Can the Foreclosure Abuse Prevention Act Survive a Constitutional Challenge?

New York Law Journal

In February 2021, the New York Court of Appeals issued a long-awaited decision in Freedom Mortgage v. Engel, 37 N.Y.3d 1 (2021), which, among other things, held that the voluntary discontinuance of a foreclosure action constitutes an affirmative revocation of acceleration because such “discontinuance withdraws the complaint and, when the complaint is the only expression of demand for immediate payment of the entire debt, this is the functional equivalent of a statement by the lender that the acceleration is being revoked.” Id. at 31-32. This decision was reasoned upon longstanding case law governing contract interpretation. See Albertina Realty Co. v. Rosbro Realty, 258 N.Y. 472 (1932); Kilpatrick v. Germania Life Ins. Co., 183 N.Y. 163 (1905).

Engel was seen as a win for the financial services industry after years of the appellate courts and New York State Legislature imposing obstacles that delayed foreclosures or prevented lenders from foreclosing upon defaulted residential mortgage loans. Foreclosure defense attorneys and pro bono legal services labelled Engel “egregious” because they viewed it as a license for banks to bring previously time-barred cases “back to life.” See Maria Volkova, ‘Foreclosure Abuse Prevention Act’ awaits New York governor’s signature, HousingWire (May 13, 2022). As a result, the New York State Legislature drafted the “Foreclosure Abuse Prevention Act” (Act), which amends CPLR 3217 by adding a new subdivision (e) to provide that the voluntary discontinuance of an action, whether by motion, order, stipulation or notice, shall not waive, postpone, cancel, toll, extend, revive or reset the statute of limitations, unless prescribed by statute. NY State Assembly Bill A7737BNY State Senate Bill S5473D. The Act became effective immediately upon Governor Hochul’s execution on Dec. 30, 2022 and applies to all actions commenced under CPLR 213(4) and in which a final judgment of foreclosure and sale has not been enforced. A.B. A7737B, §10. As such, the Act retroactively applies to pending actions, not just actions commenced after the effective date.

Notably, the Legislature justified the passage of the Act to “overrule the Court of Appeals’ recent decision in [Engel] … .” S.B. S5473D at Sponsor Memo, Justification. In fact, the Sponsor Memo asserts there are “abuses of the judicial foreclosure process” that “[have] been exacerbated by court decisions,” and the purpose of the Act is to “correct judicial applications … and overturn those decisions that have strayed from legislative prescription and intent.” Id. at Sponsor Memo, Purpose and Intent of Bill. While the Legislature allegedly sought to “rectify erroneous judicial interpretations” (id.), the Act is flawed and will inevitably face constitutional challenges that it may not survive. As discussed below, the Act may not survive a constitutional challenge based on the Due Process Clause of the Fourteenth Amendment and the Contracts Clause.

The Act Violates Substantive Due Process Under the Fourteenth Amendment

Substantive Due Process under the Fourteenth Amendment “protects against certain government actions regardless of the fairness of the procedures used to implement them.” Bryant v. N.Y.S. Educ. Dep’t, 692 F.3d 202, 217 (2d Cir. 2012). These protections only attach to conduct that “shocks the conscious” and violates a fundamental right, i.e., a “right implicit in the concept of ordered liberty.” U.S. v. Salerno, 481 U.S. 739, 746 (1987). A right is fundamental if “it is implicit in the concept of ordered liberty, or deeply rooted in this Nation’s history and tradition.” Bryant, supra, 692 F.3d at 217. If the infringed right is fundamental, the regulation is subject to “strict scrutiny” and “must be narrowly tailored to serve a compelling government interest.” Id. If the regulation does not infringe on a fundamental right, the government action “need only be reasonably related to a legitimate state objective.” Id. In the context of retroactive legislation, the due process requirement “is met simply by showing that the retroactive application of the legislation is itself justified by a rational legislative purpose.” Pension Benefit Guaranty v. R.A. Gray & Co., 467 U.S. 717, 730 (1984).

