Opinion ID: 624826
Heading Depth: 1
Heading Rank: 3

Heading: Preemption and the End-Run Theory

Text: We have now determined that Wigod has plausibly stated four claims arising under state law: breach of contract, promissory estoppel, fraudulent misrepresentation, and violation of the ICFA. We next examine whether federal law preempts or otherwise displaces them. Preemption can take on three different forms: express preemption, field preemption, and conflict preemption. Aux Sable Liquid Products v. Murphy, 526 F.3d 1028, 1033 (7th Cir. 2008). Wells Fargo concedes that Wigod's claims are not expressly preempted, but argues for both field preemption and conflict preemption. Wells Fargo also advances the novel theory that Wigod's claims are displaced because they attempt an end-run on the lack of a private right of action under HAMP itself. We reject this end-run theory, along with Wells Fargo's formal preemption arguments. Federal law does not displace Wigod's state-law claims.
In all preemption cases, we start with the assumption that the historic police powers of the States were not to be superseded by the Federal Act unless that was the clear and manifest purpose of Congress. Wyeth v. Levine, 555 U.S. 555, 565, 129 S.Ct. 1187, 173 L.Ed.2d 51 (2009) (internal quotation marks omitted), quoting Medtronic, Inc. v. Lohr, 518 U.S. 470, 485, 116 S.Ct. 2240, 135 L.Ed.2d 700 (1996). Under the doctrine of field preemption, however, a state law is preempted if federal law so thoroughly occupies a legislative field `as to make reasonable the inference that Congress left no room for the States to supplement it.' Cipollone v. Liggett Group, Inc., 505 U.S. 504, 516, 112 S.Ct. 2608, 120 L.Ed.2d 407 (1992) (internal quotation marks omitted), quoting Fidelity Federal Savings & Loan Ass'n v. de la Cuesta, 458 U.S. 141, 153, 102 S.Ct. 3014, 73 L.Ed.2d 664 (1982). Wells Fargo argues that the Home Owners Loan Act (HOLA) occupies the relevant field. Enacted to provide emergency relief from massive home loan defaults during the Great Depression, HOLA empowered what is now the Office of Thrift Supervision [OTS] in the Treasury Department to authorize the creation of federal savings and loan associations, to regulate them, and by its regulations to preempt conflicting state law. In re Ocwen Loan Servicing, LLC Mortg. Servicing Litigation, 491 F.3d 638, 642 (7th Cir.2007). In one of its regulations, OTS announced that it hereby occupies the entire field of lending regulation for federal savings associations. 12 C.F.R. § 560.2(a). In the same section, however, the regulation contains the following saving clause: state tort, contract, and commercial laws are not preempted to the extent that they only incidentally affect the lending operations of Federal savings associations or are otherwise consistent with the purposes of paragraph (a) of this section. 12 C.F.R. § 560.2(c). Read together, these provisions mean that state laws that establish licensing, registration, or other requirements specific to financial institutions cannot be applied to national banks, while laws of general applicability survive preemption so long as they do not effectively impose standards that conflict with federal ones. Cf. Watters v. Wachovia Bank, N.A., 550 U.S. 1, 11, 127 S.Ct. 1559, 167 L.Ed.2d 389 (2007) (Federally chartered banks are subject to state laws of general application in their daily business to the extent such laws do not conflict with the letter or the general purposes of [federal banking law].) (analyzing preemption under the National Bank Act, which is applied analogously to HOLA). [15] Arguing for field preemption, Wells Fargo contends that HOLA and the corresponding OTS regulations displace state common-law suits that effectively impose any standards for the processing and servicing of mortgage loans, whether they conflict with federal policy or not. This argument is directly at odds with the saving clause of 12 C.F.R. § 560.2(c), and inconsistent with our decision in Ocwen. There we noted that HOLA gave OTS the exclusive authority to regulate the savings and loan industry in the sense of fixing fees (including penalties), setting licensing requirements, prescribing certain terms in mortgages, establishing requirements for disclosure of credit information to customers, and setting standards for processing and servicing mortgages. 491 F.3d at 643. Despite its regulatory authority, however, OTS has no power to adjudicate disputes between [savings and loan associations] and their customers, and HOLA creates no private right to sue to enforce the provisions of the statute or the OTS's regulations. Id. Against this background of limited remedial authority, we held that HOLA and the OTS regulations did not preempt suits by persons harmed by the wrongful acts of savings and loan associations seeking basic state common-law-type remedies, and we allowed state-law claims like those in this casebreach of contract, fraud, and violation of consumer protection statutesto go forward. Id. Some federal statutes do receive such wide berths as to displace virtually all state laws in the neighborhood. (The National Labor Relations Act and ERISA are the best examples.) Such laws are exceptional, though, and HOLA is not one of them. Id. at 644. Ocwen thus stands for the principle that HOLA preempts generally applicable state laws only when they could interfere with federal regulationthat is, those that actually conflict with the regulatory program. Id. at 646. We decline to disturb this holding, which forecloses Wells Fargo's argument for field preemption.
