Grunbeck v. Dime Sav. Bank of New York, FSB

• Decision Date: 09 June 1995
• Docket Number: No. 94-1479,94-1479
• Citation: 74 F.3d 331
• Parties: Robert and Jennifer GRUNBECK, Plaintiffs, Appellants, v. The DIME SAVINGS BANK OF NEW YORK, FSB, Defendant, Appellee. . Heard
• Court: U.S. Court of Appeals — First Circuit

Page 331

74 F.3d 331

64 USLW 2481

Robert and Jennifer GRUNBECK, Plaintiffs, Appellants, v. The DIME SAVINGS BANK OF NEW YORK, FSB, Defendant, Appellee.

No. 94-1479.

United States Court of Appeals First Circuit.

Heard June 9, 1995.

Decided Jan. 23, 1996.

Jewel N. Klein, with whom Holstein, Mack & Klein, Chicago, IL, George P. Dickson and Law Offices of George Dickson, Milford, NH, were on brief for appellants.

Douglas G. Verge, with whom Richard P. Hazelton and Sheehan, Phinney, Bass & Green, Manchester, NH, were on brief for appellee.

Before TORRUELLA, Chief Judge, LEVIN H. CAMPBELL, Senior Circuit Judge, and CYR, Circuit Judge.

CYR, Circuit Judge.

The interesting issue of first impression presented in this case is whether section 501(a)(1) of the Depository Institutions Deregulation and Monetary Control Act of 1980, 12 U.S.C. Sec. 1735f-7a(a)(1) (1988) ("Monetary Control Act"), preempts New Hampshire Rev.Stat.Ann. Sec. 397-A:14(I) (West Supp.1994) ("Simple Interest Statute" or "SIS"). In a thoughtful and comprehensive opinion,

the district court ruled that the Simple Interest Statute, as applied to a residential mortgage loan permitting negative amortization, is preempted by section 501(a)(1).

I BACKGROUND

On January 15, 1988, Dime Real Estate Services--New Hampshire, Inc. ("Dime Real Estate NH") made a thirty-year adjustable rate loan to Timothy Ray and Thomas F. Richards in the approximate amount of $111,000, secured by a first mortgage on their residence in Milford, New Hampshire. Dime Real Estate NH, incorporated in New York and licensed to extend loans in New Hampshire, is a wholly-owned subsidiary of Dime Savings Bank of New York, FSB ("Dime Savings"), a federally-chartered savings institution also incorporated in New York. The Ray and Richards note, which contained a provision permitting negative amortization, was assigned to Dime Savings the day it was made.

The interest rate was fixed at 7.75% for the first six months, adjustable monthly thereafter at a margin of 3% above the "monthly median cost of funds" ratio, as determined by the Federal Home Loan Bank Board ("FHLBB"), and rounded to the nearest one-eighth of one percentage point. The interest rate was capped, by agreement, at 9.75% for the second six months, and 13.875% thereafter. The note afforded protection from unanticipated variable interest rate increases by permitting the borrower to pay either the total principal and interest due for the month, or a lower "minimum required payment amount." In the event the borrower elected to make the lower "minimum required payment," however, the interest remaining unpaid for that month would be added onto the loan principal, resulting in "negative amortization," and the interest due the following month would be calculated on the basis of the higher adjusted loan principal.

On October 31, 1990, Ray and Richards conveyed their Milford residence, subject to the Dime Savings mortgage, to appellants Robert and Jennifer Grunbeck, who occupied it as their principal residence. After the Grunbecks ceased payments on the mortgage in 1993, Dime Savings instituted foreclosure proceedings. The Grunbecks responded with an Ex Parte Petition for Injunctive Relief in New Hampshire state court, claiming, inter alia, that the negative amortization provision "compounded" interest and, therefore, violated the Simple Interest Statute. ¹ Dime Savings promptly removed the case to federal district court, see 28 U.S.C. Secs. 1441, 1446; see also id. Sec. 1332 (diversity jurisdiction), then moved to dismiss on the ground, amongst others, ² that section 501(a)(1) of the Monetary Control Act preempts the Simple Interest Statute. In due course the district court entered judgment for Dime Savings, see Grunbeck v. Dime Sav. Bank of New York, FSB, 848 F.Supp. 294 (D.N.H.1994), and the Grunbecks appealed.

II DISCUSSION

A. Standard of Review

We review Rule 12(b)(6) dismissals de novo, crediting all well-pleaded allegations. Clarke v. Kentucky Fried Chicken of Cal., Inc., 57 F.3d 21, 22 n. 1 (1st Cir.1995). For

present purposes, therefore, we accept the allegation that the negative amortization provision in the loan agreement "compounds" interest and thus contravenes the Simple Interest Statute. Accordingly, we turn to consider whether the statute, so construed, is preempted by section 501(a)(1). ³

B. Monetary Control Act Preemption

Congress' power to preempt state law derives from the Supremacy Clause of the United States Constitution. E.E.O.C. v. Massachusetts, 987 F.2d 64, 67 (1st Cir.1993). "[I]n any preemption analysis, 'the question of whether federal law preempts a state statute is one of congressional intent.' " Greenwood Trust Co. v. Massachusetts, 971 F.2d 818, 823 (1st Cir.1992), cert. denied, 506 U.S. 1052, 113 S.Ct. 974, 122 L.Ed.2d 129 (1993) (quoting French v. Pan Am Express, Inc., 869 F.2d 1, 2 (1st Cir.1989)). Although the preemption power is not liberally exercised by Congress, id. (citing Gregory v. Ashcroft, 501 U.S. 452, 458-60, 111 S.Ct. 2395, 2400, 115 L.Ed.2d 410 (1991)), if a federal statute includes an express preemption provision the court need only determine its scope. Id. (citing Cipollone v. Liggett Group, Inc., 505 U.S. 504, 517-18, 112 S.Ct. 2608, 2618, 120 L.Ed.2d 407 (1992)).

