Tuesday, April 10, 2012

FYI: 4th Cir Holds NBA Does Not Preempt State Debt Collection Law

The U.S. Court of Appeals for the Fourth Circuit recently held that(1) the National Bank Act did not preempt notice requirements related to repossession of personal property security under state law; and  (2) the national bank was subject to a contractual provision specifying the applicability of the statute, where the original non-bank lender elected to be governed by the statute and the bank voluntarily purchased and received the assignment of the contract.
A copy of the opinion is available at:
Plaintiff-appellant ("Plaintiff") purchased a used car from a car dealer with dealer financing, using the car as security.  The retail installment contract (RIC) provided that the Maryland Credit Grantor Closed End Credit Provisions ("CLEC") and federal law would govern the terms of the RIC
The car dealer sold and assigned the RIC to a national bank ("Bank"), which repossessed the car after the Plaintiff defaulted.  The Bank allegedly sent Plaintiff a notice informing Plaintiff of her right to redeem the car, but allegedly did not inform the Plaintiff of the vehicle's location or the time and place of the scheduled sale of the vehicle, as required by the CLEC.  The Bank allegedly sold the car and sent the Plaintiff a notice indicating in part that the Bank was seeking a deficiency for the unpaid loan balance. 
The Plaintiff filed a putative class action in Maryland state court, claiming in part that the Bank failed to comply with CLEC's notice requirements and breached the RIC.  The Bank removed the case to federal district court, where Borrower moved for partial summary judgment and the Bank filed a motion to dismiss. 
The district court dismissed the case, ruling that the National Bank Act preempted Maryland law as to debt-collection efforts of national banks. The district court also held that the contractual provision specifying that CLEC applied to the RIC was unenforceable as to the Bank because the Bank had not bargained for the applicability of CLEC to the loan agreement between the Plaintiff and the car dealer-lender.
The Plaintiff appealed, and the Fourth Circuit reversed.
As you may recall, the National Bank Act provides in pertinent part that national banks may exercise "all such incidental powers as shall be necessary to carry on the business of banking," including making loans secured by personal property.  12 U.S.C. § 24 (Seventh).  In addition, the NBA's implementing regulations promulgated by the Office of the Comptroller of the Currency ("OCC") expressly preempt any state law that interferes with a national bank's ability to fully exercise specified powers, including non-real estate lending, and allow a national bank to engage in such lending without regard to state laws concerning licensing, personal property used as security, and "disclosure and advertising" in credit applications "or other credit-related documents."  12 C.F.R. § 7.4008(d)(1)-(2)(as in effect prior to July 21, 2011). 
The OCC regulations also contain a "savings clause" that provides that certain state laws, including those governing contracts and "rights to collect debts" are not preempted if those state laws "only incidentally affect" a national bank's powers with respect to non-real estate lending.  12 C.F.R. § 7.4008(e) (as in effect prior to July 21, 2011) ("Savings Clause"). 
Further, Maryland's CLEC allows a creditor to repossess personal property securing a loan if a borrower defaults, but requires the creditor to comply with CLEC's provisions governing notice to the debtor, including notice as to the location of the repossessed property, the debtor's right to redeem the property, and the debtor's liability for any deficiency.  Md. Code Ann., Com. Law § 12-1021(a)(1), (c)-(e).
In examining the rules governing federal preemption, the Fourth Circuit noted that, while the NBA itself does not expressly preempt state law, the OCC's regulations carve out areas of state law that are expressly preempted, but also set forth particular subject categories that states may regulate pursuant to the Savings Clause.  In so doing, the Court pointed out the regulations' distinction between a national bank's collection activities and a bank's extension of credit, and that the Savings Clause specifically lists "rights to collect debts(which the Court treated as "debt collection" generally) as a category of state law not preempted by federal law. 
The Fourth Circuit thus rejected the Bank's argument that the NBA preempted the CLEC because it impermissibly interfered with the Bank's ability to make non-real estate loans.  In making this argument, the Bank argued, first, that because non-real estate lending is an enumerated power under the NBA, the CLEC's repossession notice requirements are "disclosures" preempted by 12 C.F.R. § 7.4008(d) allowing national banks to make non-real estate loans without regard to state limitations concerning "disclosure and advertising."  The Bank also argued that CLEC's notice requirements concerned "other credit related documents" and were therefore similarly preempted by 12 C.F.R. § 7.4008(d).
Relying on the Ninth Circuit's reasoning in Aguayo v. U.S. Bank, 653 F.3d 912 (9th Cir. 2011), the Fourth Circuit noted the distinction drawn in that case between a "disclosure" prior to entering a loan transaction and a "notice" to a party during the life of a loan agreement, and ruled that the CLEC's post-repossession notices were not "disclosures" related to the extension of credit within the meaning of the NBA or the OCC regulations.    In addition, the Fourth Circuit held that the CLEC's notice requirements, triggered only when a creditor is attempting to collect on a debt, did not regulate "credit-related documents" used in the establishment of a lending relationship.
Turning to the Bank's other argument that, to the extent the CLEC is a debt-collection law, it is preempted because the CLEC more than incidentally burdened the Bank's non-real estate lending power.  Again citing Aguayo, the Fourth Circuit rejected this argument, because the Bank's argument led to the conclusion that the Bank would not be subject to state or federal law, as "no federal law governs self-help repossession." See Aguayo, 653 F.3d at 924.
Accordingly, the Fourth Circuit determined that under the Savings Clause, the Bank's activity in repossessing and selling the Plaintiff's car was subject to the state notice requirements, because the CLEC did not impermissibly interfere with the Bank's federal power to extend credit, and "the degree to which the CLEC regulate[d] an enumerated power of a national bank [was] merely incidental."
The Fourth Circuit also observed that the OCC's own interpretation of the Savings Clause supported its conclusion that the CLEC was not preempted, because the CLEC, as an "undiscriminating law of general applicability," did not treat national banks differently from other bank- or non-bank lenders in Maryland.
As to the Plaintiff's breach of contract claim, the Fourth Circuit disagreed with the district court's analysis that because the Bank had not negotiated the terms of the loan agreement it purchased from the original lender, the Bank was not bound by the CLEC provision in the contract.  Noting that the original lender had expressly elected to apply the CLEC to the loan, in part because it allowed the lender to charge a higher late fee, the Court reasoned that, as the voluntary assignee of the debt, the Bank was obligated to adhere to the terms of the loan contract, including the CLEC notice requirements. 
The Fourth Circuit vacated the lower court's ruling and remanded for further proceedings.

Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
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Email: RWutscher@mtwllp.com

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