Petition for Writ of Certiorari — Chevy Chase Bank, F. S. B. v. Wells

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Text

Supreme Ce

FILED

03 918 DEC 22209

No.

IN THE

Pupremne @ Gourt of the Hnited States

CHEVY CHASE BANK, F.S.B., ET AL.,

: Petitioners,

= We

DALE WELLS, ET AL.

{

Respondents.

On Petition for a Writ of Certiorari

to the Maryland Court of Appeals

PETITION FOR A WRIT OF CERTIORARI

MICHAEL A. CARVIN

Counsel of Record

JONES DAY

51 Louisiana Avenue, N.W.

Washington, D.C. 20001

(202) 879-3939

DAVID J. CYNAMON

GERARD M. BABENDREIER

ERICA S. SIMPSON

SHAW PITTMAN LLP

2300 N Street, N.W.

Washington, D.C. 20037

(202) 663-8000

Counsel for Petitioners

December 22, 2003

QUESTION PRESENTED

Where the federal government has occupied the

field, can a state court interpret a standard

contractual choice-of-law provision to impose

otherwise preempted state law on the contracting

parties?

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ape LRN

‘

LIST OF PARTIES

1. Chevy Chase Bank, F.S.B. and Bank One

Delaware, N.A. (formerly First USA Bank, N.A.) are

the petitioners in this Court, defendants in the Circuit

Court for Baltimore City, Maryland and were

appellees in the Maryland Court of Appeals.

2. Dale Wells, Sharon Goldenberg and John Dovel

are the respondents in this Court, plaintiffs in the

Circuit Court for Baltimore City, Maryland and were

appellants in the Maryland Court of Appeals.

ili

CORPORATE DISCLOSURE STATEMENT

Petitioners provide the following corporate

disclosures pursuant‘to Supreme Court Rule 29.6:

_ 1. Chevy Chase Bank, F.S.B. states that 80% of its

stock is owned by the B.F. Saul Real Estate

Investment Trust. No other publicly-held

corporation owns 10% or more of its stock.

2. Bank One Delaware, N.A. states that it is a

wholly-owned subsidiary of Bank One Corporation.

TABLE OF CONTENTS

Page

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CORPORATE DISCLOSURE STATEMENT...................... ili

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ae is inckinisaruiestuinidneinnisientunehiineieenindansanenaphtcieits 1

CONSTITUTIONAL PROVISION, STATUTES

AND REGULATIONS INVOLVED ...........eeseeeseeeseeees l

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REASONS FOR GRANTING THE PETITION ................... 6

I. THE DECISION BELOW DIRECTLY

CONFLICTS WITH THE UNIFORM

DECISIONS OF THIS COURT, OTHER

FEDERAL COURTS AND OTS. .........sccsssscssconseseereoes 7

II. THE DECISION BELOW WILL SUBVERT

UNIFORM OTS REGULATION OF

FEDERAL LENDERS AND WILL

UNDERMINE PREEMPTION IN OTHER

AREAS IN WHICH THE FEDERAL

GOVERNMENT HAS OCCUPIED THE

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APPENDIX A

Opinion of the Maryland Court of Appeals .................... la

TABLE OF CONTENTS—continued

APPENDIX B

Order and Memorandum of the Circuit Court for

Baltimore City, Maryland ..0.0......csccecsscscsesessseceseccececee. 44a

APPENDIX C

Article VI, Clause 2 of the United States ;

RN act ssicinisielsictetersiciatese bcc et oe 53a

bib ok Oe Ee I er mtcocienniaauetisaiacda eee 54a

Maryland Code, Commercial Law, Title 12,

Subtitle 9, §§ 12-901 ef Seq. ..cececcccescsessssssssssseseseeees 57a

APPENDIX D

October 6, 2003 Opinion Letter of the Office of

Thrift Supervision, Department of the Treasury ......... 10la

APPENDIX E

October 6, 2003 Letter from the National

Association of Attorneys General to the Office of

the Comptroller of the Currency......... seviminnianbenseabinntiines 109a

TABLE OF AUTHORITIES

Cases Page(s)

