THE EFFECT OF A FAILURE TO RECORD A SATISFACTION OF MORTGAGE AND SEEKING CLASS ACTION RELIEF

New York State Real Property Actions and Proceedings Law (“RPAPL”) § 1921 and New York Real Property Law (“RPL”) § 275. RPAPL § 1921 and RPL § 275 both require a mortgagee to execute a satisfaction of mortgage and arrange to have the satisfaction recorded within 30 days. Failure of the mortgagee to do so entitles the borrower to a penalty based on when the satisfaction was recorded.

The penalty was sought to be enforced in a class action. Maddox v. BANK OF NY MELLON TR. CO., NA, Court of Appeals, 2nd Circuit 2021:

"The Bank of New York Mellon Trust Company ("BNY Mellon" or "the Bank") appeals from an order of the United States District Court for the Western District of New York (Arcara, J.) denying its motion for judgment on the pleadings. The district court held that plaintiffs Sandra Maddox and Tometta Maddox Holley (the "Maddoxes") have Article III standing to seek statutory damages from the Bank for its violation of New York's mortgage-satisfaction-recording statutes (the "statutes"). N.Y. Real P. Law ("R.P.L.") § 275; N.Y. 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 thirty days of the borrower's repayment; a failure to record renders the lender "liable to the mortgagor" for escalating statutory damages in amounts dependent on the delay in the ultimate filing. Here, the Bank did not record the satisfaction of the Maddoxes' mortgage, in an amount of over $50,000, until almost one year after full payment was received—nearly eleven months later than the law allows. For the filing of a satisfaction over ninety days after discharge, the lender becomes liable to the mortgagor for $1,500. R.P.L. § 275(1); R.P.A.P.L. § 1921(1). The Maddoxes sued to collect that penalty and to represent a putative class of similarly wronged borrowers.

The district court certified for interlocutory appeal the question whether the Maddoxes have Article III standing to sue the Bank for the statutory damages and other relief. Our initial opinion on this appeal, Maddox v. Bank of N.Y. Mellon Tr. Co., N.A., 997 F.3d 436 (2d Cir. 2021), was the subject of a motion for rehearing in light of the intervening authority of TransUnion LLC v. Ramirez, — U.S. —, 141 S. Ct. 2190 (2021). After briefing on the impact of TransUnion, we grant the motion for rehearing and issue the instant opinion.

We now hold that the Maddoxes' allegations fail to support Article III standing, and that they may not pursue their claims for the statutory penalties imposed by the New York Legislature in federal court.

Accordingly, we vacate the district court's order denying BNY Mellon's motion for judgment on the pleadings and remand with instructions that the case be dismissed.

BACKGROUND

I. The complaint's allegations.

The Maddoxes' complaint alleges the following facts, which we accept as true for purposes of this appeal. See Lynch v. City of New York, 952 F.3d 67, 74-75 (2d Cir. 2020).

On October 6, 2000, sisters Sandra Maddox and Tometta Maddox Holley entered into a mortgage loan with Aegis Mortgage Corporation (the "Loan"). The mortgage and assignment were recorded with the Erie County Clerk's Office. The mortgage encumbered the Maddoxes' property at 149 Hampshire Street, Buffalo, New York 14213 (the "Property"). The Loan was later assigned to BNY Mellon. In September 2014, the Maddoxes sold the Property to individuals who are not parties to this suit.

On or about October 5, 2014, the Loan was fully paid and the debt discharged. However, BNY Mellon failed to file a satisfaction of mortgage with the Erie County Clerk's Office until nearly one year later on September 22, 2015.

BNY Mellon's failure to record the discharge within thirty days of payment violated New York's mortgage-satisfaction-recording statutes, which require that the mortgage lender present a certificate of discharge to the county clerk for filing within thirty days of the full repayment of the debt. See R.P.L. § 275(1) (requiring timely presentation of certificate and imposing monetary penalties for noncompliance); R.P.A.P.L. § 1921(1) (same).

II. Procedural history.

On December 15, 2015, approximately three months after BNY Mellon had recorded the satisfaction, the Maddoxes brought a class action suit against BNY Mellon for violation of New York's mortgage-satisfaction-recording statutes.

In late 2016, after the Supreme Court issued its decision Spokeo, Inc. v. Robins, 578 U.S. 330 (2016), BNY Mellon moved to dismiss on the pleadings for lack of standing. It argued—among other things—that the Maddoxes lack Article III standing because they "suffered no actual damages in relation to the alleged failure to record the satisfaction" and therefore "failed to plead a concrete harm" under Spokeo. Maddox v. Bank of N.Y. Mellon Tr. Co., No. 15-cv-01053, 2017 WL 449962, at *2 (W.D.N.Y. Jan. 30, 2017) (Report and Recommendation ("R&R")) (quoting Bank's Memorandum). The Bank did not dispute that the discharge was untimely filed.^[1]

The Maddoxes countered that the Bank's eleven months of noncompliance impaired access to accurate financial information about them in the interval and created a false impression adverse to their credit status. The Maddoxes argued that the right to be free of these harms was recognized by the state legislature, that the harms bear a strong relationship to harms traditionally actionable at common law, and that the violations caused substantive harms and otherwise created concrete injuries that endow them with standing to seek remedies in federal court. The Maddoxes further argued that the Bank's period of noncompliance subjected them to a sufficiently real risk of other concrete and particularized harms—failure to obtain financing for other properties and damage to personal credit, for example—and that those risks also gave rise to an injury in fact supporting their Article III standing to sue. Finally, in conjunction with their opposition to the Bank's motion, the Maddoxes submitted an affidavit made by Tometta Maddox Holley attesting to her loss of time, her legal expenses, and her emotional trauma occasioned by the belated filing, which she learned about some time before the satisfaction was finally filed. Her attestations were not alleged in the complaint.

A magistrate judge issued a Report and Recommendation suggesting that the district court deny the motion to dismiss. R&R, 2017 WL 449962, at *4. The district court accepted the recommendation and denied BNY Mellon's motion for judgment on the pleadings. Maddox v. Bank of N.Y. Mellon Tr. Co., No. 15-cv-01053, 2018 WL 3544943, at *2 (W.D.N.Y. July 24, 2018). It held that the Bank's violation was a "procedural violation" that satisfied the injury-in-fact requirement for Article III standing because the Bank's violation of the statutes created a "material risk of harm" to them. Id. (internal quotation marks omitted). The district court reasoned that failure to timely record a mortgage satisfaction could cloud title to real property, inhibit sale of the property, and affect a mortgagor's credit.

At the same time, the district court took note of the Eleventh Circuit's contrary decision in Nicklaw v. Citimortgage, Inc., 839 F.3d 998 (11th Cir. 2016), reh'g en banc denied, 855 F.3d 1265 (2017), and a footnote in our decision in Strubel v. Comenity Bank, 842 F.3d 181, 194 n.15 (2d Cir. 2016), which cites Nicklaw with apparent approval. It accordingly identified the question as a close one and on that basis certified the question for interlocutory appeal. We accepted the certification and addressed that question, which has indeed proved close.