A lender could argue that its contractual rights rise to the level of a constitutionally protected property interest because the mortgage is set for a fixed period, and the lender expects to retain the benefits of its security interest in the property for such period. See, e.g., Radwan v. Manuel, 2022 WL 17332339 (2d Cir. 2022) (holding the termination of plaintiff’s one-year athletic scholarship created a contractual right that rose to the level of a constitutionally protected property interest because it was for a fixed period and terminable only for cause, and plaintiff reasonably expected to retain the scholarship’s benefits for that set period). Further, a lender can challenge the retroactive application of the Act because the Act arguably has no limits and upsets a lender’s prior reliance on Engel to rebut a statute of limitations defense, restore previously dismissed actions and start new actions. Moreover, the Legislature indicated that the main purpose for its passage was to overturn Engel. While the Legislature may disagree with the Court of Appeals’ decision, its knee-jerk reaction to overturn Engel is not a persuasive reason for the harsh impact of retroactivity. See Holly S. Clarendon Trust v. State Tax Commission, 43 N.Y.2d 933, 935 (1978) (“[T]he apparent absence of a persuasive reason for retroactivity, with its potentially harsh effects, offends constitutional limits …”). Thus, the Act is not justified by a rational legislative purpose and arguably violates the Due Process Clause under the Fourteenth Amendment.

The Act Violates the Contracts Clause

The Contracts Clause states: “No State shall … pass any … Law impairing the Obligation of Contracts ….” U.S. Const. art. I, §10, cl. 1. The Second Circuit applies a three-part test to determine if a law or government action violates the Contracts Clause. See Melendez v. City of New York, 16 F.4th 992, 1032-47 (2d Cir. 2021). First, the Court determines whether the Act substantially impairs the party’s contract rights, meaning the Court must consider “the extent to which the law undermines the contractual bargain, interferes with a party’s reasonable expectations, and prevents the party from safeguarding or reinstating his or her rights.” Allied Structural Steel Co. v. Spannaus, 438 U.S. 234, 244 (1978). While a state may afford temporary relief from contractual obligations, it cannot “adopt as its policy the repudiation of debts or the destruction of contracts or the denial of means to enforce them.” Home Bldg. & Loan Ass’n v. Blaisdell, 290 U.S. 398, 439 (1934). Second, the Court determines whether the legislation has a significant and legitimate public purpose. See Energy Reserves Group v. Kansas Power & Light, 459 U.S. 400, 411 (1983). Third, if a legitimate public purpose exists, the Court determines whether the “adjustment of the rights and responsibilities of contracting parties is based upon reasonable conditions and is of a character appropriate to the public purpose justifying the legislation’s adoption.” Id. at 412.

Here, under the first prong, the Act substantially impairs the contractual relationship between a lender and borrower by completely extinguishing a lender’s contractual right to unilaterally revoke acceleration. See, e.g., Allied Structural Steel, 438 U.S. at 250 (identifying unreasonable impairment of contract where law, among other things, permanently changed parties’ relationship). The permanent repudiation of a lender’s right to unilaterally revoke acceleration, particularly where a contract expressly permits unilateral acceleration of a debt, substantially modifies the terms of the mortgage contract and undermines the contractual bargain.

