National banks that take over automobile loans in Maryland will have to follow a state law that requires the bank to cancel the remainder of the loan if the car is totaled and debt cancellation insurance has been purchased. One of the nation’s biggest lenders had challenged the state law arguing that, because it is a national bank, it did not have to follow state law.
The ruling by the federal appellate court stemmed from the purchase of a used Chrysler Pacifica in 2007. Philip Decohen financed the transaction with a loan from a Maryland car dealer. The amount financed included a charge for $600 for a “debt cancellation agreement.” Under the Maryland Credit Grantor Closed End Provisions (CLEC), such an agreement requires a lender to cancel the remaining loan balance when a car is totaled and the insurance payout does not cover the entire outstanding balance. Decohen’s car was totaled in 2010. The insurance company paid all but $1,504 on the vehicle. Capital One, assigned the loan by the dealership, demanded payment of the remaining loan balance.
Decohoen filed a lawsuit against Capital One and others in the Circuit Court for Baltimore City, claiming, among other things, breach of contract and violation of the CLEC, the Maryland Consumer Protection Act and the Maryland Retail Installment Sales Act (RIC). Capital One had the lawsuit removed to federal court. The lender argued that it did not have to cancel the remaining loan balance because the National Bank Act (NBA) and federal regulations preempt Maryland’s CLEC law. Preemption is a judicial doctrine that federal legislation takes precedence over state legislation on the same subject matter, unless certain conditions, such as the federal government expressly allowing state law to be superior, are met.
The federal trial court dismissed all claims against Capital One. Decohen appealed only the CLEC and breach of contract claims. The United States Court of Appeals for the Fourth Circuit vacated the lower court’s decision and remanded the case – sent it back to the lower court – for proceedings consistent with the appellate court’s opinion.
The appellate court first explained the history and development of preemption. The Constitution’s Supremacy Clause states that the Constitution and the laws made in pursuance thereof “shall be the supreme law of the land.” In a U.S. Supreme Court case decided in 1819, McCulloch v. Maryland, the court held that federal law was supreme over state law with respect to national banking. In 1864, Congress put into place the National Bank Act (NBA) and the system of national banking still in place today. To prevent inconsistent state regulation from impairing the national system, Congress provided that national banks shall not be subject to state law except as authorized by federal law. In interpreting the NBA, the U.S. Supreme Court has repeatedly made clear that federal control shields national banking from unduly burdensome and duplicative state regulation. However, national banks are subject to state laws to the extent that those laws do not conflict with the NBA.
Over the course of time, three types of preemption has evolved: 1) express preemption in which Congress expressly states its intent to preempt state law; 2) field preemption, in which Congress occupies a certain field by “regulating so pervasively that there is no room left for the states to supplement federal law,” and 3) conflict preemption, arising when state law is preempted to the extent it actually conflicts with federal law.
In this instance, the court concluded that the CLEC provisions regarding debt cancellation agreements are not expressly preempted by federal law when the agreements are part of credit contracts originated by a local lender and then assigned to a national bank. If Capital One had directly loaned Decohen the money to purchase the vehicle and that loan had included a debt cancellation agreement, it would be governed by federal regulations, the court said. However, here, Capital One did not loan Decohen the money to purchase the vehicle, the dealership assigned the loan to Capital One. Federal regulations of national banks do not encompass such a situation and, thus, do not expressly preempt state law regarding debt cancellation agreements originated by local lenders and then assigned to national banks.
Field preemption was lacking because Congress has not occupied the field with regard to debt cancellation agreements. And, the court concluded that the CLEC was not “conflict preempted” by federal banking regulations.
Capital One argued, among other things, that allowing state regulation of debt cancellation agreements acquired through assignment would burden its lending activities. “We have little sympathy for this lament,” the court responded, noting that national banks are subject to state laws in their daily business to the extent that such laws do not conflict with the NBA. The CLEC’s debt cancellation provision will not burden Capital One any more than the state laws it already complies with, the federal appellate court said.
Breach of Contract
The court then determined whether Capital One breached the RIC by failing to honor the terms of the agreement. The court cited an earlier decided case where it held that a Maryland car dealer’s assignment to a national bank of an RIC that the parties voluntarily elected to be governed by the CLEC bound the national bank to the terms of the CLEC. Because traditional preemption doctrine did not shield a party from liability for breach of that agreement, the inquiry, turned on whether the CLEC clause in Decohen’s contract was freely chosen by the parties. The court explained that Capital One could not purchase a RIC that elects the CLEC, accept payments on a principal amount that included a $600 fee for a debt cancellation contract governed by the CLEC and then refuse to abide by the terms of the CLEC when it was no longer convenient to do so. As a result, the trial court erred in dismissing Decohen’s breach of contract claim, the appellate court said.
The case is Decohen, et al. v. Capital One et al.
Baltimore, Maryland-based Belsky, Weinberg & Horowitz has represented consumers in bankruptcy and debt collection cases for many years. Call our attorneys at 410-234-0100 or email us for a free consultation and let us help you to resolve your credit and debt problems through prompt and professional action that will make what otherwise would appear to be an impossible situation a very manageable one for you and your family!