Opinion ID: 1153673
Heading Depth: 2
Heading Rank: 5

Heading: Whether California law, as applied to NSF charges imposed by national banks, is preempted by federal law.

Text: Defendant contends that the provisions of California law on which plaintiff bases his causes of action are preempted by federal law. Since we have concluded that plaintiff's complaint states no cause of action for recovery of penalties under Civil Code section 1671, we do not discuss whether federal law preempts application of that section to banking charges. (16a) Instead, we focus our discussion on whether California law is preempted to the extent that it prohibits banks from exacting unreasonable charges (a doctrine applicable only when the contract does not expressly fix the charge) or enforcing unconscionable provisions (a doctrine applicable to all contracts). [19] No provision of federal law discusses bank charges for NSF checks, or, for that matter, bank charges for any service performed for depositors. No federal statute considers whether provisions in contracts between banks and their customers may exact unreasonable or unconscionable fees. Defendant's preemption argument, consequently, is essentially an argument that even though the federal government has largely declined to regulate this area, [20] Congress has nevertheless decided to preclude state regulation. Defendant cites various statutes and a newly promulgated administrative regulation as a basis for preemption. First, it refers to the National Bank Act of 1864, 13 Statutes at Large 99. Section 24 of this act (12 U.S.C. § 24) grants national banks general corporate powers upon proper filing of articles of association and an organizational certificate. Paragraph 7 empowers the board of directors or duly authorized officers or agents to exercise all such incidental powers as shall be necessary to carry on the business of banking ... by receiving deposits.... Defendant asserts that the power to receive deposits necessarily includes the power to control related charges, and hence that such charges are exempt from state law. (17) (See fn. 21.) Amicus California Bankers Association also points to the statutory requirement that bank directors refrain from any unsafe or unsound practice (12 U.S.C. § 1818(e)), and argues that a charge for NSF checks low enough to avoid an attack as unconscionable or penal might be inadequate to discourage the writing of such checks, and thus constitute an unsound practice. [21] (16b) Next, defendant cites the Depository Institutions Deregulation Act of 1980, 94 Statutes at Large 132 (hereafter 1980 Act) and the Garn-St. Germain Depository Institutions Act of 1982, 96 Statutes at Large 1469 (hereafter 1982 Act). The 1980 and 1982 Acts aimed at the gradual removal of federal regulations limiting the interest banks could pay to depositors. The 1980 Act also preempted state usury laws to the extent that they limited the interest banks could collect on mortgages, but left intact state limits on other loan charges. Apart from that provision, neither act expressly preempts state law; neither discusses bank charges for NSF checks or other depositor services. Defendant nevertheless argues that Congress contemplated that after deregulation, banks would pay higher interest to depositors, and raise charges for services previously subsidized by the below-market interest rates on deposit accounts. Further, defendant claims, Congress intended such charges to be set in a competitive market free of regulation. Finally, defendant relies on a regulation promulgated by the Comptroller of the Currency just prior to argument in the present case. [22] The new regulation, effective December 2, 1983, amends 12 Code of Federal Regulations section 7.8000, which previously provided only that [a]ll charges to customers should be arrived at by each bank on a competitive basis and not on the basis of any agreement, arrangement, undertaking, understanding or discussion among banks or their officers. As subsequently amended March 19, 1984, the new regulation adds subdivisions (b) and (c) to section 7.8000, to read as follows: (b) Establishment of deposit account service charges, and the amounts thereof, is a business decision to be made by each bank according to sound banking judgment and federal standards of safety and soundness. In establishing deposit account service charges, the bank may consider, but is not limited to considering: [¶] (1) Costs incurred by the bank, plus a profit margin, in providing the service; [¶] (2) The deterrence of misuse by customers of banking services; [¶] (3) The enhancement of the competitive position of the bank in accord with the bank's marketing strategy: [¶] (4) Maintenance of the safety and soundness of the institution. (c) A national bank may establish any deposit account service charge pursuant to paragraphs (a) and (b) of this section notwithstanding any state laws which prohibit the charge assessed or limit or restrict the amount of that charge. Such state laws are preempted by the comprehensive federal