Page 3

Ninth Circuit:

2018 Banking Preemption Decision Has Not Been Nullified

Majority Says 2018 Decision That Finds California Law Requires Interest Payments on Mortgage Escrow Accounts Is Not Preempted by Federal Regulation of National Banks and Is Reconcilable With U.S. Supreme Court Opinion

By a MetNews Staff Writer

The Ninth U.S. Circuit Court of Appeals held yesterday that its 2018 decision proclaiming that a California statute requiring financial institutions to make minimum interest payments on mortgage escrow accounts applies to national banks remains good law after the U.S. Supreme Court last year clarified the standard that applies in banking preemption cases.

Adopted in 1864, the National Bank Act (“NBA”) vests enumerated powers as well as “such incidental” authority as “shall be necessary to carry on the business of banking” in federally chartered institutions. Although case law has held that such banks are subject to state laws regulating daily affairs, the decisions have made clear that preemption applies if the rules significantly impair the exercise of authority granted by Congress.

Yesterday’s opinion addresses the continued viability of the Ninth Circuit’s 2018 decision in Lusnak v. Bank of America N.A. establishing that the NBA does not preempt Civil Code §2954.8(a) which provides that “[e]very financial institution that makes loans upon the security of real property…and that receives money in advance for payment of taxes,…insurance, or for other purposes…, shall pay” 2% simple interest per year.

Opposite Conclusion

Shortly after the Lusnak case was decided, the Second Circuit came to the opposite conclusion about a nearly identical New York law in Cantero v. Bank of America N.A., saying that the authority to set minimum rates is the “power to control” and so the statute significantly impaired the authority vested in national banks to make financial operating decisions.

Last year, the U.S. Supreme Court granted certiorari. The high court held that the Second Circuit had employed “a categorical test that would preempt virtually all state laws that regulate national banks” and remanded for the court to conduct a “nuanced comparative analysis” of the high court’s preemption jurisprudence.

Senior Circuit Judge Jay S. Bybee authored yesterday’s decision declaring that, although the court in Lusnak did not engage in a comparative analysis of the governing U.S. Supreme Court case law, it is not so “clearly irreconcilable” with the Cantero opinion as to justify overruling it by a three-judge panel. Senior District Court Judge Susan R. Bolton of the District of Arizona, sitting by designation, joined in the opinion.

Dissenting, Circuit Judge Ryan D. Nelson wrote that “I view Cantero as ‘clearly irreconcilable’ with Lusnak, since Lusnak did not apply the [requisite] comparative analysis” and that, under that analysis, “California’s law is preempted.”

Putative Class Action

The question arose after William Kivett, as well as other plaintiffs, filed a putative class action complaint against Flagstar Bank in 2018, asserting that they were not paid the interest required by §2954.8(a) on their mortgage interest accounts. Flagstar took the position that the section is preempted by the NBA.

After a proposed class was certified, Senior District Court Judge Alsup of the Northern District of California, in December 2020, granted the plaintiffs’ request for summary judgment based on Lusnak and awarded the class over $9 million in restitution for the unpaid interest.

Flagstar appealed, inviting the court to overrule Lusnak as wrongly decided. In May 2022, the Ninth Circuit largely affirmed Alsup’s order, remanding with directions to reduce the award by approximately $82,000 in light of a finding that the judge had incorrectly tolled the statute of limitations.

Following a petition by Flagstar, the high court granted review, vacated the Ninth Circuit decision, and remanded for “further consideration in light of Cantero.” In August of last year, Bybee, Nelson, and Bolton signed a memorandum decision declaring that Alsup’s “preemption holding is affirmed.”

In December, the Ninth Circuit granted Flagstar’s petition for panel rehearing to determine “whether California Civil Code § 2954.8(a) is preempted by the National Bank Act under the standard and methodology described in Cantero.”

Two Questions

Bybee said:

“This case raises two separate questions: First, whether our decision in Lusnak is so ‘clearly irreconcilable’ with the Supreme Court’s ‘theory or reasoning’ in Cantero that it has been ‘effectively overruled’ and is no longer binding on this panel….Second, if so, whether § 2954.8(b) is preempted….We conclude that Cantero is not clearly irreconcilable either with the reasoning or the result in Lusnak, so we decline to reach the second question. We do not hold that Lusnak was correctly decided, only that we have no authority to overrule it. Correction in this court, if any is warranted, is only appropriate through our en banc procedures.”

He noted that the Lusnak court “did not cite or discuss the six preemption cases…recounted in Cantero” and instead looked to the fact that Congress amended the Truth in Lending Act (“TILA”) in 2010 to require interest payments on certain accounts “if prescribed by…State or Federal law.”

Even though the listed accounts did not include those at issue in Lusnak, that court reasoned that national banks “can comply with state escrow interest laws without any significant interference with their banking powers.”

No Inconsistency

Under those circumstances, Bybee opined:

“Because Cantero did not decide whether the NBA preempts state interest-on-escrow laws, the result is not inconsistent with Lusnak’s judgment. Nor is Cantero’s holding—that the Second Circuit erred in applying a categorial test for preemption—inconsistent with Lusnak. Had the Lusnak panel adopted a categorical test that ‘would preempt virtually no non-discriminatory state laws that apply to both state and national banks,’…we would conclude that Lusnak is clearly irreconcilable with Cantero. But we did not apply anything close to a categorical test, and we left open the possibility for a future as-applied challenge to California’s interest-on-escrow rule.”

Looking to the cases highlighted by the high court as setting the stage for the preemption analysis, the jurist concluded that “[n]either line of cases seems to compel the result here” and remarked:

“Lusnak relied on other tools of statutory interpretation….Nothing in Cantero casts doubt on our power to use the full array of interpretive tools in preemption analysis.”

The jurist declared:

“Accordingly, we AFFIRM the district court’s preemption holding. We VACATE and REMAND…the judgment and class certification order for the district court to modify the class definition date from April 18, 2018, to August 22, 2018, and the judgment amount from $9,262,769.24 to $9,180,580.15.”

Nelson’s View

Nelson wrote:

“This was at one point a straightforward case. In Lusnak…, we held that federal law does not preempt California Civil Code §2954.8(a), which requires financial institutions to pay at least 2% interest annually on certain mortgage escrow accounts….So when Flagstar Bank argued that California’s law is preempted as to federally chartered banks, we rejected its argument as foreclosed by our precedent.”

Saying that “the landscape has changed,” he argued:

“After rehearing, I view Cantero as ‘clearly irreconcilable’ with Lusnak, since Lusnak did not apply the comparative analysis required by Cantero….Instead, Lusnak derived from an inapplicable statute a categorical anti-preemption rule that Cantero declined to endorse and which is inconsistent with a fortified application of Cantero’s reasoning. As an intermediate court, we must follow Supreme Court precedent. Lusnak has therefore been ‘effectively overruled.’…While [case law] constrains a three-judge panel’s authority to overrule circuit precedent, it does not allow us to apply precedent inconsistent in theory or reasoning with intervening Supreme Court precedent.”

Adding that Lusnak was also “wrongly decided,” Nelson wrote:

“Under Cantero’s comparative framework, California’s law is preempted: its interference with national banking powers is ‘more akin’ to the interference stemming from state laws that the Court has already deemed preempted….The majority does not conclude otherwise.”

The case is Kivett v. Flagstar Bank FSB, 21-15667.