The Ninth Circuit is about to issue its decision in Gutierrez v. Wells Fargo Bank N.A., (Appeal No. 10-16959) in which the bank contends that the National Bank Act (“NBA”) and implementing Office of the Comptroller of the Currency regulations preempt any California law that would preclude the bank from sorting items from highest to lowest for purposes of overdraft fees. The lower court found no preemption and awarded damages of over $200 million.

A New York Supreme Court judge, in Levin v. HSBC Bank, No. 650562/2011, June 26, 2012, has now gone the same direction as the lower court in Gutierrez. New York laws that provide for a covenant of good faith and fair dealing and prohibit unfair business practices are not preempted by the NBA, according to the New York court, because they “do not conflict with or significantly impair HSBC’s rights” under the federal banking laws.

The California Supreme Court in a very thorough decision has just held that California state disclosure requirement for preprinted checks are preempted by the NBA, and the question arises whether the Ninth Circuit will be moved by the court’s reasoning. Parks v. MBNA, In the Supreme Court of California, Docket S183703, June 21, 2012.

The California decision is significant in its pronouncement that the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) adopts the Supreme Court’s decision in Barnett Bank, 517 U.S. 25 (1996), as the touchstone for preemption analysis. Dodd-Frank provides that a state consumer financial law is preempted only if “in accordance with the legal standard for preemption in the decision of the Supreme Court of the United States in Barnett Bank … the state consumer financial law prevents or significantly interferes with the exercise by the national bank of its powers …” The plaintiffs’ bar insists that Dodd-Frank dialed back preemption with this language, which, they contend, has two prongs: the Barnett standard and an additional requirement, that the state law “prevents or significantly interferes.” The banking bar, and the Comptroller of the Currency in its revised preemption regulation (Federal Register Document 2011-18731, OCC NR 2011-95, July 20,2011), contend that Dodd-Frank adopts the Barnett standard lock, stock and barrel as the sole test for preemption. The language used by the California Supreme Court supports the OCC position: “In 2010, the Dodd-Frank Act codified the significant impairment test articulated in Barnett.”

The case is also significant because it holds that under the Barnett standard state laws that “by themselves do not seem particularly onerous” are nonetheless preempted where they preclude a national bank operating multistate from operating on a national uniform basis.

The case concerned “convenience checks” issued by MBNA – the plaintiff had used such checks and as a result incurred “finance charges in excess of those he would have incurred had he used his credit card for similar transactions.” The convenience checks did not include disclosures required by California Civil Code Section 1748.9. The California Court of Appeals held that while Section 1748.9 imposed some burden, the NBA did not preempt Section 1748.9 because it did not “significantly impair” the power of national banks, concluding that the “generally applicable disclosure law” did not forbid banks from making loans via convenience checks, but only required “clear and conspicuous” disclosure.

The California Supreme Court noted that the disclosure obligations imposed by Section 1748.9 “exceed any requirements in federal law,” and that while Section 1748.9 did not outlaw a category of banking activity, it burdened it. The court argued that “to say that MBNA may offer convenience checks so long as it complies with section Section 1748.9 is equivalent to saying that MBNA may not offer convenience checks unless it complies with section Section 1748.9,” finding there to be no distinction between a “conditional permission” or a “contingent prohibition.”

The court also emphasized that “[d]iverse and duplicative superintendence of national banks’ engagement in the business of banking” was “precisely what the NBA was designed to prevent” and that “preemption analysis must consider the burden of disclosure regimes imposed not just by [California], but by all States in which the banks operate.” Since MBNA would face the prospect of “limitations and restrictions as various and as numerous as the States” if requirements such as those in Section 1748.9 were allowed to stand, the court found that Section 1748.9 “significantly impair[ed] the exercise of authority granted to national banks by the NBA.”

The court also rejected the argument that Section 1748.9 was a state law of general application akin to contract law, found that it was irrelevant whether or not Section 1748.9 was a “generally applicable law” that did not discriminate against national banks, and declined to require that MBNA make “an adequate factual showing that [Section 1748.9] significantly impaired [MBNA’]s federally authorized powers.”

Query whether the California Supreme Court’s analysis, which would preclude the application of potentially conflicting state by state requirements to a national bank operating on a multistate basis, will influence the Ninth Circuit’s decision. If the National Bank Act authorizes national banks to offer checking accounts and charge fees, and the Comptroller has issued a regulation authorizing those fees and prescribing how a bank is to set them (including sort order), can the states nonetheless establish limits on those fees by requiring a national bank to establish a different fee regime state by state, with potentially 50 different sort order requirements in order to comply?