As a threshold issue, we decided that a state legislature, like Congress, has the power to create legal interests whose violation can satisfy Article III standing. See Maddox, 997 F.3d at 443-44 (2d Cir. 2021). We then affirmed the district court's holding on alternative grounds. First, we held that the statutes are "substantive" provisions and that therefore "the Maddoxes need allege no harm greater than that their discharge was untimely recorded . . . to establish a concrete, intangible injury of the sort that gives them Article III standing." Id. at 447. Second, we held that even if the statutes were "procedural" in nature, the Maddoxes still would have established an injury in fact, since the Bank's violation of the statutes exposed them to a "material risk of [concrete] harm," including the risk of not being able to borrow during the period of delay. Id. at 447-48 (alteration in original) (quoting Spokeo, 578 U.S. at 342).

After our initial disposition, BNY Mellon filed a petition for panel rehearing or rehearing en banc (the "Petition"), and the United States Supreme Court decided TransUnion LLC v. Ramirez, ___ U.S. ___, 141 S. Ct. 2190 (2021), which expanded upon the standing principles raised by this case. The parties submitted supplemental letter briefs discussing the impact, if any, of TransUnion on our previous decision. Because TransUnion bears directly on our analysis, we hereby grant the Petition, withdraw our opinion of May 10, 2021, and issue this amended opinion in its place. Additional oral argument is unnecessary.

DISCUSSION

We review a district court's decision regarding judgment on the pleadings de novo. See Lanning v. City of Glens Falls, 908 F.3d 19, 24 (2d Cir. 2018).

Article III standing requires plaintiffs to show (1) an "injury in fact," (2) a "causal connection" between that injury and the conduct at issue, and (3) a likelihood "that the injury will be redressed by a favorable decision." Lujan v. Defs. of Wildlife, 504 U.S. 555, 560-61 (1992) (internal quotation marks omitted). The central question on appeal is whether the Maddoxes have met the injury-in-fact requirement.

"To demonstrate injury in fact, a plaintiff must show the invasion of a [1] legally protected interest that is [2] concrete and [3] particularized and [4] actual or imminent, not conjectural or hypothetical." Strubel, 842 F.3d at 188 (internal quotation marks omitted). BNY Mellon argues that, although the New York State Legislature may have implicitly recognized that delayed recording can create harms such as a cloud on title and an adverse affect on a mortgagor's credit, the Maddoxes have not alleged, and cannot allege, that they suffered these harms. Therefore, BNY Mellon asks us to conclude that the Maddoxes have failed to show that the injury alleged was either "concrete" or "particularized" enough to amount to an injury in fact for purposes of Article III standing. The Maddoxes argue to the contrary, that where the Legislature has recognized a legal interest or interests and a plaintiff has suffered a harm or risk of real harm to those interests, Article III is satisfied. According to the Maddoxes, the harms that the Legislature aimed to preclude need not have come to fruition for a plaintiff to have suffered a material risk of real harm sufficient to seek the statutory remedy afforded by the Legislature. We discuss these arguments below.

I. Plaintiffs must suffer a concrete harm to establish standing.

"No concrete harm; no standing." TransUnion, 141 S. Ct. at 2200. This equation, which opens the Supreme Court's TransUnion decision, leaves little room for interpretation and may be sufficient to resolve the issue before us. Still, the facts in TransUnion bear a strong enough resemblance to those in this case that the Supreme Court's treatment of them proves highly instructive.

A class of 8,185 individuals sued TransUnion, a credit reporting agency, alleging two violations of the Fair Credit Reporting Act ("FCRA"). Id. First, the plaintiffs alleged that TransUnion's failure to use reasonable procedures led to an inaccuracy in their credit files—namely, that the class member was a "potential match" to an individual on a Treasury Department list of national security threats (the "OFAC list"). Id. 2202. Second, the plaintiffs claimed that TransUnion failed to adhere to FCRA formatting requirements in the mailings used to inform members about the potential match. Id. The class succeeded at trial, but standing became the primary issue on appeal. Id.

Before addressing the specific allegations, the Supreme Court considered the characteristics that make a harm "concrete" for the purposes of Article III. Id. at 2204. The Court explained that whether a harm qualifies as "concrete" hinges on "whether the alleged injury to the plaintiff has a `close relationship' to a harm `traditionally' recognized as providing a basis for a lawsuit in American courts." Id. (quoting Spokeo, 578 U.S. at 341). The Court recognized that physical and monetary harms, along with other traditional tangible harms, readily qualify as concrete, and that certain intangible harms, such as reputational harm, qualify as well. Id. The Court also allowed that Congress's views may be "instructive" in determining whether a harm is sufficiently concrete, id. (quoting Spokeo, 578 U.S. at 341), although "an injury in law is not an injury in fact," id. at 2205.

With that, the Supreme Court turned to the plaintiffs' claim that TransUnion's failure to use reasonable procedures led to inaccuracy in their credit files. The Court divided the class into two groups: those members whose credit reports were disseminated to third-party businesses; and those whose credit reports never left TransUnion's internal files. Id. at 2200. The Court ruled that the first group "suffered a harm with a `close relationship' to the harm associated with the tort of defamation," and, therefore, "suffered a concrete harm that qualifies as an injury in fact." Id. at 2209. The second group, however, suffered no concrete harm because "[p]ublication is `essential to liability' in a suit for defamation," and their credit files were never published. Id. (quoting Restatement of Torts § 577 cmt. a, p. 192 (1938)). As the Court explained, "there is no historical or common-law analog where the mere existence of inaccurate information, absent dissemination, amounts to concrete injury." Id. (internal quotation marks omitted).

The Court further concluded that these class members could not premise standing on a risk of future harm—that is, the risk that TransUnion would eventually disseminate the misleading information to third-party businesses. While Spokeo stated that "the risk of real harm" can sometimes "satisfy the requirement of concreteness," id. at 2210 (quoting Spokeo, 578 U.S. at 341-42), that observation (the Court explained) applied only to "suit[s] for injunctive relief," id. In suits for damages, "the mere risk of future harm, standing alone, cannot qualify as a concrete harm—at least unless the exposure to the risk of future harm itself causes a separate concrete harm." Id. at 2210-11. Because these class members presented no evidence "that they suffered some other injury (such as an emotional injury) from the mere risk that their credit reports would be provided to third-party businesses," they were unable to establish standing. Id. at 2211.

