the statute of limitations would not reset by a voluntary discontinuance. . . [, and f]or the voluntary discontinuance to be a factor now, takes away from Plaintiff’s substantive rights, rights vested in the prior decisions of the court.” In issuing these rulings, both judges appear to fundamentally disagree with the AG’s position that Engel deviated from longstanding New York precedent and that its holding was only operative for the brief period between early 2021 and December 30, 2022, the date FAPA was signed into law.1

As everyone awaits the Second Department’s decision in Simon, it is worth considering that this branch of the Appellate Division has frequently sided with borrowers on hot-button foreclosure issues in the past, whether in the original version of Engel that would ultimately be reversed by the Court of Appeals, or its now-reversed decision on pre-foreclosure notices in Bank of Am., N.A. v. Kessler, 202 A.D.3d 10 (2d Dept. 2018), reversed 2023 N.Y. LEXIS 162 (Feb. 14, 2023). Despite that, its precedent has not been spared from the broad reach of FAPA’s tentacles, as certain of its decisions regarding the viability of deacceleration notices, and when the six (6) month savings statute can be used and by whom, among others, are in the direct line of FAPA fire. A 1 There have also been adverse decisions on similar issues from trial-court level judges sitting in Queens County and the Eastern District of New York, and we are likely to continue seeing decisions going both ways in the coming months. See E. Fork Funding LLC v. United States Bank, N.A., No. 20-CV-3404 (AMD) (RML), 2023 U.S. Dist. LEXIS 56719, at *1 (E.D.N.Y. Mar. 23,2023) (finding that FAPA bars foreclosure brought after voluntary discontinuances of prior actions, and is not unconstitutional); Deutsche Bank Natl. Trust Co. v Dagrin, ___Misc 3d___, 2023 NY Slip Op 23103, *1 (Sup. Ct. Queens Cty. April 12, 2023) (same).

review of FAPA’s Sponsor’s Memo reflects that the Legislature does not seem to hold a number of decisions from the Second Department in particularly high regard. For example, the Memo describes Wells Fargo Bank, N.A. v. Eitani, 148 A.D.3d 193 (2d Dept. 2017), which permits a successor in interest to the original foreclosure plaintiff to avail itself of the six (6) month savings statute, as a “judicial misinterpretation.” The Memo further states that a decision like Pennymac Corp. v. Smith, 199 A.D.3d 820 (2d Dept. 2021), which found a lender’s deacceleration notice valid to stop the limitations period from running, required “clarification”—with “clarification” effectively meaning legislative reversal.

To predict the ultimate outcome of the FAPA retroactivity issue at this point might be foolhardy, but early signs from certain New York trial courts are at the very least promising. Servicers need not immediately fold in the face of FAPA, as there are battles to be won and meritorious legal positions to be advanced. Even Simon, though likely to prove very influential on FAPA interpretation, will not be the final say—all roads ultimately lead to the Court of Appeals, the same forum where lenders and servicers have scored significant victories in recent years (Engel, Kessler, among others). Certainly, a favorable ruling on FAPA retroactivity would offer some well-needed breathing room as the industry adjusts to the post-FAPA landscape moving forward.

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