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The U.S. Court of Appeals for the Second Circuit Finds That Plaintiffs Have Standing To Sue Over The Late Filing Of Loan Satisfaction Documents

by | May 10, 2021 | Litigation

May 10, 2021, New York, NY – In a groundbreaking opinion, the Second Circuit found for the first time that individuals have standing to sue under Article III of the U.S. Constitution for the violation of a legal interest created by a state statute. Edelson Lechtzin LLP Partner, Eric Lechtzin, was a co-author of the Plaintiffs’ Brief.

The Complaint alleges that Bank of New York Mellon Trust Company (“BONY”) violated New York’s mortgage satisfaction laws by failing to timely submit a notice of discharge after Plaintiffs paid off their mortgage. The mortgage satisfaction laws are clear with respect to the lender’s obligations to file a notice of discharge after a mortgage loan is paid off – they have 30 days to submit to the county recorder’s office a notice stating that the mortgage has been paid in full. Here, BONY took nearly eleven months to submit a satisfaction document to Erie county after Edelson Lechtzin LLP’s clients paid off their mortgage. Under New York’s mortgage satisfaction laws, the bank is liable to the borrower for penalties in the amounts of ($500, $1,000, and $1,500), which increases from more than 30, 60, and 90 days past the discharge date.

In late 2016, BONY filed a motion for judgment on the pleadings arguing that Plaintiffs lacked standing to sue because they did not suffer a “concrete” injury as defined by the Supreme Court in Spokeo Inc. v. Robins, 136 S. Ct 1540 (2016). This motion was denied by Judge Richard J. Arcara of the Western District of New York, on July 24, 2018. Although Judge Arcara found in Plaintiffs’ favor, he observed that in a similar case the Eleventh Circuit had reached the opposite conclusion. See Nicklaw v. CitiMortgage, Inc., 839 F.3d 998 (11th Cir. 2017). Because he considered this a “close call,” Judge Arcara certified the case for appeal so that the question of standing could be answered definitively.

On appeal, the Second Circuit observed that there was no factual dispute about BONY’s late filing of loan satisfaction document, nor was there a dispute that BONY’s inaction violated New York’s mortgage satisfaction laws.

The Court then addresses an issue of first impression in the Second Circuit, i.e., whether a state legislature can create a legally protected interest that, if violated, would permit an individual to bring a lawsuit. The Court determined that the stat can create such a legal interest, which is in accordance with other federal Courts of Appeal.

Next, the Court analyzed whether Plaintiffs’ rights under the New York mortgage satisfaction laws constitute a substantive right or a procedural right. While the distinction between substantive and procedural rights may seem esoteric, it has a profound impact on Article III standing. If a statute creates a substantive right, then a violation of the statute constitutes a “concrete” harm and confers standing to sue.

Here, the Court of Appeals concluded that the New York mortgage satisfaction laws create a substantive right. This conclusion is based on, among other things, the legislative history of the mortgage satisfaction laws, which called the failure of banks to timely record loan satisfaction documents a “serious problem.” Opinion at 19-20. However, the Court went even further and held that a violation of the mortgage satisfaction recording laws produces a “concrete” injury regardless of whether the statute creates a substantive or procedural right. Opinion at 21. This is because a material risk of concrete harm is present whenever these laws are violated.

Specifically, a lender’s delay in recording a satisfaction of mortgage “creates a cloud on the title of real estate,” which can make it difficult to sell a property. Opinion at 24. In addition, it harms the borrower because it creates the false impression that he or she still owes this debt. “This harms the borrower’s reputation by, among other things, making him look less creditworthy than he is.” Id. It can also cause a borrower to pay duplicative filing fees in order to get the discharge notice recorded. Opinion at 26. On this point, the Court quoted the Amicus Brief of the AARP Foundation and the National Association of Consumer Advocates, stating: “untimely recording of mortgage satisfactions foreseeably result[s] in significant problems, such as lowered credit scores or credit denials.” Opinion at 28 fn. 13. Thus, the statutory violation creates a real risk of harm to borrowers.

The case is Maddox v. Bank of N.Y. Mellon Tr. Co., Appeal No 19-1774, 2021 WL 1846308 (2d Cir.).