Borrower Settlement Negotiations And The Statute Of Limitations

This subject finds a place in the alert not arising from some new reported case, but from the issue having been encountered of late in actual actions.  To immediately ask the underlying question, if the statute of limitations is expiring, do settlement negotiations with the borrower serve to save the lender from the defense of the statute of limitations if it then expires?  The best answer is “maybe”, and it depends upon the facts.  This can be a dangerous realm; briefly examining the controlling principles should be helpful.

Of course, the knowledgeable lender or servicer might immediately wonder why a six year statute of limitations should be under consideration at all.  What lender would wait six years to begin a foreclosure action and run afoul of the statute of limitations?  To be sure, it seems like a bizarre notion, but experience confirms that it does indeed happen, and not so infrequently.

First observe an important principle which must be recognized: when a monthly installment is delinquent, should a lender wait six years and one day to initiate a foreclosure action, the statute of limitations has expired only as to that one installment which is now more than six years old.  But mortgage holders will typically accelerate the mortgage balance some months after initial delinquencies have accrued.  Once that balance is declared due, the statute of limitations of six years begins to run on that full sum.  Starting the foreclosure action tolls the statute of limitations so presumably it is not a factor – again why lenders would wonder how it is that the statute of limitations needs to be discussed here.

The response is that sometimes files are misplaced or sold and the mortgage holder only awakens near the conclusion of some critical six year period.  More insidious is the instance where a foreclosure is begun, it drags on or is litigated for five years plus (yes it does indeed happen) and the case is then dismissed.  (That, too, can and does happen.)  At that moment, the tolling that the foreclosure action had provided is gone and the statute of limitations is now about to expire.  If a new action is not begun within the six year period, the statute of limitations will be a bar to prosecuting the case and all will be lost.

Now we have the intersection of an expiring statute of limitations and the possibility (often a likelihood) that settlement negotiations between the lender and the borrower will ensue.  We need not explore the compelling pressures to settle cases placed upon lenders by regulators, by statute and by public relations.  If in a sincere effort to settle the matter those negotiations proceed for weeks or months, or more, and then the statute of limitations has expired, can the defendant/borrower still use the statute of limitations as a defense?  And now we arrive at the maxims previously mentioned.

The general rule is that a party may be estopped (that is barred) to plead the statute of limitations where the plaintiff (that is our lender or servicer) was induced by fraud, misrepresentations or deception to refrain from timely beginning the action.  Another way to say this in case law is that a defendant can be estopped to invoke the statute of limitations where that defendant’s deceptive conduct caused the plaintiff to delay instituting suit until after the statute of limitations has expired.  But to be entitled to avail itself of estoppel, the lender/plaintiff must present real evidence showing the inducement by fraud, misrepresentation or deception to refrain from timely initiating the action – and, it must prove that the conduct engaged in by the defendant was calculated to mislead and that it was reliance on that conduct which elicited the neglect to timely commence the action.

So how does this translate into any help from settlement negotiations?  The fact is, the mere actuality that settlement negotiations were ongoing is not sufficient to create an estoppel against the statute of limitations as a defense.  Rather, for that estoppel against the defendant to arise, it needs to be shown that by engaging in lengthy settlement negotiations, the defendant intended to lull the plaintiff both into inactivity and to induce continued discussions until the statute of limitations expired.

Thus, it might be that settlement negotiations could be of a nature that it would prohibit the borrower from invoking the statute of limitations defense.  But there would be a heavy burden upon the mortgage holder to demonstrate that the borrower was somehow insincere and that the settlement negotiations were just a device to fool the plaintiff into neglecting the beginning of an action.  That won’t be easy to show.

In sum, a lender or servicer must be very careful indeed when the statute of limitations is approaching.  Settlement negotiations may be a fine idea, but the lender is best advised to begin its action and preserve the timeliness of the case.  If the settlement negotiations lead to an amenable conclusion, that is fine.  But if they fail, the lender or servicer does not want to be in a position of having to prove the nature of the defendant’s conduct as the only basis to save the timeliness of the action.  There is a serious lesson here.

Mr. Bergman, author of the four-volume treatise, Bergman on New York Mortgage Foreclosures, LexisNexis Matthew Bender (rev. 2017), is a partner with Berkman, Henoch, Peterson, Peddy & Fenchel, P.C. in Garden City, New York. He is also a member of the USFN, The American College of Real Estate Lawyers, The American College of Mortgage Attorneys, an adviser to the New York Times on foreclosure issues and writes a regular servicing column for the New York Law Journal. He is AV rated by Martindale-Hubbell, his biography appears in Who’s Who In American Law and he has been for years listed in Best Lawyers In America and New York Super Lawyers.