Welcome to Brooklyn – What a Foreclosure Mess
Under New York law, the statute of limitations in a mortgage foreclosure action is six years, which begins from the date of acceleration of the loan. A mortgage loan may be accelerated either via an acceleration letter sent to the borrower or through the commencement of a foreclosure action in which acceleration of the loan is set forth in the Complaint. Acceleration will occur whether or not the notice has been properly served. However, there are a number of events and actions that may serve to toll and/or extend the statute of limitation period.
General Obligations Law § 17-101 provides “an acknowledgment or promise contained in writing signed by the party to be charged thereby is the only competent evidence of a new or continuing contract whereby to take an action out of the operation of the provisions of limitations of time for commencing actions under the [CPLR]”
General Obligations Law § 17-105 (1) “a promise to pay the mortgage debt, if made after the accrual of a right of action to foreclose the mortgage …, either with or without consideration” makes the time limited for the commencement of the action “run from the date of the promise.”
Therefore, executing a loan modification, pursuing a short sale, or just making a single payment would push forward the start date of the statute. General Obligations Law § 17-101 implies that any acknowledgement of the debt by the borrower resets the statute of limitations, which can include language within a Deed transfer that clearly acknowledges the debt.
Lawyers in Brooklyn are having some success discharging mortgages of record based on the statute of limitations. In these cases, the trustee and servicer legitimately failed to foreclose on the property within six years of acceleration and the court discharged the debt. In many cases, the statute of limitation is used as an affirmative defense preventing a foreclosure action. However, some entrepreneurial individuals are purchasing seriously distressed properties at below market prices, waiting for the expiration date, and then engaging with a legal foreclosure specialist to sue the trustee and have the court declare the mortgage discharged. In these cases, the statute is used as an independent claim to declare the mortgage canceled and discharged. The distressed borrower gets some easy cash, the entrepreneur makes a nice profit and the lawyers get their hourly fees. The only loser is the RMBS investor. When there is no valid legal defense to the statute of limitation claim, lawyers have argued that the formation of the LLC was intended to defraud the trustee (and trust) and unjustly enrich themselves and the mortgagor. Further, they argued that the LLC is not a good faith purchaser with no legitimate cause of action and therefore cannot procced on the lawsuit. We are waiting to see how the court rules.
To fully appreciate the litigation mess that is occurring within the chambers of the Supreme Court of New York, County of Kings, we will walk you through some of these cases. In many of these cases, it is disappointing to learn how the courts are protecting the wrong party. Unfortunately, in some situations, the trustee and/or servicer failed to do their job providing the opportunity for others to profit at the expense of the RMBS investor.
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