On January 9, the U.S. Court of Appeals for the Ninth Circuit affirmed a district court’s dismissal of a putative class action against a national bank over its adjustable rate mortgage disclosure and payment application. O’Donnell v. Bank of Am., N.A., No. 11-16351, slip op. (9th Cir. Jan. 9, 2013). On appeal, the borrowers argued that the district court erred in holding that their California state-law claims for common law fraud and violations of the Unfair Competition Law based on the lender’s alleged concealment of material facts about the loans’ escalating principal balances and interest rates are preempted by the National Bank Act and OCC regulations. The borrowers also challenged the district court’s dismissal of their state-law breach of contract claim based on allegations that the lender improperly applied payments solely toward satisfying part of the interest owed while adding the remaining interest to the principal balance. In affirming the dismissal, the appeals court held that the fraud and unfair competition claims are expressly preempted because they would force the lender to make additional disclosures not required by federal law. The appeals court also affirmed the district court’s holding that the FTC Act does not provide a private right of action and therefore cannot be employed as a premise for the borrowers’ unfair competition claim. With regard to the borrowers’ breach of contract claim, the court held that the mortgage contract did not include any representation that the lender would apply payments to principal if the payment failed to cover the accrued interest, and, therefore, the borrowers failed to state a plausible claim.
Ninth Circuit Affirms Preemption of State Law Claims Asserting National Bank Mislead Consumers by Failing to Make Material Disclosures
On May 22, the U.S. Court of Appeals for the Ninth Circuit affirmed a district court’s holding that the National Bank Act (NBA) preempts state disclosure requirements on a bank’s deposit-related activities. Robinson v. Bank of Am., N.A., No. 11-57194, 2013 WL 2234073 (9th Cir. May 22, 2013). In this case, the bank charged a customer a fee for using a cash-access account, which could be avoided by withdrawing all funds from the account each month before the fee was assessed. The customer alleged that the failure to disclose the ability to avoid the fee violated, among other things, California’s Consumer Legal Remedies Act and Unfair Competition Law. The district court dismissed the case, holding that the NBA preempts state laws that attempt to regulate disclosures of national banks on deposit accounts. The district court also rejected the customer’s argument that state laws that require all businesses generally (as opposed to banks in particular) to refrain from misrepresentations and from fraudulent, unfair, or illegal behavior cannot be preempted by the NBA. The Ninth Circuit affirmed the dismissal on the same grounds.
Fourth Circuit Holds State Auto Debt Cancellation Requirements Not Preempted for Certain Assigned Loans
On December 26, the U.S. Court of Appeals for the Fourth Circuit held that federal law does not preempt Maryland’s debt cancellation requirements for an auto retail installment sales contract (RISC) when a national bank is the assignee, and not the originator, of the loan. Decohen v. Capital One, N.A., No. 11-2161, 2012 WL 6685767 (4th Cir. Dec. 26, 2012). In this case, a dealer sold and financed a used vehicle and subsequently assigned the loan to a national bank. The financing included a charge for a debt cancellation agreement in the RISC, which under the Maryland Credit Grantor Closed End Credit Provisions (CLEC) requires a lender to cancel any remaining loan balance when a car is totaled and insurance does not cover the full loss. After the buyer totaled his car and was left with a loan balance, he sought to enforce the debt cancellation agreement. In dismissing the case, the district court held, in relevant part, that the agreement at issue was a “debt cancellation contract” covered by the National Bank Act, and that because such contracts are governed by federal law and regulations, including regulations regarding debt cancellation agreements, state regulation of such contracts is preempted. The district court also found that the purchaser failed to state a claim for breach of contract because the bank did not agree to cancel the remaining debt. The appeals court disagreed and held that because the OCC regulations regarding debt cancellation agreements apply only to agreements entered into by national banks, “the CLEC provisions regarding debt cancellation agreements are not expressly preempted by federal law when the agreements are part of credit contracts originated by a local lender and assigned to a national bank.” The court also held that the purchaser stated a claim for breach of contract because the parties voluntarily elected to be governed by the CLEC in the RISC, which cannot be undone by assignment of the loan. The court vacated the district court’s judgment and remanded the case for further proceedings.
Ninth Circuit Vacates Restitution Order in Overdraft Ordering Case, Allows State Fraud Claims to Proceed
On December 26, the U.S. Court of Appeals for the Ninth Circuit held that a national bank’s practice of posting payments to checking accounts in a particular order is a federally authorized pricing decision, and that federal law preempts the application of state law to dictate a national bank’s order of posting. Gutierrez v. Wells Fargo Bank, No. 10-16959, 2012 WL 6684748 (9th Cir. Dec. 26, 2012). In this case, after trial the district court enjoined the bank’s practice of ordering withdrawals from “high-to-low” and ordered the bank to pay $203 million in restitution. The court agreed with customers who had sued the bank on behalf of a class that the bank’s ordering practice was designed to maximize the number of customer overdrafts and related fees and as such violated the California Unfair Competition Law (UCL). On appeal, the court held that the bank’s ordering practice is a pricing decision the bank can pursue under federal law, and that the National Bank Act (NBA) preempts the unfair business practices prong of the UCL. The court also held that both the imposition of affirmative disclosure requirements and liability based on failure to disclose are preempted. However, the court held that the NBA does not preempt the customers’ claim of affirmative misrepresentations under the fraudulent prong of the UCL. The court also considered as an issue of first impression the effect of the Supreme Court’s intervening ruling in Concepcion on a judgment on appeal after trial. The court declined to grant arbitration, reasoning that the bank’s post-judgment arbitration request was contrary to its conduct throughout the litigation, and that granting the request would prejudice the plaintiff and frustrate the purposes of the Federal Arbitration Act. The court vacated the district court’s injunction and its $203 million restitution order, and directed the district court to determine appropriate relief on the state fraud claims.