Hymes v. Bank of Am., N.A.

• Decision Date: 30 September 2019
• Docket Number: 18-CV-2352 (RRM) (ARL),18-CV-4157 (RRM) (ARL)
• Citation: 408 F.Supp.3d 171
• Parties: Saul R. HYMES and Illana Harwayne-Gidansky, on behalf of themselves and all others similarly situated, Plaintiffs, v. BANK OF AMERICA, N.A., and Does 1 through 10, inclusive, Defendants. Alex Cantero, individually and on behalf of all others similarly situated, Plaintiff, v. Bank of America, N.A., Defendant.
• Court: U.S. District Court — Eastern District of New York

408 F.Supp.3d 171

Saul R. HYMES and Illana Harwayne-Gidansky, on behalf of themselves and all others similarly situated, Plaintiffs,
v.
BANK OF AMERICA, N.A., and Does 1 through 10, inclusive, Defendants.

Alex Cantero, individually and on behalf of all others similarly situated, Plaintiff,
v.
Bank of America, N.A., Defendant.

18-CV-2352 (RRM) (ARL)
18-CV-4157 (RRM) (ARL)

United States District Court, E.D. New York.

Signed September 30, 2019

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Daniel Tropin, Pro Hac Vice, Kopelowitz Ostrow Ferguson Weiselberg Gilbert, Fort Lauderdale, FL, Jeffrey Goldenberg, Pro Hac Vice, Goldenberg Schneider, LPA, Cincinnati, OH, Todd Seth Garber, Finkelstein, Blankinship, Frei-Pearson & Garber, LLP, White Plains, NY, for Plaintiffs.

Andrew Soukup, Pro Hac Vice, Covington & Burling LLP, Washington, DC, David L. Permut, Pro Hac Vice, Goodwin Procter LLP, Washington, DC, Gabrielle Lisa Gould, Goodwin Procter LLP, New York, NY, Mark W. Mosier, Pro Hac Vice, Covington & Burling LLP, Washington, DC, for Defendants.

MEMORANDUM AND ORDER

ROSLYNN R. MAUSKOPF, United States District Judge.

408 F.Supp.3d 175

Plaintiffs Saul Hymes and Illana Harwayne-Gidansky (the "Hymes Plaintiffs"), and plaintiff Alex Cantero (collectively with the Hymes Plaintiffs, "Plaintiffs"), bring this pair of putative class actions against Bank of America, N.A. ("the Bank"), seeking to require the Bank to pay interest, as required by New York General Obligation Law ("GOL") § 5-601, on money Plaintiffs have deposited into mortgage escrow accounts. Before the Court are the Bank's nearly identical motions to dismiss the complaints in each action for failure to state a claim pursuant to Federal Rule of Civil Procedure ("Rule") 12(b)(6). In each motion, the Bank principally argues that the National Bank Act ("NBA") preempts GOL § 5-601 and that Plaintiff's claims for breach of contract, unjust enrichment, and violation of state consumer protection law must therefore be dismissed. The motions are consolidated for the purposes of this Memorandum and Order.

For the reasons set forth below, the Court concludes the NBA does not preempt GOL § 5-601. Accordingly, Plaintiffs' complaints state valid claims for breach of contract. Plaintiffs' claims for unjust enrichment and violation of New York General Business Law § 349 are dismissed.

BACKGROUND

I. The NBA and Dodd–Frank

"In 1864, Congress enacted the NBA, establishing the system of national banking still in place today." Watters v. Wachovia Bank, N.A. , 550 U.S. 1, 10–11, 127 S.Ct. 1559, 167 L.Ed.2d 389 (2007) (citations omitted). The NBA created the Office of the Comptroller of the Currency ("OCC") to oversee nationally chartered banks, and it vested those banks with certain enumerated powers. Since the early twentieth century, this has included the power to "make, arrange, purchase or sell loans or extensions of credit secured by liens on interests in real estate." 12 U.S.C. § 371(a) ; accord 12 C.F.R. § 34.3(a).¹ The NBA also vested national banks with "all such incidental powers as shall be necessary to carry on the business of banking; by discounting and negotiating promissory notes, drafts, bills of exchange, and other evidences of debt; ... [and] by loaning money on personal security." 12 U.S.C. § 24 (Seventh). Pursuant to these powers, throughout the past century, national banks have engaged in the business of making residential real estate loans secured by mortgages.