American Airlines, Inc. v. Wolens, 513 U.S. 219

ISD issdrsstsensensiniiersecinnemcinneiitenebinansnamimenaatainttio passim

Arana v. Ochsner Health Plan, 338 F.3d 433

CO Set. Be aessanscssiniiiervccencianeniienes Scids Nias becelivdiabet 22

Ass’n of Int’l Auto. Mfrs. v. Comm'r, Mass. Dep't

of Envtl. Protection, 208 F.3d 1 (1st Cir. 2000)............. 18

‘Atkinson v. Gen. Elec. Credit Corp.,

866 F.2d 396 (11th Cir.), cert. denied,

Pe UE. BAS CIF ciinhsioeintcteermiatiicsmnanes 12, 13

Bank of Am. v. City & County of San Francisco,

SEF Be S51 CC, TI Ds cicsenssctnsrtcpcsnanetpnctantassininns 15

Barnett Bank of Marion County, N.A. v. Nelson,

SEF UG, To Ca sesvescssricitecmtienieianencinmaas 15

Breitling U.S.A., Inc. v. Fed. Express Corp.,

45 F. Supp. 2d 179 (D. Conn. 1999).............sssceeeee 11,17

Brown v. Investors Mortgage Co., 121 F.3d 472

Oe, TIT cecsvernevinavencspsencs ebnettenaemeonninmeietenaes 12

Cal. v. ARC Am. Corp., 490 U.S. 93 (1989)... eesessseeeeeees 16

Cent. States S.E. & S.W. Areas Health & Welfare

Fund v. Pathology Labs., 71 F.3d 1251

(7th Cir. 1995), cert. denied, 517 U.S. 1233 (1996)...... 18

Difelice v. Aetna U.S. Healthcare, 346 F.3d 442

CR CUR. FOE Pi osinssisunivnionscessninicbebs ceiabdidiatienciacsnnomean 22

Fantastic Fakes, Inc. v. Pickwick Int'l, Inc.,

GO1 F 26 S79 (5s Cae. FI vencncccccnrcesvceseess 12, 13, 17, 21

Fid. Fed. Sav. & Loan Ass’n v. De la Cuesta,

BSS UD. 161 Cais wkicnicen teen passim

Hauenstein v. Lynham, 100 U.S. 483 (1880) ......... cc eeeeeeeeeees 8

Hines v. Davidowitz, 312 U.S. 52 (1941) occ eeeceseeeeeeeee 15

Jones v. United States Fid. & Guar. Co.,

Civ. A. No. 90-5005, 1992 U.S. Dist. LEXIS

12908 €6.D. 1a. Bee, 5, TI ccenticbeciiontvcs 12, 17

Vii

TABLE OF AUTHORITIES—continued

Kawamata Farms, Inc. v. United Agric. Prods.,

948 P.2d 1055 (Haw. 1997) .........cccccscececcscssssssesesssessesess 18

La. Pub. Serv. Comm’n v. F.C.C.,

SPW SF Ais. He Oe iiss diterasnisdonicntalisbbcntaitiedaeclinseas 16

Lyng v. Payne, 476 U.S. 926 (1986) ....cccccccsccscsssssssssescesecece. 14

Martin v. Ford Motor Co., 914 F. Supp.-1449

PU WN WOM csiiacdllescdvbescissthiestiinmldchobiossas muskets cccindéiacs 18

N.W. Cent. Pipeline Corp. v. State Corp.

Comm'n, 489 U.S. 493 (1989) ....cccccscesecesssccscscssseseseceee. 16

ProCbD, Inc. v. Zeidenberg, 86 F.3d 1447

GPE Ge BU is sevsaspictdBininiecetebninsis seshcabcreinidas cheats 18

Roadway Package Sys., Inc. v. Kayser,

257 F.3d 287 (3d Cir.), cert. denied,

ee 13, 17, 19, 21

Singh v. Prudential Health Care Plan, Inc.,

335 F.3d 278 (4th Cir.), cert. denied,

03-478, 2003 U.S. LEXIS 9007 (2003) .........ceccesessseseees 22

Smith v. Comair, Inc., 134 F.3d 254 (4th Cir. | 11

Udall v. Tallman, 380 U.S. 1 (1965)......cccccscsessssesessecseeseseeee 14

Volt Info. Scis., Inc. v. Bd. of Trs. of Leland

Stanford Junior Univ., 489 U.S. 468 ne 18

Wallace v. Parks Corp., 629 N.Y.S.2d 570

SP iti te 18

Wells v. Chevy Chase Bank, 377 Md. 197,

Oe POE I asics priciest eden es ataettrie ok 1

Constitutional and Statutory Provisions

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Be Aen & BR TID CI iciceccccseitecthsilcsikshiscscscesnl once. 1

