Federal Appeals Court: Can FAPA Be Applied Retroactively in New York?

In East Fork Funding LLC v. U.S. Bank, National Association, as Trustee for Greenpoint Mortgage Funding Trust Mortgage Pass-Through Certificates, Series 2006-AR6, No. 23-659, 2024 WL 4351792 (2d Cir. Oct. 1, 2024),¹ the U.S. Court of Appeals for the Second Circuit, asked the New York Court of Appeals to decide "whether, and to what extent, [the Foreclosure Abuse Prevention Act] FAPA applies retroactively to voluntary discontinuances," noting that it "is a novel question of state law and answering it is necessary to resolve this appeal."

In doing so, the Honorable Raymond J. Lohier Jr., with concurrence from the Honorable Steven J. Menashi and the Honorable Lewis J. Liman of the U.S. District Court for the Southern District of New York, certified the following question to the New York Court of Appeals: 

Whether Sections 4 and/or 8 of the Foreclosure Abuse Prevention Act, codified at N.Y. C.P.L.R. 203(h) and 3217(e), respectively, apply to a unilateral voluntary discontinuance taken prior to the Act's enactment.

Why This Is Important

The Second Circuit's request that the New York Court of Appeals determine if FAPA can be retroactively applied represents the latest installment in a protracted battle of whether lenders in New York can file new foreclosure actions where an earlier case was filed more than six years ago.  Borrowers and their allies have asserted no, arguing that once a complaint is filed and the note has been accelerated – i.e., demanding full repayment of the loan – the six-year statute of limitations starts running, and the lender cannot unilaterally stop or reset the statute of limitations by revoking acceleration through written notice or a voluntary discontinuance. Lenders have taken the opposite position.

In 2021, the New York Court of Appeals – the state's highest court – disagreed with borrowers and instead confirmed that the lender's voluntary discontinuance of a foreclosure action stopped and reset the six-year statute of limitations. Freedom Mortg. Corp. v. Engel, 37 N.Y.3d 1, 31, 169 N.E.3d 912, 926 (2021). The ruling allowed lenders to continue to pursue foreclosure outside the six-year statute of limitations period if it took an affirmative act showing its intent to revoke acceleration of the note – i.e., discontinuance of the action – which effectively placed the parties back to their pre-acceleration positions and stopped and then reset the statute of limitations.

Taking issue with Engel, as well as other cases, the New York state legislature enacted FAPA, which in part overruled Engel and explicitly stated that a voluntary discontinuance did not stop or reset the statute of limitations and that the act "shall apply to all actions … in which a final judgment of foreclosure and sale has not been enforced." FAPA § 10 (2022 N.Y. Laws, Ch. 821, § 10).

Relevant Sections of FAPA

The Second Circuit identified three sections in FAPA that were relevant in making its decision. Section 4 provides that "[o]nce a cause of action upon [a mortgage] has accrued, no party may … effect a unilateral extension of the limitations period." FAPA § 4 (codified at N.Y. C.P.L.R. 203(h) (2022 N.Y. Laws, Ch. 821, § 10)). Section 8 provides that "the voluntary discontinuance of [an action on a mortgage] … shall not … reset the limitations period to commence an action." FAPA § 8 (codified at N.Y. C.P.L.R. 3217(e)). Section 10 provides that "[t]his act shall take effect immediately and shall apply to all actions commenced on [a mortgage] in which a final judgment of foreclosure and sale has not been enforced." FAPA § 10.

Arguments Asserted

Appellant U.S. Bank – in its role as trustee – argued that:

1. as a matter of statutory interpretation, FAPA does not apply retroactively to a voluntary discontinuance that occurred prior to FAPA's enactment
2. such a retroactive application of FAPA would violate the Contracts Clause, the Takings Clause and the Due Process Clause of the U.S. Constitution
3. if FAPA does not apply, then the statute of limitations for bringing a foreclosure action did not run out, because the 2010 and 2011 actions were properly discontinued under Engel

Appellee East Fork responded that:

1. as a matter of statutory interpretation, FAPA applies retroactively to voluntary discontinuances occurring before its enactment
2. retroactive application of FAPA would not be unconstitutional
3. even if FAPA does not apply, the statute of limitations still ran out under the lender’s theory, because the 2010 and 2011 actions were not properly discontinued under Engel

Court's Determination: Certification Is Warranted

The Second Circuit noted that it has discretion to certify a question to the New York Court of Appeals "[w]henever it appears … that determinative questions of New York law are involved in a case pending before [our] court for which no controlling precedent of the Court of Appeals exists." 22 N.Y.C.C.R.R. § 500.27(a).

The Second Circuit noted a number of factors that supported its decision to certify a question to the New York Court of Appeals.

1. The Second Circuit noted that "the New York Court of Appeals has not addressed FAPA's retroactive scope, and the rulings of the intermediate appellate courts are insufficient to predict how the Court of Appeals would decide the issue." Fork Funding LLC, 2024 WL 4351792, at *6.
2. The Second Circuit found that the statute's plain language does not dictate the answer, noting that "even if FAPA applies retroactively to all pending actions involving mortgage contracts signed before the statute's enactment, it is not clear whether it must also apply to a noteholder's voluntary dismissal – taken before FAPA's enactment – of a foreclosure action that itself is no longer pending." at *7.
3. The Second Circuit held that "FAPA's interpretation has implications for the New York mortgage market, New York property owners, and New York state law governing retroactive application of statutes" and, therefore, the New York Court of Appeals is better situated to address these larger public policy questions. at *6.
4. The Second Circuit held that answering the certified question is necessary to resolve the pending appeal.
5. Finally, the Second Circuit held that certification is particularly appropriate because several New York courts have already addressed the question of FAPA's retroactivity, and it is expected that the Court of Appeals will eventually render a decision on the issue.

Based on this reasoning, the Second Circuit certified the question of "[w]hether Sections 4 and/or 8 of the Foreclosure Abuse Prevention Act, codified at N.Y. C.P.L.R. 203(h) and 3217(e), respectively, apply to a unilateral voluntary discontinuance taken prior to the Act's enactment" to the New York Court of Appeals. Id. at *7.

Stay tuned for further developments.

Notes

¹ US Bank N.A.'s role in this matter is that of trustee, as opposed to in its individual capacity.