HOOD v. SANTA BARBARA BANK & TRU.
Filed 9/28/06
CERTIFIED FOR PUBLICATION
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION SIX
| CANIEVA HOOD et al., Plaintiffs and Appellants, v. SANTA BARBARA BANK & TRUST et al., Defendants and Respondents. | 2d Civil No. B184489 (Super. Ct. No. 1156354) (Santa Barbara County)
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Story continue from Part I ...
Appellants brought their action as private parties seeking damages for financial losses as well as declaratory and injunctive relief under the "private attorneys general" statute. As the California Supreme Court recognized in People v. Pacific Land Research Co. (1977) 20 Cal.3d 10, 17-19, there are fundamental differences between an action filed by a public prosecutor seeking injunctive relief and civil penalties and a consumer class action filed by a private party. (See also Payne v. National Collection Systems, Inc. (2001) 91 Cal.App.4th 1037, 1045.) The "filing of a UCL [class] action by a private plaintiff does not confer on that plaintiff the stature of a prosecuting officer, and the fact that the plaintiff may be acting as a so-called private attorney general is irrelevant . . . ." (Net2Phone, Inc. v. Superior Court (2003) 109 Cal.App.4th 583, 587.) (The Attorney General's only role in this action has been the filing of an amicus brief with this court.) Actions brought by private plaintiffs are outside the scope of the visitorial powers regulation.
In discussing visitorial powers, the trial court concluded that appellants' action is fundamentally regulatory. "[T]he purpose of [appellants'] action is to regulate cross-collection agreements, not to adjudicate an individual dispute." We do not agree that by permitting appellants' claims to proceed, the state is regulating Santa Barbara's conduct. Appellants' ability to sue respondents under the UCL, under the CLRA, for conversion, and for violating debt collection laws does not interfere with what respondents may do or how they may operate their banking business. Put another way, while the state cannot dictate to respondents how they can or cannot operate, it can insist that, however respondents choose to operate, they do so without violating debt collection laws and using deceptive business practices. (See Fenning v. Glenfed, Inc. (1995) 40 Cal.App.4th 1285, 1299.)
Appellants seek not only declaratory and injunctive relief but also the recovery of damages for class members under several theories. Appellants allege class members suffered substantial economic losses as a result of respondents' seizures of their tax refunds. The visitorial powers doctrine does not preclude appellants from pursuing their claims.[1]
The OCC's Deposit-Taking and Lending Regulations Do Not Preempt
State Tort, Contract, or Debt Collection Laws Unless These Laws More Than Incidentally Affect the Exercise of the Banks' Authorized Powers
Both the deposit-taking regulation and the lending regulation "exempt" or "save" state contract, tort, and debt collection laws from preemption. These exemptions apply to the extent that such laws only incidentally affect the exercise of national banks' deposit-taking (or non-real estate lending) powers or are otherwise consistent with the banks' deposit-taking (or non-real estate lending) powers. (See §§ 7.4007(c)(1), (2), (4), 7.4008(e)(1), (2), (4).)[2] Based on the record before us, it does not appear that the state's contract, tort or debt collection laws have more than an incidental effect on the exercise of national banks' deposit-taking (or non-real estate lending) powers or are otherwise inconsistent with the banks' deposit-taking (or non-real estate lending) powers. [3] California's debt collection law, the Rosenthal Fair Debt Collection Practices Act, does not have more than an incidental effect on respondents. Federal courts recognize that national banks and federally regulated thrift organizations are subject to state laws governing debt collection. (See Bank of America v. City & County of San Francisco, supra, 309 F.3d at p. 559; Alkan v. Citimortgage, Inc. (N.D.Cal. 2004) 336 F.Supp.2d 1061, 1064.) "'[S]tates retain some power to regulate national banks in areas such as contracts, debt collection, acquisition and transfer of property, and taxation, zoning, criminal, and tort law.'" (Wells Fargo Bank N.A. v. Boutris (9th Cir. 2005) 419 F.3d 949, 963, 970.) Appellants' claims seeking relief under state contract, tort or debt collection are not preempted by federal law.
