National Bank Act preemption
Flagstar Bank v. Kivett
Date: Oct. 3, 2025
Issue: Whether the National Bank Act (NBA) preempts California’s interest-on-escrow law, which requires national banks to pay interest on mortgage escrow accounts.
Case Summary: In a 2-1 decision, a Ninth Circuit panel concluded the NBA does not preempt California’s interest-on-escrow (IOE) statute, relying on its prior decision in Lusnak v. Bank of America.
Section 1044 of the Dodd-Frank Act codified the NBA preemption standard from the Supreme Court’s decision in Barnett Bank of Marion County N.A. v. Nelson, 517 U.S. 25 (1996), ruling the NBA preempts state law if it “prevents or significantly interferes with the exercise of a national bank’s power.”
Flagstar loaned $400,610 to William Kivett 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 contended, however, 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 law, and on May 17, 2022, the Ninth Circuit affirmed, citing its prior Lusnak decision that rejected the preemption challenge to California’s IOE statute.
On May 30, 2024, the U.S. Supreme Court decided Cantero v. Bank of America, directing courts to practically assess how much a state regulation interferes with a national bank’s powers under Barnett Bank. Afterward, the Court granted Flagstar’s certiorari petition, vacated the Ninth Circuit’s ruling, and remanded the case. On remand, a unanimous Ninth Circuit panel initially reaffirmed the district court, ruling the NBA does not preempt California’s IOE law, citing Lusnak and concluding Cantero supported that analysis. On Dec. 24, 2024, the Ninth Circuit granted Flagstar’s petition for a rehearing and vacated its previous decision. ABA filed a coalition amicus brief supporting Flagstar, urging the panel to reverse the district court’s decision and rule that the NBA does preempt California’s IOE statute.
Writing for the majority, Judge Jay Bybee concluded the Ninth Circuit’s prior Lusnak decision was not “clearly irreconcilable with Cantero. The majority explained that panels generally cannot overrule prior circuit decisions unless the higher court’s decision undercuts the theory or reasoning of the earlier case so thoroughly that the two are clearly irreconcilable. After reviewing Cantero and the preemption framework established in Barnett Bank, the court concluded Cantero did not dictate a single, mandatory method for preemption analysis, nor did it conflict with Lusnak’s approach. While Cantero emphasized a “practical assessment” of whether state laws significantly interfere with national bank powers, the panel noted that Cantero left room for courts to consider other interpretive tools, as Lusnak had, including legislative history and statutory context.
To assess whether Cantero’s comparative-analysis methodology was clearly irreconcilable with the Ninth Circuit’s approach in Lusnak, Judge Bybee analyzed two Supreme Court cases to see if they revealed any conflict between the methods. In Franklin National Bank, New York prohibited banks from using the word “savings” in advertising, but the Court held that this restriction conflicted with federal law granting national banks “all such incidental powers as shall be necessary to carry on the business of banking,” and therefore preempted the state law. In contrast, in Anderson National Bank, the Court upheld a Kentucky law that allowed the state to claim abandoned accounts only after proving abandonment, finding that it did not burden banks or interfere with their operations. Bybee acknowledged that the court did not know what additional guidance these cases offered for the IOE law. Thus, the majority concluded that Cantero’s methodology does not conflict with Lusnak, leaving the panel without authority to overrule it or reconsider preemption.
In dissent, Judge Ryan Nelson argued that Cantero clearly conflicted with Lusnak because Lusnak did not use the comparative analysis that Cantero requires. Judge Nelson emphasized that, as an intermediate court, the Ninth Circuit must follow Supreme Court precedent and that Cantero has effectively overruled Lusnak. Judge Nelson emphasized under Cantero, the NBA preempts California’s IOE law.
Bottom Line: The Ninth Circuit reaffirmed that California’s IOE law is not preempted by the National Bank Act, reaffirming Lusnak and finding that Cantero does not clearly conflict with that precedent.
Document: Opinion