While Congress delegated regulation of national banks to the OCC, it did not "wholly withdraw" them "from the operation of State legislation." First Nat'l Bank v. Kentucky , 76 U.S. (9 Wall.) 353, 361, 19 L.Ed. 701 (1869). "It is often said that we have a ‘dual banking system’ of federal and state regulation." Wachovia Bank, N.A. v. Burke , 414 F.3d 305, 314 (2d Cir. 2005) (citations omitted). In this system, and as will be discussed more fully below, national banks are subject to state law, provided the state law does not "prevent or significantly interfere with the national bank[s'] exercise of [their] powers." Barnett Bank of Marion Cty., N.A. v. Nelson , 517 U.S. 25, 33, 116 S.Ct. 1103, 134 L.Ed.2d 237 (1996). When state law does

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prevent or significantly interfere with banks' exercise of their powers, it is preempted by the NBA. Id.

II. Mortgage Escrow Accounts, RESPA, and GOL § 5-601

Since at least the middle of the twentieth century, mortgage lenders have required or negotiated with borrowers to establish mortgage escrow accounts. See Gibson v. First Fed. Sav. & Loan Ass'n of Detroit , 504 F.2d 826, 829 (6th Cir. 1974) (describing regulation of mortgage escrow accounts); cf. Edwin S. Mills, The Functioning and Regulation of Escrow Accounts , 5 HOUS. POL'Y DEBATE 203, 203 (1994) ("Escrow accounts are the stepchildren of the mortgage business."). A mortgage escrow account, sometimes called an impound account, is "a trust account set up in a borrower's name to ensure the timely payment of specified obligations affiliated with a property." H.R. Rep. No. 111-94, at 53 (2009). Borrowers pre-pay a set amount into their accounts on a regular, often monthly, basis. Id. Lenders "then use these collected sums to guarantee the timely payment of property tax bills and insurance premiums." Id. By guaranteeing timely payment, lenders protect themselves and the borrowers from tax liens and property damage risk. Id. In turn, having mitigated these risks, lenders are able to offer loans to borrowers at reduced interest rates. See Mills, supra , at 209. When the mortgage contract ends, any money remaining in escrow is returned to the borrower.

For some mortgages, such as those with a low risk of default, these benefits may not outweigh the countervailing costs. Mortgage escrow accounts cost money for lenders to create and operate – an expense which may be borne by the lender or passed to the borrower. See, e.g. , Escrow Requirements Under the Truth in Lending Act (Regulation Z) , 78 Fed. Reg. 4726, 4746–47 (Jan. 22, 2013). They also necessarily require that borrowers be parted from control of their capital, and thus from the ability to use it, including to generate income. See id. During the period between when monthly deposits are required and taxes and insurance premiums come due, money belonging to the borrower simply accumulates in escrow. The lender may use this money to generate interest and income for itself, but the borrower has no access to it. See id. ; Mills, supra , at 211.

By the 1970s, some lenders had begun to exploit this last feature of mortgage escrow accounts by requiring borrowers to deposit vastly more money than their tax and insurance liabilities demanded. See S. Rep. No. 93-866, 1974 U.S.C.C.A.N. 6546, 6548. These lenders could then invest this money for their own benefit, effectively giving themselves an interest-free loan for however long the mortgage escrow account remained in place.

In 1974, Congress and the State of New York responded with consumer protection legislation aimed at curbing different aspects this practice. At the federal level, Congress enacted the Real Estate Settlement Procedures Act ("RESPA"), 12 U.S.C. § 2601 et seq. , which capped the amount lenders – including national banks – could require in escrow deposits for federally insured, guaranteed, or owned mortgages. See Mills, supra , at 211–12. And Congress delegated authority to implement RESPA to the Department of Housing and Urban Development ("HUD"). See Pub. L. No. 93-533, § 3(6), 88 Stat. 1724, 1725 (1974). Under RESPA, lenders can now demand only so much as necessary to guarantee the timely payment of taxes and insurance premiums, and no more. See 12 U.S.C. § 2609.

At the state level, New York enacted GOL § 5-601, which required "mortgage

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investing institutions," including national banks, to pay interest to borrowers on the money in mortgage escrow accounts, thereby passing along some (or all) of whatever interest or income they made. See Flagg v. Yonkers Sav. & Loan Ass'n, FA , 396 F.3d 178, 181 (2d Cir. 2005) (first citing N.Y. Gen. Oblig. Law § 5-601, then citing N.Y. Banking Law § 14-b(5) ); see also 1974 N.Y. Laws 802–05. Specifically, New York General Obligations Law § 5-601 provides,

Any mortgage investing institution which maintains an escrow account pursuant to any agreement executed in connection with a mortgage on any one to six family residence occupied by the owner ... and located in this state shall, for each quarterly period in which such escrow account is established, credit the same with dividends or interest at a rate of not less than two per centum 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 superintendent of financial services 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. Over the next two decades, approximately a dozen states enacted similar laws. See 1973 Conn. Acts 1373–74 Reg. Sess; 1991 Me. Laws 187; Mills, supra , at 214.²

III. OCC...