DONALD M. LUSNAK, оn behalf of himself and all others similarly situated v. BANK OF AMERICA, N.A.
No. 14-56755
United States Court of Appeals for the Ninth Circuit
March 2, 2018
Opinion by Judge Nguyen
D.C. No. 2:14-cv-01855-GHK-AJW; Argued and Submitted November 7, 2016; Pasadena, California
FOR PUBLICATION
SUMMARY*
Preemption / National Bank Act
The panel reversed the district court‘s dismissal of a putative class action; held that that the National Banking Act did not preempt California‘s state escrow interest law,
Plaintiff filed his lawsuit on behalf of himself and a proposed class of similarly situated Bank of America customers, alleging that the Bank violated both California state law and federal law by failing to pay interest on his escrow account funds.
In 2010, Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act. Titles X and XIV of Dodd-Frank aim to prevent, and mitigate the effects of, another mortgage crisis.
The panel held that although Dodd-Frank significantly altered the regulatory framework governing financial institutions, with respect to National Bank Act preemption, it merely codified the existing standard established in Barnett Bank of Marion County, N.A. v. Nelson, 517 U.S. 25 (1996). Applying that standard, the panel held that the National Bank Act did not preempt
Turning to plaintiff‘s claims for relief, the panel held that plaintiff may proceed with his California UCL and breach of contract claims against Bank of America. The panel held that plaintiff could not rely on
COUNSEL
Roger N. Heller (argued), Jordan Elias, and Michael W. Sobol, Lieff Cabraser Heimann & Bernstein LLP, San Francisco; Jae K. Kim and Richard D.
OPINION
NGUYEN, Circuit Judge:
Congress significantly altered the regulation of financial institutions with the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank“). This sweeping piece of legislation was a response to the worst financial crisis since the Great Depression, in which millions of Americans lost their homes. This appeal requires us to determine whether in light of Dodd-Frank, the National Bank Act (“NBA“) preempts California‘s state escrow interest law,
California‘s escrow interest law, enacted in 1976, requires financial institutions to pay borrowers at least two percent annual interest on the funds held in the borrowers’ escrow accounts. This type of account is often set up in conjunction with a mortgage, either as a condition set by the lender or at the request of the borrower. Its purpose is to ensure payment of obligations such as property taxes and insurance. These accounts often carry a significant positive balance.
Plaintiff Donald Lusnak, on behalf of a putative class, filed suit against Bank of America, which does not pay borrowers any interest on the positive balance in their accounts. The district court dismissed the suit on the ground that the NBA preempted
We reverse. Although Dodd-Frank significantly altered the regulatory framework governing financial institutions, with respect to NBA preemption, it merely codified the existing standard established in Barnett Bank of Marion County, N.A. v. Nelson, 517 U.S. 25 (1996). Applying thаt standard here, we hold that the NBA does not preempt
I. Background
A. The National Bank Act
“In 1864, Congress enacted the NBA, establishing the system of national banking still in place today.” Watters v. Wachovia Bank, N.A., 550 U.S. 1, 10 (2007) (citations omitted). The NBA provides for the formation of national banks and grants them several enumerated powers as well as “all such incidental powers as shall be necessary to carry on the business of banking.” Id. at 11 (quoting
The NBA also ushered in a “dual banking system,” wherein banks could be chartered either by the OCC or by a State
B. Dodd-Frank
In 2010, Congress enacted Dodd-Frank in response to a “financial crisis that nearly crippled the U.S. economy.”2 S. Rep. No. 111-176, at 2 (2010); see also id. at 15 (“It has become clear that a major cause of the most calamitous worldwide recession since the Great Depression was the simple failure of federal regulators to stop abusive lending, particularly unsustainable home mortgage lending.” (quoting The Creation of a Consumer Financial Protection Agency to Be the Cornerstone of America‘s New Economic Foundation: Hearing Before S. Comm. On Banking, Hous., and Urban Affairs, 111th Cong. 82 (2009) (Statement of Travis Plunkett, Legislative Director, Consumer Federation of America))). Dodd-Frank brought abоut a “sea change” in the law, affecting nearly every corner of the nation‘s financial markets. See, e.g., Loan Syndications & Trading Ass‘n v. S.E.C., 818 F.3d 716, 718 (D.C. Cir. 2016); Damian Paletta & Aaron Lucchetti, Law Remakes U.S. Financial Landscape, Wall St. J., July 16, 2010, at A1 (“Congress approved a rewrite of rules touching every corner of finance . . . .“). One of Congress‘s main goals in this sweeping legislation was to prevent another mortgage crisis, which resulted in “unprecedented levels of defaults and home foreclosures.” See, e.g., H.R. Rep. No. 111-94, at 48 (2009).