Regarding the claim that TransUnion failed to adhere to FCRA formatting requirements, the Supreme Court held that the class members (other than the named plaintiff) had failed to demonstrate that they suffered any concrete harm—or "any harm at all"—from such violations, as they presented no evidence that they "so much as opened" the relevant mailings. Id. at 2213. Plaintiffs' distinct argument that TransUnion's formatting violations created a risk of future harm—i.e., the risk that consumers would not learn of, and remedy, the OFAC report in their credit files—failed because "the risk of future harm on its own does not support Article III standing for the plaintiffs' damages claim." Id.

In sum, TransUnion established that in suits for damages plaintiffs cannot establish Article III standing by relying entirely on a statutory violation or risk of future harm: "No concrete harm; no standing." Id. at 2214.

II. The Maddoxes have not suffered a "concrete" harm.

The only allegations that matter are few: the Maddoxes paid off their mortgage when they sold their house; the bank filed the mortgage satisfaction nearly one year afterward. By statute, New York creates a private right to collect an escalating cash penalty if the satisfaction is filed more than thirty days after the mortgage is paid off, up to $1,500 for delay exceeding ninety days.

We need not decide whether state legislatures have the same power Congress enjoys to recognize or create legally protectible interests whose invasion gives rise to Article III standing; TransUnion determined that Congress itself enjoys no such power. 141 S. Ct. at 2205 ("Congress may enact legal prohibitions and obligations. . . . But under Article III, an injury in law is not an injury in fact."). Nor need we decide whether the statutes are "substantive" or "procedural"; TransUnion eliminated the significance of such classifications, which had been a preoccupation.^[2] On this appeal, the determinative standing issue is whether the Maddoxes suffered a concrete harm due to the Bank's violation. It is clear that they have not.

First: for the ordinary borrower, delayed recording of a discharge of mortgage may create and sustain an actionable cloud on title to the property securing the discharged mortgage debt. Long-delayed filings can result in the borrower having to pay a duplicative filing fee for the discharge: once at closing and once when the discharge is actually filed. The Maddoxes did not allege such harms, however, or allege that they were at risk for such harms. This is unsurprising because conveyance of their property was completed several weeks before the mortgage satisfaction occurred. In short, the Maddoxes had no title on which a cloud could settle.^[3]

Second: a mortgage recorded with the county clerk may convey to those viewing the record that the borrower owes a debt secured by a property. Correspondingly, a lender's delay in recording a mortgage satisfaction risks creating the false appearance that the borrower has not paid the underlying debt and is thus more indebted and less creditworthy. This type of reputational harm—i.e., one that flows from the publication of false information—is well established as actionable at common law. See Weldy v. Piedmont Airlines, Inc., 985 F.2d 57, 61-62 (2d Cir. 1993) (discussing elements to establish prima facie claim of slander); see also Spokeo, 578 U.S. at 341-42 (noting libel and slander per se as being actionable).

However, the Maddoxes do not allege that they suffered any reputational harm due to the Bank's violation. The misleading record may have been public and available to all; but, so far as is known, it was read by no one. The public nature of the record is not analogous to the dissemination of the credit reports in TransUnion. There could be no doubt that the third-party businesses viewed those credit reports, which they had specifically requested and paid for.

This distinction from TransUnion is critical, as it is self-evident that "unless the defamatory matter is communicated to a third person there has been no loss of reputation." Restatement of Torts § 577 cmt. b; see also Albert v. Loksen, 239 F.3d 256, 269 (2d Cir. 2001) ("A defamatory writing is not published if it is read by no one but the one defamed.'" (quoting Ostrowe v. Lee, 256 N.Y. 36, 38 (1931) (Cardozo, C.J.))). True, 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 not form the basis of Article III standing.

Third: the Maddoxes contend that the Bank's delay adversely affected their credit during that time, making it difficult to obtain financing had they needed it in an emergency or for a new home. But it is not alleged that this purported risk materialized; so it is similarly incapable of giving rise to Article III standing.

Fourth: Tometta Maddox Holley attested (in her affidavit opposing BNY Mellon's motion for judgment on the pleadings) that the Bank's failure to timely record the satisfaction after she sold the Property caused her "great stress, mental anguish, anxiety, and distress, which compelled [her] to expend substantial time attempting to determine the status of the recording of the satisfaction of mortgage document, and seeking out legal counsel to assist [her] in having the satisfaction of mortgage recorded." App'x at 88 ¶ 8. These purported harms are of the sort that TransUnion contemplated might form the basis for Article III standing. See TransUnion, 141 S. Ct. at 2211 n.7 ("[A] plaintiff's knowledge that he or she is exposed to a risk of future physical, monetary, or reputational harm could cause its own current emotional or psychological harm."); see also Denney v. Deutsche Bank AG, 443 F.3d 253, 265 (2d Cir. 2006) ("The risk of future harm may also entail economic costs . . . but aesthetic, emotional or psychological harms also suffice for standing purposes.").

However, the Maddoxes must "plead enough facts to make it plausible that they did indeed suffer the sort of injury that would entitle them to relief." Harry v. Total Gas & Power N. Am., Inc., 889 F.3d 104, 110 (2d Cir. 2018). Although "[i]t is well established in principle that the pleading standard for constitutional standing is lower than the standard for a substantive cause of action," id., the attestations in Tometta Maddox Holley's affidavit were not the subject of allegations in the complaint and, in any event, are implausible.

Holley demands opportunity costs because she "expend[ed] substantial time attempting to determine the status of the recording of the satisfaction of mortgage document." App'x at 88 ¶ 8. But if she had, she would have found out that the satisfaction was recorded three months before the filing of a complaint that nevertheless alleges that the satisfaction was unrecorded at the time this litigation began. As to her emotional distress, she offers no reason why the delayed recordation would cause "great stress, mental anguish, anxiety, and distress." Id. A perfunctory allegation of emotional distress, especially one wholly incommensurate with the stimulant, is insufficient to plausibly allege constitutional standing. Even if it were sufficient, "it is extremely unlikely that such an allegation would be typical of the class." R&R, 2017 WL 449962, at *3 n.5.

In any event, the Maddoxes need not show a cloud, reputational harm, or any other injury. The Maddoxes have an easy way to collect their reward for reporting the Bank's delay in recording the mortgage satisfaction: they may recover the statutory penalty in state court.^[4] 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.

Of course, state court remains an option for all absent class members as well. To the extent that such 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.

CONCLUSION

For the foregoing reasons, we vacate the district court's order denying BNY Mellon's motion for judgment on the pleadings and remand with instructions that the case be dismissed.

[1] It did argue, however, that it was associated with the Maddoxes' mortgage only as a trustee and therefore had no liability. The district court rejected that argument, and the issue is not part of the question certified for interlocutory appeal. See Maddox v. Bank of N.Y. Mellon Tr. Co., No. 15-cv-01053, 2018 WL 3544943, at *5 (W.D.N.Y. July 24, 2018).

