A federal district court judge in the Southern District of New York ruled late last week that three credit unions had successfully established a likelihood of success on their claims that the retroactive application of New York’s recently-passed rate reduction law constitutes a regulatory taking in violation of the U.S. Constitution and preliminarily enjoined state sheriffs’ offices from enforcing the law.

The credit unions had filed a federal class action lawsuit seeking to enjoin the enforcement or implementation of the rate reduction law which lowered the statutory annual interest rate on consumer debt judgments in New York from 9% to 2%, and was set to take effect April 30, 2022.  Three of the New York county sheriffs’ offices –the named defendants in the lawsuit – initially opposed the preliminary injunction but reversed their position during a hearing on the motion, noting that they too would benefit (from potential indemnification) should the court issue an injunction and clearly define their obligations under the new law.  In response to concerns of the three sheriffs’ offices about uneven application, the court also ordered a copy of the issued preliminary injunction to be served on the sheriffs’ offices of the remaining fifty-nine counties in New York not named directly in the lawsuit.

The only other named defendant – the chief administrative judge for New York state courts whose office is ostensibly tasked with creating the policies and procedures necessary to implement the rate reduction law – will not be enjoined under the court’s order.  According to the court, the credit unions had failed to show the chief administrative judge had either the authority or “willingness to exercise [his] duty” to enforce the rate reduction law, and therefore failed to demonstrate a likelihood of success as to that state official.

In determining that the preliminary injunction should be granted as to the sheriffs, the court relied on the credit unions’ arguments that retroactive application of the law would violate their property interests by eradicating millions of dollars currently owed by judgment debtors; a regulatory taking the court deemed “so onerous that its effect is tantamount to a direct appropriation . . . .”  The credit unions also raised concerns about due process violations arising from the law’s silence on how to perform mandated rate recalculations, particularly where some payments have been made.  According to the credit unions, the law’s silence on this issue creates significant compliance uncertainty.

The injunction will remain in place while the litigation proceeds unless the court (or an appellate court) decides it is no longer necessary.