In addition, the Act does not appear to serve a significant or legitimate purpose under the second prong. Contrary to the Sponsor Memo’s passing reference to the “societal interest … of giving repose to human affairs,” the Act does not “protect a basic societal interest.” S.B. S5473D at Sponsor Memo, Justification. It benefits only a “favored group”—seriously delinquent borrowers and the Senator who sponsored the Act—to the detriment of lenders, who have advanced substantial sums of money, not just the loan, but taxes, insurance and other hard costs to maintain the property, which benefit borrowers. See Brendan Lyons, Senate attorney facing eviction from Albany residence, Times Union (April 6, 2022). Unlike legislation passed during the Great Depression of 1929, the Act was not passed to address a broad, generalized economic or social problem. See Melendez v. City of New York, 16 F.4th at 1022-32 (discussing mortgage moratorium upheld during the Great Depression, but denying motion to dismiss Contracts Clause challenge to “Personal Liability Provisions in Commercial Leases law”). Rather, as discussed above, the Act was passed in direct response to overrule a decision by a separate branch of government. Further, while the Act may claim to “thwart and eliminate abusive and unlawful litigation tactics that have been employed by foreclosure plaintiffs to the prejudice of homeowners,” the Act does not explain what such tactics have been employed. Any delays in the foreclosure process have been the result of the courts and Legislature with the imposition of Administrative Orders (see, e.g., A.O. 548/10, amended by A.O. 431/11; A.O. 208/13) and other statutes, including CPLR 3408 (requires mandatory settlement conferences that often drag on for over a year) and RPAPL §1304 (requires the mailing of 90-day pre-foreclosure notices). Moreover, the Legislature’s reasoning that “no other civil plaintiff in this state is extended such unilateral and unfettered powers” to “unilaterally manipulate, arrest, stop, and restart the limitations period” (S.B. S5473D at Justification) is inaccurate, as courts have repeatedly held that the discontinuance of an action returns the parties to the status quo. See Loeb v. Willis, 100 N.Y. 231, 235 (1885) (“the foreclosure action was discontinued and all the proceedings therein thus annulled … by the discontinuance of the action the further proceedings in the action are arrested not only, but what has been done therein is also annulled, so that the action is as if it never had been”); Brown v. Cleveland Trust Co., 233 N.Y. 399, 406 (1922); Weldotron v. Arbee Scales, 161 A.D.2d 708, 709 (2d Dept. 1997); American Progressive Health Ins. Co. v. Chartier, 6 A.D.2d 579, 580 (1st Dept. 1958); Matter of Makowski, 72 A.D.3d 1515, 1516 (4th Dept. 2010).

Because a legitimate public purpose does not exist, courts should not reach the third prong. Regardless, the Act does not reasonably advance a legitimate public interest, and the adjustment to lenders’ rights is not reasonable because the Act permanently alters the express terms of the mortgage contract and provides financial relief to seriously delinquent borrowers at the expense of financial institutions “by destroying [their] contract expectations.” Melendez v. City of New York, 16 F.4th at 1042. As such, the Act unjustifiably interferes with lawfully contracted for expectations by eliminating the lenders’ rights, including, but not limited to, their ability to unilaterally revoke acceleration and enforce seriously delinquent debts. Notably, this would impact a significant number of mortgages, as the Fannie Mae/Freddie Mac Uniform Instrument mortgages generally provide for unilateral acceleration and therefore unilateral revocation of acceleration. Accordingly, the Act arguably violates both Substantive Due Process under the Fourteenth Amendment and the Contracts Clause. Perhaps Governor Hochul did not previously sign the Act into law, despite its passage in May 2022, because of these constitutional issues, as well as other issues that plague the legislation. Needless to say, this is not the end of the story, as the Act will be litigated.

* Nothing in this article constitutes the opinions of any of the referenced individuals or entities. In addition, the Foreclosure Abuse Prevention Act may be further amended post-publication, so please check for potential updates at NY State Assembly Bill A7737B (  

“Can the Foreclosure Abuse Prevention Act Survive a Constitutional Challenge?” by Diana M. Eng and Andrea M. Roberts was published on January 6, 2023, in the New York Law Journal.

Reprinted with permission from the January 6, 2023, edition of the New York Law Journal © 2023 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited.

For more information on FAPA, please read New York’s Foreclosure Abuse Prevention Act: What You Need to Knowpublished by Diana M. Eng and Andrea M. Roberts in the January 11, 2023, edition of the New York Law Journal.