[2] Our original opinion observed that a statutory right is considered "substantive" if it protects against a harm that has a close relationship to a harm traditionally regarded as providing a basis for a lawsuit in American courts. The violation of a substantive right, the opinion explained, constitutes a concrete injury in fact sufficient to establish Article III standing without any additional showing. TransUnion clarified, however, that the type of harm that a statute protects against is of little (or no) import; what matters is "whether the alleged injury to the plaintiff has a `close relationship' to a harm `traditionally' recognized as providing a basis for a lawsuit in American courts." 141 S. Ct. at 2204 (emphasis added) (quoting Spokeo, 578 U.S. at 341). In other words, plaintiffs must show that the statutory violation caused them a concrete harm, regardless of whether the statutory rights violated were substantive or procedural.

[3] True, it may be said that during the period of BNY Mellon's delayed recordation the two nonparty homebuyers ran a risk that if they had flipped the Property the title insurer would flag a vestigial lien. But the Maddoxes, who had already sold the Property, did not suffer a detriment and never ran the risk of one.

[4] "[S]tate courts are not bound to adhere to federal standing requirements. . . ." ASARCO Inc. v. Kadish, 490 U.S. 605, 617 (1989)."

WHEN YOU TERMINATE AN EMPLOYEE - PART 2

Recalling yesterday's post about New York Labor Law Section 195 (6) requiring written notice of termination, etc., it also provided that "Failure to notify an employee of cancellation of accident or health insurance subjects an employer to an additional penalty pursuant to section two hundred seventeen of this chapter." Let us look at that penalty.

New York Labor Law Section 217 (7):

"(a) Any policyholder who fails to comply with this section, shall forfeit to the people of the State a sum up to five thousand dollars, to be recovered by the commissioner in a civil action.  Where the policyholder is a corporation, trade association, joint stock association, incorporated or unincorporated association, the president, secretary and treasurer thereof shall be liable for any forfeiture.

(b) In addition to such penalty, where the failure to comply involves the failure to notify an employee of the termination of a group accident or group health policy pursuant to subdivision three of this section or the failure to remit premiums pursuant to subdivision six of this section, or the failure to provide an individual with notice of termination pursuant to subdivision six of section one hundred ninety-five of this chapter, the policy holder shall also be liable, in a civil action brought by the individual entitled to receive the notice of termination or exercise the right to continuation of coverage in a court of competent jurisdiction, to appropriate damages which shall include reimbursement for medical expenses which were not covered by the policyholder's insurer by virtue of his termination of the policy or failure to remit such premiums."

And this is in addition to the penalties under New York Labor Law Section 218 (1) which state, in effect, that an employer who violates the non-monetary provisions of Article 6 of the Labor Law (which includes Section 195), is subject to a maximum penalty of $1,000 for a first violation, $2,000 for a second violation and $3,000 for a third or subsequent violation.

COMMERCIAL LEASE ACCELERATION CLAUSE

172 VAN DUZER v. GLOBE ALUMNI, 24 NY 3d 528 - NY: Court of Appeals 2014:

"To the extent defendants suggest that a landowner should be subject to a duty to mitigate, we previously rejected this argument in Holy Props. v Cole Prods. (87 NY2d 130 [1995]). In that case the Court stated that once a tenant abandons the property prior to expiration of the lease, a "landlord [is] within its rights under New York law to do nothing and collect the full rent due under the lease" (id. at 134, citing Becar v Flues, 64 NY 518 [1876], Underhill v Collins, 132 NY 269 [1892], and Matter of Hevenor, 144 NY 271 [1895]). The Court adhered to this established approach, and stated that parties in business transactions depend on the certainty of settled rules, "in real property more than any other area of the law, where established precedents are not lightly to be set aside" (Holy Props., 87 NY2d at 134). We see no reason to reverse course in defendants' case, in particular where, as in Holy Props., the parties here freely agreed to bind defendants to pay rent after termination of the landlord-tenant relationship (id. at 134, citing International Publs. v Matchabelli, 260 NY 451, 454 [1933], Mann v Munch Brewery, 225 NY 189, 194 [1919], and Hall v Gould, 13 NY 127, 133-134 [1855]).

Defendants argue, in the alternative, that the liquidated damages as future rent provided for under the acceleration clause are grossly disproportionate to Van Duzer's actual losses, and therefore constitute an unenforceable penalty. Defendants are correct that an acceleration clause is subject to judicial scrutiny based on a challenge that it is nothing more than a means by which to exact a penalty otherwise proscribed by the law.

As a general matter parties are free to agree to a liquidated damages clause "provided that the clause is neither unconscionable nor contrary to public policy" (Truck Rent-A-Ctr. v Puritan Farms 2nd, 41 NY2d 420, 424 [1977], citing Mosler Safe Co. v Maiden Lane Safe Deposit Co., 199 NY 479, 485 [1910]). Liquidated damages that constitute a penalty, however, violate public policy, and are unenforceable (Truck Rent-A-Ctr., 41 NY2d at 424, citing City of Rye v Public Serv. Mut. Ins. Co., 34 NY2d 470, 472-473 [1974]). A provision which requires damages "grossly disproportionate to the amount of actual damages provides for [a] penalty and is unenforceable" (Truck Rent-A-Ctr., 41 NY2d at 424).
Whether a provision in an agreement is "an enforceable liquidation of damages or an unenforceable penalty is a question of law, giving due consideration to the nature of the contract and the circumstances" (JMD Holding Corp. v Congress Fin. Corp., 4 NY3d 373, 379 [2005], citing Mosler Safe Co., 199 NY at 485; Leasing Serv. Corp. v Justice, 673 F2d 70, 74 [2d Cir 1982]). "The burden is on the party seeking to avoid liquidated damages . . . to show that the stated liquidated damages are, in fact, a penalty" (JMD Holding Corp., 4 NY3d at 380, citing P. J. Carlin Constr. Co. v City of New York, 59 AD2d 847 [1st Dept 1977]; Wechsler v Hunt Health Sys., Ltd., 330 F Supp 2d 383, 413 [SD NY 2004]). Where a party establishes a penalty, the proper recovery is the amount of actual damages established by the party (JMD Holding Corp., 4 NY3d at 380 ["`If the (liquidated damages) clause is rejected as being a penalty, the recovery is limited to actual damages proven'"], quoting Brecher v Laikin, 430 F Supp 103, 106 [SD NY 1977]).

Defendants claim that because the acceleration clause permits Van Duzer to hold possession and immediately collect all rent due, the damages are grossly disproportionate to the landowner's actual damages. They contend this is a windfall that allows Van Duzer to double dip—get the full rent now and hold the property. On its face this argument is compelling because arguably the ability to obtain all future rent due in one lump sum, undiscounted to present-day value, and also enjoy uninterrupted possession of the property provides the landowner with more than the compensation attendant to the losses flowing from the breach—even though such compensation is the recognized purpose of a liquidated damages provision (Truck Rent-A-Ctr., 41 NY2d at 423; see JMD Holding Corp., 4 NY3d at 382; Benderson v Poss, 142 AD2d 937, 938 [4th Dept 1988]; Gotlieb v Taco Bell Corp., 871 F Supp 147, 155 [ED NY 1994]). Although the acceleration clause in Fifty States was held enforceable, that case is distinguishable from the instant case because there the landlord did not get to keep the property."