The Deposit-Taking and Non-Real Estate Lending Regulations
Do Not Preempt Claims That Are Based on Federally Grounded Obligations
In Smith, supra, 135 Cal.App.4th 1463, the court held that the OCC's deposit-taking regulation did not preempt Smith's UCL or CLRA causes of action, which were partially based on Wells Fargo's violation of federal law (specifically, the OCC disclosure regulations). Because Smith's UCL cause of action was not based on an alleged violation of a state law requiring (or limiting) certain disclosures by Wells Fargo, the court concluded that it was not preempted by the deposit-taking regulation. (Id. at pp. 1482, 1487.)
Some of the legal obligations that appellants seek to enforce are created by federal law. Appellants seek to redress the violation of federal standards that have been adopted as part of California law. For example, appellants allege that respondents violated Civil Code section 1788.17 of the Rosenthal Fair Debt Collection Practices Act, which requires debt collectors to comply with the federal Fair Debt Collection Practices Act. In addition, title 12, United States Code section 4302(e) prohibits depository institutions from making "any advertisement, announcement, or solicitation relating to a deposit account that is inaccurate or misleading or that misrepresents its deposit contracts." Appellants allege that "[d]efendants deceive and mislead consumers when they induce consumers to sign RAL Agreements containing the [cross-collection provision]"; that defendants have violated Civil Code section 1770, subdivision (a)(5) because they have represented that the RAL's are a form of tax refund when they are loans subject to seizure by the lender to pay off alleged prior RAL debts of individual taxpayers; and that they have violated Civil Code section 1770, subdivision (a)(14) by representing that they have rights and remedies that are prohibited by law. The facts alleged in the complaint support a legal theory of liability for false and misleading advertising based on the predicate act(s) of violation of federal law regarding required disclosures and prohibited misleading or misrepresentative advertising. (See Smith, supra, 135 Cal.App.4th at pp. 1487-1488.) Further, title 15, United States Code section 1692e provides that "[a] debt collector may not use any false, deceptive, or misleading representation or means in connection with the collection of any debt." The complaint's alleged facts would support a legal theory of liability for violation of section 1692e also.
An act or practice is "unfair competition" under the UCL if it is forbidden by law. (Smith, supra, 135 Cal.App.4th at pp. 1479-1480.) The UCL "borrows" violations of other laws, including federal laws, and makes them actionable as unlawful business practices. (See id. at p. 1480 & authorities cited therein.) Therefore, a violation of federal law may serve as a predicate for a UCL action. (Ibid.) The OCC has recognized that the UCL applies to national banks.[4]
The Smith court concluded that Smith's UCL cause of action "only 'incidentally affect[ed]' [the bank's] deposit-taking powers" because Smith's UCL cause of action in effect was "a tort cause of action based on alleged violations of federal disclosure requirements applicable to Bank regardless of the UCL." (Smith, supra, 135 Cal.App.4th at p. 1483.) The court further reasoned that it could not be "reasonably . . . or persuasively, argued that Smith's UCL cause of action based on alleged violations of OCC disclosure requirements involves a state law that 'obstruct[s], impair[s], or condition[s]' [the bank's] ability to fully exercise its deposit-taking powers." (Ibid., citing § 7.4007(b)(1).) The court applied similar reasoning to Smith's CLRA cause of action and concluded that neither his UCL nor his CLRA causes of action were preempted. (Id. at pp. 1483, 1486-1487.)
State laws redressing violations of federal law are not preempted even where those laws offer additional remedies. (See, e.g., Medtronic, Inc. v. Lohr (1996) 518 U.S. 470, 495.) The federal Fair Debt Collection Practices Act expressly protects from preemption state laws that provide greater consumer protection than does the federal law. (15 U.S.C. § 1692n.) "Ordinarily, 'state causes of action are not pre-empted solely because they impose liability over and above that authorized by federal law.'" (Washington Mutual Bank v. Superior Court (1999) 75 Cal.App.4th 773, 782.)[5]
The relevant OCC regulations preempt those state laws that "obstruct, impair, or condition" a national bank's ability to exercise its federally authorized deposit-taking and lending powers. (§§ 7.4007(b)(1), 7.4008(d)(1).) Here, appellants' CLRA, UCL, and Rosenthal Fair Debt Collection Practices Act's causes of action allege facts that would support a cause of action based on violations of federal law that apply to respondents regardless of state law. Thus, those causes of action are not preempted because they do not impose any substantial limitations upon, or "obstruct, impair, or condition" a bank's actions. (See Smith, supra, 135 Cal.App.4th at pp. 1483-1487.)[6]
The OCC's Non-Real Estate Lending Regulation Does Not Authorize
Banks to Require Mitigants to Protect Third Party Creditors from Risk
The trial court ruled that the national banks' ability to require cross-collection contracts as a risk mitigant or term of RAL credit was expressly preempted from state regulation and laws, in apparent reliance on section 7.4008(d)(2)(ii) and (iv). Respondents describe this section as "a primary ground" of the trial court's ruling.
