Donald M. Lusnak, on behalf of himself and all others similarly situated, Plaintiff-Appellant,
Bank of America, N.A., Defendant-Appellee.
and Submitted November 7, 2016 Pasadena, California
from the United States District Court for the Central
District of California D.C. No. 2:14-cv-01855-GHK-AJW, George
H. King, District Judge, Presiding
N. Heller (argued), Jordan Elias, and Michael W. Sobol, Lieff
Cabraser Heimann & Bernstein LLP, San Francisco; Jae K.
Kim and Richard D. McCune, Redlands, California; for
William Mosier (argued), Andrew Soukup, and Keith A. Noreika,
Covington & Burling LLP, Washington, D.C.; Peter J.
Kennedy and Marc A. Lackner, Reed Smith LLP, Los Angeles,
California; for Defendant-Appellee.
Before: Marsha S. Berzon, Morgan Christen, and Jacqueline H.
Nguyen, Circuit Judges.
/ National Bank Act
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, Cal. Civil Code § 2954.8(a); and remanded so that
the plaintiff could proceed with his California Unfair
Competition Law ("UCL") and breach of contract
claims against Bank of America.
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.
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
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 Cal. Civil Code § 2954.8(a) because
it did not prevent or significantly interfere with Bank of
America's exercise of its powers.
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 15 U.S.C. § 1639d(g)(3) in
prosecuting his UCL claim where plaintiff's escrow
account was established prior to the effective date of the
section, but this did not preclude him from obtaining relief
under the theory that the Bank violated the UCL by failing to
comply with Cal. Civil Code § 2954.8(a).
NGUYEN, Circuit Judge:
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 Civil Code § 2954.8(a).
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.
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 California Civil Code § 2954.8(a).
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 that
standard here, we hold that the NBA does not preempt
California Civil Code § 2954.8(a), and Lusnak may
proceed with his California Unfair Competition Law
("UCL") and breach of contract claims against Bank
The National Bank Act
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 12 U.S.C. § 24(Seventh)). Congress
established the Office of the Comptroller of the Currency
("OCC") to charter, regulate, and supervise these
national banks. National Bank Act, 38 Cong. Ch. 106, §
1, 13 Stat. 99, 99-100 (1864); About the OCC, Office
of the Comptroller of the Currency,
(last visited Jan. 25, 2018) ("The OCC charters,
regulates, and supervises all national banks . . . .").
also ushered in a "dual banking system, " wherein
banks could be chartered either by the OCC or by a State
authority and be subject to different legal requirements and
oversight from different regulatory bodies. See First
Nat'l Bank of Fairbanks v. Camp, 465 F.2d 586, 592
(D.C. Cir. 1972); Kenneth E. Scott, The Dual Banking
System: A Model of Competition in Regulation, 30 Stan.
L. Rev. 1 (1977). Since the NBA's enactment, the Supreme
Court has often ruled on the scope of State authority to
regulate national banks. See Watters, 550 U.S. at
11-13. Congress has also enacted legislation "[t]o
prevent inconsistent or intrusive state regulation from
impairing the national system." See id. at 11.
2010, Congress enacted Dodd-Frank in response to a
"financial crisis that nearly crippled the U.S.
economy."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 about 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).
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. Dodd-Frank Wall Street Reform and
Consumer Protection Act, Pub. L. No. 111-203, § 1461,
124 Stat. 1376, 2178-81 (2010) (codified at 15 U.S.C. §
1639d). These provisions were designed to correct abusive and
deceptive lending practices that contributed to the mortgage
crisis, specifically with regard to the administration of
escrow accounts for property taxes and insurance. H.R. Rep.
No. 111-94, at 53- 56.
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 Lusnak's mortgage. In March 2009, Lusnak refinanced
his mortgage, and in January 2011, he and Bank of America
agreed to modify certain terms. The 2009 agreement and 2011
modification contain the relevant terms governing
Lusnak's mortgage. The agreements provide that
Lusnak's mortgage "shall be governed by federal law
and the law of the jurisdiction in which the Property is
located." The parties agree that ...