NEW YORK UNEMPLOYMENT INSURANCE - FRAUD

In determining what is a misstatement, whether deemed willful or fraud, there is a distinction between misstatements of fact and law.

 

The issue of fraud typically comes into play when a claimant certifies eligibility for unemployment insurance when in fact the claimant is employed.

 

In the following Court of Appeals case,  the appeals are limited to the following issues: (1) did the claimants make false statements when they stated that they were unemployed and (2) did they act wilfully. In order to sustain a finding of wilfulness the evidence must show that the claimants knew that their actions constituted employment.

    57 N.Y.2d 116 (1982)

In the Matter of the Claim of Grace Valvo, Respondent. Philip Ross, as Industrial Commissioner, Appellant.
In the Matter of the Claim of Debra Loll, Respondent. Philip Ross, as Industrial Commissioner, Appellant.
In the Matter of the Claim of Josephine Polvino, Respondent. Philip Ross, as Industrial Commissioner, Appellant.

Court of Appeals of the State of New York. Decided September 14, 1982. Robert Abrams, Attorney-General (Iris A. Steel of counsel), for appellant in the first, second and third above-entitled matters.
Stephen S. Joy for respondent in the first above-entitled matter.
Andrew M. Rothstein for respondent in the second above-entitled matter.
Paul M. Aloi for respondent in the third above-entitled matter.
Chief Judge COOKE and Judges JASEN, JONES, FUCHSBERG and MEYER concur; Judge GABRIELLI taking no part.
119*119WACHTLER, J.
In these three cases recipients of unemployment insurance failed to report that they had performed occasional services of a business nature for friends or family members during periods of claimed unemployment. The agency found that these services constituted employment, that claimants had therefore made false statements of unemployment and that the statements were wilfully made. In each case a penalty was imposed and the claimants were also directed to repay the benefits received.
On three separate appeals the Appellate Division, Third Department, modified by annulling the penalty and repayment provisions after concluding that proof of the element of wilfulness was lacking. The Appellate Division also rejected the agency's contention that a portion of the benefits are recoverable pursuant to subdivision 4 of section 597 of the Labor Law on the theory that claimant had made a false statement unintentionally. The agency appeals on the basis of the modifications.^[1]

VALVO CASE

Claimant, Grace Valvo, is employed by Tambe Oil, which delivers heating oil to homes and a few businesses during the winter months. From late spring to early fall it is dormant. The corporation is owned and operated by Anthony Tambe, the father-in-law of one of the claimant's close friends. Mr. Tambe was formerly employed as a truck driver. He went into business for himself in September, 1976. The business presently consists of a truck and a garage with a small office in the garage. The owner personally delivers the oil, and in the beginning also attended to the clerical matters. However, he had so much difficulty balancing his checking account that his credit rating was soon impaired and he was on the verge of going out of business. When he mentioned this to his daughter in claimant's presence, claimant volunteered to help. From October, 1976 to November, 1977 claimant wrote his checks and balanced the checkbook as a favor, without compensation. During this period she was receiving unemployment benefits.
120*120In November, 1977 Mr. Tambe hired claimant as a secretary to write checks, send out the bills, record all financial transactions and answer the phone at the office. In this capacity she worked 40 hours a week at the office. During the summer months in 1978 and 1979 she was officially laid off and collected unemployment benefits. However, if a bill had to be paid for monthly utilities or outstanding loans Mr. Tambe would call claimant and ask her to write a check. He would then pick it up at her home, sign it and mail it. Claimant received no compensation for these services.
In June, 1980 the agency informed claimant that her uncompensated check-writing activities constituted employment under the Labor Law,^[2] that she had therefore made false statements when she claimed to be unemployed during the off-season, and also during the period she wrote the company's checks on a volunteer basis before she was hired in November, 1977. It further concluded that the statement had been wilfully made and that claimant should therefore be penalized by forfeiting 664 days of future eligibility and must also repay all benefits received in the amount of $6,019.
Claimant requested a hearing which was held in July, 1980. After the hearing the administrative law judge concluded that the initial determination assessing a penalty and requiring repayment of benefits should be set aside primarily because there was no evidence of fraud or wilful misrepresentation on claimant's part. He stated: "While claimant did perform check writing functions for this employer during the period prior to the time when she went on the payroll in November of 1977 and also during the off season of 1978, claimant could reasonably have believed that there was no employer employee relationship since she was not reporting to the employer's establishment during the periods when she was writing such checks and she was performing no other services. This is especially the case in the period prior to her going on the 121*121 payroll in November of 1977. With respect to the off season of 1978, claimant's activities were so substantially different from her regular work assignments that even here she could reasonably have believed that she was not performing as an employee * * * In addition, she was clearly not self employed and since the amount of time required to write the checks was minimal the activity of writing the checks as such did not establish a lack of total unemployment."
The appeal board reversed the decision of the administrative law judge and reinstated the initial determination. The board summarily concluded that claimant's weekly certifications of unemployment "were false and known by her to be false when made" and therefore constituted wilful misrepresentations. The board also found that claimant's statements were false in fact because "claimant performed substantial services for her employer of a similar nature to those she performed when concededly in employment".
Claimant appealed to the Appellate Division to have the board's determination set aside. In support of its determination the agency claimed that there was substantial evidence of wilfulness and that it was therefore authorized to impose the penalty and require repayment pursuant to section 594 of the Labor Law.^[3] In the alternative the agency urged that pursuant to subdivisions 3 and 4 of section 597 of the Labor Law, it could recover a portion of the benefits (i.e., those paid during the year preceding discovery of the overpayment) whenever the claimant has made a false statement of unemployment even unintentionally.^[4]
122*122The Appellate Division unanimously modified by reversing that portion of the determination which imposed the penalty and ordered repayment of benefits. The court accepted the board's determination that claimant's check-writing activities constituted employment but found nothing in the record to support the board's determination of wilfulness. With respect to the board's right to recover a portion of the benefits pursuant to subdivisions 3 and 4 of section 597 of the Labor Law on the theory that she had made a false statement the court held that "the term `false statement' in the statute refers to a false factual statement" and not to an erroneous conclusion of law. (83 AD2d, at p 346.) In this case the court found that "the requirement that claimant weekly `report and certify as to his unemployment' (12 NYCRR 473.2 [a]) obligated claimant to draw a legal conclusion — whether her uncompensated check-writing activities constituted employment within the meaning of the Labor Law — rather than provide factual data". (83 AD2d, at p 347.) The court distinguished our recent decision in Matter of Maguire (Ross) (54 N.Y.2d 965) on the ground that the petitioner's activities in that case obviously constituted employment.

