Flagg v. Yonkers Savings And Loan AssociationFlagg v. Yonkers Savings And Loan Association
Jean E. Burke, Thacher Proffitt & Wood, LLP, New York City (Doreen Klein, on the brief), for Defendant-Appellee.
H. Rodgin Cohen, Sullivan and Cromwell LLP (Bruce E. Clark, of counsel), New York City, for the New York Bankers’ Association as amicus curiae in support of Defendant-Appellee.
Before: OAKES, CALABRESI, and STRAUB, Circuit Judges.
STRAUB, Circuit Judge.
1 The small universe of facts germane to the present appeal is set forth in the decision of the District Court, reported at Flagg v. Yonkers Sav. & Loan Ass‘n, 307 F.Supp.2d 565 (S.D.N.Y.2004). We recite them here only briefly.
2 Plaintiffs-Appellants Hans and Eileen Flagg (the “Flaggs“) entered into a mortgage agreement with defendant-appellee Yonkers Savings and Loan Association (“Yonkers“) on June 12, 1998. Pursuant to that agreement, and consistent with federal laws and guidelines that regulate Yonkers as a federal savings association, the Flaggs deposited funds into an escrow account from which property taxes, insurance, and other fees associated with the mortgaged property were to be paid. In relation to these escrow funds, the mortgage agreement provided that “Lender will not be required to pay me any interest or earnings on the Funds unless either (i) Lender and I agree in writing at the time I sign this Security Instrument, that Lender will pay interest on the Funds; or (ii) the law requires Lender to pay interest on the Funds.” The principal issue on appeal is whether “the law” so required.
3 Until May 2002 Yonkers did not pay interest to the Flaggs on funds held in the escrow account. In May 2002 Yonkers merged with Atlantic Bank of New York (“Atlantic“), a wholly-owned subsidiary of the National Bank of Greece. After this merger Atlantic began to pay interest on the funds held in the Flaggs’ mortgage escrow account. The Flaggs subsequently sued Yonkers based on New York statutes, New York common law, and the Fifth Amendment to the United States Constitution, seeking
DISCUSSION
4 The Flaggs raise three issues on appeal. First, they maintain that New York State law required that Yonkers pay them interest on their mortgage escrow account. Second, they contend that the contract governing their mortgage escrow account incorporated New York law, thereby obligating Yonkers to pay interest on the account under the contract. Third, the Flaggs assert that the District Court erred in dismissing their Fifth Amendment claim. We do not find merit in any of these arguments.
I. Federal Law Preempts the Field of Mortgage Escrow Accounts Held by Federal Savings Associations.
6 New York law requires “mortgage investing institutions” to pay interest on mortgage escrow accounts on a quarterly basis at a rate of “not less than two percentum per year based on the average of the sums so paid for the average length of time on deposit or a rate prescribed by the banking board pursuant to section fourteen-b of the banking law and pursuant to the terms and conditions set forth in that section whichever is higher.”
7 Pursuant to the authority granted to it by the Home Owners’ Loan Act,
8 On appeal the Flaggs do not contest the District Court‘s determination that the OTS has preempted state law with respect to the provision of interest on mortgage escrow accounts; rather, the Flaggs contend that this OTS action exceeds the authority granted to it by HOLA and is an arbitrary and unreasonable exercise of its regulatory power. We do not agree. Consistent with the District Court, we find that the exercise of authority here is neither arbitrary nor unreasonable and is within the broad grant of power to the OTS contained in HOLA.
9 “Federal regulations have no less pre-emptive effect than federal statutes. Where Congress has directed an administrator to exercise his discretion, his judgments are subject to judicial review only to determine whether he has exceeded his statutory authority or acted arbitrarily. When the administrator promulgates regulations intended to pre-empt state law, the court‘s inquiry is similarly limited.” Fid. Fed. Sav. & Loan Ass‘n. v. de la Cuesta, 458 U.S. 141, 153-154 (1982) (internal citations omitted); see also La. Pub. Serv. Comm‘n. v. F.C.C., 476 U.S. 355, 374 (1986) (“[A] federal agency may pre-empt state law only when and if it is acting within the scope of its congressionally delegated authority.... [T]he best way of determining whether Congress intended the regulations of an administrative agency to displace state law is to examine the nature and scope of the authority granted by Congress to the agency.” (internal citations omitted)).
