The U.S. Court of Appeals for the Fourth Circuit recently held that Maryland's Credit Grantor Closed End Credit Provisions concerning debt cancellation agreements are not preempted by the National Bank Act, when the debt was extended by a non-depository lender rather than by a national bank.
A copy of the opinion is available at:
http://www.ca4.uscourts.gov/Opinions/Published/112161.P.pdf.
A consumer purchased a used car from an auto dealership, financing the purchase with a Retail Installment Sale Contract ("RIC"). The RIC provided that the purchase price included a $600 charge for an "Optional Debt Cancellation Agreement." The debt cancellation agreement provided that part of the outstanding debt was to be cancelled in the event of the "total destruction" of the car. The dealership then sold and assigned the RIC to a national bank (the "bank").
The consumer suffered a total loss, but the amount paid by his insurance company did not cover the remaining balance of his loan. The consumer submitted the claim to the debt's servicer, who denied the claim. The bank then demanded payment of the outstanding balance of the loan.
The consumer sued the bank and the servicer, among others, alleging violations of Maryland's Credit Grantor Closed End Credit Provisions (the "CLEC"), Md. Code Ann., Com. Law Sec. 12-1001 et seq., among others. The consumer also brought a breach of contract claim. The defendants removed the matter to federal court, and argued that the CLEC was preempted by the National Bank Act ("NBA"). The district court found that the CLEC was preempted, and dismissed the consumer's claims. The consumer appealed only the dismissals of his CLEC and breach of contract claims against the bank.
As you may recall, the Supreme Court has held that although nations banks are shielded from "unduly burdensome and duplicative state regulation," such banks are nevertheless subject to "state laws of general application...to the extent such laws do not conflict with...the NBA." See Watters v Wachovia Bank, N.A., 550 U.S. 1, 11 (2007).
Further, the NBA includes both a preemption provision and a savings clause, the latter of which provides that state laws concerning contracts and the right to collect debts are not preempted, to the extent that these laws "only incidentally affect the exercise of national banks' non-real estate lending powers." 12 C.F.R. 7.4008(e).
The Office of the Comptroller of the Currency ("OCC") has promulgated regulations concerning debt cancellation contracts, which define such a contract as one in which " a bank agrees to cancel all or part of a customer's obligation to repay an extension of credit from that bank..." 12 C.F.R. 37.2(f).
After considering the "plain language" of the above-referenced statutes, regulations and case law, the Fourth Circuit held that "the CLEC provisions regarding debt cancellation agreements are not expressly preempted by federal law when the agreements are part of credit contracts originated by a local lender and assigned to a national bank."
To reach that conclusion, the Fourth Circuit relied on the fact that the OCC regulations concern "debt cancellations entered into by national banks." Therefore, the Court reasoned that because the debt cancellation agreement was not entered into by a national bank, the federal regulations "do not expressly preempt the CLEC's regulation of debt cancellation agreements originated by local lenders and assigned to national banks."
The Fourth Circuit next considered whether the federal regulations might "occupy the field" of debt cancellation agreements, and thus preempt local regulation of the same. The Fourth Circuit again answered in the negative, holding that the federal regulatory regime "leaves room for state regulation of debt cancellation agreements entered into by entities other than national banks..."
The Fourth Circuit also concluded that the CLEC was not in conflict with federal banking regulations, and therefore not preempted on those grounds. The Fourth Circuit noted that it is not "physically impossible" to comply with both laws, as the CLEC requires that a debt cancellation agreement must cancel all of the remaining debt, whereas federal regulations allow for the cancellation of "all or part of" the remaining debt.
The bank countered that complying with the state regulations of debt cancellation agreements would burden its lending activities, such that preemption would be appropriate. The Fourth Circuit disagreed, finding that complying with the CLEC's debt cancellation provision "would not burden [the bank] any more than the state laws it presumably already complies with," such as -- the court specifically noted -- state usury laws.
Having determined that the RIC was subject to the terms of the CLEC, the Fourth Circuit next considered whether the bank breached those terms. The Fourth Circuit was guided in its consideration of this issue by case law providing that preemption does not apply where to shield a party from liability for breach of a voluntarily-assumed obligation. See Epps v. JP Morgan Chase Bank, 675 F.3d 315, 326-27 (4th Cir. 2012). Here, the Court determined that the obligation was voluntarily assumed, and therefore held that the consumer adequately plead his breach of contract claim.
Accordingly, the Fourth Circuit vacated the judgment of the lower court, and remanded the matter for further proceedings consistent with its opinion.
Ralph T. Wutscher
McGinnis Wutscher LLP
The Loop Center Building
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Chicago, Illinois 60602
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Email: RWutscher@mtwllp.com
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