State escrow account law is preempted, 9th Circuit rules

A divided 9th U.S. Circuit Court of Appeals panel ruled Tuesday JP Morgan Chase Bank doesn't have to pay interest on escrow accounts because it is preempted by a 1933 federal law.

Two judges selected by Republican presidents -- in an opinion authored by Judge Ryan D. Nelson, an appointee of President Donald Trump -- concluded a California law requiring the payments in home sales is preempted.

The scope of the decision is limited, as it applies only to mortgages acquired by banks from federal savings associations before January 2013. In this case, the dispute concerns mortgages acquired by JP Morgan Chase after the lender, Washington Mutual Bank, was placed under Federal Deposit Insurance Corporation receivership following the 2008 financial crisis.

The bank did not pay interest on homeowners' escrow accounts, arguing it did not have to do so because Washington Mutual, the original lender, was covered by the Home Owners Loan Act of 1933. The bank maintained the federal law preempts the state law.

U.S. District Judge Edward M. Chen of San Francisco, an appointee of President Barack Obama, ruled preemption no longer applied because the complaint sought redress only for the bank's nonpayment of escrow interest after it acquired the Washington Mutual assets.

Nelson overruled Chen's decision, citing subsequent amendments to the federal law -- known as HOLA -- allowing federal savings associations to sell loans on the secondary market.

"We therefore hold that HOLA preemption principles extend to a situation where, as here, a loan originates from a federal savings association, but the state purports to regulate the conduct of a non-federal savings association, such as a national bank, over that same loan," he wrote. McShannock et al. v. JP Morgan Chase Bank, 2020 DJDAR 10298 (9th Cir., filed April 29, 2019).

California's law requiring payment of interest of escrow accounts is preempted "because it affects the sale, purchase of, investment in, and participation in loans originated by savings associations," he added.

Senior 9th Circuit Judge J. Clifford Wallace6268, an appointee of President Richard M. Nixon, joined Nelson's opinion.

U.S. District Judge James S. Gwin of the Northern District of Ohio, an appointee of President Bill Clinton who sat on the case on assignment, dissented. He said the 2011 Dodd-Frank Act changed the law, requiring banks to comply with state interest rate requirements as of January 2013.

Citing a recent 9th Circuit decision ruling banks must pay escrow interest on loans that banks made, Gwin wrote the case should be simple, but that the majority granted a one-off exemption to the bank even though there is no suggestion Congress intended such a thing.

"Under the supremacy clause, federal law preempts conflicting state law, but only when Congress intends to preempt state law," he wrote. Gwin made a point in his dissent of quoting several times from a 2019 opinion by U.S. Supreme Court Justice Neil Gorsuch on textual analysis, arguing Nelson "hypothesizes about the economic impact of a finding against preemption" and ignores the statute's text.

Glenn A. Danas, an attorney with Robins Kaplan LLP who represents the estate that acquired the homes, said in an email the decision conflicts with the 9th Circuit's own 2018 precedent. Lusnak v. Bank of America N.A., 883 F.3d 1185 (9th Cir. 2018).

"As the dissent points out, requiring Chase to pay interest on escrow funds acquired from savings associations merely would place such loans on the same footing as loans Chase originates itself, under 9th Circuit precedent," he wrote in an email on Monday.

Danas said his clients are considering their next steps, and might seek a rehearing.

Christina Dello Buono, a JP Morgan Chase spokeswoman, said in an email the bank had no comment on the decision. Alan E. Schoenfeld, an attorney with Wilmer Cutler Hale Pickering and Dorr LLP who argued the appeal, did not return a message seeking comment.