BP Ween SA CI coiciciiadiiieeih estinccedas Si 7

MD. CODE ANN., Com. Law §§ 12-901

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TABLE OF AUTHORITIES—continued

Federal Regulations

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Fa i ae 0 ID sisiisiessicscesnrsiciaievenlessisiioinniais 20, 21

ESE Bes G FOU. Pe) Ds csncrscssersasesignenssntoonnvees pabininati 3

61 Fed. Reg. 50951 (Sept. 30, 1996)............ccsecssscsersees passim

68 Fed. Reg. 46119 (Aug. 5, 2003).....ccccssssssscssssssssssssseceseee 22

A le IA al a Be A tal ek aS Sone

PETITION FOR A WRIT OF CERTIORARI

Chevy Chase Bank, F.S.B. (“Chevy Chase”) and Bank One

Delaware, N.A. hereby petition for a writ of certiorari to

review the judgment of the Maryland Court of Appeals in this

case.

OPINIONS BELOW

The opinion of the Maryland Court of Appeals (App. la-

43a) is reported at 377 Md. 197, 832 A.2d 812 (2003). The

opinion and order of-the Circuit Court for Baltimore City,

Maryland (App. 44a-52a) is unreported.

JURISDICTION

The judgment of the Maryland Court of Appeals was

entered on September 23, 2003. The jurisdiction of this Court

is invoked under 28 U.S.C. § 1257(a) (2003).

CONSTITUTIONAL PROVISION, STATUTES

AND REGULATIONS INVOLVED

The constitutional provision, statutes and regulations

involved are Art. VI, cl. 2 of the United States Constitution;

Section 5(a) of the Home Owners’ Loan Act, 12 U.S.C. §

1464(a) (2003); 12 C.F.R. § 560.2 (2003); and Title 12,

Subtitle 9 of the Maryland Commercial Law Article, MD.

CODE ANN., Com. LAW §§ 12-901 et seq. (2002) (hereafter

“Subtitle 9”). They are reproduced in Appendix C. (App.

53a-100a.)

STATEMENT OF THE CASE

1. Introduction. The Office of Thrift Supervision (“OTS”)

“occupies the entire field of lending regulation for federal

Savings associations.” 12 C.F.R. § 560.2(a). (App. 54a.) See

also 12 U.S.C. § 1464(a). (App. 53a-54a.) The express

purpose of OTS’s occupation of the field is “[t]o enhance the

Safety and soundness and to enable federal savings

associations to conduct their operations in accordance with

best practices (by efficiently delivering low-cost credit to the

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public free from undue regulatory duplication and burden).”

12 C.F.R. § 560.2(a). (App. 54a.) OTS’s field preemption

regulations specifically preempt, among other things, state

laws, such as Maryland’s Subtitle 9, that require disclosures

of certain information in credit-related documents. 12 C.F.R.

§ 560.2(b). (App. 55a-56a.) -

In the case below, the Maryland Court of Appeals held that,

notwithstanding OTS’s field preemption of state lending laws

governing federal savings associations, Subtitle 9 could be

imposed on a federal lender simply because that state law is

referred to in the choice-of-law provision in the lender’s

contract with its credit cardholders. The court’s decision

directly conflicts with the decisions of this Court and every

other federal court that has considered the issue, as well as

with the position of OTS itself. Moreover, the Court of

Appeals’ decision creates a dangerous precedent for other

state courts to undermine the federal government’s

occupation of the field not only in the regulation of federal '

lenders but in-any area in which ubiquitous contractual

choice-of-law provisions could be “interpreted” to override

preemptive federal law.

2. Statement of Facts. This case arose from a lawsuit on

behalf of former credit cardholders of Chevy Chase, a federal

Savings association. The Cardholder Agreement embodying

the terms of the credit card contract between Chevy Chase

and its customers contained a change-in-terms provision that

permitted Chevy Chase to “amend the terms of [the]

Agreement in accordance with applicable law at any time.”