The Supreme Court has found implied conflict pre-emption where either (1) it is impossible for a private party to comply with both state and federal requirements, or (2) where state law stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress. Freightliner Corp. v. Myrick, 514 U.S. 280, 287, 115 S.Ct. 1483, 131 L.Ed.2d 385 (1995) (internal quotation marks omitted). Wells Fargo does not contend that it would be impossible, without violating federal law, for it to comply with the state-law duties Wigod's suit seeks to impose. Instead, it invokes the second species of conflict preemption, which is known as obstacle preemption. Wells Fargo says that entertaining Wigod's state-law claims here would undermine the purposes of Congress in two ways: First, it would substantially interfere with Wells Fargo's ability to service residential mortgage loans in accordance with HOLA and OTS regulations. [16] Second, it would frustrate Congressional objectives in enacting [the 2008 Act] ... to stabilize the economy and provide a program to mitigate `avoidable' foreclosures. The first argument for obstacle preemption, like Wells Fargo's theory of field preemption, is inconsistent with Ocwen. There we held that the plaintiff-mortgagors' conventional state law claims against a federal savings and loan association for breach of contract, fraud, and deceptive business practices complemented rather than conflicted with HOLA: Suppose an S & L signs a mortgage agreement with a homeowner that specifies an annual interest rate of 6 percent and a year later bills the homeowner at a rate of 10 percent and when the homeowner refuses to pay institutes foreclosure proceedings. It would be surprising for a federal regulation to forbid the homeowner's state to give the homeowner a defense based on the mortgagee's breach of contract. Or if the mortgagee... fraudulently represents to the mortgagor that it will forgive a default, and then forecloses, it would be surprising for a federal regulation to bar a suit for fraud.... Enforcement of state law in either of the mortgage-servicing examples above would complement rather than substitute for the federal regulatory scheme. Ocwen, 491 F.3d at 643-44. In our attempt to untangle in that case the complaint's gallimaufry of alleged skullduggery, we distinguished claims asserting conventional misrepresentation or breach of contract (which were not preempted) from those that would have effectively imposed state-law rules governing mortgage servicing and thereby interfere[d] with federal regulation of disclosure, fees, and credit terms (which were preempted). Id. at 644-46. Thus a claim under Connecticut's consumer protection statute alleging exorbitant and usurious mortgages was preempted, while straight fraud claims arising under both state common-law and consumer fraud statutes were not preempted. Id. at 647 (internal quotation mark omitted). Wells Fargo appears to concede, as it must in light of Ocwen, that HOLA does not preempt Wigod's breach of contract claim or her common-law fraudulent representation claim. Wells Fargo nevertheless maintains that conflict preemption principles bar Wigod's ICFA claims, attempting to distinguish Ocwen by arguing that these claims would necessarily establish new standards for servicers' customer relation policies. The argument is not persuasive. The gist of Wigod's ICFA claims is that Wells Fargo failed to disclose that it was going to reevaluate her eligibility for a permanent modificationcontrary to the terms of both her TPP and HAMP program guidelinesand that it deceived her into believing it would modify her mortgage. Allowing these claims to proceed against Wells Fargo would not create state-law duties for servicing home mortgages, let alone ones that actually conflict with HOLA or federal standards promulgated thereunder. See Geier v. American Honda Motor Co., 529 U.S. 861, 869, 120 S.Ct. 1913, 146 L.Ed.2d 914 (2000). In Ocwen, we found that the straight fraud claims arising under various state consumer protection statutes were not subject to conflict preemption under HOLA. 491 F.3d at 644-45, 647. Here, too, Wigod's ICFA claims sound[ ] like conventional fraud charge[s], the prosecution of which appears perfectly consistent with federal mortgage rules. Id. at 645. HOLA does not preempt them. Wells Fargo's second conflict preemption theory is that a finding of liability in Wigod's suit would frustrate Congressional objectives in enacting the 2008 Act that authorized HAMP. Wells Fargo argues that claims like Wigod's would generate such friction in three ways: First, they would force servicers to modify mortgages in violation of both Treasury directives and the servicers' contractual obligations to the government. Second, they would invite many uncoordinated lawsuits, exposing servicers to varying standards of conduct. Third, they would discourage servicers from participating in HAMP. The arguments are not persuasive. The first theory is inapplicable because none of Wigod's claims, at least as she has framed them, would impose on Wells Fargo any duties that go beyond its existing obligations under HAMP. As Wigod puts it, if Wells Fargo followed the letter of the Program it would not have breached its contracts, acted negligently or fraudulently, or violated the ICFA. The whole thrust of this suit is that Wells Fargo failed to do what it agreed to do and what HAMP required it to do. The breach of