An appellate court has ruled against Flagstar Bank in a California case which had been mentioned in connection with a New York escrow interest case heard by the U.S. Supreme Court.
The ruling in Kivett v. Flagstar was the second against a bank in recent weeks. A Sept. 22 First Circuit ruling sent a similar case against Citizens Bank back to a lower court.
What the U.S. Supreme Court said about state vs. federal banking law
In May 2024, the U.S. Supreme Court
That ruling sent Cantero back to the Second Circuit for deeper analysis of the issues at hand. In the first go round on its way up to the high court, the Second Circuit ruled in favor of B of A in dismissing the case.
Meanwhile, in its previous rulings, the Ninth Circuit had held in favor of Kivett, creating a conflict in interpretations.
What happened with Kivett following the Cantero ruling
Following the Cantero ruling, the U.S. Supreme Court granted a petition from Flagstar to vacate the Ninth Circuit decision and remand this case as well. Last August,
Industry groups, including the Mortgage Bankers Association and American Bankers Association, filed an amicus brief in support of Flagstar. On the other hand, state regulator organizations, the American Association of Residential Mortgage Regulators and the Conference of State Bank Supervisors wrote in support of the original decision.
In an Oct. 2 decision, this court ruled 2-1 to affirm the original district court ruling that the National Banking Act did not preempt California's requirements on payment of interest on escrows.
It also vacated and remanded to the district court to modify the class definition date for borrowers covered by the lawsuit and the judgment amount.
The Ninth Circuit mentioned a previous ruling in favor of the state's escrow law in another case, Lusnak v. Bank of America. The majority said it did not have the ability to overrule that case in Kivett because the Supreme Court's Cantero ruling did not make that decision irreconcilable with Lusnak.
What was the majority's reasoning in ruling against Flagstar?
"We do not hold that Lusnak was correctly decided, only that we have no authority to overrule it," wrote Judge Jay Bybee in the majority decision. "Correction in this court, if any is warranted, is only appropriate through our en banc procedures."
An en banc hearing involves all of the judges on an appellate court and can be an intervening step before a case goes before the U.S. Supreme Court. Bybee had cited an en banc ruling, Miller v. Gamme, which also set standards on whether a three judge panel can overrule a precedent like Lusnak.
"Because Cantero did not decide whether the NBA preempts state interest-on-escrow laws, the result is not inconsistent with Lusnak's judgment," Bybee said. "Nor is Cantero's holding — that the Second Circuit erred in applying a categorial test for preemption — inconsistent with Lusnak."
What was the minority opinion supporting Flagstar?
But the dissenting judge, Ryan Nelson, said Cantero is clearly irreconcilable with Lusnak (and thus Kivett) because the older decision did not apply the comparative analysis spelled out by the U.S. Supreme Court.
"We are disappointed by the Court's decision," said Bao Nguyen, senior executive vice president, general counsel at Flagstar Bank in a statement. "As Judge Nelson correctly points out, today's decision continues to rely on the flawed logic of the Lusnak case and completely ignores the instructions of the Supreme Court that require lower courts to conduct a nuanced comparative analysis of Supreme Court precedents to determine whether a state law is preempted."
Flagstar plans to pursue a further appeal in order to preserve the federal preemption, which Nguyen said is essential to the dual banking system.
However, Flagstar is no longer in the mortgage servicing business. In 2024, it
Why the First Circuit ruled against Citizens Bank
The First Circuit case, Conti v. Citizens Bank, involves Rhode Island law. The three-judge panel ruled unanimously to vacate a district court ruling in favor of Citizens to dismiss the case, also citing Cantero.
Because the district court ruling was made prior to the U.S. Supreme Court decision "without the benefit of Cantero, incorrectly granted Citizens' motion to dismiss," wrote Judge Seth Aframe.
The First Circuit had stayed Conti's appeal while Cantero was being decided. The argument in the Conti case then became: did the lower court apply the Cantero analysis?
How Cantero affected the Conti law suit
"As Citizens acknowledges, interest-on-escrow laws have been enacted by at least twelve states," Aframe said. "Furthermore, Congress has mandated compliance with state interest-on-escrow laws as to a select set of mortgages under [the Truth in Lending Act]."
Citizens had argued that the federal preemption applies when state law dictates the terms of a banking product, but the panel rejected that reasoning.
Among the reasons cited by Aframe was that Citizens' proposed test did not follow the relevant legal precedents cited by the U.S. Supreme Court in Cantero.
Citizens Bank declined to comment on the First Circuit ruling.