(App. 46a.) The Cardholder Agreement also contained a

choice-of-law provision, entitled “Governing Law,” which

defined the “governing law” of the contract as “Subtitle 9 of

Title 12 of the Commercial Law Article of the Maryland

Annotated Code and applicable federal laws.” (App 47a.)'

On January 16, 1996, Chevy Chase, with the approval of

OTS, relocated its “home office,” as defined by applicable

federal regulations, from Maryland to Virginia. (App. 4a.) In

connection with that relocation, Chevy Chase amended the

choice-of-law provision to provide that the Cardholder

Agreement “is subject to and governed by Virginia law and

applicable federal laws and regulations.” Jd Chevy Chase

subsequently amended other provisions of the Cardholder

Agreement, including finance charges and other fees. (App.

4a-Sa.) Notice of the amendments was provided in

' The choice-of-law provision referred to Subtitle 9,

rather than Maryland law generally, because Maryland

maintains several different usury laws potentially applicable

to lenders. Unlike most states that do so, Maryland

specifically requires lenders to designate the “new” and more

flexible usury laws (of which Subtitle 9 is a part) in writing in

their credit agreements in order to avoid being subjected to

the more restrictive provisions of the “old” usury laws set

forth in Subtitle 3 of Title 12 of the Maryland Commercial

Law Article and elsewhere. See Mp. CODE ANN., CoM. LAW

§ 12-913.1 (2002). Thus, Chevy Chase needed to designate

Subtitle 9 as the governing state law in order to ensure that it

would govern any aspect of the Cardholder Agreement that

might not be governed by preemptive federal law, and in

order to obtain maximum flexibility with respect to interest

rates and related charges, as to which federal regulations look

to state law. See 12 U.S.C. § 1463(g) (2003); 12 C.F.R. §

560.110(b) (2003) (authorizing federal Savings institutions to

“export” the “most favored lender” interest rate and charges

of the state in which they are located).

accordance with the Truth-in-Lending Act (“TILA”), which is

the applicable law pursuant to OTS regulations. See Lending

& Investment, 61 Fed. Reg. 50951, 50965-66 (Sept. 30,

1996).

3. The Proceedings Below. The three named plaintiffs in

the case below continued to use their credit cards subject to

the amended terms and conditions without protest or

objection for three years. On January 15, 1999, one day short

of the applicable statute of limitations, they commenced this

action in the Circuit Court for Baltimore City, Maryland,

against Chevy Chase and Bank One Delaware, N.A., which

had purchased Chevy Chase’s credit card business in 1998.

(App. 5a.) The complaint alleges that Chevy Chase breached

the Cardholder Agreement and committed unfair and

deceptive trade practices when it amended the Cardholder

Agreement in 1996, because Chevy Chase allegedly failed to

give notice of the amendments in accordance with the

provisions of Subtitle 9, which impose disclosure

requirements beyond those required by TILA. (App. 5a-6a.)

Chevy Chase moved to dismiss the complaint on the

ground that Subtitle 9 was preempted by federal law.

Plaintiffs acknowledged that fact but contended that Chevy

Chase had obligated itself to follow the notice provisions of

Subtitle 9-by referring to that statute in the choice-of-law

provision of the Cardholder Agreement. (App. 45a-46a.)

The circuit court granted Chevy Chase’s motion,

characterizing plaintiffs’ argument as “both ingenious, and a

trifle disingenuous.” (App. 51a.) The court noted, “It seems

both implausible and inconsistent with federal preemption to

claim that a state regulatory scheme was agreed to between

the parties by a mere reference to Subtitle 9 [in the choice-of-

law clause].” Jd. The court explained that “[the parties]

could not waive federal preemption and could only have

intended that state law apply as ‘governing law’ should

‘federal law’ not apply.” (App. 52a.)

Plaintiffs sought review of this decision in the Maryland

Court of Appeals. Initially, the Court of Appeals denied

plaintiffs’ petition for a writ of certiorari. Subsequently,

however, the court granted certiorari on its own initiative, and

reversed the circuit court in a 6-1 decision. (App. 1a-43a.)

