Flagg v. Yonkers Sav. And Loan Ass'n, Fa

• Decision Date: 21 January 2005
• Docket Number: Docket No. 04-1948-CV.
• Citation: 396 F.3d 178
• Parties: Hans W. FLAGG and Eileen S. Flagg, on behalf of themselves and all others similarly situated, Plaintiffs-Appellants, v. YONKERS SAVINGS AND LOAN ASSOCIATION, FA, also known as Yonkers Financial, Defendant-Appellee.
• Court: U.S. Court of Appeals — Second Circuit

396 F.3d 178

Hans W. FLAGG and Eileen S. Flagg, on behalf of themselves and all others similarly situated, Plaintiffs-Appellants, v. YONKERS SAVINGS AND LOAN ASSOCIATION, FA, also known as Yonkers Financial, Defendant-Appellee.

Docket No. 04-1948-CV.

United States Court of Appeals, Second Circuit.

Argued: November 18, 2004.

Decided: January 21, 2005.

COPYRIGHT MATERIAL OMITTED

William R. Weinstein, Wechsler Harwood, LLP, New York, N.Y. (Michael Katz, Rabunski & Katz, LLP, New York City, on the brief), for Plaintiffs-Appellants.

Jean E. Burke, Thacher Proffitt & Wood, LLP, New York City (Doreen

Klein, on the brief), for Defendant-Appellee.

H. Rodgin Cohen, Sullivan and Cromwell LLP (Bruce E. Clark, of counsel), New York City, for the New York Bankers' Association as amicus curiae in support of Defendant-Appellee.

Before: OAKES, CALABRESI, and STRAUB, Circuit Judges.

STRAUB, Circuit Judge.

The small universe of facts germane to the present appeal is set forth in the decision of the District Court, reported at Flagg v. Yonkers Sav. & Loan Ass'n, 307 F.Supp.2d 565 (S.D.N.Y.2004). We recite them here only briefly.

Plaintiffs-Appellants Hans and Eileen Flagg (the "Flaggs") entered into a mortgage agreement with defendant-appellee Yonkers Savings and Loan Association ("Yonkers") on June 12, 1998. Pursuant to that agreement, and consistent with federal laws and guidelines that regulate Yonkers as a federal savings association, the Flaggs deposited funds into an escrow account from which property taxes, insurance, and other fees associated with the mortgaged property were to be paid. In relation to these escrow funds, the mortgage agreement provided that "Lender will not be required to pay me any interest or earnings on the Funds unless either (i) Lender and I agree in writing at the time I sign this Security Instrument, that Lender will pay interest on the Funds; or (ii) the law requires Lender to pay interest on the Funds." The principal issue on appeal is whether "the law" so required.

Until May 2002 Yonkers did not pay interest to the Flaggs on funds held in the escrow account. In May 2002 Yonkers merged with Atlantic Bank of New York ("Atlantic"), a wholly-owned subsidiary of the National Bank of Greece. After this merger Atlantic began to pay interest on the funds held in the Flaggs' mortgage escrow account. The Flaggs subsequently sued Yonkers based on New York statutes, New York common law, and the Fifth Amendment to the United States Constitution, seeking declaratory judgment and compensation for past interest that they allege is owed to them under New York law for the pre-merger period. Yonkers moved for dismissal for failure to state a claim upon which relief could be granted. The Flaggs cross-moved for summary judgment. By its March 8, 2004, decision, the District Court granted Yonkers's motion and denied the Flaggs' motion as moot based on its determination that federal law and regulations had preempted the field of mortgage escrow accounts held by federal savings associations and its finding that federal law did not mandate payment of interest on such accounts. The Flaggs now appeal. We affirm.

DISCUSSION

The Flaggs raise three issues on appeal. First, they maintain that New York State law required that Yonkers pay them interest on their mortgage escrow account. Second, they contend that the contract governing their mortgage escrow account incorporated New York law, thereby obligating Yonkers to pay interest on the account under the contract. Third, the Flaggs assert that the District Court erred in dismissing their Fifth Amendment claim. We do not find merit in any of these arguments.

I. Federal Law Preempts the Field of Mortgage Escrow Accounts Held by Federal Savings Associations.

New York law requires "mortgage investing institutions" to pay interest on mortgage escrow accounts on a quarterly basis at a rate of "not less than two percentum per year based on the average of the sums so paid for the average length of time on deposit or a rate prescribed by the banking board pursuant to section fourteen-b of the banking law and pursuant to the terms and conditions set forth in that section whichever is higher." N.Y. Gen. Oblig. Law § 5-601; see also N.Y. Banking L. § 14-b (describing the power of the New York Banking Board to prescribe minimum rates of interest to be paid on residential mortgage escrow accounts). Looking at Yonkers's failure to pay interest on their mortgage escrow account through the lens of these statutory provisions the Flaggs cannot be blamed for thinking that they were denied something due to them. No matter how intense their outrage, however, they cannot claim that they suffered any injustice because preemptive exercise of federal authority by the Office of Thrift Supervision freed Yonkers, as a federal savings association, from any obligation to pay interest on mortgage escrow accounts under New York law.

