Cantero v. Bank of Am., N.A.

49 F.4th 121

Alex CANTERO, individually and on behalf of all others similarly situated, Plaintiff-Appellee,

v.BANK OF AMERICA, N.A., Defendant-Appellant.

Saul R. Hymes, Ilana Harwayne-Gidansky, on behalf of themselves and all others similarly situated, Plaintiffs-Appellees,

v.Bank of America, N.A., Defendant-Appellant.

Nos. 21-400

21-403

August Term 2021

United States Court of Appeals, Second Circuit.

Argued: March 31, 2022

Decided: September 15, 2022

Mark W. Mosier, Covington & Burling LLP, Washington, DC (Andrew Soukup, Laura Dolbow, Covington & Burling LLP, Washington, DC; Thomas M. Hefferon, Goodwin Procter LLP, Washington, DC, on the brief), for Defendant-Appellant.

Jonathan E. Taylor, Gupta Wessler PLLC, Washington, DC (Matthew W.H. Wessler, Gupta Wessler PLLC, Washington, DC; Jonathan M. Streisfeld, Kopelowitz Ostrow Ferguson Weiselberg Gilbert, Ft. Lauderdale, FL; Hassan Zavareei, Anna C. Haac, Tycko & Zavareei LLP, Washington, DC; Todd S. Garber, Finkelstein, Bankinship, Frei-Pearson & Garber, LLP, White Plains, NY, on the brief), for Plaintiff-Appellee Alex Cantero.

Mark C. Rifkin, Daniel W. Krasner, Wolf Haldenstein Adler Freeman & Herz LLP, New York, NY, for Plaintiffs-Appellees Saul R. Hymes and Ilana Harwayne-Gidansky.

Benjamin W. McDonough, Bao Nguyen, Gregory F. Taylor, Peter C. Koch, Gabriel A. Hindin, Michael K. Morelli, Office of the Comptroller of the Currency, Washington, DC, for Amicus Curiae Office of the Comptroller of the Currency in Support of Defendant-Appellant.

H. Rodgin Cohen, Matthew A. Schwartz, Helen F. Andrews, Sullivan & Cromwell LLP, New York, NY; Gregg L. Rozansky, The Bank Policy Institute, Washington, DC; Daryl Joseffer, Paul V. Lettow, U.S. Chamber Litigation Center, Washington, DC; David Pommerehn, Consumer Bankers Association, Washington, DC; Thomas Pinder, The American Bankers Association, Washington, DC, for Amici Curiae The Bank Policy Institute, American Bankers Association, Consumer Bankers Association, and Chamber of Commerce of the United States of America in Support of Defendant-Appellant.

Before: Livingston, Chief Judge, and Park and Pérez, Circuit Judges.

Judge Pérez concurs in a separate opinion.

Park, Circuit Judge:

In February 1818, the Maryland General Assembly levied a tax of $15,000 per year on "all Banks or Branches thereof, in the State of Maryland, not chartered by the [state] Legislature." McCulloch v. Maryland , 17 U.S. (4 Wheat.) 316, 320, 4 L.Ed. 579 (1819). When the Second Bank of the United States—a federally chartered, majority privately owned bank—refused to pay, Maryland sued. Before the U.S. Supreme Court, the state argued that its modest tax merely "submitted" the bank "to the jurisdiction and laws of the State, in the same manner with other corporations and other property" and that it could be imposed "without ruining the institution, or destroying its national uses." Id. at 346. Chief Justice Marshall, writing for the Court, famously rejected this line of reasoning:

We are not driven to the perplexing inquiry, so unfit for the judicial department, what degree of taxation is the legitimate use ....

That the power to tax involves the power to destroy; that the power to destroy may defeat and render useless the power to create; that there is a plain repugnance in conferring on [state] government[s] a power to control the constitutional measures of [the federal government], are propositions not to be denied.

Id. at 430–31 (emphasis added).

The question in these appeals is whether a New York law requiring mortgage lenders to pay a 2% minimum interest rate on mortgage escrow accounts applies to banks chartered by the federal government. As in McCulloch , Plaintiffs say that because the law requires payment of only a "modest amount of interest," Appellee's Br. at 35,¹ it may be applied, consistent with federal law, to national banks. But unlike in McCulloch , both the state and federal governments here have taken the position that New York's law is preempted. We agree. The minimum-interest requirement would exert control over a banking power granted by the federal government, so it would impermissibly interfere with national banks’ exercise of that power. We thus hold that the law is preempted by the National Bank Act of 1864 ("NBA"), 12 U.S.C. § 21 et seq. , and we reverse the order of the district court concluding otherwise.