contract and fraudulent misrepresentation claims allege that the TPP Agreement required Wells Fargo to offer Wigod a modification if she qualified under HAMPand that she did and it didn't. One Wells Fargo defense, among others, will be that Wigod was not actually qualified, but that presents a factual dispute that cannot be resolved now. Likewise, the ICFA claim alleges that Wells Fargo failed to disclose that it would not follow HAMP guidelines. Again, it would be a complete defense that Wells Fargo did follow HAMP guidelines as they were incorporated into the terms of Wigod's TPP, but that also presents a factual issue. For each of these claims, the state-law duty allegedly breached is imported from and delimited by federal standards established in HAMP's program guidelines. Where federal law supplies the standard of care imposed by state law, it is hard to see how they could conflict. See, e.g., Bates v. Dow Agrosciences LLC, 544 U.S. 431, 448, 125 S.Ct. 1788, 161 L.Ed.2d 687 (2005) (a state cause of action that seeks to enforce a federal requirement `does not impose a requirement that is different from, or in addition to, requirements under federal law.') (internal quotation marks omitted), quoting Lohr, 518 U.S. at 513, 116 S.Ct. 2240 (O'Connor, J., concurring in part and dissenting in part); Lohr, 518 U.S. at 495, 116 S.Ct. 2240 (majority opinion) (Nothing... denies Florida the right to provide a traditional damages remedy for violations of common-law duties when those duties parallel federal requirements.); Bausch v. Stryker Corp., 630 F.3d 546, 556 (7th Cir.2010) (holding that the Food, Drug, and Cosmetic Act did not preempt the plaintiff's tort claims against medical device manufacturer because the state tort duty allegedly breached was parallel to FDA regulations promulgated under the Act; claims are not ... preempted by federal law to the extent they are based on defendants' violations of federal law). For the same reason, we do not foresee any possibility that permitting suits such as Wigod's will expose mortgage servicers to multiple and varied standards of conduct. So long as state laws do not impose substantive duties that go beyond HAMP's requirements, loan servicers need only comply with the federal program to avoid incurring state-law liability. This is not a case in which the federal requirements leave much room for interpretation, but to the extent Wigod's case hinges on construing Treasury directives, they present questions of law for the court to decide, not questions of fact for a jury to decide. See Bausch, 630 F.3d at 556. As for its contention that the potential exposure to state liability may discourage servicers from participating in HAMP, Wells Fargo may be right. But that is hardly an argument for conflict preemption. [T]he purpose of Congress is the ultimate touchstone in every pre-emption case. Wyeth, 555 U.S. at 565, 129 S.Ct. 1187, quoting Lohr, 518 U.S. at 485, 116 S.Ct. 2240. Because the States are independent sovereigns in our federal system, we have long presumed that Congress does not cavalierly pre-empt state-law causes of action. Bates, 544 U.S. at 449, 125 S.Ct. 1788, also quoting Lohr, 518 U.S. at 485, 116 S.Ct. 2240. We can reasonably assume that one purpose of Congress in enacting the 2008 Act was to ensure mortgage servicers participated in the foreclosure mitigation programs it empowered Treasury to set up. But another goal was surely to prevent these banks from hoodwinking borrowers in the process. Nothing in the 2008 Act suggests that Congress saw servicer participation as the Act's paramount purpose that would trump any concerns about whether servicers were actually complying with the program and with their contractual obligations. See Rodriguez v. United States, 480 U.S. 522, 525-26, 107 S.Ct. 1391, 94 L.Ed.2d 533 (1987) (no legislation pursues its purposes at all costs). There is no indication that Congress meant to foreclose suits against servicers for violating state laws that impose obligations parallel to those established in a federal program. In addition, Treasury's own HAMP directive states that servicers must implement the program in compliance with state common law and statutes. See Supplemental Directive 09-01 (Each servicer... must be aware of, and in full compliance with, all federal state, and local laws (including statutes, regulations, ordinances, administrative rules and orders that have the effect of law, and judicial rulings and opinions)....). This would be an odd provision if Treasury had anticipated that HAMP would preempt state-law claims, especially ones that mirror its own directives. In this context, the agency's own tacit view of its program's lack of preemptive force is entitled to some weight. See Wyeth, 555 U.S. at 577, 129 S.Ct. 1187 (agencies have a unique understanding of the statutes they administer and an attendant ability to make informed determinations about how state requirements may pose an `obstacle to the accomplishment and execution of the full purposes and objectives of Congress'), quoting Hines v. Davidowitz, 312 U.S. 52, 67, 61 S.Ct. 399, 85 L.Ed. 581 (1941); Geier, 529 U.S. at 883, 120 S.Ct. 1913 (placing some weight on agency's interpretation of its own regulation's objectives and its conclusion that a tort suit ... would `stand as an obstacle to the accomplishment and execution' of those objectives) (internal citations and quotation marks omitted).
