Law360 (July 22, 2020, 2:09 PM EDT) --
In this article, we discuss how to determine when the statute of limitations starts to run, arguments a loan servicer may make to challenge the application of a statute of limitations bar, and analyze the risks to lenders, loan servicers and debt collectors when they attempt to collect possibly time-barred debt.
Determining when the clock starts to run is not always clear.
In New York, an action to foreclose a mortgage may be brought to recover unpaid sums which were due within the six-year period preceding the commencement of the action. While seemingly straightforward, when the statute of limitations begins to run is a question that has been debated.
New York courts have held that an election to accelerate requires some affirmative action that informs the borrower that the entire outstanding debt is immediately due. Notice of acceleration must be "clear and unequivocal."
Whether a lender has effectively exercised an acceleration option, and what effect that has on the statute of limitations to foreclose, is a question of fact unique to each case. Filing a foreclosure complaint, for example, may be a sufficient affirmative act to accelerate a debt. However, whether a default notice accelerates a debt frequently will depend on the specific language used in the notice.
Lenders have challenged whether filing a foreclosure complaint accelerates the entire mortgage debt when the mortgage is a standard Fannie Mae or Freddie Mac mortgage contract. This issue is currently making its way through the New York appellate courts.
The argument — which has been accepted and affirmed by the highest courts in Florida — is premised on a provision in the standard Fannie Mae mortgage contract which provides the right to cure payment defaults and reinstate the mortgage loan prior to maturity by repaying only past-due installment payments, even after a demand for immediate payment in full has been made.
Even if a foreclosure complaint "elects to declare immediately due and payable the entire unpaid balance of principal," the borrower retains the right to bring the mortgage loan current by paying only the amounts past due. Thus no acceleration occurred; the statute of limitations continues to run on each missed payment, not on the full mortgage loan principal.
Even once the statute of limitations begins to run, complications continue.
Even if a loan was previously accelerated, arguments remain that the statute of limitations has not expired for commencing a foreclosure action. Servicers may determine, for example, that there was a deacceleration of the debt.
Courts have held that a lender may revoke a prior acceleration through a deacceleration notice and contemporaneous conduct reflecting that the loan was returned to installment status, such as monthly statements thereafter sent to the customer and voluntarily discontinuing a pending foreclosure action.
If the election to accelerate is revoked within the relevant limitations period, the statute of limitations ceases to run, and a second attempt to collect the debt after such deacceleration would not be time-barred.
A borrower's partial payment toward a mortgage debt may also renew the statute of limitations in a foreclosure action. As the New York Supreme Court stated in U.S. Bank NA v. Martin:
The New York appellate divisions are split on the issue of whether payments made pursuant to a trial loan modification plan constitute such an absolute and unqualified acknowledgment sufficient to renew the statute of limitations. In Wells Fargo Bank NA v. Grover, the Third Department found that the borrower's payments made pursuant to a Home Affordable Mortgage Program trial plan renewed the statute of limitations on a foreclosure action.
The Second Department declined to follow Grover in Nationstar Mortgage LLC v. Dorsin, and reached the opposite conclusion, reasoning that:
A lender must also look at whether the statute of limitations had been tolled, thus extending the timeframe during which a claim can be filed. A borrower's bankruptcy filing or military service may toll the running of the statute of limitations.
But, the question of tolling is particularly relevant now in the midst of the COVID-19 pandemic. On March 20, Cuomo issued Executive Order No. 202.8, which, among other things, directs that:
Cuomo has since extended the tolling period dictated by Executive Order 202.8 four times: first to May 7, then June 6, then July 6, then to Aug. 5. In total, the statute of limitation has been extended by 138 days — the number of days between March 20 and Aug. 5.
The interaction between this tolling period and the complicated analysis of how the statute of limitations runs in cases attempting to collect mortgage debt have not yet been addressed in the courts, but there is sure to be litigation over these questions in the near future, as there has been in the past when limitations periods were tolled due to natural disasters.
Even when the statute of limitations bars an action to collect the mortgage loan principal, it may not bar an action to collect on advances made by the lender for taxes and insurance because the borrower's obligation to pay those did not arise until the lender or loan servicer actually advanced money to pay for them.
Moreover, if a timely commenced foreclosure action is terminated, a lender may be able to rely on New York Civil Practice Law and Rule 205(a), known as the New York savings clause, to commence a new action, even if the statute of limitations has since expired.