I. BACKGROUND

A. Statutory Framework

1. National Bank Act of 1864

The Civil War Congress enacted the NBA "to facilitate ... a national banking system." Marquette Nat'l Bank of Minneapolis v. First of Omaha Serv. Corp. , 439 U.S. 299, 315, 99 S.Ct. 540, 58 L.Ed.2d 534 (1978) (cleaned up). A replacement for the bank-chartering regime at issue in McCulloch , the NBA enabled the federal government to issue bank charters and thereby introduced a "dual banking system" that is "still in place today." Watters v. Wachovia Bank, N.A. , 550 U.S. 1, 10, 15 n.7, 127 S.Ct. 1559, 167 L.Ed.2d 389 (2007) ; see id. at 11, 127 S.Ct. 1559 ; see also Kenneth E. Scott, The Dual Banking System: A Model of Competition in Regulation , 30 Stan. L. Rev. 1, 3–8 (1977). Under this system, "both federal and state governments are empowered to charter banks and to regulate the banks holding their respective charters." Lacewell v. OCC , 999 F.3d 130, 135 (2d Cir. 2021). Banks may seek a charter from either the state or federal government, and both state and national banks are able to compete—under the constraints of their respective regimes—for consumer business. Id.

While state banks are organized under state law, "[n]ational banks are instrumentalities of the Federal government, created for a public purpose, and as such necessarily subject to the paramount authority of the United States." Davis v. Elmira Sav. Bank , 161 U.S. 275, 283, 16 S.Ct. 502, 40 L.Ed. 700 (1896). The NBA grants national banks broad powers, functioning as "a complete system for the establishment and government of national banks." Cook Cnty. Nat'l Bank v. United States , 107 U.S. 445, 448, 2 S.Ct. 561, 27 L.Ed. 537 (1883). These include certain enumerated powers as well as "all such incidental powers as shall be necessary to carry on the business of banking." 12 U.S.C. § 24 (Seventh); see Starr Int'l Co. v. Fed. Rsrv. Bank of N.Y. , 742 F.3d 37, 41 n.4 (2d Cir. 2014) (interpreting this grant as conferring the power to engage in "activities convenient and useful in connection with the performance of an express power" (cleaned up)).

One such enumerated power is the power to "make, arrange, purchase or sell loans ... secured by liens on interests in real estate." 12 U.S.C. § 371(a). The district court recognized, and no party disputes, that banks have the incidental "power to provide escrow services" in connection with home mortgage loans. Hymes v. Bank of Am., N.A. , 408 F. Supp. 3d 171, 193 (E.D.N.Y. 2019). As the Office of the Comptroller of the Currency ("OCC") has explained, "tax and insurance escrow accounts" affiliated with home mortgage loans are "an integral part of or a logical outgrowth of the lending function." OCC Conditional Approval No. 276, 1998 WL 363812, at *9 (May 8, 1998). Lenders use these accounts to require customers to make intermittent payments for property taxes and insurance premiums, ensuring fulfilment of these obligations while "reliev[ing] [mortgagors] of the tasks of paying such regular tax and insurance obligations in a lump sum." Id.

2. Other Federal Statutes

Among Congress's regulations of national banks are three statutory provisions discussed by the parties here. First, the Real Estate Settlement Procedures Act of 1974 ("RESPA"), 12 U.S.C. § 2601 et seq. , limits the amount banks may require borrowers to deposit in escrow accounts in connection with their home mortgages. Lenders who establish escrow accounts for property tax and insurance payments may not require borrowers to deposit more than is "sufficient to pay such taxes, insurance premiums and other charges." 12 U.S.C. § 2609(a)(1). This provision of RESPA does not mention a rate of return on the balance, but rather caps the amount that may be required to be contributed.

Second, the Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010) ("Dodd-Frank"), codified a standard for when "State consumer financial laws" are preempted. Id. § 1044, 124 Stat. at 2015 (codified at 12 U.S.C. § 25b(b)(1) ). Such laws are void if any of the following is true:

(A) application of a State consumer financial law would have a discriminatory effect on national banks , in comparison with the effect of the law on a bank chartered by that State;

(B) in accordance with the legal standard for preemption in the decision of the Supreme Court of the United States in Barnett Bank of Marion County, N. A. v. Nelson, Florida Insurance Commissioner, et al. , 517 U.S. 25, 116 S.Ct. 1103, 134 L.Ed.2d 237 (1996), the State consumer financial law prevents or significantly interferes with the exercise by the national bank of its powers ; and any preemption determination under this subparagraph may be made by a court, or by regulation or order of the Comptroller of the Currency on a case-by-case basis, in accordance with applicable law; or

(C) the State consumer financial law is preempted by a provision of Federal law other than title 62 of the Revised Statutes .

Id. (emphases added).

Third, Dodd-Frank amended the Truth in Lending Act ("TILA") to add 15 U.S.C. § 1639d, which includes language implicating certain mortgage escrow accounts. See Dodd-Frank § 1461(a), 124 Stat. at 2178–81 (codified at 15 U.S.C. § 1639d ). Section 1639d mandates the creation of escrow accounts for certain mortgages, and it provides that for those mandatory escrow accounts, "[i]f prescribed by applicable State or Federal law, each creditor shall pay interest to the consumer on the amount held in any impound, trust, or escrow account that is subject to this section in the manner as prescribed by that applicable State or Federal...