On July 9, 2013, the Eighth Circuit Court of Appeals decided JPMorgan Chase Bank, N.A. v. Johnson, Docket Nos. 12-2370, 12-2686, 12-3049 (8th Cir. July 9, 2013). Although the decision was based on the interpretation of an Arkansas statute, the case raised an interesting question of federal preemption under the National Bank Act (“NBA”).
The case involved JPMorgan’s attempts to use Arkansas’ Statutory Foreclosure Act (“SFA”) to foreclose on the homes of five borrowers. Under Arkansas law, a bank may foreclose on real property using one of two methods. A bank may bring an action to have the property sold. Alternatively, a bank may utilize the notice and sale provisions of the SFA.
The Bankruptcy Court held a national bank not registered to do business with the Arkansas Secretary of State or the Arkansas Banking Department was not authorized to use the non-judicial foreclosure method under the SFA. Since JPMorgan was not registered with the Arkansas Bank Department as an out-of-state bank or otherwise authorized to do business under Arkansas law, the Bankruptcy Court found that foreclosure was not available under the SFA. On appeal, the United States District Court reversed, finding that JPMorgan was authorized to do business in Arkansas pursuant to federal law, and that this authorization sufficed under the SFA.
The Eighth Circuit affirmed, noting that there is no language in the SFA that required the bank to register with the state, rather authorization to conduct business under state or federal law was sufficient. Under the National Bank Act (“NBA”), JPMorgan is authorized to conduct the business of banking in Arkansas, and the court concluded that there was nothing indicating an intent to impose state registration as the exclusive method of authorization for purposes of the SFA.
Because of the court’s interpretation of Arkansas law, it did not reach the issue of preemption under the NBA. However, in its brief, JPMorgan argued that the NBA preempts all state law that attempts to place limits on a national bank’s exercise of an authorized power, and the Office of the Comptroller of the Currency (“OCC”), not state officials, has the authority to regulate the banking activities of national banks. The NBA limits the ability of states to interfere with a national bank’s exercise of its authorized powers, and state laws that limit a national bank’s power “conflict with federal law even if the federal law does not impose a requirement, but merely provides authority to act.”
Through its enactment of the SFA, Arkansas effectively offered a shortcut from the usual foreclosure process only to those banks that were authorized to do business in the state. The plaintiffs might have argued that Arkansas was not actually requiring JPMorgan to acquire a license to perform basic banking activities because national banks were still able to make mortgage loans and conduct foreclosures in the state of Arkansas. However, even where there is no licensing or condition upon the exercise of a federally authorized power, the NBA will generally preempt a state law if it prevents a national bank from exercising its authorized powers in the most economically beneficial manner. In Watters v. Wachovia Bank, NA, 550 U.S. 1 (2007), the Supreme Court ruled that states are not permitted to regulate the activities of national banks that would “prevent or significantly impair the exercise of authority, enumerated or incidental,” or that would “curtail or hinder a national bank’s efficient exercise of any other power.”
State laws that condition a national bank’s power “interfere with [a] bank’s federally authorized business.” A court examining the issue of preemption would likely conclude, based on the Watters case and other precedent, that the Arkansas law was preempted by the NBA even if it did not require JPMorgan to obtain a license because it limited JPMorgan’s efficient exercise of its authorized powers. The OCC has opined that a state-imposed requirement that a national bank register under State law in order to exercise a banking power authorized under federal law is preempted by the NBA. For example, the OCC issued an opinion (Preemption Opinion, 66 F.R. 23977, May 10, 2001) stating that a state law which required a license to sell reclaimed leased vehicles via public sale would be preempted as applied to national banks because national banks are authorized to engage in leasing activities and the ability to dispose of lease property was a component activity of this permissible business.
JPMorgan’s brief also discussed Section 1044 of the Dodd-Frank Act, and specifically whether narrower preemption principles applicable to state consumer financial laws would apply. Section 1044 of Dodd-Frank defines “state consumer financial law” as “a state law that does not directly or indirectly discriminate against national banks, and that directly and specifically regulates the manner, content, or terms and conditions of any financial transaction, or any account related thereto, with respect to a consumer.” The NBA preempts only those state consumer financial laws that have a discriminatory effect on national banks or prevents or significantly interferes with the national bank’s exercise of power. JPMorgan argued that since the Arkansas statute was not attempting to regulate the terms of JPMorgan’s transactions, but rather limited JPMorgan’s choice of foreclosure process, it was outside of the scope of consumer financial laws that might survive NBA preemption.
Although the case might have addressed the issue of preemption under different circumstances, the Eighth Circuit ultimately decided the case based on its interpretation of Arkansas law.
A copy of the Eighth Circuit decision can be found here.
Contributed to by Tiana Towns, Summer Associate