Second Circuit Withdraws Decision In Wake of TransUnion v. Ramirez and Holds That Plaintiffs Seeking To Form Class For Unrecorded Mortgage Discharges Lack Article III Standing

On November 17, 2021, on its review en banc of its prior decision, the United States Court of Appeals for the Second Circuit changed its course in Maddox v. The Bank Of New York Trust Company, N.A., docket number 19-1774, and held that the plaintiffs’ allegations “fail to support their Article III standing, and that they may not pursue their claims for statutory penalties imposed by the New York Legislature in federal court.”  Notably, the rehearing decision was issued by Judge Dennis Jacobs, who issued the sharp dissent of the panel’s May 10, 2021 decision.

The changed ruling is credited to the Supreme Court of the United States’ recent decision in TransUnion LLC v. Ramirez, __ U.S. __ 141 S. Ct. 2190 (2021), which widely curtailed standing in federal courts for legislatively-memorialized injuries and claims for statutory damages; the punchlines of Ramirez are “no concrete harm; no standing,” and “injury in law is not an injury in fact.”

Based on Ramirez, the en banc panel held that the Maddoxes did not suffer a concrete harm, and thus lacked standing in federal court.  The Second Circuit held there was no need to determine whether distinctions exist between rights created by state or federal legislative bodies, or whether the statutes at issue (New York Real Property Law (“RPL”) § 275 and Real Property Actions and Proceedings Law (“RPAPL”) § 1921) are “substantive” or “procedural,” because Ramirez “eliminated the significance of such classifications.”  The Second Circuit noted that its May 10, 2021 decision relied significantly on the analysis of “substantive” and “procedural” laws, but Ramirez reduced the Second Circuit’s contemplation to a  mere “preoccupation.”

So, instead of focusing on generalized injuries contemplated by the statutes, the panel shifted its analysis to injuries suffered specifically by the Maddoxes themselves.  First, Judge Jacobs noted that the Maddoxes did not allege that they suffered any injury for duplicative filing fees or having a cloud on title, and held they could not because their property was sold before their mortgage was satisfied.

Second, Judge Jacobs noted that the Maddoxes did not allege they suffered any reputational harm, and held that the public record “so far as is known, . . . was read by no one,” hence it was “not analogous to the dissemination of the credit reports” in Ramirez.  Describing the distinction as “critical,” the en banc panel held that without the publication of a defamatory writing, “the Maddoxes may have suffered a nebulous risk of future harm during the period of delayed recordation—i.e., a risk that someone (a creditor, in all likelihood) might access the record and act upon it—but that risk, which was not alleged to have materialized, cannot [] form the basis of Article III standing.”

Third, in a similar vein to the lack of materialized defamation, Judge Jacobs rejected the Maddoxes’ contention that “the Bank’s delay adversely affected their credit . . . making it difficult to obtain financing had they needed it in an emergency or for a new home,” as an unmaterialized purported risk that is incapable of conferring standing.

Fourth, with respect to one of the plaintiff’s claims that she suffered emotional and psychological distress, the en banc panel held that they “were not the subject of allegations in the complaint and, in any event, are implausible,” because “she offers no reason why the delayed recordation would cause ‘great stress, mental anguish, anxiety, and distress.’”  “A perfunctory allegation of emotional distress, especially one wholly incommensurate with the stimulant, is insufficient to plausibly allege constitutional standing,” and “[e]ven if it were sufficient, ‘it is extremely unlikely that such an allegation would be typical of the class.’”  And with respect to claims for opportunity costs, Judge Jacobs noted that the satisfaction was recorded three months before the Maddoxes filed the complaint claiming it was unrecorded.

In closing, Judge Jacobs echoed a sentiment from his sharp dissent in the May 10, 2021 decision—that the Maddoxes should follow through on their individual claim in state court.  “This is a small claim, in a fixed amount, amenable to a recovery without dispute—and probably without counsel or fees.  It is hard to imagine that a bank would press the issue to litigation.”

For the plaintiffs’ bar, Judge Jacobs offered guidance: “[t]o the extent that [absent class members] (or their lawyers) prefer to form a class and bring their claims in federal court, they must come prepared to prove that they suffered concrete harm due to the Bank’s violation of the relevant statutes.”

