Watters Rising?
Ready for an early Halloween? The U.S. Supreme Court almost caused a 20-car pile-up when it granted certiorari in Wachovia Bank, N.A.v.Watters, 431 F.3d 556 (6th Cir. 2005). We like to imagine our glasses half full, but this one isn’t easy.
Wachovia Bank held that the National Bank Act and OCC regulations preempted state regulation of operating subsidiaries of national banks.
This was not a controversial holding. The Second, Sixth, and Ninth Circuits had already so held, so there was no split among
Circuits. The Fourth Circuit recently joined the ranks. (See "Prepayment Penalties Preempted," this issue.) Even critics of NBA preemption had pretty much thrown in the towel and conceded
that op-subs of national banks are beyond the regulatory reach of the states.
The Court granted certiorari on two issues: (i) Is the interpretation that 12 C.F.R. § 7.4006 preempts Michigan’s law purporting
to regulate mortgage lending by national bank operating subsidiaries entitled to deference under Chevron U.S.A., Inc.v.Natural Resources Defense Council, 467 U.S. 837 (1984)? (ii) Does the OCC regulation violate the 10th Amendment by treating op-subs the same as their national
bank parents for purposes of federal preemption? Wachovia Bank will mark the first significant NBA federal preemption case to be decided by the Supreme Court in a decade. Pessimists will
read into this that the Supremes think preemption has gone too far and that it’s time to corral the OCC and the lower courts.
On the other hand, maybe the Supremes just want to settle the issue once and for all.
If Wachovia Bank is reversed, it could be hugely disruptive for national banks (and maybe also federally-chartered savings associations) who
will once again feel required to commission 50-state surveys just to sneeze. Worst-case scenario would be a reversal with
implications beyond just op-subs.
For more information, contact Rick Fischer at rfischer@mofo.com.
The Gift Card Gift
Not all preemption news is scary. In a major victory for the banking industry, a federal district court in New Hampshire rejected
that state’s efforts to regulate the terms of stored-value gift cards issued by a national bank and federal savings association,
but marketed and sold by a non-bank third party. SPGCC, LLC; MetaBank; and U.S. Bank, N.A.v.Ayotte, No. 04-CV-420-M, 2006 DNH 089, 2006 WL 2165672 (D.N.H. Aug. 1, 2006).) According to the court, a state’s attempt to impose restrictions upon a national banking product "stand[s]
as an obstacle to the fulfillment of Congressional policies and goals embodied in federal banking laws and the associated
regulations implemented by both OTS and OCC" and is therefore preempted. (Id., at *28.)
Simon, a major operator of shopping malls nationwide, markets and sells stored-value gift cards issued by U.S. Bank National
Association, a national bank, and MetaBank, a federal savings association. In November 2004, the State of New Hampshire notified Simon that its sale of the gift cards violated provisions of New Hampshire’s Consumer Protection Act relating to "gift certificates," including the prohibitions on expiration dates and
the imposition of certain administrative fees. When the state threatened enforcement action, Simon filed suit in federal court
seeking declaratory and injunctive relief. The state thereafter filed suit in state court. Simon moved for summary judgment
in the federal action, and U.S. Bank (represented by the Firm) and MetaBank subsequently sought, and were granted leave, to
intervene as plaintiffs.
On August 1, the district court granted the plaintiffs’ motion for summary judgment. The "central issue" was whether the use
of a third party to sell and market the gift cards "exposes those cards to state regulations which would otherwise be preempted
by federal banking laws." (Id., at *21.) The court rejected the state’s argument that third-party involvement subjects the product to state law. The state
has appealed.
The firm represented plaintiff-in-intervention U.S. Bank. For more information, contact Rick Fischer at rfischer@mofo.com or James McGuire at jmcguire@mofo.com.
OTS Preemption
The firm won a preemption victory in June in the California Court of Appeal for client WFS Financial Inc, one of the nation’s
largest independent automobile finance companies. (WFS Financial Inc v. Super. Ct.(de la Cruz),140 Cal. App. 4th 637 (2006).) WFS originally sued a borrower after the proceeds from a sale of a repossessed car failed to cover the
loan balance. The borrower asserted a class action cross-complaint alleging that the lender’s pre-sale notice failed to comply
with disclosure requirements under California’s Rees-Levering Automobile Sales Finance Act (Cal. Civ. Code § 2983.2) and asserted
an Unfair Competition Law claim based on that violation. The plaintiff sought refunds to every borrower sued in a collection
case by WFS for over four years.
The trial court denied WFS’s demurrer, but the Court of Appeal reversed due to OTS preemption and ordered the trial court
to dismiss the cross-claim without leave to amend. Citing U.S. Supreme Court authority, the court found that the OTS’s interpretation
of its own regulation was definitive. The court distinguished numerous troubling California appellate decisions addressing OTS preemption.
For more information, contact Michael Agoglia at magoglia@mofo.com.
Prepayment Penalties Preempted
Maryland cannot enforce a law that limits prepayment penalties on adjustable rate mortgages if the lender is an operating subsidiary
of a national bank, the Fourth U.S. Circuit Court of Appeals held on August 10, 2006. (National City Bank of Indianav.Turnbaugh, Comm’r, ___ F.3d ___, 2006 U.S. App. LEXIS 20538 (4th Cir. Aug. 10, 2006).) Said the court: "If state law applied to operating subsidiaries
to a greater extent than it applied to their parent national banks, it would frustrate national banks’ right to conduct the
‘business of banking’ through operating subsidiaries." (Id., at *15.) The Fourth Circuit won’t get the last word, though; the U.S. Supreme Court granted certiorari in Wachovia Bankv.Watters, a case raising the same op-sub issue. See "Watters Rising?", this issue.