The Court of Appeals necessarily acknowledged that OTS

has occupied the field and that Subtitle 9 is therefore

preempted. (App. 19a-21a.) The court nonetheless held that,

because the choice-of-law provision in the Cardholder

Agreement refers to state law, that provision could be

interpreted to mean that Chevy Chase had contractually

obligated itself to comply with the notice provisions of the

otherwise preempted state law. (App. 22a-42a.) In reaching

that conclusion, the court relied heavily on this Court*s

decision in American Airlines, Inc. v. Wolens, 513 U.S. 219

(1995), which held that express contractual obligations are

not preempted by federal law. (App. 24a-29a.) The Court of

Appeals concluded, therefore, that the mere reference to

Subtitle 9 in the choice-of-law provision could be interpreted

as an incorporation by reference of all of the terms of Subtitle

9 as express-contractual obligations. (App. 38a-42a.)

While Wolens did not involve the question presented in this

case — whether a contractual choice-of-law provision can ever

be read as an election by the contracting parties to override

preemptive federal law - the court below distinguished

another decision of this Court that addressed this precise issue

and definitively answered it in the negative. Fid. Fed. Sav. &

Loan Ass'n v. De la Cuesta, 458 U.S. 141 (1982) (“Fidelity”).

The Court of Appeals erroneously read Fidelity as applying

only to cases where the chosen state law is in direct conflict

with federal law. (App. 35a-36a.) The court similarly

purported to distinguish the subsequent decisions of lower

federal courts that uniformly hold that a choice-of-law

provision cannot be interpreted to allow the application of

preempted state law instead of preemptive federal law. (App.

36a-38a.)

In view of its holding that plaintiffs’ breach of contract

claims based on Subtitle 9 were not preempted, the court

remanded the case to the circuit court to determine, pursuant

to state law canons of contract construction, whether the

Cardholder Agreement obligated Chevy Chase to follow the

notice requirements of Subtitle 9. (App. 42a.)

REASONS FOR GRANTING THE PETITION

The decision below flatly contradicts this Court’s decision

in Fidelity, 458 U.S. 141, and the uniform decisions of the

lower federal courts that a contractual choice-of-law

provision cannot be read to “choose” a designated state’s laws

over preemptive federal law. Those decisions are based on

the fundamental principle, enunciated by this Court in

Fidelity, that pursuant to the Supremacy Clause, Art. VI, cl. 2,

“the Constitution, laws and treaties of the United States are as

much a part of the law of every State as its-own local laws

and Constitution.” 458 U.S. at 157. Thus, while a contractual

choice-of-law provision can designate which state law will

govern the parties’ agreement (since none is superior to the

other), the parties cannot elect to impose a subordinate state

law in favor of superior federal law. Since the Maryland

Court of Appeals’ decision, if left in place, will create both

confusion and a sweeping exception to this heretofore well-

established principle of federal preemption, this Court should

grant review.

It takes little imagination to recognize the destructive effect

the decision below will have on OTS’s effort to establish

consistent regulation of the lending operations of federal

Savings associations. Under the decision below, all it takes

for a concededly preempted “consumer protection” state law

to be applied to a federal lending institution is a choice-of-law

provision that refers to state law. Because choice-of-law

provisions are virtually universal in credit and loan

agreements, all of these state laws will be revived, even

though they were preempted precisely because OTS believed

federal savings institutions should not be “subject to a hodge-

podge of conflicting and overlapping _ state lending

requirements.” 61 Fed. Reg. 50951, 50965. Although the

federal courts have consistently rejected this result, this is the

first decision of a state’s highest court on the subject. As

such, it provides a roadmap for all other state courts to subject

federal savings institutions to inconsistent and onerous state

law regulation through the back door of “contract

interpretation.” Needless to say, states have a vested and

well-documented interest in bringing federal savings

institutions within their regulatory ambit, thereby

significantly undermining the uniform, national regulatory

scheme that OTS has established to promote the safety and

soundness of those institutions.

Nor will this abrogation of well-settled preemption

principles be limited to federal savings or other financial

institutions. Because choice-of-law provisions are common

in all types of commercial contracts, the decision below will

be used to reassert state law through the back door in other

areas of regulation, such as the Employment Retirement

Income Security Act, 29 U.S.C. § 1144(a) (2003) (“ERISA”),

in which the federal government has occupied the field. This

Court should not condone the lower court’s transparent effort

to undermine the careful balance struck by federal regulators

through its impermissible manipulation of “contract

interpretation” principles.