De-Acceleration Notices, Post-Engel

In the wake of the Court of Appeals’ landmark decision in Freedom Mortgage v. Engel, 2021 NY Slip Op 01090 (2021), the Second Department has subsequently followed the guidance in Engel in modifying a lender’s burden in rebutting statute of limitation challenges.  In Engel, the Court of Appeals, reversing contrary Second Department holdings, held that a voluntary dismissal, by itself, constituted an affirmative act to revoke a lender’s acceleration of a mortgage loan, thus resetting the six-year statute of limitations to commence a mortgage foreclosure action.  Now, the Second Department, in U.S. Bank v. Papanikolaw, __ A.D.3d __ (2d Dept. 2021), has held that the transmittal of a de-acceleration letter to the borrower, without more, similarly constitutes an affirmative act to revoke a lender’s acceleration.

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Supreme Court Declares CDC Eviction Moratorium Unconstitutional

Late Thursday evening, the Supreme Court of the United States issued an opinion to reinstate a court order blocking the Centers for Disease Control and Prevention’s (“CDC”) nationwide moratorium on residential evictions.

In March 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security Act, which, in part, imposed a 120-day eviction moratorium on properties subject to federally backed mortgage loans.  Congress did not renew the eviction moratorium after its 120-day term.  Instead, the CDC promulgated a more expansive administrative eviction moratorium covering all residential properties nationwide and imposed criminal penalties on violators.  The CDC’s moratorium was originally scheduled to expire on December 31, 2020; however, subsequent renewals extended the moratorium through October 3, 2021.

To support its actions, the CDC relied on the statutory provision of § 361(a) of the Public Health Service Act, which provides:

The Surgeon General, with the approval of the [Secretary of Health and Human Services], is authorized to make and enforce such regulations as in his judgment are necessary to prevent the introduction, transmission, or spread of communicable diseases from foreign countries into the States or possessions, or from one State or possession into any other State or possession. For purposes of carrying out and enforcing such regulations, the Surgeon General may provide for such inspection, fumigation, disinfection, sanitation, pest ex-termination, destruction of animals or articles found to be so infected or contaminated as to be sources of dangerous infection to human beings, and other measures, as in his judgment may be necessary.

See 58 Stat. 703, as amended, 42 U.S.C. § 264(a).

In a 6-3 decision, the Supreme Court found the CDC’s reliance on § 361(a) to be unconstitutional.  The Supreme Court reasoned that “the CDC has imposed a nationwide moratorium on evictions in reliance on a decades-old statute that authorizes it to implement measures like fumigation and pest extermination.  It strains credulity to believe that [§ 361(a)] grants the CDC sweeping authority that it asserts.”  The Supreme Court found that the CDC misconstrued the scope of its authority under § 361(a) and that this statutory provision “is a water-thin reed on which to rest such sweeping power.”

The Supreme Court acknowledged the strong public interest of combating the spread of the COVID-19 Delta variant, but opined that the judicial system does not permit administrative agencies to issue unconstitutional regulations, even in pursuit of a desirable outcome.  Rather, the Supreme Court rested its decision on the fact that it is up to Congress, not the CDC, to decide whether a federally imposed eviction moratorium is to continue.

In a few jurisdictions, such as California, Minnesota, New Jersey, New York, and Washington, state governments have enacted their own legislation suspending residential evictions during the ongoing pandemic.  The Supreme Court’s decision will have little to no impact on those states’ moratoria.  However, the effect of the Supreme Court’s decision will be felt immediately in most states, where governments have relied entirely on the CDC’s moratorium to curtail eviction actions.  Accordingly, the Supreme Court’s rejection of the CDC’s moratorium may cause a flurry of state and local governments to enact new eviction moratoria in wake of Thursday’s decision.


Agency Director Ousted Immediately Following the Supreme Court’s Ruling that the FHFA’s Structure to be Unconstitutional

In a 7-2 decision, the Supreme Court of the United States ruled that the Federal Housing Finance Agency’s (“FHFA”) statutory structure, which protected its director from being removed from position “only for cause”, violated the Constitution’s separation of powers.  Writing for the majority in Collins, et al. v. Yellen, et al., Nos. 19-422 and 19-563, Justice Alito found that “the Constitution prohibits even ‘modest restrictions’ on the President’s power to remove the head of an agency with a single top officer.”  The Supreme Court found this structure to violate the Constitution and reasoned that “the President must be able to remove not just officers who disobey his commands but also those he finds to be negligent and inefficient[.]”  Hours after the Supreme Court rendered its ruling, President Biden removed FHFA’s Director, Mark Calabria.

