A New York trial court recently ruled that federal banking laws did not preempt a plaintiff’s state law claims against a National Bank that issued stored-value gift cards. The ruling allowed the plaintiff to move forward with her class action claims of breach of contract, implied covenant of good faith and fair dealing, violation of Section 349 of the New York General Business Law, indebtedness, and unjust enrichment. Sheinkin v. Simon Property Grp., Inc., No. 022038/2010, 2011 Slip Op. 31908(U), at *1 (Sup. Ct. Nassau Co. 2011). The decision noted that it was following a line of cases which have agreed that nothing in federal law preempts the assertion of state law claims for violations of deceptive practices statutes.
The lead plaintiff, Janet Sheinkin, allegedly received a $50 stored-value gift card which had been purchased from a Simon Group mall. While the card was sold by the Simon Group, it was issued by and contained disclosures prepared by U.S. Bank. The disclosures included a sticker on the front of the card which described dormancy, replacement and renewal fees ― drawing attention to the expiration date of the card. The back of the card allegedly contained the same disclosures, and referred the user of the card to a multi-page “sleeve” document which allegedly was attached to the card and contained all the relevant disclosures.
Sheinkin never used the card and, by the expiration date of January 1, 2009, the balance on the card had been automatically reduced to $22.50 as a result of monthly dormancy fees. Following the card’s expiration, monthly dormancy fees continued to accrue until April 1, 2009 when U.S. Bank charged an account closure fee that consumed the remaining $12.50 on the card. Thereafter, the plaintiff brought a class action suit.
The National Bank Act
The National Bank Act (“NBA”) created a set of uniform standards for the regulation of so-called national banks. This provision finds its roots in the National Banking Acts of 1863 and 1864. This early framework has grown into the dual system of nationally regulated and state regulated banks that we have today. The business activities of the national banks are governed by the NBA, along with the Office of the Comptroller of the Currency (“OCC”) which is responsible for overseeing the operations of the banks, and how the banks interact with their customers.
The NBA gives the OCC the ability to oversee the banks through audits and oversight functions, but the NBA also gives the national banks incidental powers to carry out business. These incidental powers include a variety of functions, such as the delegation of specific functions to subsidiaries and other functions necessary to carry out the day to day activities of national banks. The NBA also has the power to preempt state laws that are targeted at regulating the activities of a national bank under certain circumstances.
In her complaint, the plaintiff asserted that U.S. Bank charged allegedly illegal fees on stored-value gift cards that it sold at Simon Malls through Simon Property Group. The plaintiff filed a complaint alleging breach of contract, implied covenant of good faith and fair dealing, GBL § 349, indebtedness, and unjust enrichment. The plaintiff made these class claims on behalf of all those that purchased the stored-value gift cards.
The Motion to Dismiss
Defendants filed a motion to dismiss to the complaint on the grounds that the state law claims asserted were preempted by the NBA. The court denied the motion, finding that the NBA did not preempt state laws in this area.
The court based this holding on an examination of the powers within federal law generally and those within the NBA. The court found no indication that “all state laws which might affect a national bank’s operations are preempted [by federal law], as would be the case in field preemption.” The court continued by stating “[r]ather, only those state laws that specifically conflict with the National Bank Act’s regulation of national banks are preempted.”
Defendants attempted to rebut this argument by making a showing that stored-value cards are an incidental power of nationally charted banks. This argument failed because, as the court noted, the U.S. Supreme Court has held that with respect to such incidental or enumerated powers, “states are permitted to regulate the activities of national banks where doing so does not prevent or significantly interfere with the national bank’s or the national bank regulator’s exercise of its powers.” In this respect the court also noted that the OCC which regulates national banks “has stated in its regulations that laws of general applicability . . . are not preempted.”
Distinguishing this case from cases relied on by the defendants; the court noted that those cases concerned laws that were aimed specifically at regulating the use of stored-value cards. For example, the court distinguished the holding in SPGCC, LLC v. Ayotte, 488 F.3d 525 (1st Cir. 2007), by pointing out that the state statute in that case sought to directly regulate the use of stored-value cards. Another case relied on by the defendants was distinguishable because it involved the application of a state statute that sought to specifically regulate stored-value cards to a subsidiary of the Simon Group who was not a national bank. Goldman v. Simon Property Grp. Inc., 58 A.D.2d 208 (N.Y. App. Div. 2d Dep’t 2008).
The court concluded that, because the plaintiff’s causes of action are generally applicable to any conduct, not just conduct by the banks, they are not specific to the issuance of stored-value cards. The court continued that “there is no reason to conclude that [the plaintiff’s causes of action] as applied to stored-value cards . . . would substantially interfere with or impair the OCC’s ability to regulate the operations of the national banks.”
The defendants “strenuously argue[d] that ‘resolving any of these theories in [the plaintiff’s] favor would significantly interfere with U.S. Bank’s authorized power to charge such fees in conjunction with its gift card program.” Rejecting this argument the court discussed that national banks do not operate in a legal void in the absence of OCC regulation. Therefore state laws, such as usury laws, are still applicable to national banks. The court focused this distinction on the reasoning that “[s]imply put, there is a difference between challenging a national bank’s power to do something and challenging the manner in which it is done.”
This Sheinkin case makes clear that banks, national or otherwise, have the duty to abide by laws of general application within states, regardless of whether the power it exercises emanates from the NBA. A bank cannot simply invoke the NBA to rebut any claims that it violated a state law which does not specifically seek to regulate the activity of the national bank. The only recourse for a national bank against a generally applicable law is to argue that the law significantly interferes with the operation of the national bank, or the operation of the OCC’s regulatory power over a national bank. These arguments, however, must be considered within the context of an acceptance within courts that state law concerning usury and other generally applicable matters will likely be enforced despite a national bank status.