I. THE DECISION BELOW DIRECTLY CONFLICTS

WITH THE UNIFORM DECISIONS OF THIS COURT,

OTHER FEDERAL COURTS AND OTS

Until the court below issued its decision, every court that

has considered this issue, including this Court, held that a

contractual choice-of-law provision cannot be read to

override preemptive federal law. In Fidelity, this Court struck

down a California state law prohibiting due-on-sale clauses in

mortgage agreements on the ground that it was preempted by

federal regulations that permitted such clauses. (A due-on-

sale clause allows the lender to declare the entire balance of a

loan immediately payable when the property securing the loan

is sold, and OTS’s predecessor had authorized federal savings

associations to include such clauses in their loan contracts.)

458 U.S. at 145-46. The plaintiffs in that case argued that,

notwithstanding preemptive federal law, the more restrictive

state law should apply because the governing law provisions

of the loan documents in question provided that they would

be “governed by the law of the jurisdiction in which the

Property is located.” Jd. at 148. Unlike Chevy Chase’s

Cardholder Agreement, which explicitly referred to federal

law as well as Maryland’s Subtitle 9, the governing law

provisions in Fidelity did not even mention federal law.

Nonetheless, this Court held that “the incorporation of state

law does not signify the inapplicability of federal law, for a

‘fundamental principle in our system of complex national

polity’ mandates that ‘the Constitution, laws and treaties of

the United States are as much a part of the law of every State

as its own local laws and Constitution.’” Jd. at 157 (quoting

Hauenstein v. Lynham, 100 U.S. 483, 490 (1880)). The Court

therefore rejected the plaintiffs’ argument that the choice-of-

law provision meant that the parties to the contract agreed to

be bound by the restrictive state law. The Court noted in this

regard that “the ‘law of the jurisdiction’ includes federal as

well as state law.” Jd. at 157 n.12. The Court also pointed

out that the purpose of the contractual reference to locai law

was “not to elevate state law over federal law, but to provide

a uniform choice-of-law provision to be used when interstate

disputes arose regarding the interpretation of a mortgage.” Jd.

In short, both because private parties are obviously

powerless to elevate state law over federal law and because

state law necessarily incorporates federal law, reference to

state law in a choice-of-law provision cannot be interpreted as

a promise to be bound by otherwise preempted state law.

This prudent rule, of course, also avoids presenting lending

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institutions with the Hobson’s Choice of either foregoing

choice-of-law provisions or having a state court subsequently

“interpret” these provisions to expose them to the host of

consumer protection laws that federal regulators have deemed

unduly burdensome or otherwise inconsistent with the

national regulatory scheme. Perhaps most important, the

Fidelity rule avoids the undermining of the distinct regulatory

balance struck by federal regulators that would result from

indirectly exposing federally regulated institutions to a

patchwork of non-uniform and conflicting state laws.

To be sure, federal lending institutions, like all contracting

parties, can directly promise to provide consumers with

benefits in addition to those required by federal law and of the

sort mandated by preempted state law. Thus, the savings

association m Fidelity could have promised that the balance

of the loan would not be due when the securing property was

sold, or Chevy Chase could have promised to provide

cardholders with notice in addition to that required by TILA.

This simply reflects the fact that contracting parties may

proraise anything not prohibited by law and that a court can

enforce such voluntarily undertaken contractual obligations

without disrupting the federal regulatory scheme. This

Court’s decision in American Airlines, Inc. v. Wolens, 513

U.S. 219 (1995) makes this obvious point.

In Wolens, this Court held that the Airline Deregulation Act

(“ADA”), which preempts state laws purporting to regulate

airlines’ rates, routes or services, precluded private claims

against the airline based on state consumer protection laws.

Id. at 226-28. The Court nevertheless allowed claims seeking

to enforce “self imposed undertakings” expressly promised in

the “contract terms” by the airline, because the “terms and

conditions airlines offer and passengers accept are privately-

ordered obligations,” which can be enforced like other

voluntarily offered consideration for a contract. Jd. at 228.

The Court thus distinguished between claims seeking to

enforce express promises contained within the four corners of

the contract, which are not preempted, and claims that involve

“enlargement or enhancement based on state laws or policies

external to the agreement,” which are preempted. Jd. at 233.