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New Settlement Exhibits CFPB’s Continued Focus on Transparency for Short-Term Loans

The Consumer Financial Protection Bureau (“CFPB”) recently took aim at Driver Loan LLC (the “Company”), a company which frequently offers loans to drivers of ride share services, for the Company’s alleged deceptive practices.[1]  In its complaint, the CFPB described that, in addition to giving loans to drivers of Uber and Lyft, the Company also took deposits from consumers to fund these driver loans.[2]  The CFPB  alleged that the Company and its CEO created a deceptive business model because: (i) the Company told consumers they could deposit funds with it in FDIC insured accounts, although the accounts were not FDIC insured; (ii)  consumers who deposited funds with the Company were promised a 15% rate of return which they did not receive; and (iii) the short term loans offered to drivers of ride share companies had an APR of, at times, over 900% when they were advertised as having APRs of 440%.[3]

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Strict Foreclosure and Reforeclosure – Options in Foreclosing on Omitted Parties

“The absence of a necessary party in a foreclosure action leaves that party’s rights unaffected by the judgment and sale, and the foreclosure sale may be considered void as to the omitted party.”  6820 Ridge Realty LLC v. Goldman, 263 A.D.2d 22, 26 (2d Dept. 1999).

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CPLR 3216 Dismissal Demands Compliance from All – Courts Included

As vaccination rates increase, holds on foreclosure actions expire, and the courts slowly return to addressing their largely frozen foreclosure dockets, we can expect some familiar concerns to reappear. One common concern is the threat of dismissal pursuant to CPLR 3216 for unreasonable neglect to proceed. Given the severe disruption to mortgage litigation caused by the COVID-19 pandemic, and its effects on the staffing and continuity of many firms whose main focus is residential foreclosures, it would not be surprising to see an uptick in CPLR 3216 notices and/or CPLR 3216 dismissals. As with any dismissal, this poses a serious threat to lien enforceability and could lead to complete loss of the lien if, by the time of dismissal, the foreclosure is beyond or approaching six years since acceleration. Fortunately, the threat posed to mortgage liens is mitigated somewhat by the strict requirements imposed by the statutory language of CPLR 3216 and controlling case law.

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SCOTUS Issues Anticipated Decision in Facebook, Inc. v. Duguid And Unanimously Reverses Ninth Circuit, Holding Facebook’s Text Notification System Did Not Meet the TCPA’s Definition of An Autodialer Because It Did Not Use A Random Or Sequential Number Generator

On April 1, 2021, the Supreme Court of the United States issued its highly anticipated decision in the Facebook Inc. v. Duguid matter.  In a unanimous decision delivered by Justice Sonia Sotomayor, the Supreme Court addressed a hotly debated issue of statutory construction regarding the Telephone Consumer Protection Act (“TCPA”), and reversed the Court of Appeals for the Ninth Circuit’s decision holding that Facebook, Inc. (“Facebook”) used a text-message notification system that met the TCPA’s definition of an “autodialer.”  In short, the Court held that Facebook’s notification equipment did not meet the definition of an autodialer because it does not use a random or sequential number generator.  The Court rejected Plaintiff Noah Duguid’s more broad interpretation of the statute, noting that if an autodialer were any device that had the capacity to dial random numbers, the TCPA would encompass any equipment that stores and dials telephone numbers, such as a modern smartphone.

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To Forgive or Not to Forgive a CPLR 3215(c) Violation in a Residential Mortgage Foreclosure

CPLR 3215(c) requires a plaintiff to take proceedings for entry of judgment within one year of default or face dismissal of the action as abandoned, except where sufficient cause is shown why the complaint should not be dismissed.  The purpose of this provision is to prevent a plaintiff from taking advantage of a defendant’s default where the plaintiff has also been guilty of inaction.  See Myers v. Slutsky, 139 A.D.3d 2d 709 (2d Dep’t 2012).

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The Appellate Courts Look at the Waiver of Standing Defenses post-RPAPL § 1302-a

Prior to the enactment of Real Property Actions and Proceeding Law (“RPAPL”) § 1302-a, defendants waived their affirmative defense of standing in a residential foreclosure action by failing to raise that defense in an answer or a pre-answer motion to dismiss.  See, e.g., JP Morgan Chase Bank, Nat’l Ass’n v. Butler, 129 A.D.3d 777, 780 (2d Dep’t 2015).  However, since the enactment of RPAPL § 1302-a, which became effective on December 23, 2019, defendants can raise a standing defense at any time in a residential foreclosure action.  This issue arises both where the borrower defaulted in the foreclosure action and seeks to vacate that default to assert a standing defense and where an answer was filed but no standing defense was initially asserted. The Second Department has recently issued decisions addressing both the interplay between the new statute and a borrower’s default in answering and an answering defendant’s ability to amend to assert a standing defense after summary judgment was granted. In addition, the Court of Appeals has recently clarified application of the statute in the context of an appeal of an order entered prior to the enactment of RPAPL § 1302-a.

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