10 This evaluation is usually informed by a presumption in favor of the authority of state law in areas of activity traditionally allocated to the supervisory organs of the various states. See Rice v. Santa Fe Elevator Corp., 331 U.S. 218, 230 (1947). The presumption against federal preemption disappears,
11 HOLA, in pertinent part, provides that “[t]he Director [of the OTS] may issue such regulations as the Director determines to be appropriate to carry out the responsibilities of the Director or the Office,”
12 While the propriety of this particular use of regulative power by the OTS appears to present a novel question in this Circuit, there is ample analogous precedent to demonstrate that this exercise of preemption is within reason and HOLA‘s grant of authority. In de la Cuesta, for example, the Supreme Court was asked to consider the OTS‘s authority to promulgate and enforce
13 We cannot discern a critical difference between these cases and the one at bar. HOLA gives a broad grant of authority to the OTS. We see no basis for concluding that the use of that authority here is outside the authority of the OTS.
14 We also find that the OTS‘s use of its authority in this case is not arbitrary. We recognize the potential interest that the OTS has in providing for consistency across the field of mortgage accounts offered by federal savings associations. See
15 More concretely, the Flaggs claim that the OTS regulation releasing federal savings associations from responsibility to pay interest on escrow funds is unreasonable and without authority because it is inconsistent with provisions of the Real Estate Settlement Procedures Act (“RESPA“),
16 Most germane to the present case is RESPA‘s interest in effecting a “reduction in the amounts home buyers are required to place in escrow accounts established to insure the payment of real estate taxes and insurance.”
17 First, RESPA and HOLA are not coextensive. RESPA applies to all mortgage loans that are “federally related.”
18 Given that HOLA deals with institutions and RESPA deals with transactions, it simply does not make sense to read RESPA as superceding HOLA and preventing the OTS from asserting regulatory authority over the policies and practices of federal savings associations with respect to escrow accounts. The more sensible reading of these statutes is that federal savings associations, like all grantors of mortgage loans, must abide by RESPA as interpreted by the Secretary of Housing and Urban Development. The OTS cannot, therefore, promulgate rules and regulations that are contrary to RESPA. That this is so does not, however, exclude the OTS from preempting the field of rules governing federal savings associations and establishing nationwide regulations governing these institutions that are consistent with federal law, including RESPA.2
19 Second, the Flaggs’ reliance on RESPA‘s statement of purpose found at
20 The Flaggs express some concerns that mortgage contracts are prepared by lending institutions and constitute contracts of adhesion. However, this particular contract specifically provides an opportunity for mortgagees of Yonkers to negotiate, by separate agreement, payment of interest on escrow accounts. It cannot, therefore, be a contract of adhesion. Moreover, the Flaggs do not appear to have attempted to negotiate interest terms on their escrow account. Having failed to take advantage of the invitation extended in the contract, the Flaggs’ argument that the contract, by virtue of disparities in power between the parties, was effectively a contract of adhesion fails to persuade. Their argument is only made less persuasive when one considers that Atlantic, which currently is host to the Flaggs’ account, does pay interest on mortgage escrow accounts. This fact suggests that the mortgage-lender marketplace is inhabited by lenders who do pay interest on mortgage escrow accounts, providing both options and bargaining power to borrowers such as the Flaggs.
II. The Mortgage Contract Does Not Incorporate State Law.
22 The Flaggs contend that, even if Yonkers was not bound by New York law requiring payment of interest on mortgage escrow accounts, their contract with Yonkers incorporated New York law, therefore requiring that Yonkers pay interest to the Flaggs under the contract. In support of this argument, the Flaggs point to section fifteen of the contract, titled “Law that Governs this Security Instrument.” That section reads, in its entirety:
This Security Instrument is governed by federal law and the law that applies in the place where the Property is located. If any term of this Security Instrument or of the Note conflicts with the law, all other terms of this Security Instrument and of the Note will still remain in effect if they can be given effect without the conflicting term. This means that any terms of this Security Instrument and of the Note which conflict with the law can be separated from the remaining terms, and the remaining terms will still be enforced.
