Reversing the Court of Appeal, the California Supreme Court recently held that the National Bank Act preempts California's credit disclosure requirements for credit card issuers that issue "convenience checks" to their cardholders, ruling that the disclosure requirements "significantly impaired" national banks' powers to engage in the business of banking, including "loaning money on personal security." In so ruling, the Court held that national banks need not make a factual showing to demonstrate significant impairment.
A copy of the opinion is available at:
A copy of the opinion is available at:
Defendant national bank ("Issuing Bank") issued a credit card to plaintiff ("Cardholder") and subsequently sent Cardholder preprinted draft instruments, commonly known as "convenience checks," as an additional means of using his credit card account. The convenience checks did not include the detailed disclosures that California state law requires credit card issuers to provide along with such checks.
Cardholder used the checks to make purchases and incurred finance charges in excess of the finance charges Cardholder would have otherwise incurred had he simply used his credit card for the purchases.
Cardholder used the checks to make purchases and incurred finance charges in excess of the finance charges Cardholder would have otherwise incurred had he simply used his credit card for the purchases.
Seeking monetary and injunctive relief, Cardholder filed a putative class action suit against Issuing Bank, alleging that Issuing Bank had engaged in unfair competition in violation of California's Business and Professional Code by failing to make the required state-law disclosures.
Before the trial court, Issuing Bank argued that the National Bank Act ("NBA") and its federal regulations preempted the state disclosure law, and, in light of a Ninth Circuit decision involving the same factual and legal issues, renewed its motion for judgment on the pleadings. See Rose v. Chase Bank USA, N.A., 513 F.3d 1032, 1034 (9th Cir. 2008) (NBA preempted California convenience check disclosure requirements and national bank's failure to attach the disclosures to its convenience checks was therefore not unlawful).
Before the trial court, Issuing Bank argued that the National Bank Act ("NBA") and its federal regulations preempted the state disclosure law, and, in light of a Ninth Circuit decision involving the same factual and legal issues, renewed its motion for judgment on the pleadings. See Rose v. Chase Bank USA, N.A., 513 F.3d 1032, 1034 (9th Cir. 2008) (NBA preempted California convenience check disclosure requirements and national bank's failure to attach the disclosures to its convenience checks was therefore not unlawful).
Relying on Rose, the trial court granted Issuing Bank's motion. Cardholder appealed.
The Court of Appeal reversed, ruling in part that the NBA did not preempt California's disclosure requirements because California law did not "significantly impair" the powers of national banks, as the state law did not forbid national banks from making loans through the use of convenience checks, but merely required "clear and conspicuous" disclosures to be attached to the convenience checks. The Appellate Court also held, despite the Ninth Circuit's preemption ruling in Rose, that Issuing Bank had failed to make the required factual showing of significant impairment.
The Court of Appeal reversed, ruling in part that the NBA did not preempt California's disclosure requirements because California law did not "significantly impair" the powers of national banks, as the state law did not forbid national banks from making loans through the use of convenience checks, but merely required "clear and conspicuous" disclosures to be attached to the convenience checks. The Appellate Court also held, despite the Ninth Circuit's preemption ruling in Rose, that Issuing Bank had failed to make the required factual showing of significant impairment.
Issuing Bank sought review by the California Supreme Court, which reversed and remanded.
As you may recall, the NBA authorizes national banks "[t]o exercise by its board of directors or duly authorized officers or agents, subject to law, all such incidental power as shall be necessary to carry on the business of banking; . . . by . . . loaning money on personal security. . . ." 12 U.S.C. § 24 (Seventh).
In addition, California's Civil Code section 1748.9 requires "[a] credit card issuer that extends credit to a cardholder through the use of a preprinted check or draft [to] disclose on the front of an attachment that is affixed by perforation or other means to the preprinted check or draft, in clear and conspicuous language, all of the following information: (1) that 'use of the attached check or draft will constitute a charge against your credit account.' (2) The annual percentage rate and the calculation of finance charges, as required by . . . [federal Regulation Z] . . . . (3) Whether the finance charges are triggered immediately upon the use of the check or draft." Cal. Civ. Code. § 1748.9(a).
