Handle Acceleration Clauses With Care
If you look at your mortgage notes, chances are they include an acceleration clause stating that in the event a mortgage payment is overdue, a borrower is in default and the entire mortgage becomes payable. These so-called acceleration clauses still exist, even though the courts continue to chip away at their efficacy.
(Another clause you might see is one stipulating that an unauthorized transfer of residential property also accelerates payment of the mortgage. Interpreted literally, a child who receives mortgaged property upon the death of his parents would immediately have to pay the entire mortgage. Federal law has, however, long since invalidated these clauses as applied to successors in interest. 12 U.S.C.A. § 1701j-3)
The latest example of this trend is a case recently decided in Queens (B & H Caleb 14 LLC v. Mabry). The facts in the case are fairly straightforward. Karen C. Mabry took out a mortgage to buy property in Queens from Greenpoint Mortgage. Under the terms of the mortgage, all payments had to be made by the first of each month. The mortgage notes stated that in the event payment is late by at least ten days, a late fee of 5% of the total monthly payment due could be charged. It further stipulated that the failure to make this payment constituted a default for which the entire remaining mortgage could become payable. Karen Mabry did not send her April 1 payment until April 8 and it was not received by the Bank’s attorney until April 14. The amount she sent did not include a late fee of $118.
B & H, which assumed the mortgage from Greenpoint, brought a lawsuit seeking to accelerate the entire mortgage and foreclose on the property. Interestingly, the Court noted that there is little case law in New York analyzing the validity of mortgage acceleration clauses. In 1991, the Third Department, which has jurisdiction over much of Eastern New York, stated that the law is clear that when a mortgagor defaults on loan payments, even if only for a day, the mortgagee may accelerate the loan, require that the loan balance be rendered, or commence foreclosure proceedings.
Conversely, the Court cited with approval cases in which a “mortgagee’s opportunistic bad-faith in accepting payment of a check and subsequently seeking to foreclose on the property was considered unconscionable conduct.”
As a result, the Court concluded that in the event Ms. Mabry could show that her late payment was the result of an inadvertent mistake that she intended to cure as soon as she realized what she had done, she could prevent foreclosure notwithstanding the plain language of the mortgage. The case underscores just how radically foreclosure law has evolved in the last decade.
As I mentioned in a previous blog, a veteran attorney once told me that the only question in foreclosure cases used to be whether or not a homeowner had made his payment on time. As this case demonstrates, the law is now a lot more complicated.
Have a nice weekend folks, I’m taking tomorrow off.