statutory scheme governing the deposit-taking function of national banks. [23] (18) (See fn. 24.) The parties dispute whether the regulation is legislative or interpretative in character. [24] Plaintiff contends that it is legislative, and hence invalid because the Comptroller failed to comply with the notice and hearing requirements of the Administrative Procedure Act (5 U.S.C. § 553). (19, 20) (See fn. 25.) Defendant maintains that it falls within the Administrative Procedure Act's exception for interpretative rules (5 U.S.C. § 553(b)(3)(A)). [25] (21) (See fn. 26.) As an interpretative regulation, section 7.8000 would be entitled to consideration and weight, but would not be binding on the courts. [26] We now turn to the question whether the foregoing statutes preempt application of California law in the case at bar. (22) As the United States Supreme Court explained in Silkwood v. Kerr-McGee Corp. (1984) 464 U.S. 238 [78 L.Ed.2d 443, 104 S.Ct. 615], state law can be preempted in either of two general ways. If Congress evidences an intent to occupy a given field, any state law falling within that field is preempted. [Citations.] If Congress has not entirely displaced state regulation over the matter in question, state law is still preempted to the extent it actually conflicts with federal law, that is, when it is impossible to comply with both state and federal law [citation], or where the state law stands as an obstacle to the accomplishment of the full purposes and objectives of Congress.... (464 U.S. at p. 248 [78 L.Ed.2d at p. 452]; accord, Pac. Gas & Electric v. St. Energy Resources Conserv. (1983) 461 U.S. 190, 203-204 [75 L.Ed.2d 752, 764-765, 103 S.Ct. 1713, 1722].) Defendant bears the burden of persuasion on this issue; [c]ourts are reluctant to infer preemption, and it is the burden of the party claiming Congress intended to preempt state law to prove it. ( Elsworth v. Beech Aircraft Corp. (1984) 37 Cal.3d 540, 548 [208 Cal. Rptr. 874, 691 P.2d 630] and cases there cited.) (16c) Defendant contends that Congress, by comprehensive regulation, has occupied the field of regulation of contracts between national banks and their depositors. One hundred and fifteen years of practice under the national banking system argue to the contrary. While nationally chartered banks are subject to the paramount authority of the United States, [27] Congress has declined to provide an entire system of federal law to govern every aspect of national bank operations. Consequently, national banks have traditionally been governed in their daily course of business far more by the laws of the State than of the Nation. All their contracts are governed and construed by State laws. ( National Bank v. Commonwealth (1870) 76 U.S. (9 Wall.) 353, 362 [19 L.Ed. 701, 703]; see Scott, The Dual Banking System: A Model of Competition in Regulation (1977) 30 Stan.L.Rev. 1.) [28] As explained in National State Bank, Elizabeth, N.J. v. Long, supra, 630 F.2d 981, [w]hatever may be the history of federal-state relations in other fields, regulation of banking has been one of dual control since the passage of the first National Bank Act in 1863.... In only a few instances has Congress explicitly preempted state regulation of national banks. More commonly, it has been left to the courts to delineate the proper boundaries of federal and state supervision. [¶] The judicial test has been a tolerant one. [National banks'] right to contract, collect debts, and acquire and transfer property are all based on state law. (P. 985.) Thus the rule is that state laws apply, the exception being the cessation of the operation of such laws whenever they expressly[ [29] ] conflict with the laws of the United States or frustrate the purpose for which the national banks were created, or impair their efficiency to discharge [their] duties.... ( McClellan v. Chipman (1896) 164 U.S. 347, 357 [41 L.Ed. 461, 465, 17 S.Ct. 85].) [30] The assertion in the regulation that state laws limiting bank service charges are preempted by the comprehensive federal statutory scheme governing the deposit-taking function of national banks (12 C.F.R. § 7.8000, subd. (c)) is palpably erroneous. There is no comprehensive federal statutory scheme governing the taking of deposits. There is one relevant statute, section 24 of the National Bank Act, and that merely authorizes banks to accept deposits. Section 24 may by implication also authorize banks to charge for deposit-related services as an incidental power necessary to carry on the business of receiving deposits, but such implied authority does not constitute a regulatory scheme so comprehensive as to displace state law. [31] Under the Comptroller's interpretation, any banking matter related to deposits would be exempt from state law. The result would be far-reaching and extremely disruptive. Currently, California and most other states extensively regulate all banks within their territory. For example, article 4 of the Uniform Commercial Code (codified at Cal. U. Com. Code, §§ 4101-4407), entitled Bank Deposits