Decohen v. Capital One, N.A.

703 F.3d 216

Philip DECOHEN, on his own behalf and on behalf of all others similarly situated, Plaintiff–Appellant,

v. CAPITAL ONE, N.A., successor by merger to Chevy Chase Bank, F.S.B., Defendant–Appellee,andAbbasi LLC, d/b/a Nation Auto of Marlow Heights; Beacon Industries Worldwide, Incorporated, Defendants.

No. 11–2161.

United States Court of Appeals, Fourth Circuit.

Argued: Oct. 25, 2012.

Decided: Dec. 26, 2012.

ARGUED:Benjamin Howard Carney, Gordon & Wolf, Chtd, Towson, Maryland, for Appellant. Bryan Alan Fratkin, McGuireWoods, LLP, Richmond, Virginia, for Appellee. ON BRIEF:Martin E. Wolf, Gordon & Wolf, Chtd, Towson, Maryland; Mark H. Steinbach, O'Toole, Rothwell, Nassau & Steinbach, Washington, D.C., for Appellant. Ava E. Lias–Booker, Sung B. (“Ben”) Yhim, McGuireWoods, LLP, Baltimore, Maryland, for Appellee.

Before SHEDD, DAVIS, and WYNN, Circuit Judges.

Vacated and remanded by published opinion. Judge DAVIS wrote the opinion, in which Judge SHEDD and Judge WYNN joined.

OPINION

DAVIS, Circuit Judge:

This appeal arises out of an allegation by Appellant Philip Decohen that he paid for something that he did not receive. The question presented is whether the Maryland law that protected his expectation is enforceable.

Decohen bought a used Chrysler Pacifica and financed it with a loan from a Maryland car dealer, Nation Auto of Marlow Heights (“Nation Auto”). The amount financed included a $600 charge for a “debt cancellation agreement.” Under the Maryland Credit Grantor Closed End Provisions (“CLEC”), Md.Code Ann., Com. Law § 12–1001 et seq., such an agreement requires a lender to cancel the remaining loan balance when a car is totaled and the insurance payout does not cover the entire outstanding balance. But that did not happen here. Decohen's car was totaled, but Nation Auto had assigned his loan to Appellee Capital One, N.A. (“Capital One”), and Capital One argues that it does not have to cancel the remaining loan balance because the National Bank Act (“NBA”) and federal regulations preempt Maryland's CLEC law. Decohen filed this putative class action, asserting claims for, inter alia, breach of contract and violation of the CLEC.

The district court was persuaded that the NBA and federal regulations preempt the CLEC, and that Decohen failed to state a claim for breach of contract; it therefore granted Capital One's motion to dismiss. For the reasons set forth below, we conclude that the district court erred. Accordingly, we vacate the judgment and remand for further proceedings consistent with this opinion.

I.

Decohen purchased a used Chrysler Pacifica from Nation Auto in Temple Hills, Maryland, on September 29, 2007, for $22,669, financing the purchase with a Retail Installment Sale Contract (“RIC”). The RIC lists Decohen as the “Buyer” and Nation Auto as the “Creditor–Seller.” J.A. 42. The total price of the vehicle included a $600 charge for an “Optional Debt Cancellation Agreement.” J.A. 43. The “Applicable Law” section of the contract stated:

Federal law and Maryland law apply to this contract. This contract shall be subject to the Credit Grantor Closed End Credit Provisions (Subtitle 10) of Title 12 of the Commercial Law Article of the Maryland Code.

J.A. 45. The contract also contained a “Holder Notice” that stated:

Any holder of this consumer credit contract is subject to all claims and defenses which the debtor could assert against the seller of goods or services obtained pursuant hereto or with the proceeds hereof. Recovery hereunder by the debtor shall not exceed amounts paid by the debtor hereunder.

Id. (emphasis removed).

Under Maryland's CLEC law, the only valid debt cancellation agreement that can be financed as part of the purchase of a vehicle is one that pays off the entire remaining loan balance in the event of a total loss. Md.Code Ann., Com. Law §§ 12–1001(h), 12–1005(c)(1). The law defines a “debt cancellation agreement” as “an agreement between a credit grantor and a borrower which provides for cancellation of the remaining loan balance in the event of theft or total destruction of the collateral for the loan minus the proceeds of any insurance maintained on the collateral for the loan....” Id. § 12–1001(h).

