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California State Court Chips Away at Preemption
By Dana F. Clarke

The California Court of Appeals recently issued an opinion in Parks v. MBNA America Bank, N.A., that further chips away at preemption for national banks. Allan Parks obtained a credit card from MBNA America Bank, N.A. MBNA subsequently sent “convenience checks” to Parks, and Parks used two of the convenience checks. He later filed a class action complaint against MBNA, alleging that MBNA violated California’s Unfair Competition Law by failing to include disclosures on the face of the convenience checks as required by California law. Under California Civil Code §1748.9, a credit card issuer that extends credit to a cardholder through the use of a preprinted check must disclose:

(1) The following statement providing that the: “use of the attached check or draft will constitute a charge against your credit account;”

(2) The annual percentage rate and the calculation of finance charges associated with the use of the attached check or draft, as required by Regulation Z, Section 226.16; and

(3) Whether the finance charges are triggered immediately upon the use of the check or draft.

These disclosures must appear on the front of an attachment affixed by perforation or other means to the preprinted check and must be written in clear and conspicuous language.

The convenience checks sent to Parks (and other class members) did not include these disclosures.

MBNA moved to dismiss Parks’s complaint, arguing that California’s disclosure requirements are preempted by the National Bank Act and the Office of the Comptroller of the Currency’s regulations. Following Ninth Circuit precedent, the trial court agreed that Park’s claims were preempted and dismissed Parks’s complaint. Parks appealed to the California Court of Appeals, which reversed the trial court’s decision.

In its opinion reversing the trial court, the appellate court rejected the Ninth Circuit’s ruling in Rose v. Chase Manhattan Bank USA, a case with identical facts and, in which, the Ninth Circuit ruled that the National Bank Act and the OCC regulations preempted California Civil Code §1748.9. Based on the appellate court’s interpretation of U.S. Supreme Court case law, the court explained that Rose was wrongly decided and that the National Bank Act and the OCC’s regulations preempt California law only to the extent that California law forbids or significantly impairs the exercise of a power explicitly granted to national banks by the National Bank Act. The appellate court noted that California Civil Code §1748.9 provides a disclosure requirement and does not forbid the exercise of a national bank power.

The appellate court concluded that where the state law does not, on its face, significantly impair MBNA’s power, then MBNA has the burden of factually showing such impairment. The appellate court also concluded that the OCC exceeded its authority by issuing regulations that purport to exempt national banks from all state disclosure requirements. Fortunately, for national banks, the appellate court left open the issue of whether California Civil Code §1748.9 significantly impairs a national bank’s exercise of the power to lend money on personal security.

However, national banks can no longer assume that they will not be bound by state consumer protection laws, as courts are inclined to accept arguments that consumer protection provisions, like state disclosures, are not preempted, notwithstanding prior decisions to the contrary.

Dana Frederick Clarke is a partner in the California office of Hudson Cook, LLP. Basis Points readers can reach Dana at 714-263-0427 or by email at dclarke@hudco.com.

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