Titles X and XIV of Dodd-Frank, at issue in this case, aim to prevent, and mitigate the effects of, another mortgage crisis. In a section of Title X called “Preservation of State Law,” Congress addressed the framework of NBA preemption determinations. These provisions were designed to address “an environment where abusive mortgage lending could flourish without State controls.” S. Rep. No. 111-176, at 17. Congress aimed to undo broad preemption determinations, which it believed planted the seeds “for long-term trouble in the national banking system.” Id. at 17. In a section of Title XIV called “Escrow and Impound Accounts Relating to Certain Consumer Credit Transactions,” Congress established a series of measures to help borrowers understand their mortgage obligations.
C. Factual Background
In July 2008, Lusnak purchased a home in Palmdale, California with a mortgage from Countrywide Financial. Soon thereafter, Bank of America purchased Countrywide Financial and assumed control over
As a condition for obtaining a mortgage, Lusnak was required to open a mortgage escrow account into which he pays $250 per month. Lusnak alleges that Bank of America is able to enrich itself by earning returns on funds in his account. Bank of America acknowledges that it does not comply with state escrow interest laws and that Wells Fargo—its chief competitor and the largest mortgage banker in America—does. But it contends that no federal or “appliсable” state law requires it to pay interest on Lusnak‘s escrow account funds.
D. Procedural History
On March 12, 2014, Lusnak filed this lawsuit on behalf of himself and a proposed class of similarly situated Bank of America customers. Pursuant to the “unlawful” prong of California‘s UCL, Lusnak alleged that Bank of America violated both state law,
The district court granted the motion to dismiss. Lusnak v. Bank of Am., N.A., No. CV 14-1855-GHK (AJWx), 2014 WL 6779131 (C.D. Cal. Oct. 29, 2014). It first acknowledged that Dodd-Frank clarified and amended the NBA preemption framework. Id. at *3–5. The district court then concluded that California‘s escrow interest law “prevents or significantly interferes with” banking powers and therefore is preempted by the NBA. Id. at *7–8. In so concluding, the district court determined that
II. Jurisdiction and Standard of Review
We have jurisdiction under
III. Discussion
The central question here is whether the NBA preempts
this court‘s attention,
(3) Applicability of payment of interest
If prescribed by applicable State or Federal law, each creditor shall pay interest to the consumer on the amount held in any impound, trust, or escrow account that is subject to this section in the manner as prescribed by that applicable State or Federal law.
A. Preemption Framework
1. Guiding Principles of Preemption
Our analysis is governed by “the two cornerstones of . . . preemption jurisprudence.” Wyeth v. Levine, 555 U.S. 555, 565 (2009). “First, ‘the purpose of Congress is the ultimate touchstone in every pre-emption case.‘” Id. (quoting Medtronic, Inc. v. Lohr, 518 U.S. 470, 485 (1996)). “[W]hen Congress has made its intent known through explicit statutory language, the courts’ task is an easy one.” English v. Gen. Elec. Co., 496 U.S. 72, 79 (1990). Second, we start with the assumption that the State‘s historic police powers are not preempted “unless that was the clear and manifest purpose of Congress.” Wyeth, 555 U.S. at 565 (quoting Medtronic, 518 U.S. at 485).
In the context of the NBA, Dodd-Frank provides that state laws are preempted if they “prevent[] or significantly interfere[] with the exercise by the national bank of its powers.”
2. Dodd-Frank‘s Amendments to the NBA Preemption Framework
Dodd-Frank addressed the preemptive effect of the NBA in several ways. First, it emphasized that the legal standard for
Before Dodd-Frank, the Supreme Court held in Barnett Bank that states are not “deprive[d] . . . of the power to regulate national banks, where . . . doing so does not prevent or significantly interfere with the national bank‘s exercise of its powers.” 517 U.S. at 33 (emphasis added). This is because “normally Congress would not want States to forbid, or to impair significantly, the exercise of a power that Congress explicitly granted.” Id.
