Under New York law, but not federal law, a bank that “maintains an escrow account pursuant to any agreement executed with a mortgage” must pay borrowers an “interest at a rate of not less than two per centum per year” on the balance. The borrowers each took out mortgages from the bank and placed monthly deposits into escrow accounts with the bank. The borrowers sued the bank for failing to comply with New York law by not paying the borrowers’ interest on the balances of their escrow accounts. The bank responded by arguing that federal law, which does not require banks to pay borrowers interest on their escrow accounts, preempted New York’s escrow payment law. The district court held in favor of the plaintiffs, while the appellate court reversed the district court’s holding, finding that federal law preempted New York’s law. In its holding, the appellate court, relying on “an unbroken line of case law since McCulloch [v. Maryland, 17 U.S. 316 (1819)],” held that any state law that “purports to exercise control over a federally granted banking power,” regardless of “the magnitude of its effects” is preempted by federal law.
In Cantero v. Bank of Am., N.A., 144 S. Ct. 1290 (2024), the Supreme Court vacated the appellate court’s ruling and remanded the case to the district court. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 established the standard by which courts analyze whether federal law preempts a state law: courts are to analyze whether the state law “discriminates against national banks as compared to state banks” or “prevents or significantly interferes with the exercise by the national bank of its powers.” Because New York’s law did not discriminate against national banks, the Court analyzed New York’s law under the latter rule. The Dodd-Frank Act instructs courts, in determining whether a state law prevents or interferes with a national bank’s exercise of its powers, to act “in accordance with the legal standard for preemption in the decision of the Supreme Court of the United States in Barnett Bank of Marion City, N. A. v. Nelson, 517 U.S. 25 (1996).”
In Barnett Bank, the Court had established that non-discriminatory state laws that significantly interfere with a bank’s exercise of its powers may be preempted, even if the state law and federal law may both be complied with. However, the Court did not establish a clear line to determine when a state law significantly interferes with a national bank’s power. Instead, the Court looked to previous cases in which it determined whether non-discriminatory state laws are preempted by federal law. In Franklin Nat’l Bank of Franklin Square v. New York, 347 U.S. 363 (1954), the Court held a New York law that prohibited banks from using the word “saving” or “savings” in the advertising interfered with the power of national banks “to receive savings deposits.” In contrast, in Anderson Nat’l Bank v. Luckett, 321 U.S. 233 (1944), the Court held that a Kentucky law that required banks to turn over abandoned deposits to the state did not interfere with national bank’s powers. While national banks had the power to collect deposits, “an inseparable incident” of that power is the obligation to return the deposits to the party legally entitled to demand payment of it. The Kentucky law simply made the state a party that may be legally entitled to demand payments of deposits “in the same way and to the same extent that depositors could” after the depositors abandoned the account.”
In determining whether a state law is preempted by federal law, courts must analyze the state law in accordance with the guideline established by Barnett Bank, comparing and contrasting the state law to previous cases in which the Supreme Court determined that a state law does or doesn’t interfere with national bank’s powers. The appellate court, attempting to establish a bright-line rule to determine whether a state law is preempted, followed a different standard. The Supreme Court vacated the appellate court’s judgment and remanded the case with instructions to analyze New York’s law in accordance with the guidelines established in Barnett Bank.
By Gregory Ferrer, [email protected]
Edited By Ashley Boyce, [email protected]
Edited By Hayden Mariott, [email protected]