Opinion ID: 619531
Heading Depth: 2
Heading Rank: 3

Heading: Contract claim on the payoff statement fee

Text: However, the Moloskys' breach of contract claim with regard to the payoff statement fee is not preempted by HOLA. The contract provision in question is a paragraph labeled Borrower's Right to Prepay that included the following sentence: I may make a full Prepayment or partial Prepayments without paying a Prepayment charge. Neither this term of the contract nor the state contract law that applies to it is one of the types of state law listed as preempted in 12 C.F.R. § 560.2(b), not least because the contract provision, although enforceable under state law, is imposed by the contracting party upon itself. The Supreme Court distinguished contract terms stipulated by a regulated party in just this way in a case involving federal preemption of airline regulation, noting the distinction between what the State dictates and what the airline itself undertakes confines courts, in breach-of-contract actions, to the parties' bargain, with no enlargement or enhancement based on state laws or policies external to the agreement. American Airlines, Inc., v. Wolens, 513 U.S. 219, 233, 115 S.Ct. 817, 130 L.Ed.2d 715 (1995). Section 560.2(a) does generally provide for the preemption of state laws purporting to regulate or otherwise affect [federal savings association] credit activities, but this broad preemption is explicitly limited by § 560.2(c), which excepts Contract and commercial law from preemption to the extent that [such state laws] only incidentally affect the lending operations of Federal savings associations or are otherwise consistent with the purposes of paragraph (a). To hold Washington Mutual to the terms of its contract with the Moloskys is consistent with the purposes of the OTS's regulation. The Seventh Circuit's analysis in this regard is persuasive: [W]e read subsection (c) to mean that OTS's assertion of plenary regulatory authority does not deprive persons harmed by the wrongful acts of savings and loan associations of their basic state common-law-type remedies. 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 (or a servicer like Ocwen) 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. Some federal laws do create such bars, notably ERISA, see 29 U.S.C. § 1132(a), (e), but this is recognized as exceptional. Enforcement of state law in either of the mortgage-servicing examples above would complement rather than substitute for the federal regulatory scheme. In re Ocwen, 491 F.3d at 643-44 (citations omitted). Indeed, the OTS anticipated this very situation when it allowed prepayment fees only [s]ubject to the terms of the loan contract. 12 C.F.R. § 560.34. Moreover, the comments to the regulation make clear that the purpose of paragraph (c) is to preserve the traditional infrastructure of basic state laws that undergird commercial transactions, 61 Fed.Reg. 50966. It is true that § 560.2(c) is not meant to be used to open the door to state regulation of lending by federal savings associations. In re Ocwen, 491 F.3d at 643. The OTS has recognized that common law can be used to regulate federal savings associations as surely as statutes. There may be cases where permitting breach of contract claims may not be consistent with the purposes of HOLA, such as when state contract law interposes unstated or implied terms into a contract. See Schilke v. Wachovia Mortg., FSB, 758 F.Supp.2d 549, 556-57 (N.D.Ill.2010) (citing In re Ocwen, 491 F.3d at 646); Moskowitz v. Washington Mut. Bank, FA, 329 Ill.App.3d 144, 263 Ill.Dec. 502, 768 N.E.2d 262, 266 (2002). The Supreme Court in the American Airlines case indeed recognized the difference between state contract law that seeks to effectuate a state's public policies and contract law that seeks to effectuate the intent of the parties. American Airlines, 513 U.S. at 233 & n. 8, 115 S.Ct. 817. But the claim we are considering does not present the former case. If explicit terms of a contract like those suggested by the Seventh Circuit, and like the contract provision in this case, are not preempted, then it is hard to conceive of any situation in which § 560.2(c) would apply. Lending practices cannot be more than incidentally affected by claims that merely seek[] to make defendants live up to the word of their agreements they sign with their customers. McAnaney v. Astoria Fin. Corp., 665 F.Supp.2d 132, 164 (E.D.N.Y.2009). In this respect, breach of contract claims are even more clearly not preempted than claims that an association has violated state laws that prohibit deceptive acts and practices. The OTS itself has said that such claims only incidentally affect lending practices, because federal thrifts are presumed to interact with their borrowers in a truthful manner. Preemption of State Laws Applicable to Credit Card Transactions, OTS Op. Letter (Dec. 24, 1996) at 10 (available at http:// www.ots.treas.gov/_files/56615.pdf). The opinion letter goes on to say that interpreting and applying the deceptive practices laws of multiple states presents no issue as far as preemption is concerned. Id. It follows that a breach of contract claim which, as here, does not purport to impose additional terms on a contract, but only to hold federal savings and loan associations to the basic norms that undergird commercial transactions, id. at 9, only incidentally affects lending operations, and so is not preempted. Washington Mutual argues against such a conclusion by claiming that the contract clause the Moloskys cite does not apply to the payoff statement fee, because it is not a prepayment fee. This argument goes to the merits of the contract claim, not to whether the claim is preempted. It is illogical to say that the validity of a contract claim must be determined before a court can decide if that claim has been preempted. Rather, a court should be able to determine from the contract and the complaint whether a claim is the sort that is preempted. Any further inquiry is a matter of contract interpretation analytically distinct from the threshold preemption analysis. Because the district court dismissed the Moloskys' contract claim on preemption grounds, it did not consider whether the Moloskys have stated a valid claim. The answer to that question hinges on whether the payoff statement fee qualifies as a prepayment fee, and requires an inquiry into both the nature of the fee and relevant case law. As the Supreme Court in the American Airlines case stated, That question of contract interpretation has not yet had a full airing, and we intimate no view on its resolution. 513 U.S. at 234, 115 S.Ct. 817.