9th Circuit Holds that National Bank Act Does Not Preempt California Statute Requiring Interest on Certain Escrow Accounts

The U.S. Court of Appeals for the Ninth Circuit recently held that the National Bank Act (NBA) does not preempt a California statute’s requirement that a financial institution making or purchasing loans secured by real property containing a one- to four-family residence must pay interest on monies held in escrow in connection with such loans.

In the underlying litigation, a class of California borrowers holding mortgage escrow accounts with a large national bank sued the bank, alleging that it did not pay interest on these accounts as the California statute requires.  In response, the bank asserted that the NBA preempted this statutory requirement.  The U.S. District Court for the Northern District of California held that NBA did not preempt this statutory requirement, and a Ninth Circuit panel affirmed.

The U.S. Supreme Court, however, vacated and remanded that opinion, following its decision in Cantero v. Bank of America.  There, the Supreme Court held that the NBA preempts a state law if the law significantly interferes with a national bank’s exercise of powers.  WBK covered that decision here.  On remand, the Ninth Circuit observed that no legal authority supported the argument that state interest-on-escrow laws prevent or significantly interfere with the exercise of a national bank’s powers.  To the contrary, the court maintained, the Dodd–Frank Act contains provisions specifically requiring payment of interest on certain types of escrow accounts when required by state law.  WBK covered that opinion here.

Subsequently, the Ninth Circuit panel granted the bank’s petition for rehearing.  Under Ninth Circuit precedent, a prior panel decision is binding on future panels, unless the underlying reasoning of such decision is “clearly irreconcilable” with that of an intervening decision from the U.S. Supreme Court or state court of last resort.  Following this approach, the court determined that its prior opinion in Lusnak v. Bank of America, which addresses state interest-on-escrow statutes, still governed because it was not “clearly irreconcilable” with the reasoning in Cantero.  Accordingly, the panel’s most recent opinion once again held that the NBA does not preempt the California statute’s requirement to pay interest on certain escrow accounts.

The Ninth Circuit, therefore, affirmed the district court’s preemption holding — based on which it had granted summary judgment to the plaintiffs — but vacated and remanded for the district court to correct its award based on an error in tolling the statute of limitations.