The trial court's ruling gave an expansive interpretation to the "risk mitigants" permissible under the OCC's non-real estate lending regulation. The ruling enforced a risk mitigant (or term of credit) against Hood and in favor of respondents, including Santa Barbara, in a transaction where Santa Barbara extended no credit to Hood. Santa Barbara's seizure of Hood's 2001 tax refund alleviated a risk incurred by a third party (Household Bank) under a preexisting transaction. The trial court thus applied the non-real estate lending regulation to a transaction where Santa Barbara made no loan and incurred no risk.
We disagree with the trial court's expansive reading of the non-real estate lending regulation. As we have already indicated, we narrowly construe the precise language of the regulation. (Smith, supra, 135 Cal.App.4th at p. 1476.) The mitigation of risks of third parties is beyond the scope of the non-real estate lending regulation. That regulation encompasses a bank's (lender's) mitigation of its own risk with respect to its extension of credit to an individual borrower. The regulation refers to "[a] bank," "a borrower's ability to repay" (§ 7.4008(b), italics added), and "[a] national bank['s]" authority to make loans without regard to state law limitations concerning "[t]he ability of a creditor to require . . . risk mitigants," or terms of credit. (§ 7.4008(d)(2)(ii), italics added.) This language does not expressly preempt state laws where banks use loan applications to seize consumers' tax refunds for the purpose of collecting the consumers' preexisting debts to third parties. Appellants' claims are outside the scope of preemption encompassed by the non-real estate lending regulation. (See Gibson v. World Savings & Loan Assn., supra, 103 Cal.App.4th at pp. 1301-1302, citing Cipollone v. Liggett Group, Inc., supra, 505 U.S. at p. 516.)
The Non-Real Estate Lending Regulation Does Not Preempt
Claims of Class Members Who Received No Loans
Hood and similarly situated class members received no loans from Santa Barbara. Respondents nevertheless argue that the OCC's non-real estate lending regulations preempt their claims. We disagree. Santa Barbara has no lending relationship with appellants. Consequently, their claims against Santa Barbara and the laws upon which they base those claims are outside the scope of the non-real estate lending regulation.
In addition, respondents argue that "established principles of administrative law" require this court to "defer to the OCC's finding that national banks may participate in RAL cross-collection programs," and that to reach a contrary result "would directly obstruct the OCC's regulatory authority, in violation of longstanding preemption principles." In so arguing, respondents cite Chevron U.S.A. v. Natural Res. Def. Council (1984) 467 U.S. 837, 843-844, and Arkansas v. Oklahoma (1992) 503 U.S. 91, 105-114. Respondents also cite recent federal appellate court decisions that uphold the OCC preemption regulations at issue here. We are not bound by lower federal appellate court decisions. (See People ex rel. Renne v. Servantes (2001) 86 Cal.App.4th 1081, 1090; People v. Williams (1997) 16 Cal.4th 153, 190.)
Admittedly, courts defer to administrative agencies concerning areas particularly within their expertise, as in Arkansas v. Oklahoma, supra, 503 U.S. at pages 105-114, where the court granted substantial deference to the EPA's interpretation of Oklahoma's water quality standards. Although respondents urge this court to give deference to the OCC regulations concerning the preemption of state law, respondents have not cited any controlling authority requiring a court to defer to an agency's regulations concerning preemption. The United States Supreme Court has declined to accord deference to an agency regulation purporting to preempt state law, stating it would "assume (without deciding) that the . . . question [of whether a statute is preemptive] must always be decided de novo by the courts." (Smiley v. Citibank (South Dakota), N.A. (1996) 517 U.S. 735, 744.)
