49 F.4th 121
2d Cir.2022Background
- Plaintiffs took out home mortgages from Bank of America (BOA) and were required to fund tax/insurance escrow accounts; BOA paid no interest on those escrow balances.
- Plaintiffs sued for breach of contract claiming entitlement to a minimum 2% interest under New York Gen. Oblig. Law § 5-601 (GOL § 5-601).
- BOA moved to dismiss, arguing GOL § 5-601 is preempted as applied to nationally chartered banks by the National Bank Act (NBA); the district court denied the motion relying in part on Dodd-Frank/TILA changes.
- Dodd-Frank codified a Barnett Bank–style preemption standard and amended TILA to require interest payments on escrow for certain covered mortgages; Cantero’s loan predated those provisions, Hymes’s loan postdated them.
- The Second Circuit reversed: applying ordinary conflict-preemption principles, it held the NBA preempts GOL § 5-601 as applied to national banks and concluded Dodd-Frank did not alter that outcome for these loans.
- The court emphasized that preemption turns on whether a state law purports to control a federally granted banking power (here, escrow-account administration and the power to set payment terms), not on the magnitude of economic impact.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether NY GOL § 5-601 (2% minimum on mortgage escrow) applies to national banks or is preempted by the NBA | GOL § 5-601 is a modest consumer-protection rule and does not control or destroy national-bank powers; therefore it is not preempted | NBA grants national banks powers (including incidental escrow services) that displace state laws that would control those powers; GOL § 5-601 purports to control escrow administration and is preempted | The NBA preempts GOL § 5-601 as applied to national banks because the statute would control a federally granted banking power (payment terms for escrow accounts) |
| Whether Dodd-Frank (including the TILA amendment) changes the preemption analysis or makes GOL § 5-601 applicable to these loans | Dodd-Frank codified a standard requiring preemption only when state laws "prevent or significantly interfere," and the TILA amendment reflects Congress’s judgment that state escrow-interest laws can apply | Dodd-Frank codified Barnett Bank and did not broaden state authority; the TILA amendment applies only to certain covered mortgages and does not retroactively eliminate NBA preemption | Dodd-Frank merely codified Barnett Bank’s ordinary preemption rules and does not change the result; TILA’s escrow-interest provision is inapplicable to these loans and does not imply GOL § 5-601 applies to national banks generally |
| Whether Plaintiffs plausibly pleaded a contractual obligation to pay interest on escrow balances | Plaintiffs allege contracts governed by federal and state law and that BOA systematically refuses to pay interest | BOA argues that, because GOL § 5-601 is preempted, no statutory basis exists to imply a contract obligation to pay interest | Plaintiffs failed to state a breach-of-contract claim because GOL § 5-601 is preempted as applied to BOA, and the complaints lack other factual allegations creating a contractual duty to pay interest |
Key Cases Cited
- McCulloch v. Maryland, 17 U.S. 316 (federal instrumentalities immune from state laws that would "control" or "destroy" federal powers)
- Barnett Bank of Marion Cnty., N.A. v. Nelson, 517 U.S. 25 (preemption analysis: apply ordinary conflict-preemption principles; federal grant of bank powers preempts contrary state law)
- Watters v. Wachovia Bank, N.A., 550 U.S. 1 (federal control shields national banking from unduly burdensome or duplicative state regulation)
- Franklin Nat'l Bank of Franklin Square v. New York, 347 U.S. 373 (state law preempted where it directly regulated an incidental national-bank power)
- First Nat'l Bank of San Jose v. California, 262 U.S. 366 (aggregation of similar state laws could "destroy" federal banking powers; preemption even where practical effects appear limited)
- Davis v. Elmira Sav. Bank, 161 U.S. 275 (national banks are federal instrumentalities subject to the paramount authority of the United States)