Second Circuit Reverses Judgement Against Mortgagee In De-Acceleration Case

• Published date: 08 December 2021
• Subject Matter: Finance and Banking, Litigation, Mediation & Arbitration, Charges, Mortgages, Indemnities, Financial Services, Trials & Appeals & Compensation
• Law Firm: Riker Danzig Scherer Hyland & Perretti
• Author: Mr Michael O'Donnell, Michael Crowley, Desiree McDonald and Kevin Hakansson

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. 53^rd 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...