Federal Credit Preemption
King v. Navy Federal Credit Union
Date: Aug. 1, 2025
Issue: Whether National Credit Union Administration Rule 12 C.F.R. § 701.35(c) preempts claims under California’s Unfair Competition Law (UCL).
Case Summary: A unanimous Ninth Circuit panel held that federal credit unions are exempt from state laws that regulate account fees.
The California regulation 12 C.F.R. § 701.35(c) authorizes federal credit unions to set account-related fees. It states: “State laws regulating such activities do not apply to federal credit unions.”
In 2023, Andrew King sued Navy Federal Credit Union (NFCU) after a bounced-check dispute. King deposited a large check that failed to clear, and although he was not at fault, NFCU charged him a $15 returned-check fee under its policy. After failing to resolve the issue by phone, King sued NFCU alleging it violated California’s Unfair Competition Law by imposing the fee as an unfair and unlawful practice. He also claimed the fee violated the Consumer Financial Protection Act.
The Central District of California dismissed the suit, holding that state law claims challenging a federal credit union’s fee practices are preempted. Because King’s UCL claim targeted NFCU’s fee practices, the court ruled that 12 C.F.R. § 701.35(c) expressly preempted it and dismissed the case.
On appeal, the Ninth Circuit affirmed, ruling Section 701.35(c) preempts King’s UCL claims. The panel explained that preemption takes three forms — express, implied and conflict — and this case involved express preemption, which occurs when Congress explicitly states that federal law displaces state law on a subject. The panel noted that courts interpreting an express preemption clause must first examine its plain language and then consider the surrounding regulatory framework and the regulation’s stated purposes.
As described by the panel: “It is difficult to imagine preemption language more explicit than this,” highlighting the clarity of the regulation’s text. Allowing state laws to govern fee practices would “directly undermine the deregulatory objectives underlying § 701.35(c)” and “overlook the unique role that a federal credit union member plays in the governance of the union,” according to the panel. Specifically, unlike other financial institutions, federal credit union members have a direct say in fee-setting and can force out directors who impose unreasonable fees.
The panel emphasized to “ascend this Everest-like preemption mountain,” King made two arguments but failed to “reach the summit.” King first argued that if federal law prohibits a fee, then the preemption clause disappears, and state law claims may proceed. The panel reasoned, however, if the $15 fee violated federal law, his interpretation ignored Section 701.35(c)’s plain language. The regulation makes two independent points: federal credit unions may charge fees consistent with federal law, and state laws regulating those fees do not apply to federal credit unions. The panel concluded that whether a fee complies with federal law does not affect the preemption of state law claims.
Next, King argued that Section 701.35(c) preempts only state laws that directly “regulate” federal credit union fees, not generally applicable laws like the UCL. He relied on the Ninth Circuit’s decision in Total TV v. Palmer Communications, which interpreted the word “regulate” to indicate “a more limited preemptive intent” than a phrase like “related to,” which “signifies a broad preemptive purpose sufficient to preempt state laws of general application.” But the panel explained that Total TV turned on its statutory context and Congress’s express statement that it did not intend to preempt the generally applicable law at issue there. The panel further emphasized that King’s reading of Section 701.35(c) would create an irrational loophole allowing states to target federal credit unions through statutes that appear unrelated to share accounts.
Bottom Line: The decision is a significant win for federal credit unions.
Documents: Opinion