and Collections has been adopted in 49 states and is routinely applied to national banks. [32] Also, numerous provisions of the California Financial Code regulate deposit-related practices. [33] Financial Code section 100 specifically subjects national banks to its provisions insofar as those provisions do not conflict with federal law. The Comptroller's interpretation would suddenly exempt national banks from many, if not all, of these regulatory measures. There is nothing to suggest that Congress, by authorizing national banks to receive deposits, intended such a result. The United States Supreme Court decisions construing section 24 do not support the Comptroller's expansive interpretation. Instead, whether upholding or preempting the state law, the court has focused on the narrow issue of whether the state law impeded the bank's ability to receive deposits. For example, Franklin Nat'l Bank v. New York (1954) 347 U.S. 373 [98 L.Ed. 767, 74 S.Ct. 550] held that a New York statute which prohibited all banks except nonprofit state chartered banks from using the term savings in their advertising, conflicted with the national bank's authorization to receive deposits. [34] Emphasizing the importance of advertising in competing for deposits, the court reasoned that the statute interfered with the bank's ability to receive deposits. [W]e [cannot] construe the [National Bank Act and the Federal Reserve Act] as permitting only a passive acceptance of deposits thrust upon them. Modern competition for business finds advertising one of the most usual and useful of weapons. ( Id., at p. 377 [98 L.Ed. at pp. 773-774].) Similarly, in another case the court found that a California law which automatically escheated dormant accounts to the state was preempted by section 24 because it impeded the bank's ability to attract deposits. ( First National Bank v. California (1923) 262 U.S. 366 [67 L.Ed. 1030, 43 S.Ct. 602].) But as the court later explained in Anderson Nat'l Bank v. Luckett, supra, 321 U.S. 233, 250 [88 L.Ed. 692, 706-707], not all state escheat laws are preempted: [The] decision [in First Nat'l ] turned ... on the effect of the state statute in altering the contracts of deposit in a manner considered so unusual and so harsh in its application to depositors as to deter them from placing or keeping their funds in national banks. [35] Nowhere did the court suggest that section 24 preempts all state regulation of deposit-related matters. In an attempt to bring itself within these cases, defendant argues that Franklin in particular implies that all terms and conditions upon which national banks may compete for deposits are presumed to be the exclusive province of federal law. This reading of Franklin is unduly broad. Franklin preempted the New York law because of its deterrent effect on deposits. This holding does not logically extend into the broader proposition that every possible term or practice which may be the subject of competition between banks is beyond the reach of state law. As the numerous regulations cited earlier demonstrate, it is possible for states to regulate such terms or conditions without impeding banks' ability to attract deposits. And in the present setting, it is difficult to believe that persons would be deterred from depositing in federally chartered banks by the knowledge that such banks, like their state chartered counterparts, were prohibited by state law from enforcing unreasonable charges or unconscionable contracts. [36] If the National Bank Act does not displace state regulation of bank service charges, the additional enactment of the 1980 and 1982 Acts adds nothing. As we have seen, these statutes do not mention bank service charges; neither separately nor in combination with the National Bank Act can they be described as a comprehensive scheme regulating such charges. Moreover, when in the 1980 Act Congress expressly preempted state usury laws, it deliberately left in effect other provisions of state law regulating charges in contracts between banks and borrowers. [37] It is not plausible that the same Congress intended by silence to preempt all state laws regulating charges in contracts between banks and depositors. We conclude that the Comptroller's assertion that state laws regulating service charges are preempted by a comprehensive federal statutory scheme governing the deposit-taking function of national banks (12 C.F.R. § 7.8000) is not a reasonable interpretation of the controlling statutes. (23) (See fn. 38.), (16d) It is not an attempt to interpret the language of the statute, [38] fill in the gaps in the statutory coverage, [39] or to explain how the Comptroller will exercise his discretion. [40] Instead, the regulation, insofar as it claims federal preemption, represents legislation of far-reaching character and effect, of a type never considered by Congress, which would radically alter the respective roles of the states and the Comptroller in the regulation of bank-depositor contracts. Such legislation cannot be enacted in the guise of statutory