Pursuant to the authority granted to it by the Home Owners' Loan Act, 12 U.S.C. § 1461 et seq. ("HOLA"), the Office of Thrift Supervision ("OTS"), which operates under the aegis of the Department of Treasury to provide for, inter alia, the "examination, safe and sound operation, and regulation of savings associations," 12 U.S.C. § 1463(a)(1), has "authority [that] is preemptive of any state law purporting to address the subject of the operations of a Federal savings association." 12 C.F.R. § 545.2. Seized of this authority, the OTS has "occupie[d] the entire field of lending regulation for federal savings associations." 12 C.F.R. § 560.2(a). Among these are "laws purporting to impose requirements regarding... [e]scrow accounts." 12 C.F.R. § 560.2(b). In exercise of this asserted authority, the OTS has removed all legal obligations that federal savings associations may have to pay interest on mortgage escrow accounts, "allowing such matters to be governed by the loan contract." 48 Fed.Reg. 23032.01, 23039 (May 23, 1983). Based on these statutory and regulatory sections, the District Court found that OTS regulations preempted state law in areas affecting federal savings and loan institutions. Flagg, 307 F.Supp.2d at 574-75.

On appeal the Flaggs do not contest the District Court's determination that the OTS has preempted state law with respect to the provision of interest on mortgage escrow accounts; rather, the Flaggs contend that this OTS action exceeds the authority granted to it by HOLA and is an arbitrary and unreasonable exercise of its regulatory power. We do not agree. Consistent with the District Court, we find that the exercise of authority here is neither arbitrary nor unreasonable and is within the broad grant of power to the OTS contained in HOLA.

"Federal regulations have no less pre-emptive effect than federal statutes. Where Congress has directed an administrator to exercise his discretion, his judgments are subject to judicial review only to determine whether he has exceeded his statutory authority or acted arbitrarily. When the administrator promulgates regulations intended to pre-empt state law, the court's inquiry is similarly limited." Fid. Fed. Sav. & Loan Ass'n. v. de la Cuesta, 458 U.S. 141, 153-154, 102 S.Ct. 3014, 73 L.Ed.2d 664 (1982) (internal citations omitted); see also La. Pub. Serv. Comm'n. v. F.C.C., 476 U.S. 355, 374, 106 S.Ct. 1890, 90 L.Ed.2d 369 (1986) ("[A] federal agency may pre-empt state law only when and if it is acting within the scope of its congressionally delegated authority.... [T]he best way of determining whether Congress intended the regulations of an administrative agency to displace state law is to examine the nature and scope of the authority granted by Congress to the agency." (internal citations omitted)).

This evaluation is usually informed by a presumption in favor of the authority of state law in areas of activity traditionally allocated to the supervisory organs of the various states. See Rice v. Santa Fe Elevator Corp., 331 U.S. 218, 230, 67 S.Ct. 1146, 91 L.Ed. 1447 (1947). The presumption against federal preemption disappears, however, in fields of regulation that have been substantially occupied by federal authority for an extended period of time. See United States v. Locke, 529 U.S. 89, 108, 120 S.Ct. 1135, 146 L.Ed.2d 69 (2000). Regulation of federally chartered banks is one such area. See Barnett Bank, N.A. v. Nelson, 517 U.S. 25, 32-33, 116 S.Ct. 1103, 134 L.Ed.2d 237 (1996) (citing cases dating to 1877 that document the long history of federal regulations' preempting of state laws that purport to govern federally chartered banks); Bank of Am. v. City and County of San Francisco, 309 F.3d 551, 558 (9th Cir.2002) (tracing the history of federal preemption of state laws that purport to govern federally chartered banks to McCulloch v. Maryland, 4 Wheat. 316, 17 U.S. 316, 4 L.Ed. 579 (1819)).

HOLA, in pertinent part, provides that "[t]he Director [of the OTS] may issue such regulations as the Director determines to be appropriate to carry out the responsibilities of the Director or the Office," 12 U.S.C. § 1463(a)(2) (emphasis added), and that "the Director is authorized, under such regulations as the Director may prescribe, to provide for the organization, incorporation, examination, operation, and regulation of associations to be known as Federal savings associations." Id. § 1464(a) (emphasis added). This is an extremely broad grant of power that provides ample authority for the Director's efforts to enforce consistent, nationwide regulations affecting lending practices, by preempting, inter alia,"state laws purporting to impose requirements regarding ... [e]scrow accounts." 12 C.F.R. § 560.2(b).

While the propriety of this particular use of regulative power by the OTS appears to present a novel question in this Circuit, there is ample analogous precedent to demonstrate that this exercise of preemption is within reason and HOLA's grant of authority. In de la Cuesta, for example, the Supreme...