Judges' questions may hint at limits to FAPA's retroactivity

New York Court of Appeals judges' responses to recent arguments in a closely-watched Foreclosure Abuse Prevention Act case suggest they could take a narrower view of the law's retroactivity but are less open to broad constitutional challenges to it.

Recent questions from the New York judges focused more on case details than the constitutional issues, said Brian McGrath, partner at Hinshaw and Culbertson. McGrath is on the legal team representing mortgage and banking groups in an amicus brief filed in the case.

"It appeared as though that was a challenging bench for the bank's counsel to deal with out of the gate in trying to help the court understand why expansive application of FAPA was improper under state constitutional provisions," he said.

The industry is tracking junior lienholder Article 13 LLC's lawsuit against multiple entities closely because it may impact broader interpretations of FAPA's retroactivity, which some see as justifying dismissals of foreclosures on older loans when the cases involved were started under an earlier statute of limitations.

"If I'm on the foreclosure defense side of the industry, I think I would like how that argument seemed to play out," McGrath said, referring to attorneys who seek to block default actions. 

"It seems as though the court was prepared to give the legislature full deference, they did not seem open to re-engage in discussion of the Engel decision, which is what precipitated FAPA," he added.

Arguments over the legislature's use of estoppel

For entities that pursue foreclosures to make good on unpaid loans, there might be "some optimism that there could be a ruling that would be narrower" in a "quiet title" action like Article 13 v. Ponce de Leon, in which a dispute over property claims exists, McGrath said.

That narrower view could be taken if the judges accept some arguments around the use of the term "estoppel" in the case, which involves a situation that arose when Article 13 went to cancel a loan encumbering a property, according to the amicus brief. 

"Estoppel is applied to a party that has been charged with having taken a different position or having done something previously that now prevents them from taking a different position, and I think that was the most interesting thing about the argument that I took away," McGrath said.

In FAPA, which is aimed at closing what some consumers and others see as loopholes in the statute of limitations, estoppel appears to be positioned to stop a foreclosing entity from arguing that earlier efforts to the same end weren't valid in order to extend the timeline.

But the brief from the Mortgage Bankers Association and other groups pointed out that "by creating an estoppel against mortgages, FAPA leaves mortgagees without any recourse, despite suffering injury to their lien as a result of the unauthorized conduct of third parties with no connection to the loan."

Chief Judge Rowan Wilson had questions around the legislature's use of estoppel in the law during the case's arguments late last week, McGrath said. Associate Judge Michael Garcia did too, McGrath said.

Questions came up around whether estoppel is applicable to a situation where another party that does not have a right to foreclose proceeds with one, according to the online video of the case arguments last week. 

Central to Article 13's allegation that the statute of limitations had expired is a contention that a servicer Central Mortgage Co. accelerated the debt in 2007. Whether CMC held the note when foreclosure began and had a right to foreclose is in question, according to the amicus brief. 

The court also heard a Van Dyke v. US Bank case which includes FAPA concerns the same day as the Article 13 v. Ponce de Leon case, but the arguments and questions around it had fewer broad takeaways for the industry, McGrath said.

What's next for court review of FAPA's retroactivity

The Supreme Court turned down a petition to consider a FAPA case called US Bank National Association, Trustee v. Cassandra Fox, and the New York judges did not appear receptive to Article 13 v. Ponce de Leon's constitutional arguments, but others could still review them. 

McGrath anticipates the New York Court of Appeals will be relatively quick to move Article 13 v. Ponce de Leon forward.

"The Ponce de Leon case is a case that they agreed to hear after the Second Circuit certified it, so they know the Second Circuit is waiting on their ruling to continue that case in federal court. So they tend to move a little quicker," he said.

The MBA, American Bankers Association and their state affiliates asserted conflicts with protections for due process and contracts, and also with the "takings" clause in the U.S. Constitution in their amicus brief. Hinshaw & Culbertson also asserted conflicts with equivalents of the due process and "takings" clauses in the New York Constitution on their behalf.