The U.S. Court of Appeals for the Second Circuit recently held that a borrower had Article III standing to sue in federal court for statutory damages from a mortgagee for its alleged violations of New York’s mortgage satisfaction recording statutes.
In so ruling, the Second Circuit held that:
- State legislatures may create legally protected interests whose violation supports Article III standing, subject to certain federal limitations.
- The mortgagee’s alleged failure to record the plaintiffs’ mortgage discharge created a material risk of concrete and particularized harm to the plaintiffs by providing a basis for an unfavorable credit rating and reduced borrowing capacity.
- These risks and interests, in addition to that of clouded title, which an ordinary mortgagor would have suffered (but plaintiffs did not), are similar to those protected by traditional actions at law.
- The plaintiffs could pursue their claims for the statutory penalties imposed by the New York Legislature, as well as for other relief.
A copy of the opinion in Maddox v. Bank of N.Y. Mellon Tr. Co. is available at: Link to Opinion.
The trial court held that the plaintiffs had Article III standing to seek statutory damages from a mortgagee for its violations of New York’s mortgage satisfaction recording statutes. N.Y. Real P. Law (“R.P.L.”) § 275, N.Y. 20 Real P. Actions & Proc. L. (“R.P.A.P.L.”) § 1921.
These statutes require mortgage lenders to record satisfactions of mortgage (also known as “certificates of discharge”) within 30 days of the borrower’s repayment. A failure renders the lender liable to the mortgagor for increasing statutory damages in amounts dependent on the lateness of the ultimate filing; for a 90-day delay, the penalty is $1,500. R.P.L. § 275(1); R.P.A.P.L. § 1921(1).
Here, the defendant mortgagee allegedly did not record the satisfaction of the plaintiffs’ mortgage until nearly 11 months after full payment was received and almost 10 months after the law required. Therefore, the plaintiffs sued for the statutory penalty and to represent a class of similarly wronged borrowers.
After denying the mortgagee’s motion for judgment on the pleadings, the trial court certified for interlocutory appeal the question of whether the plaintiffs had Article III standing to sue the mortgagee for statutory damages and other relief. The Second Circuit accepted the certification.
The Second Circuit first held that the invasion of interests protected by state law can support Article III standing. The Court determined that if a statute protects against a harm bearing a “close relationship” to a harm traditionally recognized at common law, the harm alleged due to a violation of that statute constitutes a concrete injury in fact sufficient to establish Article III without any additional showing. Spokeo Inc. v. Robins, 136 S. Ct 1540, 1549 (2016).
In R.P.L. § 275 and R.P.A.P.L. § 1921, the New York State Legislature obligated lenders to timely file mortgage satisfactions and gave borrowers rights to claim a penalty payment in designated amounts for the mortgagee’s failure to comply.
The Court held that the intangible rights the mortgage-satisfaction-recording statutes seek to protect and the concurrent injury from a mortgagee’s violation of the statutes, i.e., the delay in recording a mortgage satisfaction, have “a close relationship to [multiple] harm[s] that ha[ve] traditionally been regarded as providing a basis for lawsuit in English or American courts.” Id. Specifically, the Court concluded that the interests are similar to those in common law cloud of title and defamation suits.
The Second Circuit next decided that the plaintiffs’ complaint supported a plausible inference that the bank’s violation both (1) harmed the plaintiffs’ financial reputations during the nearly 10-month period of the mortgagee’s noncompliance with the 30-day filing deadline, and (2) created a material risk of particularized harm to them during that period by impairing their credit and limiting their borrowing capacity. The Court also noted that these interests are protected by the state’s statutory timely filing requirements and its imposition of a penalty payment obligation on the noncompliant bank to the wronged borrower.
Furthermore, the Court reasoned that, even if it were to characterize the satisfaction-of-mortgage statutes as “procedural” (as the trial court did) rather than substantive, it would still hold that the plaintiffs established a concrete injury for Article III purposes. Although Spokeo held that “a bare procedural violation, divorced from any concrete harm” does not satisfy the injury-in-fact requirement of Article III, “the violation of a procedural right granted by statute can be sufficient in some circumstances to constitute injury in fact,” such as when the violation presents a “material risk of [concrete] harm.” Id. at 1549-50.
The Second Circuit found that, during the mortgagee’s alleged 10-month delay in recording the discharge of more than $50,000 in debt, there was in the Court’s view a real risk of material harm to the plaintiffs of the type that the legislation would be expected to protect against. Specifically, the Court inferred that the delay adversely affected the plaintiffs’ credit during the 10 months, making it difficult to obtain financing had they needed it in an emergency, and left a false public record of indebtedness even if they had not attempted to borrow.
Because it held that a mortgagee’s violation of the mortgage-satisfaction-recording statutes by itself gives rise to a risk of real harm, the Second Circuit also concluded that a mortgagor need not allege any further harm to meet the concrete injury requirement. Regardless, the Court also decided that the plaintiffs in fact suffered impaired credit and a loss in financial reputation during those 10 months in which their discharge unlawfully went unrecorded.
Accordingly, considering these particularized actual harms and risks of harm and their general recognition in the common law, the Second Circuit held that the plaintiffs had Article III standing to pursue their claims.
Therefore, the Court affirmed the trial court’s judgment and remanded the case for further proceedings consistent with its ruling.