Cantero v. Bank of America
In the latest episode of “Court Briefs,” host Kannon Shanmugam, along with colleague William Marks, discuss the Supreme Court’s decision in Cantero v. Bank of America, from the case’s background to the legal battle over state versus federal law in banking regulation.
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- Transcript
Kannon Shanmugam: Welcome to “Court Briefs,” a podcast from Paul, Weiss. I'm your host, Kannon Shanmugam, the chair of the firm's Supreme Court and Appellate Litigation Practice and co-chair of our Litigation Department. In this podcast, we analyze Supreme Court decisions of interest to the business community.
Today, I'm coming to you from the British Commercial Bar Association Conference in Stockholm, and I'm joined by my colleague, Will Marks, who's back in the office in Washington. We're going to talk about the Supreme Court's recent decision in a case called Cantero v. Bank of America, and this case involves the preemption of state laws by federal law in the context of banking regulation. So, Will, tell us a little bit about the facts of this case.
William Marks: Sure. So, the plaintiffs in this case were Bank of America customers who had taken out mortgages for homes in the state of New York. The bank, like most mortgages, required monthly payments into escrow accounts for the homeowners to fund property tax payments and home insurance payments. Now, under New York law, the bank was required to provide a minimum of 2% interest on the balance of those escrow accounts. But the bank wasn't paying any interest at all, and in fact, it had taken the position that the National Banking Act preempted the New York law in question.
Kannon Shanmugam: So, Will, how did this case end up in the Supreme Court?
William Marks: So, the plaintiffs filed suit in a federal court in New York, arguing that the bank was violating this New York law. And as you might expect, the bank argued that the National Bank Act preempted the New York law. The district court ultimately disagreed with the bank, but the Second Circuit then reversed. It held that any state law that purports to exercise any amount of control over a federally granted power to a national bank was preempted.
And in the Second Circuit's view, the New York law in question was attempting to control the federal banking power to create and fund escrow accounts. The Supreme Court ultimately granted review to determine whether the act preempts these sorts of state escrow interest laws.
Kannon Shanmugam: So thus far this year, we've seen a number of decisions from the Supreme Court that have been unanimous, but that ended up resolving cases on pretty narrow grounds. And it sure seems like this is the latest in that line of cases. Is that fair?
William Marks: Yeah, and I think that's entirely fair. Frankly, the Supreme Court did not do much here. It held that the Second Circuit had applied the wrong standard, and the Court remanded the case so that the Second Circuit could apply the correct preemption standard.
Kannon Shanmugam: So, Will, perhaps we should stop here and explain to our listeners how preemption works in this context. And when we're talking about preemption, what we're really talking about is the displacement of state law by controlling federal law.
And when it comes to the National Bank Act, the way that that preemption operates is, frankly, unique. And so, Will, why don't we talk a little bit about the standard for preemption under the National Bank Act?
William Marks: Okay, so the National Bank Act is an older statute. In an ordinary preemption case, a court would simply look to the text of the National Bank Act and determine whether the act preempts the relevant state law in question. But here, Congress enacted in 2008 in the Dodd-Frank Act, a specific statutory standard for preemption under the National Bank Act. There are two forms of preemption. The first is when a state law discriminates against a national bank as compared to state banks. Now, in this case, there was no question about discrimination, so that form of preemption isn't at issue. But the second form of preemption was at issue. And under the Dodd-Frank Act, that second form of preemption is when a state law prevents or significantly interferes with a national bank's exercise of federally granted powers.
Now, this is where preemption under the National Bank Act gets really unique. Congress did not just set forth this statutory standard. It also told courts that in applying that standard, it needed to apply the Supreme Court's decision in a 1996 case called Barnett Bank. So essentially, Congress not only set forth a new standard for preemption in this second prong of the Dodd-Frank analysis, but it also codified a previous Supreme Court decision that was applying this standard.
Kannon Shanmugam: So how did the Supreme Court apply or not apply that standard in this case?
William Marks: Well, in Barnett Bank, the court didn't provide a clear test. It effectively performed what I would call a common law analysis, where it took the law in question, and then it compared that law to the laws at issue in previous National Bank Act precedents. And it looked at some cases where the court had previously held that the National Bank Act preempted the state law and, in some cases, where the state law wasn't preempted.
And the court essentially performed a comparative analysis in Barnett Bank to determine which side of the line the state law before it fell on. In Cantero, the Supreme Court held that this sort of comparative analysis is exactly what Congress had codified in Dodd-Frank.
So going forward, courts can't simply look to the text of Dodd-Frank to determine whether there's preemption. It also has to perform this comparative analysis based on the Supreme Court's precedents. In this case, the Second Circuit hadn't performed that sort of comparative analysis, so the Supreme Court vacated the Second Circuit's decision and remanded for the Second Circuit to apply the correct analysis.
Kannon Shanmugam: So, given that the Supreme Court didn't even definitively decide whether or not the New York law at issue remains valid, what can we take away from this decision?
William Marks: Well, I think the big takeaway is that preemption in this context is fact-specific, and because Congress codified Barnett Bank, it will essentially always be fact-specific. Unless a bank is dealing with a state law that is essentially directly analogous to a law that the Supreme Court has already assessed for purposes of National Bank Act preemption, there's going to be inherent litigation risk. And the bank is going to have, frankly, a bit of a difficult time knowing how courts are going to determine whether a particular state law is or is not preempted by the National Bank Act.
Kannon Shanmugam: Great. Well, thank you, Will, for breaking down this decision. And if you have any questions about the decision, please feel free to reach out either to Will or to me. For more information about Paul, Weiss's Supreme Court and Appellate Litigation Practice, please visit us at our website, paulweiss.com. And please subscribe to “Court Briefs” wherever you listen to your podcasts. Until next time, thank you for joining us and take care.
