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Lusnak v. Bank of America, N.A.

United States Court of Appeals, Ninth Circuit

March 2, 2018

Donald M. Lusnak, on behalf of himself and all others similarly situated, Plaintiff-Appellant,
v.
Bank of America, N.A., Defendant-Appellee.

          Argued and Submitted November 7, 2016 Pasadena, California

         Appeal 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

          Roger 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 Plaintiff-Appellant.

          Mark 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.

          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, 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.

         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 Cal. Civil Code § 2954.8(a) because it did not prevent or significantly interfere with Bank of America's exercise of its powers.

         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 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).

          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 Civil Code § 2954.8(a).

         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 California Civil Code § 2954.8(a).

         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 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 of America.

         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 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)[1]; About the OCC, Office of the Comptroller of the Currency, https://www.occ.treas.gov/about/what-we-do/mission/index-about.html (last visited Jan. 25, 2018) ("The OCC charters, regulates, and supervises all national banks . . . .").

         The NBA 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.

         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 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).

         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. 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.

         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 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 ...


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