The California Supreme Court noted that under the "significant impairment test," codified into federal law by the Dodd-Frank Wall Street Reform and Consumer Protection Act, section 1748.9's disclosure requirements imposed conditions on the powers conferred on national banks by the NBA, which expressly include "loaning money on personal security." See 12 U.S.C. § 25b(1)(B)(preemption standards for national banks and subsidiaries); Barnett Bank of Marion County, N.A. v. Nelson, 517 U.S. 25 (1996)(state consumer financial laws are preempted if the state law prevents or significantly interferes with a national bank's exercise of its powers). See also Watters v. Wachovia Bank, N.A., 550 U.S. 1 (2007)(subsidiaries of national banks not subject to Michigan's bank regulatory regime).
In so ruling, like the United States Supreme Court in Barnett Bank, the California Supreme Court observed that there was no indication in the NBA that Congress intended to subject a national bank's powers to local law. Moreover, the California Supreme Court pointed out that section 1748.9 imposed detailed requirements as to the content, language, manner, and format of disclosures that exceeded any requirements imposed by federal law.
Thus, disagreeing with the Court of Appeal's characterization of section 1748.9's requirements as not "forbidding" the exercise of national banks' powers and therefore not a "significant impairment" to the exercise of those powers, the California Supreme Court reasoned that "to say that [Issuing Bank] may offer convenience checks so long as it complies with section 1748.9 is equivalent to saying that [Issuing Bank] may not offer convenience checks unless it complies with section 1748.9. . . . [T]he effect of section 1748.9 is to forbid national banks from offering credit in the form of convenience checks unless they comply with state law."
Thus, disagreeing with the Court of Appeal's characterization of section 1748.9's requirements as not "forbidding" the exercise of national banks' powers and therefore not a "significant impairment" to the exercise of those powers, the California Supreme Court reasoned that "to say that [Issuing Bank] may offer convenience checks so long as it complies with section 1748.9 is equivalent to saying that [Issuing Bank] may not offer convenience checks unless it complies with section 1748.9. . . . [T]he effect of section 1748.9 is to forbid national banks from offering credit in the form of convenience checks unless they comply with state law."
The California Supreme Court also noted that, even if California's disclosure requirements were not particularly onerous, any ruling that the state law requirements could stand would potentially subject national banks to the various disclosure rules of all fifty states.
Importantly, disagreeing with the Court of Appeals, the California Supreme Court also emphasized that national banks need not make a factual showing to demonstrate significant impairment. According to the California Supreme Court, requiring individual national banks to make a factual showing of significant impairment would be impractical, partly because preemption rulings would then vary depending on the particular operations of individual banks and preemption law would therefore lack consistency.
Also rejecting Cardholder's arguments as to the meaning of the NBA and that section 1748.9 was a law of general applicability, the Court noted, first, that Cardholder's reading of "subject to law" ran counter to the historical interpretation of the NBA as preempting state law "absent express language that makes a federal banking power subject to state law." Second, the Court concluded that section 1748.9 was not a generally applicable law similar to a law against unconscionable contracts, because section 1748.9 expressly targets "credit card issuer[s]" and mandates specific and affirmative conduct on the part of such entities. The Court pointed out that, although section 1748.9 applied equally to all credit card issuers in California, including national banks, section 1748.9 nevertheless restricted national banks' federal powers to engage in the "business of banking."
Accordingly, the California Supreme Court ruled that section 1748.9's disclosure requirements "significantly impaired" the exercise of authority granted to national banks under the NBA, and were therefore preempted.
Accordingly, the California Supreme Court ruled that section 1748.9's disclosure requirements "significantly impaired" the exercise of authority granted to national banks under the NBA, and were therefore preempted.
Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
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