LOLL CASE

In March, 1978 claimant, Debra Loll, was laid off from her job as a clerk cashier at Stop & Go in Elmira. She was rehired in September of that year. In the interim she collected unemployment benefits. At an unemployment interview on July 7, 1978 she had stated that she occasionally helped out at her father's drugstore, but received no compensation for these services. Toward the end of the month the agency sent her a letter warning her that any services performed for her father at his store would constitute employment even if she did not receive any compensation. On August 8, the manager of the unemployment 123*123 office who was a regular customer at the drugstore saw the claimant behind the counter.
In October the agency made an initial determination that petitioner was ineligible to receive benefits for two days out of each week during the period of claimed unemployment, representing the days she helped her family at the drugstore. Her weekly certifications of unemployment were characterized as false and wilful misrepresentations. As a result claimant was penalized 96 effective days and was directed to repay $564 representing the benefits she received on the days she was employed at her father's drugstore.
Claimant demanded a hearing which was held in February of 1979. At the hearing she testified that she went to her father's store nearly every day during the period she claimed unemployment, so that she could borrow his car or have a family member babysit for her three-year-old son while she looked for a job. On occasion she would take care of a customer or deliver a prescription if her father or brother were busy or wanted to take a break. She usually only helped out for a few minutes one or two days a week during the evening or on a Saturday and on rare occasions worked for a few hours. These activities ceased after being warned of the consequences in July. However, she continued her daytime visits and during one of them might have assisted her family at the store for a few minutes because she had done so automatically throughout her life. She received no compensation for the help she provided at the store.
At the conclusion of the hearing the administrative law judge held that claimant's activities at her father's store constituted employment. He also stated that "the record is clear that the claimant was not candid with the local office and did not advise them of her activities". Thus he sustained the initial determinations. The appeal board affirmed adopting both the findings of fact and opinion of the administrative law judge.
The case was heard by the Appellate Division in November, 1980, a year before its decision in the Valvo case. In a brief memorandum the court held that the record supported 124*124 the board's finding that claimant had made false statements but not its finding of wilfulness. The court modified by reversing so much of the agency's determination as assessed a penalty of 96 effective days.
At the time of its decision in Valvo the Appellate Division granted reargument in this case. In another brief memorandum, relying upon Valvo, the court further modified by reversing so much of the agency's determination as directed claimant to repay benefits received.

