California Appellate Court Split Opinion Rejects Defense Federal Preemption Arguments and Reverses Order Dismissing Class Action
Plaintiffs filed a putative class action in California state court against a bank alleging conversion, and violations of California’s Consumers Legal Remedies Act (CLRA), Unfair Competition Law (UCL), Fair Debt Collection Practices Act (FDCPA) based on the bank’s “wrongful” release of tax refund monies to a third party creditor bank. Hood v. Santa Barbara Bank & Trust, 143 Cal.App.4th 526, 49 Cal.Rptr.3d 369, 373 (Cal.App. 2006). Defense attorneys cross-complained against several other banks, and the banks filed motions for judgment on the pleadings on the ground of federal preemption. Id., at 375. The trial court granted the motions, concluding that the “visitorial powers” regulation, the deposit-taking regulation and the non-real estate lending regulation adopted by the Office of the Comptroller of the Currency (OCC) expressly preempted plaintiffs’ class action claims. Id., at 375-76. By a 2-1 vote, the California Court of Appeal reversed.
The named plaintiff, Hood, applied for a tax refund anticipation loan (RAL) with defendant. RALs are short-term loans secured by the consumer’s anticipated tax refund. To effectuate this security interest, the consumer authorizes the IRA to deposit the refund directly into a bank account opened for the express purpose of receiving those funds. If the refund does not materialize, or if the refund is otherwise less than expected, the consumer is responsible for the outstanding balance on the RAL. Hood, at 374. Thus, as part of her loan application Hood executed documents by which she “(1) pledge[d] her 2001 tax refund as security for a RAL, (2) authorize[d] the IRS to deposit her refund into a Santa Barbara account, and (3) authorize[d] Santa Barbara to use her 2001 refund to pay her existing debts to other RAL lenders.” Because RAL’s are based on anticipated tax refunds, the borrower is liable for any shortfall remaining after the tax refund proceeds are applied against the outstanding debt. In this case, defendant rejected Hood’s loan application because another bank claimed that she still owed money on a prior RAL. Pursuant to the authorization signed as part of defendant’s RAL documents, the IRS deposited Hood’s tax refund into the Santa Barbara bank account, and the bank released the funds to the third-party creditor. Id., at 373. Because Hood did not receive her tax refund, “[she] could not pay her rent and received an eviction notice.” Id., at 375.
In reversing the judgment, the California Court of Appeal first observed that motions for judgment on the pleadings are akin to demurrers, thus invoking a de novo standard of review. Hood, at 376. Of the various types of preemption, the banks argued on appeal that the class action claims were expressly preempted by OCC regulations. Id., at 377 n.4. Because preemption “’generally is not favored,’” the party claiming preemption bears the burden of establishing it. Id., at 378.
With respect to the “visitorial powers” doctrine, the appellate court held that this regulation “explicitly contemplates state action.” Hood, at 380-81. The trial court reasoned that plaintiffs’ action “is fundamentally regulatory”; a conclusion the Court of Appeal rejected: “We do not agree that by permitting [plaintiffs’] claims to proceed, the state is regulating Santa Barbara’s conduct.” Id., at 381.
With respect to the deposit-taking and non-real estate lending regulations, the appellate court held that state contract, tort and debt collection laws were exempt from preemption if those laws “only incidentally affect” the banks’ powers under those OCC regulations. Hood, at 382. The Court concluded that the class action claims were not preempted. Id., at 382-83. Further, “State laws redressing violations of federal law are not preempted even where those laws offer additional remedies.” Id., at 384.
Finally, the appellate court concluded that the trial court erred in giving an “expansive interpretation” to the “risk mitigants” language in the non-real estate lending regulation, holding that the regulation is limited to efforts by a bank to mitigate its own losses, not those of third party creditors. Hood, at 385. Moreover, the Court of Appeal rejected the holdings of “lower federal appellate court[s]” and concluded that the non-real estate lending regulation applies only if the bank has a “lending relationship” with the plaintiff. Id., at 385-86. Because Santa Barbara refused to extend a loan to Hood, no such relationship existed.
NOTE: As noted above, the appellate opinion was split. One of the justices filed a dissent, arguing that the trial court correctly held that plaintiffs’ class action claims were preempted by the OCC regulations. The dissenting opinion is included in the PDF file referenced below.