Finally, Wells Fargo insists that Wigod's case cannot go forward because her allegations are HAMP claims in disguise and an impermissible end-run around the lack of a private action in [the 2008 Act] and HAMP. This end-run theory was the primary basis on which the district court dismissed Wigod's complaint. That court explained that `the facts and allegations as pleaded in this case are premised chiefly on the terms and procedures set forth via HAMP and are not sufficiently independent to state a separate state law cause of action.' Wigod, 2011 WL 250501, at , quoting Vida v. OneWest Bank, F.S.B., No. 10-987-AC, 2010 WL 5148473, at -4 (D.Or. Dec. 13, 2010). Wells Fargo has developed the same theory before this court, arguing: If Congress had intended courts to be adjudicating whether a borrower qualified for a loan modification under [the 2008 Act] or HAMP, it would have provided a private right of actionbut it chose not to do so. The end-run theory is built on the novel assumption that where Congress does not create a private right of action for violation of a federal law, no right of action may exist under state law, either. Wells Fargo and the district court appear to have conflated two distinct lines of casesone involving the existence of a federal private right of action, see Touche Ross & Co. v. Redington, 442 U.S. 560, 99 S.Ct. 2479, 61 L.Ed.2d 82 (1979), and the other about federal preemption of state law. Wells Fargo invokes Touche Ross for the proposition that when Congress wished to provide a private damage remedy, it knew how to do so and did so expressly. Appellee's Br. at 15, quoting Touche Ross, 442 U.S. at 572, 99 S.Ct. 2479. If this case involved whether to recognize a federal right of action under HAMP, Touche Ross and its progeny would certainly weigh in favor of judicial caution. See Karahalios v. Nat'l Federation of Federal Employees, Local 1263, 489 U.S. 527, 533, 109 S.Ct. 1282, 103 L.Ed.2d 539 (1989) (It is also an `elemental canon' of statutory construction that where a statute expressly provides a remedy, courts must be especially reluctant to provide additional remedies [under federal law].), quoting Transamerica Mortg. Advisors, Inc. v. Lewis, 444 U.S. 11, 19, 100 S.Ct. 242, 62 L.Ed.2d 146 (1979). The issue here, however, is not whether federal law itself provides private remedies, but whether it displaces remedies otherwise available under state law. The absence of a private right of action from a federal statute provides no reason to dismiss a claim under a state law just because it refers to or incorporates some element of the federal law. See, e.g., Bates, 544 U.S. at 448, 125 S.Ct. 1788 (although [the Federal Insecticide, Fungicide, and Rodenticide Act] does not provide a federal remedy to farmers and others who are injured as a result of a manufacturer's violation of FIFRA's labeling requirements, nothing in [the statute] precludes States from providing such a remedy). To find otherwise would require adopting the novel presumption that where Congress provides no remedy under federal law, state law may not afford one in its stead. To appreciate the novelty of Wells Fargo's argument, consider the many cases in which the Supreme Court has confronted issues of subject matter jurisdiction presented by state common-law claims that incorporate federal standards of conduct, without so much as a peep about whether state law may do so without being preempted. See, e.g., Grable & Sons Metal Products, Inc. v. Darue Engineering & Mfg., 545 U.S. 308, 312, 311, 315, 125 S.Ct. 2363, 162 L.Ed.2d 257 (2005) (quiet title action brought under state law turn[ed] on substantial question[] of federal law because the interpretation of the notice statute in the federal tax law was an essential element of [plaintiff's] quiet title claim); Merrell Dow Pharmaceuticals, Inc. v. Thompson, 478 U.S. 804, 805-07, 106 S.Ct. 3229, 92 L.Ed.2d 650 (1986) (violation of federal labeling requirements in the Federal Food, Drug, and Cosmetic Act created a rebuttable presumption of negligence and proximate cause under state tort law); Moore v. Chesapeake & Ohio Ry., 291 U.S. 205, 214-15, 54 S.Ct. 402, 78 L.Ed. 755 (1934) (Kentucky worker's compensation statute provided that employer railroad's violation of Federal Safety Appliance Acts would constitute negligence per se under state law). Of course, these well-known cases grappled with an issue different from the one before this court: whether the presence of a federal issue in a state-created cause of action gives rise to federal question jurisdiction under 28 U.S.C. § 