Moreover, our decision does not prohibit national banks from participating in cross-collection programs that comply with relevant laws. Further, although the Attorney General has urged us to do so, we do not decide whether the OCC exceeded its authority in adopting the preemption regulations.[7]
Respondents refer to various materials in arguing that the OCC is aware of lenders' RAL cross-collection agreements.[8] We have examined those materials but find no clear indication that the OCC condones the use of cross-collection provisions by a "lender" who extends no credit to a consumer and seizes that consumer's tax refund to pay the proceeds to a third party lender for a preexisting RAL debt.
Because the trial court erred in concluding that federal law expressly preempted appellants' claims, we reverse the judgment and remand this matter to the trial court. Costs are awarded to appellants.
CERTIFIED FOR PUBLICATION.
COFFEE, J.
I concur:
PERREN, J.
I respectfully dissent.
The effect of the majority's decision is to permit a trial court in California to exercise regulatory control over the conditions under which national banks make Refund Anticipation Loans (RALs) and, acting pursuant to cross-collection agreements with other national banks, apply tax refunds deposited into special accounts to satisfy balances due on RALs made in prior tax years. Regulations adopted by the Office of the Comptroller of the Currency (OCC) preempt state laws that purport to regulate the deposit-taking and non-real estate lending activities of national banks. Here, appellants seek a state court injunction invalidating a federal banking practice approved by the OCC. In my view, the majority should stay out of the federal banking business. Because the trial court correctly concluded that appellant's claims are preempted by federal law, I would affirm.
The majority errs, in my view, when it applies a presumption against preemption. This is a dispute over the performance of contracts by and between federally regulated national banks. As the United States Supreme Court has noted, the presumption against preemption is "not triggered when the State regulates in an area where there has been a history of significant federal presence." (United States v. Locke (2000) 529 U.S. 89, 108 [146 L.Ed.2d 69, 88].) National banking has been the subject of federal legislation and regulation for more than a century. "Indeed, since the passage of the National Bank Act in 1864, the federal presence in banking has been significant." (Bank of America v. City & County of San Francisco (9th Cir. 2002) 309 F.3d 551, 558; see also Barnett Bank v. Nelson (1996) 517 U.S. 25, 32 [noting federal courts' history of interpreting statutory grants of authority to national banks as "not normally limited by, but rather ordinarily pre-empting, contrary state law."].)[9] As a consequence, "the usual presumption against federal preemption of state law is inapplicable to federal banking regulation." (Wells Fargo Bank N.A. v. Boutris (9th Cir. 2005) 419 F.3d 949, 956.) We should presume that state laws are preempted and that respondents' obligations to RAL borrowers are defined by the federal regulations.
With respect to non-real estate lending, the federal regulations expressly preempt state laws purporting to regulate "terms of credit," "disbursements and repayments," "impound accounts, and similar accounts" and "[s]ecurity property." (12 C.F.R. § 7.4008(d)(2)(iv), (ix), (v), (vi).) Appellants challenge the terms under which respondents make short term loans that are secured by the borrower's expected tax refund, and respondents' seizure of tax refund checks from specially created, temporary bank accounts to repay similar loans made by other national banks in prior tax years. Their claims fall squarely within the categories of claims expressly preempted by federal law.
The OCC deposit-taking regulations also authorize national banks to employ special purpose savings services "without regard to state law limitations." (12 C.F.R. § 7.4007(b)(2)(vii).) The RAL process involves the creation of a special purpose savings account to receive the tax refund. State laws purporting to limit the terms under which those savings accounts are created or managed are expressly preempted.
Appellant's claims are not preserved by the "saving clauses" included in both the deposit-taking and non-real estate lending regulations. (12 C.F.R. §§ 7.4007, subd. (c); 7.4008, subd. (e).)[10] These general savings clauses do not control over the more specific express preemption regulations. "A general 'remedies' saving clause cannot be allowed to supersede the specific substantive pre-emption provision . . . ." (Morales v. Trans World Airlines, Inc. (1992) 504 U.S. 374, 385 [119 L.Ed.2d 157, 168, 112 S.Ct. 2031].)
