Acceleration: Is There No More (Graf vs.) Hope?

Most mortgages contain an “acceleration clause,” which provides that the lender has the right to accelerate the entire balance of the mortgage in the event of an uncured default. In 1930, when, following a relatively minor and inadvertent payment default, the Court of Appeals held the right to accelerate the entire debt was a covenant “neither oppressive nor unconscionable . . . fair on its face to which both parties willingly consented,” the right to accelerate appeared to be inviolate and lenders could simply refuse to allow a mortgagor to cure their default and insist on the entire debt being paid in full. (Graf v. Hope Building Corp., 254 N.Y. 1 (1930)).

In the days when Graf was decided, mortgage payments consisted of a constant principal payment plus a payment of interest that had to be calculated each month by the Mortgagor. In Graf, the interest payment was incorrectly calculated by one of his clerks, who then contacted the lender and advised that the deficiency would be corrected immediately upon the president’s return home from a business trip. When the president returned, however, the clerk forgot to do so. Since the mortgage provided a 20-day grace period, the lender waited until the 21st day of default to accelerate the mortgage and commence a foreclosure action. Although the president immediately offered to cure the default, the lender refused to reinstate the mortgage and insisted on payment of the entire balance.

At both the trial level and the Appellate Division, the foreclosure proceeding was dismissed; however, the Court of Appeals, in a divided 4-3 opinion, reversed and allowed the plaintiff to foreclose.

Despite this result, a great victory for lenders, an analysis of Graf would not be complete without discussing Chief Judge Cardozo’s dissenting opinion, which has provided fodder for later cases that digressed from the principles of the Graf holding. In his dissent, Judge Cardozo focuses heavily on the purpose of equity to “prevent [a] creditor from taking an unconscionable advantage of” the debtor. Id. at 11-12 (Cardozo, J., dissenting) (citing Console v. Torchinsky, 97 Conn. 353, 357 (1922)).

Cardozo insisted that there are times when a “hardship” emerges “that will limit the occasions upon which” the acceleration “power should be exercised.” Id. at 10. To him, “in this case, the hardship [was] so flagrant, the misadventure so undoubted, the oppression so apparent, as to justify holding that only through acceptance of the tender will equity be done.” Id. at 14.

Despite the fact that Chief Judge Cardozo was the dissenting voice in Graf, the evolving case law since 1930 has actually largely adopted Cardozo’s reasoning that “foreclosure may be denied in the case of an inadvertent, inconsequential default in order to prevent unconscionably overreaching conduct by a mortgagee”, especially where the default was not a default in payment. Karas v. Wasserman, 91 A.D.2d 812 (App. Div. 1982). A showing of “waiver, estoppel, bad faith, fraud, or oppressive or unconscionable conduct on the part of the mortgagee” may also induce a court to compel reinstatement of the mortgage and stop foreclosure proceedings. In rem Tax Foreclosure Action No. 31, Borough of Manhattan, 136 Misc.2d 533 (Sup. Ct. N.Y. Cty. 1987).

To further complicate and add confusion to the current status of a lender’s right to accelerate, effective September 1, 2008, CPLR § 3408(f) requires mortgagees to “negotiate in good faith to reach a mutually agreeable resolution, including a loan modification, if possible.”

In today’s world, most foreclosure defendants are seeking loan modifications, not reinstatement, and many have claimed that their lenders/servicers have violated CPLR § 3408 and are subject to sanctions for not negotiating in good faith as a way to pressure the lenders into granting their requests for a loan modification. However, on February 13, 2014, the Appellate Division 2nd Department decided Bank of America v. Lucido, 2014 NY Slip Op 00956, stating "Nothing in CPLR 3408 requires plaintiff to make the exact offer desired by [the] defendant[ ], and [the] plaintiff's failure to make that offer cannot be interpreted as a lack of good faith".  Thus, even with the requirements of CPLR § 3408 and the watering down of the Graf holding, the “stability of contract obligations must not be undermined by judicial sympathy.” Wells Fargo Bank, N.A. v. Meyers, 108 A.D.3d 9, 22 (App. Div. 2013), and a court “may not rewrite the contract that the parties freely entered into . . . upon a finding that one of those parties failed to satisfy its obligation to negotiate in good faith pursuant to CPLR § 3408.” Id.

So where do Graf, its subsequent case law, and CPLR § 3408 leave mortgage servicers today? While Courts may not “rewrite contracts” and the case law appears to be evolving that a refusal to accept a defendant’s loan mod request is not, in and of itself, “bad faith”, there is a significant difference between modifying a loan and allowing a borrower to cure their default.  Accordingly, lenders should be more wary of having foreclosures severely delayed, if not dismissed, or being sanctioned for their refusal to “negotiate in good faith”, should they refuse to allow a foreclosure defendant, entitled to the provisions of CPLR 3408, to reinstate the mortgage by curing the default than they would be for refusing to grant a requested loan modification.