Ruling reshapes foreclosure challenges in New York

A court's ruling in a closely watched case involving New York's six-year statute of limitations puts pressure on related parties to confirm that the entity initiating a foreclosure lawsuit is a noteholder with standing.

The New York Court of Appeals ruled in Article 13 LLC vs. Ponce De Leon Federal Bank that an interpretation of an estoppel provision in section 7 of the Foreclosure Abuse Prevention Act can't be used to argue that the note was not validly accelerated in a prior lawsuit.

"The industry needs to coordinate to ensure that the suit is commenced by a plaintiff with standing," said Adam Swanson, a financial service litigation and bankruptcy partner at law firm McCarter & English, noting that this can be tricky as the note changes hands and moves through the secondary market, especially when it's securitized.

The ruling written by Chief Justice Rowan Wilson also addressed the law's retroactivity, finding the application to loans that predated FAPA to be in line with the legislature's intent and not to be in violation of the state constitution's due process clause.

Jacob Inwalk, director of litigation and economic justice at Legal Services NYC, said in a press release that the decision is "a huge win for New York homeowners who, for too long, have been preyed upon by lenders working to manipulate the statute of limitations."

FAPA impacts many borrowers and the industry because New York is a financial center and plays a central role in much of the securitized market. (The statute of limitations does not run against government loans but does impact Fannie Mae/Freddie Mac and private markets.)

The retroactive interpretation of FAPA creates a conflict with pre-existing law, which allowed a noteholder to de-accelerate within a six-year statute of limitations.

Other legal questions the ruling doesn't answer

The lawsuit will next head back to the U.S. Court of Appeals for the Second Circuit, where challenges to the federal constitution asserted in the case will be reviewed.

A footnote to the ruling indicates it does not extend to situations involving where "true stranger" acts without standing.

"Judge Wilson effectively says, 'Well, we haven't decided that. Maybe that will happen someday and we'll decide it later,'" Swanson said. "My guess would be that it might be an unusual circumstance."

Another recent ruling on New York foreclosure law

The New York Court of Appeals also ruled recently on another FAPA case called Van Dyke v. U.S. Bank NA, in which an opinion written by Judge Madeline Singas upheld retroactivity and dismissed a challenge based on the federal constitution's contracts and due process clauses.

One difference worth noting in that case is that, in addition to looking at estoppel provisions similar to those in the Ponce De Leon case, it gave a nod to unresolved voluntary discontinuance issues calling for interpretations of two other sections of FAPA, Swanson said.

"They determined those sections were intended to apply retroactively, but in that case, because the voluntary discontinuance was filed after the statute of limitations ran, the lender failed to establish a vested right required for the analysis under the due process clause," he said.

The attorneys involved in that state case could file a petition for writ of certiorari with the Supreme Court. That court declined to hear another FAPA case called US Bank National Association Trustee v. Cassandra Fox, but it views individual lawsuits on their own merits, so that would not necessarily influence the outcome in the event there was a petition to hear Van Dyke.