24 This section of the contract, is, by title and content, a choice of law provision. While contracts may incorporate particular laws as contract terms, the contract must do so with specificity. General choice of law provisions do not accomplish this task. See Shaw Group, Inc. v. Triplefine Int‘l Corp., 322 F.3d 115, 123 (2d Cir.2003) (without clear language of incorporation, a general choice of law provision was held not to have incorporated New York arbitration law into a contract).
25 The contract specifically states that Yonkers will not pay interest on the account unless required by law. Since, per HOLA and OTS regulations, Yonkers is not required by law to pay interest, the contract does not commit Yonkers to pay interest to the Flaggs on this mortgage escrow account.
27 The Flaggs claim that Yonkers‘s failure to pay interest on amounts held in the mortgage escrow account constituted an uncompensated taking in violation of their Fifth Amendment rights. The District Court granted Yonkers‘s motion to dismiss this claim based primarily on its finding that there was no state action. Flagg v. Yonkers Sav. & Loan Ass‘n., 307 F.Supp.2d 565, 585 (S.D.N.Y.2004). We agree.
28 “Because the United States Constitution regulates only the Government, not private parties, a litigant claiming that his constitutional rights have been violated must first establish that the challenged conduct constitutes ‘state action.‘” United States v. Int‘l. Bhd. of Teamsters, 941 F.2d 1292, 1295 (2d Cir.1991). “[S]tate action requires both an alleged constitutional deprivation ‘caused by the exercise of some right or privilege created by the State or by a rule of conduct imposed by the State or by a person for whom the State is responsible,’ and that ‘the party charged with the deprivation must be a person who may fairly be said to be a state actor.‘” Am. Mfrs. Mut. Ins. Co. v. Sullivan, 526 U.S. 40, 50 (1999) (quoting Lugar v. Edmondson Oil Co., 457 U.S. 922, 937 (1982)). While Yonkers‘s election not to pay interest to the Flaggs on their escrow account may qualify as an “exercise” of a “privilege created by the State,” its action is not “fairly attributable to the State,” Sullivan, 526 U.S. at 50, and, therefore, it was not a “state actor” for purposes of evaluating the legal merits of the Flaggs’ takings claim.
29 Though Yonkers is a “federal savings association,” it is a private corporation, not a state agency. “For the conduct of a private entity to be fairly attributable to the state, there must be such a close nexus between the State and the challenged action that seemingly private behavior may be fairly treated as that of the State itself.” Cranley v. Nat‘l Life Ins. Co., 318 F.3d 105, 111 (2d Cir.2003) (internal quotations omitted). A nexus of “state action” exists between a private entity and the state when “the state exercises coercive power, is entwined in the management or control of the private actor, or provides the private actor with significant encouragement, either overt or covert, or when the private actor operates as a willful participant in joint activity with the State or its agents, is controlled by an agency of the State, has been delegated a public function by the state, or is entwined with governmental policies.” Id. at 112 (internal quotations and alterations omitted). By these well-established standards, no nexus existed between the OTS and Yonkers‘s decision not to pay interest on the Flaggs’ escrow account.
30 While federal law freed Yonkers, as a federal savings association, from any legal duty to pay interest on mortgage escrow accounts, there was no federal mandate prohibiting Yonkers from paying interest to the Flaggs or any other mortgagee-client. Neither did any state agent advise or command that Yonkers not pay interest on mortgage escrow accounts. In fact, the OTS was neutral on the subject, leaving negotiation of interest payments on escrow accounts to the contracting parties. Neither the OTS nor any other state agency was party to the Flaggs’ contract with Yonkers. There was no OTS-Yonkers joint enterprise; and no state function was delegated to Yonkers as a mortgagor. In short, Yonkers was a private entity participating in a regulated field of activity. Yonkers‘s actions were consistent with the law, to be sure, but obedience to the law alone does not create a sufficient nexus with the state to sustain a finding of “state action.”
31 We have reviewed all of appellants’ remaining arguments and find each of them to be without merit. For the foregoing reasons, the judgment of the District Court is AFFIRMED.