The debt cancellation agreement that was part of Decohen's contract did not comply with Maryland law. The agreement stated that the “Dealer/Assignee agrees to cancel a portion of the Customer's indebtedness in the event of a Total Loss of the Vehicle.” J.A. 47 (emphasis added). The agreement states that portion will be calculated as the “Unpaid Net Balance less the Actual Cash Value” of the vehicle. Id. The agreement goes on to define “Unpaid Net Balance” and “Actual Cash Value” such that the customer's remaining loan balance may not be entirely cancelled. The agreement defines the unpaid net balance as the purchase price of the vehicle (the “amount financed”), divided by the total number of payments, and then multiplied by the number of payments remaining after the loss of the vehicle. J.A. 48. This formula, however, omits interest payments. Decohen's “Amount Financed,” according to his RIC, was the purchase price: $22,669. J.A. 42. His total number of payments was 72. Divide $22,669 by 72, and the resulting monthly payment is $314. Decohen's RIC, however, specified that the monthly payment on the loan would be $454, which includes interest with the principal.

A second provision of the debt cancellation agreement also was at odds with the CLEC. The agreement defines the “Actual Cash Value” of the vehicle as the amount paid by the insurance company, or the Kelley Blue Book retail value of the car, or the National Automobile Dealer Association's (“NADA”) used car guide retail value—whichever is greater. J.A. 48. The CLEC, however, requires a debt cancellation agreement to cancel “the remaining loan balance” minus “the proceeds of any insurance maintained.” Md.Code Ann., Com. Law § 12–1001(h). The law does not allow for the use of retail car guides in the calculation. See id.

Decohen suffered a total loss of the Pacifica in 2010. His insurance company paid a total of $12,839. But Decohen owed another $1,504 on the vehicle. Under Maryland law, as described above, the holder of the note on the vehicle would have been compelled to cancel the remaining balance. Consequently, Decohen submitted a claim to the servicer of the debt cancellation agreement, Beacon Industries Worldwide, of Fort Lauderdale, Florida. Beacon calculated the unpaid net balance to be $12,908.¹ Beacon then calculated the “actual cash value” of the car by looking to the NADA used car guide, which set the car's value at $13,475. As the value was greater than the balance, Beacon denied the claim. As a result of the claim denial, Capital One demanded payment of the $1,504 remaining loan balance.

On September 29, 2010, Decohen filed suit in the Circuit Court for Baltimore City against Capital One, Beacon Industries, and Abbasi LLC (Nation Auto is a registered trade name of Abbasi LLC, and Nation Auto apparently has gone out of business). The lawsuit alleged violations of the CLEC, the Maryland Consumer Protection Act (“MCPA”), and the Maryland Retail Installment Sales Act (“RISA”), as well as claims for breach of contract, declaratory relief, and restitution and unjust enrichment. Defendants removed the case to the United States District Court for the District of Maryland under the Class Action Fairness Act (“CAFA”), 28 U.S.C. § 1453, and 28 U.S.C. § 1332(d)(2). ²

The district court dismissed all claims against Capital One and Beacon. Decohen v. Abbasi, LLC, No. WDQ–10–3157, 2011 WL 3438625, at *7 (D.Md. July 26, 2011). Because Decohen appeals only the dismissal of the CLEC and breach of contract claims against Capital One, we limit our review to those claims. First, the court found that the debt cancellation, or Guaranteed Asset Protection (“GAP”), agreement attached to Decohen's financing contract was not permissible under Maryland law. Specifically, the court stated: “Decohen's complaint is sufficient to show that the GAP Agreement is not a ‘debt cancellation agreement’ within the meaning of the CLEC, and therefore may not be financed ‘in connection with closed end credit offered and extended’ under the statute.” Id. at *4 (quoting Md.Code Ann., Com. Law § 12–1002(b)). Thus, the court reasoned, “the CLEC claim will not be dismissed on the basis that Decohen's allegations fail to state a basis for relief under Maryland law.” Id.

The district court, however, found the CLEC claim was preempted by the NBA. Id. at *6. The court first noted that national banks are controlled by the NBA and regulations promulgated thereunder by the Office of the Comptroller of the Currency (“OCC”). Id. at *5. Under OCC regulations, national banks have authority “ ‘to enter into debt cancellation contracts ... in connection with extensions of credit.’ ” Id. at *6 (quoting 12 C.F.R. § 37.1(a)). The court then noted that under the NBA, a debt cancellation contract is defined as a “ ‘loan term of contractual arrangement ... under which a bank agrees to cancel all or part of a customer's obligations to repay an extension of credit from that bank upon the occurrence of specified events.’ ” Id. (quoting 12 C.F.R. § 37.2(f)). Thus, the court concluded, the GAP agreement in the instant case was a “debt cancellation contract” for NBA purposes. Id. Because such contracts are governed by federal law and regulations, the court held, state regulation of such contracts is preempted. Id.

Finally, the district court reasoned that the fact that Capital One did not originate the loan, but rather was assigned it, does not change the preemption analysis. Id. To support this legal conclusion, the court cited Aguayo v. U.S. Bank, 658 F.Supp.2d 1226, 1235–36 (S.D.Cal.2009), which held that because loans purchased by national banks are “subject to the same regulation” as loans originated by the bank, “it follows that assigned [retail...