Following Barnett Bank, the OCC issued in 2004 its interpretation of the NBA preemption standard: “Except where made applicable by Federal law, state lаws that obstruct, impair, or condition a national bank‘s ability to fully exercise its Federally authorized real estate lending powers do not apply to national banks.”
We never addressеd whether the OCC‘s interpretation was inconsistent with Barnett Bank, or whether the regulation was owed deference while it was in effect. The Supreme Court, however, has indicated that regulations of this kind should receive, at most, Skidmore deference—and even then, only as to a conflict analysis, and not as to the legal conclusion on preemption. In Wyeth v. Levine, the Supreme Court noted that when Congress has not
We conclude that under Skidmore, the OCC‘s regulation would have been entitled to little, if any, deference in light of Barnett Bank, even before the enactment of Dodd-Frank. This regulation was the OCC‘s articulation of its legal analysis; the OCC simply purported to adopt the Supreme Court‘s articulation of the applicable preemption standards in prior cases, but did so inaccurately. See 69 Fed Reg. at 1910 (“We have adopted in this final rule a statement of preemption principles that is consistent with the various formulations noted [in Supreme Court precedent] . . . ; that is, that state laws do not apply to national banks if they impermissibly contain a bank‘s exercise of a federally authorized power.“). The OCC did not conduct its own review of specific potential conflicts on the ground. See id. It follows that the OCC‘s 2004 preemption regulation had no effect on the preemption standard prior to Dodd-Frank, which was governed by Barnett Bank.
In Dodd-Frank, Congress underscored that Barnett Bank continues to provide the preemption standard; that is, state consumer financial law is preempted only if it “prevents or significantly interferes with the exercise by the national bank of its powers,”
The one substantive change in the law that Dodd-Frank enacted was to require the OCC to follow certain procedures in making preemption determinations. Dodd-Frank mandates that all of the OCC‘s future preemption determinations be made “on a case-by-case basis, in accordance with applicable law.”
We now turn to the question of whether the NBA preempts California‘s escrow interest law.
B. The NBA Does Not Preempt California‘s Escrow Interest Law
Under both Barnett Bank and Dodd-Frank, we must determine whether
Congress provided in Dodd-Frank, the operative question is whether section 2954.8(a) prevents Bank of America from exercising its national bank powers or significantly interferes with Bank of America‘s ability to do so. See
Applying that standard here, we hold that
Dodd-Frank does not define the term “applicable.” But the Supreme Court recently explained:
“Applicable” means “capable of being applied: having relevance” or “fit, suitable, or right to be applied: appropriate.” Webster‘s Third New International Dictionary 105 (2002). See also New Oxford American Dictionary 74 (2d ed. 2005) (“relevant or appropriate“); 1 Oxford English Dictionary 575 (2d ed. 1989) (“[c]apable of being applied” or “[f]it or suitable for its purpose, appropriate“). So an expense amоunt is “applicable” within the plain meaning of the statute when it is appropriate, relevant, suitable, or fit.
Ransom v. FIA Card Servs., N.A., 562 U.S. 61, 69 (2011); see also Applicable, Collins English Dictionary 97 (12th ed. 2014) (“being appropriate or relevant“); Applicable, Oxford Dictionaries (Oxford University Press), https://premium.oxforddictionaries.com/definition/american_english/applicable (last visited Jan. 25, 2018) (“[r]elevant or appropriate“). Accordingly, “applicable” law in the context of
The inclusion of this term makes sense because not every state has escrow interest laws. In a rеgulation implementing Dodd-Frank‘s amendments to the TILA, the Consumer Financial Protection Bureau explained that:
[T]he creditor may be able to gain returns on the money that the consumers keep in their escrow account. Depending on the State, the creditor might not be required to pay interest on the money in the escrow account. The amount that the consumer is required to have in the consumer‘s escrow account is generally limited to two months’ worth of property taxes and home insurance. However, some States require a fixed interest rate to be paid on escrow accounts, resulting in an additional cost to the creditors.
