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United States: Second Circuit Says It Can Alleged State Mortgage Satisfaction Act Violation in Federal Court
June 14, 2021
Riker Danzig Scherer Hyland & Perretti
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In a first impression case with constitutional implications, the Second Circuit found that a mortgagor had standing to bring an action under Article III of the Constitution in the Federal Court for breach by a lender of a law on the satisfaction of state mortgages, Maddox v. Bank of New York Mellon Tr. Co., NA, 2021 WL 1846308 (2d Cir. May 10, 2021). In October 2000, the Maddox sisters took out a mortgage on their Buffalo property, which was subsequently transferred to BNY Mellon. In September 2014 the property was sold and as part of that sale the loan was repaid and the debt discharged on October 5, 2014. However, BNY Mellon did not file a mortgage satisfaction with the office of the Erie County clerk until almost a year later, on September 22, 2015. This violated the New York State Mortgage Satisfaction Act, RPL 275 (1), which requires the mortgage lender to file a clearance certificate within 30 days of full debt repayment. Despite the fact that RPL 275 is state law, the Maddoxes filed a class action lawsuit against BNY Mellon in the United States District Court for the Western District of New York, seeking damages under the RPL. 275. BNY Mellon sought judgment on the pleadings, arguing, among other things, that the Maddox did not have standing under Article III of the United States Constitution because the Maddox did not suffered no real damage in connection with the alleged failure to register the satisfaction and had therefore not pleaded concrete damage. The Maddoxes argued, in turn, that the Bank’s period of non-compliance hampered access to accurate financial information about them and created a false impression about their credit status during that period, and that it has created a sufficiently real risk of other tangible and particular harm, for example, a possible failure to obtain financing for other properties or damage to personal credit. They also argued that because the New York legislature recognized the right not to suffer such prejudices by creating state law, and because such prejudices were similar to those which can be claimed at common law, the article III could be retained. The district court ruled in favor of the Maddoxes and dismissed BNY Mellon’s motion for judgment, but also certified the matter on interlocutory appeal to the Second Circuit Court of Appeals.
On appeal, the Second Circuit, in a split decision, upheld the dismissal of the pleadings judgment motion and agreed that the Maddox had standing to bring a complaint in federal court under Article III. The Court ruled that the New York law at issue created a legally protected interest in a mortgagor’s right to time discharge[ting] people to seek legal redress. The Court further concluded that the Maddox ‘allegations of potential reputational damage resulting from the false impression that their debt was still owed, and the potentially reduced creditworthiness resulting therefrom showed concrete and particular damage sufficient to confer standing. . Circuit Judge Dennis Jacobs filed a dissenting opinion in this case, stating that [b]There statute, New York creates a private right to collect an increasing cash penalty. . . up to $ 1,500. . . that’s it, and that penalty could easily be recouped in New York City Small Claims Court. Jacobs J. also noted that the statute in question did not provide for class action enforcement, and that by allowing the Maddox to proceed in Federal Court, the court facilitated a spinning of the wheels that did not advance any interest but that of the lawyer. The majority attempted to counter this dissent in their opinion, stating that despite the relatively small penalty amount, the law still seeks in part to protect mortgagors when it requires timely registration and that in what concerns dissent concerns about class actions, questions about claims should generally not be relevant to the ongoing investigation under Article III[.] Accordingly, the Court found that the Maddox had standing and upheld the district court order dismissing BNY Mellon’s motion for judgment on the pleadings.
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