1331. In none of these cases has the Supreme Court even suggested that the absence of a private right of action under a federal statute would prevent state law from providing a cause of action based in whole or in part on violations of the federal law. When the issue is whether arising under jurisdiction is available, Congressional silence matters a great deal, for our jurisdiction under § 1331 is determined by Congress. See Merrell Dow, 478 U.S. at 812, 106 S.Ct. 3229 (stating that it would undermine... congressional intent to ... exercise federal-question jurisdiction and provide remedies for violations of [a] federal statute that contains no private right of action, solely because the violation of the federal statute is an element of state law claim). When the federal court's jurisdiction over state-law claims is based on diversity of citizenship, however, the absence of a private right of action in a federal statute actually weighs against preemption. See, e.g., Wyeth, 555 U.S. at 574, 129 S.Ct. 1187 (Congress did not provide a federal remedy for consumers harmed by unsafe or ineffective drugs in the 1938 statute or in any subsequent amendment. Evidently, it determined that widely available state rights of action provided appropriate relief for injured consumers.). We realize that Wells Fargo does not style its end-run theory as a preemption argument. But in the absence of any other doctrinal foundation for it, we see no other way to classify it. As Judge Hibbler wrote in one of the HAMP cases in which claims under Illinois law survived a motion to dismiss, [There is no] general rule that where a state common law theory provides for liability for conduct that is also violative of federal law, a suit under the state common law is prohibited so long as the federal law does not provide for a private right of action. Indeed, it seems the only justification for such a rule would be federal preemption of state law. Fletcher v. OneWest Bank, FSB, 798 F.Supp.2d 925, 930-31 (N.D.Ill.2011); see also Bosque, 762 F.Supp.2d at 351 (The fact that a TPP has a relationship to a federal statute and regulations does not require the dismissal of any state-law claims that arise under a TPP.). In short, a state-law claim's incorporation of federal law has never been regarded as disabling, whether the federal law has a private right of action or not. See Grable & Sons, 545 U.S. at 318-19, 125 S.Ct. 2363 (The violation of federal statutes and regulations is commonly given negligence per se effect in state tort proceedings.), quoting Restatement (Third) of Torts § 14, Reporters' Note, cmt. a, p. 195 (Tent. Draft No. 1, Mar. 28, 2001); Merrell Dow, 478 U.S. at 816, 106 S.Ct. 3229 (violation of the federal standard as an element of state tort recovery did not fundamentally change the state tort nature of the action); W. Keeton, D. Dobbs, R. Keeton, & D. Owen, Prosser and Keeton on Law of Torts § 36, p. 221, n.9 (5th ed. 1984) (the breach of a federal statute may support a negligence per se claim as a matter of state law). Wells Fargo has tried to find some support for its end-run theory in two Second Circuit cases involving very different statutes. In Grochowski v. Phoenix Construction, 318 F.3d 80 (2d Cir.2003), a construction contract between the City of New York and some general contractors required the latter to pay their laborers in accordance with the Davis-Bacon Act (DBA), a federal law that accords no private right of action, at least under Second Circuit precedent. [17] The contractors did not do so, and their laborers sued them under New York common law for breach of contract as third-party beneficiaries. The district court granted the contractors' motion to dismiss. A divided panel of the Second Circuit affirmed, reasoning that no private right of action exists under the DBA and that the plaintiffs' efforts to bring their claims as state common-law claims are clearly an impermissible `end run' around the DBA. Id. at 86 (emphasis added). The majority's only elaboration of this theory was the following: At bottom, the plaintiffs' state-law claims are indirect attempts at privately enforcing the prevailing wage schedules contained in the DBA. To allow a third-party private contract action aimed at enforcing those wage schedules would be inconsistent with the underlying purpose of the legislative scheme and would interfere with the implementation of that scheme to the same extent as would a cause of action directly under the statute. Davis v. United Air Lines, Inc., 575 F.Supp. 677, 680 (E.D.N.Y.1983). Grochowski, 318 F.3d at 86.