Esсrow Requirements Under the Truth in Lending Act (Regulation Z), 78 Fed. Reg. 4726, 4747 (Jan. 22, 2013). Lusnak notes that only thirteen states appear to have escrow interest laws similar to California‘s. Through its requirement that creditors pay interest “in the manner as prescribed by” the relevant state law, Congress demonstrated an awareness of, and intent to address, the differences among state escrow interest laws.
Although we need not resort to legislative history, we note that it, too, confirms our interpretatiоn of
Servicers must administer such accounts in accordance with the Real Estate Settlement Procedures Act (RESPA), [Flood Disaster Protection Act], and, if applicable, the law of the State where the real property securing the transaction is located, including making interest payments on the escrow account if required under such laws.
Id. at 91 (emphasis added). This passage shows Congress‘s view that creditors, including large corporate banks like Bank of America, can comply with state escrow interest laws without any significant interference with their banking powers.
No legal authority supports Bank of America‘s position that
All of Bank of America‘s cited cases are inapposite. Flagg v. Yonkers Savings & Loan Association concerned the Office of Thrift Supervision‘s (“OTS“) authority to regulate federal savings associations, and the Second Circuit‘s holding in that сase was based on the OTS‘s field preemption over the regulation of such associations. 396 F.3d 178, 182 (2d Cir. 2005). Unlike the OTS, the OCC does not enjoy field preemption over the regulation of national banks.8 Aguayo, 653 F.3d at 921–22 (“[W]hile the OTS and the OCC regulations are similar in many ways . . . the OCC has explicitly avoided full field preemption in its rulemaking and has not been granted full field preemption by Congress.“). First Federal Savings and Loan Association of Boston v. Greenwald also fails to support Bank of America‘s position. 591 F.2d 417 (1st Cir. 1979). Greenwald concerned a direct conflict between a state regulation requiring payment of interest on certain escrow accounts and a federal regulation expressly stating that no such obligation was to be imposed on federal savings associations “apart from the duties
imposed by this paragraph” or “as provided by contract.” Id. at 425. Here, there is no federal regulation that directly conflicts with section 2954.8(a).9
C. Lusnak‘s Claims For Relief
We turn now to Lusnak‘s two claims for relief. Using the UCL as a procedural vehicle, Lusnak alleges that Bank of America violated both state law,
Bank of America—failing to distinguish between Lusnak‘s state and federal theories—argues that his UCL claim cannot proceed because his escrow account was created before
Moreover,
However, these conclusions do not preclude Lusnak from obtaining relief under the UCL. Because
Lusnak may also proceed on his breach of contract claim. Lusnak‘s mortgage
IV. Conclusion
For the reasons set forth above, we REVERSE and REMAND the case for further proceedings consistent with this Opinion.
JACQUELINE H. NGUYEN
UNITED STATES CIRCUIT JUDGE
Notes
In full,
Every financial institution that makes loans upon the security of real property contаining only a one- to four-family residence and located in this state or purchases obligations secured by such property and that receives money in advance for payment of taxes and assessments on the property, for insurance, or for other purposes relating to the property, shall pay interest on the amount so held to the borrower. The interest on such amounts shall be at the rate of at least 2 percent simple interest per annum. Such interest shall be credited to the borrower‘s account annually or upon termination of such account, whichever is earlier.
That these provisions were among those that had a future effective date, see 124 Stat. at 2018, makes no difference to our analysis. If we were to apply the “previous” NBA preemption standard and level of deference to OCC preemption determinations, we would apply, as explained above, the Barnett Bank standard and Skidmore deference required by the Dodd-Frank amendments.
Of course, a statute should be “so construed that, if it can be prevented, no clause, sentence, or word shall be superfluous, void, or insignificant.” TRW Inc. v. Andrews, 534 U.S. 19, 31 (2001) (quoting Duncan v. Walker, 533 U.S. 167, 174 (2001)). But no such superfluity exists here where the effective date provision applies to the whole subtitle, which imposes other requirements upon the OCC, and not just the provisions clarifying the preemption and agency deference standards. 124 Stat. at 2018. In fact, the OCC appears to have interpreted the effective date in just such a manner. See 76 Fed. Reg. at 43557.