The savings clause provides that when a timely action is terminated, the same claims can be brought in a new action within six months, even if the applicable statute of limitations has meanwhile expired, so long as the manner of termination was not one of the four identified types.
While there is uncertainty about when a debt is time-barred under New York law, there is certainty that regulators and the courts will continue to scrutinize collection efforts following the current pandemic. Lenders risk loss of liens and potential liability if they seek to collect debt that is arguably time-barred.
As we are about to see a wave of new mortgage defaults, creditors and debt collectors will need to stay on top of debt collection efforts, track evolving law on acceleration and defenses to a statute of limitations bar, and carefully analyze the facts of each case to evaluate whether a debt can be pursued.
Allison Schoenthal is a partner and head of the consumer finance litigation practice at Hogan Lovells.
Robin Muir is a senior associate at the firm.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
 New York state and federal courts have found that a claim to foreclose on a Federal Housing Authority loan is not subject to any state-imposed statute of limitations. See, e.g., Windward Bora, LLC v. Wilmington Savings Fund Society, FSB , Civ. No. 1:18-CV-402 (DJS), 2019 WL 4736236, at *6 (N.D.N.Y. Sept. 27, 2019); Fleet Nat. Bank v. D'Orsi, 26 A.D.3d 898, 899-900 (N.Y. App. Div. 4th Dep't 2006); Long Island Realty Grp. VII v. U.S. Dep't of Hous. & Urban Dev. , 2005 WL 2179687, at *4 (E.D.N.Y. Sept. 9, 2005). In all other cases, a debt cannot be collected if the statute of limitations has expired.
 See, e.g., Wells Fargo Bank, N.A. v. Burke , 94 A.D.3d 980, 982, 943 N.Y.S.2d 540, 542 (N.Y. App. Div. 2d Dep't 2012).
 The First and Fourth Departments are expected to address this argument in short term. See, e.g., Ditech Fin. LLC v. Rector 70 LLC, N.Y. Cnty. Index No. 850330/2018 (1st Dep't appeal pending); Berdoe v. Fed. Nat'l Mortg. Ass'n, Bronx Cnty. Index No. 24911/2017E (1st Dep't appeal pending); Squitieri v. Fed. Nat'l Mortg. Ass'n, 4th Dep't Case Nos. CA 18-02343, 19-00064 (awaiting decision by 4th Dep't). The Second Department, however, rejected this argument in Bank of New York Mellon v. Dieudonne , 171 A.D.3d 34, 96 N.Y.S.3d 354 (N.Y. App. Div. 2d Dep't 2019). Although the Court of Appeals denied the plaintiff's motion for leave to further appeal in Dieudonne, the First and Fourth Department appeals will present additional opportunities to present this argument to the Court of Appeals.
 Gomez v. Household Fin. Corp., III , 688 F. App'x 680, 683-84 (11th Cir. 2017); Bartram v. U.S. Bank Nat'l Ass'n , 211 So. 3d 1009, 1019 (Fla. 2016).
 See, e.g., Milone v. U.S. Bank Nat'l Ass'n , 164 A.D.3d 145, 83 N.Y.S.3d 524 (N.Y. App. Div. 2d Dep't 2018).
 U.S. Bank N.A. v. Martin , 144 A.D.3d 891, 892-93, 41 N.Y.S.3d 550 (quoting Lew Morris Demolition Co. v. Board of Educ. of City of N.Y. , 40 N.Y.2d at 521, 387 N.Y.S.2d 409).
 165 A.D.3d at 1543, 86 N.Y.S.3d at 302.
 180 A.D.3d at 1057, 119 N.Y.S.3d at 439 (internal citations omitted).
 See, e.g., Lubonty v. U.S. Bank Nat'l Ass'n , 159 A.D.3d 962, 74 N.Y.S.3d 279 (N.Y. App. Div. 2d Dep't 2018); 50 U.S.C.A. App. § 526(a).
 See L.K. Land Corp. v. Gordon , 1 A.D.2d 699, 700, 147 N.Y.S.2d 463, 465 (N.Y. App. Div. 2d Dep't 1955), rev'd on other grounds, 1 N.Y.2d 465, 154 N.Y.S.2d 32 (N.Y. 1956)).
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