POLVINO CASE

From 1974 to 1977 claimant Josephine Polvino was intermittently employed by a small construction company owned and operated by her two sons, one of whom resides at home with his parents. The company does general construction work but specializes in paving driveways in the summer and removing snow in the winter. The company's office is located in a trailer on property where the equipment is stored. However, company business is frequently conducted at claimant's residence.
Claimant performed clerical duties at the office of a general and unskilled nature including answering phones, writing checks and keeping some company records. She was laid off and collected unemployment benefits on several occasions: March 4 to July 14, 1974; December 23, 1974 to June 13, 1976, and August 8, 1977 to May 14, 1978. According to claimant and her sons this was due to a lack of work. However during these periods she continued on occasion to answer phone calls from customers, write checks and keep some company records at her residence without compensation.
In March of 1979 the agency sent claimant a notice of initial determination stating that she had been found to be ineligible for unemployment benefits during the periods of claimed unemployment listed above because she had continued to perform "services for Polvino Construction Corporation". She was directed to make repayment in the amount of $8,834. The agency also imposed a penalty of 208 effective days for wilful misrepresentation "because you failed to divulge your association and activities for Polvino Construction Company".
125*125Claimant demanded a hearing at the conclusion of which the administrative law judge sustained the initial determination. He noted that claimant had been employed by her sons' company where the services she performed were somewhat vague. He stated: "In a situation where a claimant is employed by a closely held corporation whose principal officers and shareholders are related to her, the closest scrutiny must be given to a claim for benefits. In the instant case the pattern of her claims over several years makes it appear obvious that the employer controlled her periods of employment. Because of the control exercised over the periods of her employment, the undersigned cannot accept claimant's eligibility for benefits during these several periods when, by her own admission, claimant performed some services for the corporation."
That decision was in turn affirmed by the appeal board which adopted the findings of fact and opinion of the administrative law judge.
The Appellate Division modified the agency's determination by reversing the penalty and repayment provisions. In its memorandum the court held that there was substantial evidence to support the board's determination that petitioner was unavailable for employment. The court also found no "reason for disturbing the board's determination that claimant was not totally unemployed". The court then stated: "We are of the opinion, however, that there is insufficient evidence to support the board's determination on the issue of wilfull misrepresentation. Claimant's activities did not obviously constitute employment as the situation was found to be in Matter of Maguire (Ross) (54 N.Y.2d 965, supra). Although claimant may be found to have been employed in the technical sense of the Labor Law, there is no evidence of wilfulness in her certifications to total unemployment on her weekly reports. Consequently, the imposition of a forfeiture of effective days and the recovery of overpayments pursuant to section 594 of the Labor Law are not warranted in the present case (see Matter of Valvo [Ross], supra; Matter of Smalt [Ross], 82 AD2d 958). In addition, under the circumstances presented herein, there may be no recovery of a portion of the benefits pursuant to 126*126 subdivision 4 of section 597 of the Labor Law (see Matter of Valvo [Ross], supra)." (85 AD2d, at p 807.)
The order of the Appellate Division should be affirmed in the first case (Valvo) and reversed in the other two (Loll and Polvino).
Initially we note that at this stage no one challenges the agency's determination that the petitioners' activities technically constitute employment within the meaning of the statute. The appeals are limited to the following issues: (1) did the petitioners make false statements when they stated that they were unemployed and (2) did they act wilfully. In addition the agency concedes that in order to sustain a finding of wilfulness the evidence must show that the petitioners knew that their actions constituted employment.
The problem is that the agency's interpretation of the statute defining employment (Labor Law, § 522) although rational, does not reflect the common understanding of employment. As a result laymen, particularly unskilled laymen who undoubtedly represent the majority of claimants for unemployment benefits, may not realize that occasionally helping a friend or relative may constitute employment even though they are not paid for it. The agency claims that its information booklet provides a kind of constructive notice when it states: "You are considered employed on any day when you work — even an hour or less — in self-employment, on a free lance basis, or for someone else. It makes no difference whether * * * you get paid for that day". The agency, however, has omitted the next sentence which states: "For example, work on a straight commission basis is employment even though you may not receive the commission until some time later or make no sale at all". This gloss leaves the impression that the term employment includes activities that are generally perceived as employment regardless of the technicalities.
The agency is on firmer ground when it relies on the facts of the particular cases. In the Polvino case, for instance, where the claimant worked for her sons, the evidence shows that she performed essentially the same limited services while allegedly unemployed as she did while 127*127 allegedly employed. The only significant difference is that she received unemployment benefits instead of wages. In addition, as the agency notes, her periods of unemployment were never satisfactorily explained. It was appropriate for the agency to closely scrutinize this situation as it did, because of the possibility that the periods of employment and unemployment were manipulated in order to claim unemployment benefits. Under the circumstances the agency could conclude that if she understood that the services she performed for her sons constituted employment when she was on their payroll, she also realized that they constituted employment when she was technically laid off.
The Loll case presents a more sympathetic situation but nevertheless there is substantial evidence to sustain the agency's finding that she acted wilfully. The evidence shows that she was warned that her services at her father's drugstore constituted employment. When, despite this warning, she was later observed behind the counter, the agency could reasonably infer that her activities throughout the period were not the result of ignorance of the law. Notably in this case she was not required to repay all benefits received but only those relating to the days on which she was actually working at the store.
In the Valvo case, on the other hand, there is nothing in the record from which it can be reasonably inferred that she realized that her writing of a few monthly checks during a long period of seasonal unemployment would constitute employment disqualifying her from all benefits throughout the entire period. Although she worked for the father-in-law of a close friend, there is no suggestion that her employment was not legitimate and the obvious seasonal nature of the business and genuine lack of work during the period of claimed unemployment is undisputed. Thus the agency's finding of wilfulness was arbitrary.
With respect to the agency's alternative argument that claimant Valvo should be required to repay a portion of the benefits for making a false statement within the meaning of subdivision 4 of section 597 of the Labor Law, the Appellate Division correctly held that the statute only applies to false statements of fact and that petitioner's 128*128 certification of unemployment represented an error of law. This does not mean, as the agency suggests, that wilful misrepresentation is now required under this section and section 594 thus rendering one of the sections meaningless. It should be clear from the Appellate Division's decision that section 597 permits recovery of benefits received within the past year when the claimant has made a false statement of fact even though unintended. However, when claimant has in good faith received benefits to which he or she was not entitled because of a mistake of law on the part of the claimant or the agency, none of the benefits may be recovered. This interpretation is required by the wording of the statute, and supported by its legislative history, which shows that it was designed to provide relief to claimants when an overpayment or erroneous payment of benefits resulted from an honest mistake, and to preclude all recovery when the claimant was not in any way responsible for the error (see, e.g., Industrial Comm Memorandum of April 9, 1942 on Assembly Int No. 1804, Print No. 2455).
Accordingly, the order of the Appellate Division should be affirmed in Matter of Valvo, and reversed in Matter of Loll and Matter of Polvino. In the latter two cases the determination of the appeal board should be reinstated.
In Matter of Valvo: On review of submissions pursuant to rule 500.2 (b) of the Rules of the Court of Appeals (22 NYCRR 500.2 [g]), order affirmed, with costs.
In Matter of Loll and Matter of Polvino: On review of submissions pursuant to rule 500.2 (b) of the Rules of the Court of Appeals (22 NYCRR 500.2 [g]), orders reversed, without costs, and decisions of the Unemployment Insurance Appeal Board reinstated.
[1] Disposition of these appeals has been expedited pursuant to 22 NYCRR 500.2(g).
[2] Section 522 of the Labor Law states: "`Total unemployment' means the total lack of any employment on any day. The term `employment' as used in this section means any employment including that not defined in this title."
[3] The relevant portion of section 594 of the Labor Law states: "A claimant who has wilfully made a false statement or representation to obtain any benefit * * * shall forfeit benefits for at least the first four but not more than the first eighty effective days following discovery of such offense for which he otherwise would have been entitled to receive benefits. Such penalty shall apply only once with respect to each such offense * * * A claimant shall refund all moneys received because of such false statement or representation made by him."
[4] The relevant portions of section 597 of the Labor Law state:"3. Limitation on review of determinations. Any determination regarding a benefit claim may, in the absence of fraud or wilful misrepresentation, be reviewed only within one year from the date it is issued because of new or corrected information * * *
"4. Effect of review. Whenever a new determination in accordance with the preceding subdivision or a decision by a referee, the appeal board, or a court results in a decrease or denial of benefits previously allowed, such new determination or decision * * * shall not affect the rights to any benefits already paid * * * provided they were accepted by the claimant in good faith and the claimant did not make any false statement or representation and did not wilfully conceal any pertinent fact in connection with his claim for benefits."

UNEMPLOYMENT INSURANCE - CRIMINAL PENALTIES

A recent consultation brought up this issue. This is from the DOL web site and it is in all bold:

"If you work while receiving benefits and do not report that employment, even if it is part-time work, you may be committing fraud. You must report all full-time and part-time employment to the Labor Department or you risk criminal penalties."

So if a Claimant does not report income when a Claimant should, what happens? First, let us look at the NYS Unemployment Insurance Law:

"Sec. 594. Reduction of benefits for false statement. A claimant who has wilfully made a false statement or representation to obtain any benefit under the provisions of this article shall forfeit benefits for at least the first four but not more than the first eighty effective days following discovery of such offense for which he otherwise would have been entitled to receive benefits. Such penalty shall apply only once with respect to each such offense.

For the purpose of subdivision four of section five hundred ninety of this article, the claimant shall be deemed to have received benefits for such forfeited effective days.

The penalty provided in this section shall not be confined to a single benefit year but shall no longer apply in whole or in part after the expiration of two years from the date on which the offense was committed."

A claimant shall refund all moneys received because of such false statement or representation made by him."

What if the Claimant does not refund all moneys. The UI regulations are helpful:

"§ 470.4 Overpaid unemployment insurance benefits

The Commissioner of Labor shall, as provided for in section 18 of the State Finance Law, waive the assessment of interest and late charges on debts owed which occurred as a result of overpayment of unemployment insurance benefits.

§ 470.5 Setoff against unemployment insurance benefits

Established and outstanding overpaid unemployment insurance benefits shall be collected from a claimant's weekly benefit award as a setoff.

Priority of liquidation. In the event that more than one overpayment is established against an individual claimant, setoff amounts will be debited to such overpayments in chronological order.

Willful overpayment. A setoff of 100 percent of the weekly benefit amount will apply to one or more established and outstanding overpayments attributable to an individual claimant so long as at least one of such overpayments is determined to have been willful.

Non-willful overpayment. A setoff of 50 percent of the weekly benefit amount will apply to one or more established and outstanding overpayments attributable to an individual claimant so long as none of such overpayments are determined to have been willful"

But we must also look at another relevant section of the Unemployment Insurance Law:

"Sec. 630. Penalties. Any misdemeanor defined in this title shall be punishable by a fine of not more than five hundred dollars or imprisonment for not more than one year, or both. The penalties and misdemeanors imposed by this title are in addition to those otherwise prescribed in this entire article."