1. Rules of Construction

The scope of an express preemption provision is gleaned, first and foremost, from the language of the federal statute, employing traditional rules of statutory construction. CSX Transp., Inc. v. Easterwood, 507 U.S. 658, ----, 113 S.Ct. 1732, 1737, 123 L.Ed.2d 387 (1993) ("If the statute contains an express pre-emption clause, the task of statutory construction must in the first instance focus on the plain wording of the clause, which necessarily contains the best evidence of Congress' pre-emptive intent."). Of course, if the statutory language is ambiguous, Burlington N. R.R. Co. v. Oklahoma Tax Comm'n, 481 U.S. 454, 461, 107 S.Ct. 1855, 1860, 95 L.Ed.2d 404 (1987), or would work an unreasonable result, we may consult relevant legislative history, Cabral v. INS, 15 F.3d 193, 194 (1st Cir.1994), to confirm an interpretation indicated by the plain language. Strickland v. Commissioner, Maine Dep't. of Human Servs., 48 F.3d 12, 17 (1st Cir.), cert. denied, --- U.S. ----, 116 S.Ct. 145, 133 L.Ed.2d 91 (1995), (citing INS v. Cardoza-Fonseca, 480 U.S. 421, 432-43, 446, 107 S.Ct. 1207, 1213-19, 1221, 94 L.Ed.2d 434 (1987)).

Where Congress has spoken directly to the issue, an interpretation rendered by the agency responsible for administering the statute is entitled to no special deference. Chevron, U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 842, 104 S.Ct. 2778, 2781, 81 L.Ed.2d 694 (1984). In all events, the courts will reject an agency interpretation which conflicts with congressional intent. Id. at 843 n. 9, 104 S.Ct. at 2781 n. 9. Finally, we attribute "ordinary meaning" to plain statutory terms, see Greenwood Trust, 971 F.2d at 824 (citing Morales v. Trans World Airlines, Inc., 504 U.S. 374, 382-83, 112 S.Ct. 2031, 2036, 119 L.Ed.2d 157 (1992)), but may reject an express preemption claim absent a sufficiently clear license to trespass on state sovereignty. See E.E.O.C., 987 F.2d at 68 (citing Gregory, 501 U.S. at 460-62, 111 S.Ct. at 2401).

The Monetary Control Act preemption provision relied upon by the district court states in relevant part:

The provisions of the constitution or laws of any State expressly limiting the rate or amount of interest, discount points, finance charges, or other charges which may be charged, taken, received, or reserved shall not apply to any loan, mortgage, credit sale, or advance which is--

(A) secured by a first lien on residential real property (B) made after March 31, 1980; and

(C) described in section 527(b) of the National Housing Act....

12 U.S.C. Sec. 1735f-7a(a)(1) (emphasis added). ⁴ Like the district court, see Grunbeck, 848 F.Supp. at 297-98, the parties focus their preemption analyses primarily on the phrase "limiting the rate or amount of interest."

As Dime Savings views the matter, the SIS plainly "limits" the "rate or amount of interest" received in the sense that more interest would be paid by the borrower were "compounding" not banned under the SIS; and the SIS effectively "limits" the "amount" of interest the lender can recover in the sense that the lender could earn more interest were it permitted to charge interest at the same "rate" calculated on a compound basis.

These arguments rest on the implicit premise that the "amount" of interest the lender may charge is "limited" by the SIS. On the contrary, the SIS imposes no restriction on either the "rate" or the "amount" of interest the borrower may be charged, but merely requires that any interest rate or amount agreed to by the parties be computed on a "simple interest" basis. Thus, nothing in the SIS prevents a lender from contracting for whatever simple interest rate will exact an interest return equal to or greater than whatever rate and amount of interest would be recoverable through compounding. The SIS leaves entirely to the parties the rate and amount of simple interest to be exacted.

The Dime Savings interpretation blurs the distinction between the terms "rate" and "amount" of interest, as used in section 501(a)(1). It assumes that the central question--whether the SIS limits the "rate" of interest--is to be resolved through reference to the effect the SIS ban against charging interest on interest might have upon the "amount" of interest the lender may be able to command in the marketplace. Not only does this assumption implicitly acknowledge that the SIS itself imposes no statutory limit on the simple interest "rate" lenders may charge, but it alters the fundamental focus of the preemption debate by inquiring whether the SIS might make it more difficult for lenders to command--in a better-informed marketplace (i.e., wherein a "simple...