Moreover, each saving clause provides that state laws may "apply to national banks to the extent that they only incidentally affect the exercise of national banks' deposit taking [or non-real estate lending] powers." (12 C.F.R. § 7.4007, subd. (c), 7.4008, subd. (e).) State laws "incidentally affect" a national bank when they are laws of general application that "are not designed to regulate lending and do not have a disproportionate or otherwise substantial effect on lending. To the contrary, they are part of the legal infrastructure that undergird all contractual and commercial transactions." (Gibson v. World Savings & Loan Ass'n. (2002) 103 Cal.App.4th 1291, 1303-1304.)
Here, appellants are using state laws of general application, including the common law tort of conversion, the Unfair Competition Law (Bus. & Prof. Code, § 17200, et seq.), the Consumers Legal Remedies Act (Civ. Code, § 1750, et seq.) and the Rosenthal Fair Debt Collection Practices Act (Civ. Code, § 1788, et seq.), to enjoin a national bank from performing under its cross-collection agreements with other national banks. This is more than an individual claim for money damages based on a breach of contract or tort. It is a class action that seeks to regulate not only the terms under which national banks make and collect on RALs, but also the manner in which they conduct business with other national banks. The remedy sought by appellants would dictate the terms under which national banks make RALs and would vitiate their cross-collection agreements. By any standard, that is more than an incidental impact on the banks' deposit-taking and non-real estate lending powers. As a result, appellants' claims fall outside the regulations' savings clauses. The trial court correctly recognized this and found appellants' claims expressly preempted by the OCC regulations. Its judgment should be affirmed.
CERTIFIED FOR PUBLICATION
YEGAN, J.
James W. Brown, Judge
Superior Court County of Santa Barbara
______________________________
The Sturdevant Law Firm, James C. Sturdevant, Monique Olivier; The National Consumer Law Center, Stuart Rossman, Chi Chi Wu for Plaintiffs and Appellants Canieva Hood and Congress of California Seniors.
Tom Greene, Chief Assistant Attorney General, Albert Norman Shelden, Senior Assistant Attorney General, Ronald A. Reiter, Supervising Deputy Attorney General, Michele R. Van Gelderen, Deputy Attorney General, for Attorney General Bill Lockyer as Amicus Curiae in support of Plaintiffs and Appellants.
Eric Halperin, Kathleen Keest, Amanda Quester for Center for Responsible Lending and National Association of Consumer Advocates as Amici Curiae in support of Plaintiffs and Appellants.
Sheppard, Mullin, Richter & Hampton LLP, D. Ronald Ryland for Defendants and Respondents Santa Barbara Bank & Trust, a division of Pacific Capital Bank, N.A., and Pacific Capital Bank N.A.; Stroock & Stroock & Lavan LLP, Julia B. Strickland, Stephen J. Newman, Deborah E. Barack, Nancy M. Lee for Defendants and Respondents Beneficial National Bank, Household Bank, F.S.B., HSBC Taxpayer Financial Services Inc., formerly known as Household Tax Masters, Inc. and JPMorgan Chase Bank, N.A., successor by merger to Bank One, N.A. (Ohio).
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[1] Because the visitorial powers doctrine does not apply to appellants' claims, we do not address whether the claims fall within the "courts of justice exception." Nor do we address whether the OCC lacked authority to promulgate section 7.4000 (concerning the visitorial powers doctrine), which the Attorney General asserts "purports to . . . prevent state officials from enforcing a variety of . . . laws against national banks."
[2] In Smith, supra, 135 Cal.App.4th 1463, Smith had asserted that the deposit-taking regulation (§ 7.4007(b)(2)) should not be applied retroactively to preempt cases based on conduct predating its February 12, 2004, effective date. The trial court adopted the OCC's position that because the deposit-taking regulation was a "clarification of existing law," it could be given retroactive effect. (Smith, at p. 1470.) The Court of Appeal decided the case without addressing this issue. (Id. at p. 1482, fn. 17.) Appellants' action challenges conduct that predates the OCC preemption regulations, as well as similar, ongoing conduct.
