NATIONAL BANK ACT
Flagstar Bank v. Kivett
Date: Aug. 22, 2024
Issue: Whether the National Bank Act (NBA) preempts state laws requiring national banks to pay interest on mortgage escrow accounts.
Case Summary: In a unanimous unpublished memorandum disposition, a Ninth Circuit panel again rejected an argument that California’s interest-on-escrow (IOE) statute is preempted by the NBA.
Flagstar loaned William Kivett $400,610 to finance a 2012 real estate purchase in California. Kivett filed a class action alleging Flagstar failed to pay interest on his mortgage escrow account. Kivett also asserted a claim under California’s Unfair Competition Law, which mandates financial institutions pay at least 2% interest annually on escrow accounts associated with certain residential mortgage loans.
Flagstar argued the NBA preempts state laws requiring national banks to pay interest on mortgage escrow accounts. A California federal district court ruled the NBA did not preempt California’s IOE statute, and the Ninth Circuit affirmed. In reaching its decision, the Ninth Circuit reaffirmed its prior ruling in Lusnak, which rejected the preemption challenge to California’s IOE statute. In its amicus brief supporting Flagstar, ABA argued review is warranted to resolve the circuit split, and the Ninth Circuit’s decision risks turning the national banking system into a patchwork 50-state banking system.
On May 30, 2024, the U.S. Supreme Court vacated the Second Circuit’s decision in Cantero, ruling that courts must conduct a practical assessment of the nature and degree of the interference when determining whether a state regulation significantly interferes with the national bank’s exercise of its powers and is thus preempted under Barnett Bank. In light of Cantero, the U.S. Supreme Court granted Flagstar’s petition vacating the Ninth Circuit’s decision and remanded the case to the Ninth Circuit for further consideration.
On remand, the Ninth Circuit reaffirmed the district court’s decision in the Flagstar case that California’s IOE statute is not preempted by the NBA. The panel noted that Lusnak is still good law in the Ninth Circuit, and thus the panel can only depart from Lusnak’s reasoning if Lusnak is “clearly irreconcilable with the reasoning or theory of intervening higher authority.” The panel concluded Lusnak is not clearly irreconcilable with Cantero. In the panel’s view, “the Supreme Court’s decision in Cantero suggests that Lusnak was correctly decided,” because Lusnak “properly applied” the Barnett preemption analysis.
Bottom Line: As of Sept. 1, Flagstar has not filed an en banc (full panel) petition for rehearing.
Documents: Order
