United States: Preemption Battles & Class Actions Ahead?

On March 2, 2018, a three-judge panel of the Ninth Circuit Court of Appeals reversed the dismissal of a putative class action in Lusnak v. Bank of America, No. 14-56755, 2018 WL 1122298 (9th Cir. Mar. 2, 2018), ruling that the National Bank Act (NBA) does not preempt a California law requiring banks to pay interest on borrowers' escrow accounts. In one of the most important aspects of the opinion, the panel essentially rejected the preemption rules of the Office of the Comptroller of the Currency (OCC). This ruling could mark the beginning of a series of preemption battles and an increase in financial services class actions.

Plaintiff Donald Lusnak, on behalf of a putative class, alleged that Bank of America violated California's escrow interest law, Cal. Civ. Code § 2954.8(a), California's Unfair Competition Law, Cal. Bus & Prof. Code § 17200 et seq. (UCL), and a federal statute requiring payment of escrow interest, 15 U.S.C. § 1639d(g)(3), as well as the terms of his mortgage agreement, by failing to pay interest on escrow account funds. The district court dismissed the action on the ground that the NBA preempted Civil Code section 2954.8(a), which formed the basis of each of plaintiff's claims. In reversing that decision, the Ninth Circuit panel relied on a broad interpretation of the Dodd-Frank Act's provisions and its purpose to protect consumers.

To begin, the panel acknowledged that the Dodd-Frank Act includes no presumption against preemption. The panel raised the bar, however, by characterizing Civil Code section 2954.8(a) as a "consumer protection" statute for purposes of establishing the preemption standard (despite recognizing elsewhere that section 2954.8(a) is a "state consumer financial law" under the Dodd-Frank Act). The panel then stated: "Where, as here, we are confronted with state consumer protection laws, 'a field traditionally regulated by the states, compelling evidence of an intention to preempt is required.'"

Nevertheless, the panel purported to apply the legal standard established by the Supreme Court's 1996 holding in Barnett Bank of Marion County N.A. v. Nelson 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." Noting that the Dodd-Frank Act's preemption provision codified this standard, the panel found that Civil Code section 2954.8(a) does not prevent or significantly impair a national bank's exercise of its powers. In doing so, the panel focused on the Dodd-Frank Act's provision requiring payment of escrow interest, § 1639d(g)(3), which states: "If prescribed by applicable State or Federal law, each creditor shall pay interest to the consumer on the amount held in any . . . escrow account that is subject to this section in the manner as prescribed by that applicable State or Federal law."

The panel reasoned that the § 1639d(g)(3) requirement for "banks to pay interest on escrow account balances '[i]f prescribed by applicable State [] law' expresses Congress's view that such laws would not necessarily prevent or significantly interfere with a national bank's operations." But the opinion never squarely addressed why "applicable" state law should be read to include state law that would otherwise be preempted as to national banks. For instance, the opinion included no discussion of the Supreme Court's 2015 holding in DIRECTV, Inc. v. Imburgia that a contractual reference to the "law of your state" necessarily excluded state law that was preempted by federal law.

Of particular importance in future cases, the panel opined that the Dodd-Frank Act clarified that the OCC's preemption determinations are entitled only to Skidmore deference—i.e., the agency's views carry weight only to the extent that they have the "power to persuade." Applying this standard, the panel found that the OCC's preemption rules purported to adopt the standards of Barnett Bank and its progeny but did so inaccurately. Accordingly, the panel concluded that "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."

The decision in Lusnak is the first express rejection of the OCC's current preemption rules at the federal circuit court level and could have broad impact. Although the OCC's rules have raised strong objections in many quarters, the categories of bank activities listed in those rules have been treated essentially as off-limits to state regulation, such that the main preemption issue has been whether a particular state law falls within the ambit of the list. The Lusnak decision upends that approach. Consequently, the next few years may see a rise in both class actions and preemption battles, even as the industry has been building hope that federal agencies under the Trump administration will return to more frequent assertions of federal preemption.

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