interpretation. [41] Thus the application of state law to bank service charges is not preempted by a comprehensive federal statutory scheme which occupies the field. We therefore turn to the second preemption issue, whether the application of state law in this case will create an actual conflict with federal law in the sense that it is impossible to comply with both state and federal law. ( Silkwood v. Kerr-McGee Corp., supra, 464 U.S. 238, 248 [78 L.Ed.2d 443, 452].) As we have noted, no provision of federal law discusses bank service charges in general or bank charges for NSF checks in particular. Amicus California Bankers Association nevertheless points to a possibility of actual conflict. Bank directors, it observes, are required to refrain from engaging in any unsafe or unsound practice. (12 U.S.C. § 1818(e).) Conceivably directors might believe a charge for NSF checks low enough to avoid attack as unreasonable or unconscionable might fail to discourage the writing of NSF checks, and thus constitute an unsafe or unsound practice. Amicus' argument proves too much, for if the mere possibility that bank directors might deem compliance with a state law to be unsound banking practice was enough to preempt the state law, the dual system of banking regulation would disappear. We recognize, of course, that in the unlikely event of actual conflict, banks must follow the federal requirements. But such actual conflict is a remote and unlikely possibility; a contractual term must be overreaching and oppressive before it is denominated unreasonable or unconscionable. Surely sound banking practices would rarely, if ever, require the enforcement of oppressive contracts. [42] Finally, we come to the question whether the application of state law will stand as an obstacle to the accomplishment of the full purposes Congress sought to achieve. Defendant's argument on this matter centers on the 1980 and 1982 Acts discussed earlier in this opinion. ( Ante, p. 934.) As we there noted, these acts provided for gradual removal of federal regulations limiting interest paid depositors, but, apart from preempting state usury laws, did not expressly discuss the role of state regulation. Neither act mentions charges for services to depositors. The extensive legislative history of the acts shows that Congress expected deregulation to lead banks to pay higher interest to depositors, ending the bank's ability to subsidize depositor services by paying below-market interest on deposits. Thus, Congress clearly anticipated that banks would be able to charge fees for depositor services sufficient to recover the cost of such services. Arguably a state law which required that services be offered free, or below cost, would frustrate the congressional intent by preventing the bank from paying market interest to depositors. The state laws in question, however, permit the bank to charge fees sufficient to recover the cost of the services and a reasonable profit. We find nothing in the legislative history to suggest that Congress thought it essential that the banks be able to charge more. While an excessive charge for depositor services might help the economic status of a bank, and could enable it to subsidize interest payments and pay above-market interest, we find no indication that such is essential to the congressional purpose. Defendant also argues that underlying both the 1980 and 1982 Acts is the philosophy that service charges as well as interest rates should be set by market forces, not government regulation. [43] Defendant's argument mistakes the purpose of the provisions of state law at issue here. Those provisions are part of the common law governing all commercial transactions; they regulate not only sale of bank services but the sale of groceries, automobiles, furniture or medical services. The duty of good faith and fair dealing, and protection against unconscionable contracts, has never been thought incompatible with a free and competitive market. Defendant is really asking for a market free of those restraints against oppression and overreaching applicable to all other commercial operations. We find no indication that Congress envisioned not only a free and competitive market, but one freer than any other market. In sum, the controlling doctrines of California law do not facially conflict with any federal statute or regulation. Neither does it appear from the pleading that the application of these doctrines to national bank contracts will impair the efficiency or viability of national banks, or frustrate the purpose of legislation regulating (or deregulating) those banks. Although conceivably information not contained in the pleadings might lead to a different conclusion, such information is not before us in reviewing a judgment upon demurrer. We cannot presume, without evidence, that prohibiting a national bank from setting unreasonable prices or enforcing an unconscionable contract will render that bank less efficient, less competitive or less able to fulfill its function in a national banking system. [44]