[3] The trial court did not "rely on [the declaration submitted by respondents to establish] more than an incidental effect" and did not allow appellants to conduct "further discovery to respond to that evidence" because it "would not effect the court's decision." The dissent concludes that appellants' class action "[b]y any standard [would have] more than an incidental impact on the banks' deposit-taking and non-real estate lending powers," as it would regulate the terms under which national banks make and collect on RAL's and the manner in which they conduct business with other national banks.
For reasons previously explained, we reject the argument that a private action such as appellants' is regulatory. Further, if the judgment in this case were sustained on the ground that appellants' pursuit of their claims would have more than an incidental effect on respondents' exercise of its authorized powers without requiring the consideration of evidence from the parties relevant to such effect, it seems that national banks could avoid state law compliance and state court process in nearly any case.
[4] "Unfair or deceptive acts or practices are unlawful under federal and state law." (OCC Advisory Letter 2002-3 (Mar. 22, 2002) p. 3 at
[5] Respondents challenge appellants' ability to pursue their claims alleging a violation of federal law where they did not raise that theory below. That does not bar appellants' reliance on a federal law violation to support their UCL and CLRA theories. "[T]he test of the adequacy of a complaint is whether it alleges sufficient facts to support a particular cause of action and not whether it expressly alleges legal theories of liability underlying a cause of action. A complaint is adequate if its factual allegations are sufficient to support a cause of action on any available legal theory (whether specifically pleaded or not). [Citation.] . . . [T]o the extent [respondents] argue[] on appeal that [appellants] waived [their] violations of [federal law and other theories or liability under the UCL and CLRA] by not expressly raising those theories in [their] complaint, [respondents] misconstrue[] applicable California law . . . ." (Smith, supra, 135 Cal.App.4th at p. 1485.)
[6] In urging this court to uphold the trial court's ruling that the OCC regulations preempt state law, respondents stress that the RAL program involves an activity that has great federal interest. (E.g., RAL's are secured by a federal tax refund; the IRS deposits the refund electronically into an account at a national bank; IRS rules describe disclosure duties of tax preparers assisting taxpayers applying for RAL's; and certain components of the RAL program are protected by federal patents.) These factors do not control the issue of preemption.
[7] The Attorney General notes that the "California Supreme Court has categorically rejected the OCC's [previous] attempts to preempt state law by regulatory command" in Perdue v. Crocker National Bank (1985) 38 Cal.3d 913, 932. The Attorney General further notes that Congress later referred to the Perdue case when it characterized the OCC's application of preemption principles as "'inappropriately aggressive, resulting in preemption of State law in situations where the federal interest did not warrant that result.'"
[8] (See, e.g., OCC Interpretative Letter No. 959 (Feb. 13, 2003); OCC Corporate Decision No. 2005-11 (July 12, 2005) pp. 2-3 [application to merge First Bank of San Luis Obispo]at
[9] The OCC reached the same conclusion in its commentary on the adoption of the final rules at issue here, noting that "there is no presumption against preemption in the national bank context." (Bank Activities and Operations, 69 Fed. Reg. 1895, 1896 (Jan. 13, 2004).) Congress expressly charged the OCC with the regulation of national banks. We should defer to its reasonable interpretation of the preemptive scope of that legislative mandate. (Tidewater Marine Western Inc. v. Bradshaw (1996) 14 Cal.4th 557, 568; see also Presley v. Etowak County Commission (1992) 502 U.S. 491, 508 [117 L.Ed.2d 51]; Ford Motor Credit Co. v. Milhollin (1980) 444 U.S. 555 [63 L.Ed.22].)
[10]The savings clauses provide: "State laws on the following subjects are not inconsistent with the deposit-taking [or non-real estate lending] powers of national banks and apply to national banks to the extent that they only incidentally affect the exercise of national banks' deposit-taking [or non-real estate lending] powers: (1) Contracts;
(2) Torts;
(3) Criminal law;
(4) Rights to collect debts;
(5) Acquisition and transfer of property;
(6) Taxation;
(7) Zoning; and
(8) Any other law the effect of which the OCC determines to be incidental to the deposit-taking [or non-real estate lending] operations of national banks or otherwise consistent with the powers set out in paragraph (a) of this section." (12 C.F.R. §§ 7.4007, subd. (c); 7.4008, subd. (e).)