That section under the Unemployment Insurance Law will lead us to the following:

"Sec. 632. False statements or representations.1. Benefits and contributions. Any person shall be guilty of a misdemeanor who wilfully makes a false statement or representation

(a) with the effect of obtaining, either for himself or for any other person, any benefit or payment under the provision of this article or of any similar law of another state or the United States in regard to which this state acted as agent pursuant to an arrangement authorized by this article...."

But other statutes are also involved. In June of 2009, 30 New York State employees from Albany to New York City were arrested and charged with unemployment fraud after they allegedly claimed unemployment benefits while actually working for the state. According to Attorney General Andrew Cuomo, the thirty defendants were charged with some variation of the crimes of Grand Larceny in the Third and Fourth Degrees, Falsifying Business Records in the First Degree, and Petit Larceny. Thus, felony charges can be involved. And if this can happen to state employees, can it happen in the private sector? Here is a press release from the Department of Labor in January of this year:

"New York State Cracks Down on Unemployment Insurance Fraud in New York City
Department of Labor Announces 2009 Fraud Investigation Results

Albany, NY (January 13, 2010) - State Labor Commissioner M. Patricia Smith today announced 159 arrests in New York City during 2009 for the theft of $800,112 from New York State's Unemployment Insurance (UI) trust fund. The State Labor Department worked with district attorneys and other law enforcement agencies to bring these people to justice. Most of those arrested had collected UI benefits while earning a paycheck. Governor David A. Paterson said, "One of the pitfalls of having so many New Yorkers collecting UI is that there will always be somebody who will try to take advantage of the system. Fortunately, we're doing a great job to keep on top of fraud and the results speak for themselves. In fact, New York's stepped-up crackdown on Unemployment Insurance fraud saved businesses large and small more than $35 million last year alone."

"It is nothing short of shameful to think that people would steal from a fund designed to help families put food on the table, gas in their cars and clothes on the backs of their children," said Commissioner Smith. "Governor Paterson has directed the Labor Department and its partners in law enforcement to remain aggressive in bringing individuals who defraud the UI system to justice. Rest assured we will do just that."

The arrests are a direct result of a Labor Department program that emphasizes better fraud detection through data matching, more proactive investigations, and better coordination with local law enforcement and prosecution agencies.

Details by county are below:

New York City Region:

Manhattan 55 arrests $261,966

Brooklyn (Kings) 35 arrests $198,254

Queens 33 arrests $198,057

Bronx 25 arrests $81,897

Richmond (Staten Island) 11 arrests $59,938

Total NYC Region: 159 arrests $800,112

The State Labor Department administers unemployment insurance benefits for the federal government. The weekly payments assist eligible workers who have lost their jobs through no fault of their own. To qualify for UI, people must be:

unemployed
ready, willing and able to work and
searching for a new job.

When applicants cheat the system by stealing from the UI Trust Fund, it has a negative effect on businesses across the state. Employers whose accounts pay for the false claims must take on a higher tax rate. For example, the average employer in New York State (with some 14 employees) that has an undetected fraudulent claim filed against it will pay over $700 more in taxes the next year. However, if the Labor Department detects the fraud, the tax increase is not charged to the employer.

"Unemployment insurance is a safety net for those who need assistance, not a jackpot for those who would game the system and cheat their neighbors," said Deputy Secretary for Public Safety Denise E. O'Donnell. "In this economic climate, when government resources are scarce and needs are high, we must be especially vigilant to discourage and punish cheating. Governor Paterson and I applaud Commissioner Smith and local law enforcement officials for their aggressive efforts to track down cheaters and recover the money they stole from honest taxpayers."

New York State Police Superintendent Harry J. Corbitt said, "The State Police stands ready to assist in investigating and apprehending those individuals willing to engage in the fraudulent use of Unemployment Insurance funds meant to assist honest workers and their families."

Manhattan District Attorney Cyrus R. Vance, Jr. said, "At a time when so many New Yorkers depend on unemployment benefits, the Manhattan DA's Office is committed to rooting out and prosecuting those who fraudulently receive these funds. Thanks to the work of the Governor's Office, the Department of Labor and state and local law enforcement agencies, through investigations like these we can ensure that unemployment benefits are directed toward those who urgently need them. I am proud that our Office was able to restore more than $250,000 to the State."

Kings County District Attorney Charles J. Hynes said, "This kind of fraud steals funds intended to help people who are in genuine need of public assistance. We continue to be vigilant about prosecuting these crimes."

Queens District Attorney Richard A. Brown said, "The payment of unemployment benefits is intended to assist out-of-work individuals and their families struggling through these tough economic times - not to subsidize the lifestyles of those who bilk the government of scarce resources through deception."

Bronx District Attorney Robert T. Johnson said, "The Labor Department is to be applauded for enhancing its data-matching and investigative ability. We will continue to stand alongside them in their efforts to put a stop to fraud."

Richmond County District Attorney Daniel M. Donovan, Jr. said, "Unemployment Insurance fraud is a crime against the taxpayers of this state and our neighbors who are out of work in this tough economy and legitimately need temporary assistance. We will continue to work with our partners in government and law enforcement to aggressively investigate and prosecute this crime."

To make an anonymous report about fraud against the Unemployment Insurance fund, call the Department of Labor's toll-free hotline at (888) 598-2077."

UNEMPLOYMENT INSURANCE - PENALTIES

Since we have been discussing overpayments, you should be aware of this statute and the very wide definition of wilfully:

"§ 594 Labor Law. Reduction of benefits for false statement.

A claimant who has wilfully made a false statement or representation to
obtain any benefit under the provisions of this article shall forfeit
benefits for at least the first four but not more than the first eighty
effective days following discovery of such offense for which he otherwise
would have been entitled to receive benefits. Such penalty shall apply only
once with respect to each such offense.

For the purpose of subdivision four of section five hundred ninety of
this article, the claimant shall be deemed to have received benefits for
such forfeited effective days.

The penalty provided in this section shall not be confined to a single
benefit year but shall no longer apply in whole or in part after the
expiration of two years from the date on which the offense was committed. A
claimant shall refund all moneys received because of such false statement
or representation made by him."

Now according to the Department of Labor:

"Not every false statement subjects a claimant to the penalties provided in sub. sec. 594. A claimant may provide information (s)he believes to be true, which ultimately proves to be incorrect. In such instances no penalty applies. However, if it is established that the claimant was aware of the true situation, but gave false information, or purposely failed to fully disclose the facts, a determination of wilful misrepresentation should be made. As the courts have held, "'wilful' as used here does not imply a criminal intent to defraud but means 'knowingly' , 'intentionally' , 'deliberately' to make a false statement. (Matter of Vick, 12 AD 2d 120)"