Thus, Wolens and Fidelity set forth a quite straightforward

preemption principle. While companies subject to extensive

federal regulation may voluntarily undertake to commit

themselves to actions not required by federal law (or

putatively required by preempted state law), a contractual

choice-of-law provision stating that a particular state’s law

governs cannot be interpreted as a commitment by the

promisor to abide by such preempted state law. This

“distinction between what the State dictates and what the

[promisor] itself undertakes confines courts, in breach-of-

contracts actions, to the parties’ bargain, with no enlargement

or enhancement based on state laws or policies external to the

agreement.” Wolens, 513 U.S. at 233.

The Maryland Court of Appeals — alone among lower

courts — flipped this straightforward rule on its head by

concluding that a choice-of-law provision referencing state

law is equivalent to an express agreement to voluntarily

undertake to do all that is required by the preempted state law.

In this regard, the court below contemptuously stated that the

distinction set forth in Wolens — between contractual

obligations contained directly in the agreement and state laws

external to the agreement — “make[s] absolutely no sense”

because it “fails to distinguish between the preemption issue

and the contract interpretation issue.” (App. 39a.)? But, of

course, it is the Maryland Court of Appeals that mangles both

contract interpretation and preemption doctrine by invoking

the plainly inapposite Wolens rule that applies to specific

promises in the document, rather than the obviously

controlling Fidelity rule that applies to choice-of-law

provisions that reference state law external to the agreement.

The Court of Appeals’ fundamental error is in stark conflict

with the uniform view of the lower federal courts and OTS’s

Own interpretation of the preemptive force of its field

preemption regulation.

? In this regard, the court reasoned that the issue of

whether a choice-of-law provision may incorporate external

State policies is “a question of state law” and thus, apparently,

immune from this Court’s rulings specifying which

contractual language can form the basis for a contractual

challenge to enforce preempted state law. (App. 39a.)

Incredibly, to support this facially erroneous result, the court

relied on a series of cases that in no way suggest that the

requirements of a preempted state law can become private

contractual rights merely because the state law is mentioned

in a choice-of-law provision. Indeed, the cases relied on

expressly hold that, under Wolens, the contractual provisions

were “preempted by the ADA” because they sought to

“impose common law principles and policies on the

agreement between the two parties... .” Breitling USA, Inc.

v. Fed. Express Corp., 45 F. Supp. 2d 179, 183-84 (D. Conn.

1999) (quoted at App. 40a). See also Smith v. Comair, Inc.,

134 F.3d 254, 258 (4th Cir. 1998) (holding contract claim was

“preempted under the ADA” because plaintiff's “contract

claim can only be adjudicated by reference to law and policies

external to the parties’ bargain”) (also quoted at App. 40a).

For example, in Atkinson v. General Electric Credit Corp.,

866 F.2d 396 (11th Cir.), cert. denied, 493 U.S. 815 (1989),

the Eleventh Circuit found that the plaintiff's usury claim

under Georgia law was preempted because the loan contract

at issue complied with the requirements of governing federal

regulations. 866 F.2d at 397, 399. The loan agreement

specified that the governing law was the law of Georgia, with

no reference to federal law. Applying the principle set forth

in Fidelity, however, the court held that the governing law

provision could mean only that Georgia state law would

govern matters not controlled by preemptive federal law.

Atkinson, 866 F.2d. at 398. See also Brown v. Investors

Mortgage Co., 121 F.3d 472, 476 (9th Cir. 1997) (holding

that provision stating that loan “shall be governed by the laws

of the State of Washington” did not waive lender’s federal

preemption defense); Fantastic Fakes, Inc. v. Pickwick Int’l,

Inc., 661 F.2d 479, 483 (Sth Cir. 1981) (holding that

contractual choice-of-law provision “merely designates the

state whose law is to be applied to the extent its use is not

preempted by nor contrary to the policies of’ federal

States Fidelity & Guaranty Co., Civ. A. No. 90-5005, 1992

U.S. Dist. LEXIS 12303, at *10 (E.D. La. Aug. 5, 1992), “the

purpose of a choice-of-law provision in a contract is to ensure

that the law of State A, as opposed to State B, will govern the

contract. The parties may not use a choice-of-law provision

to provide that state law, instead of federal law, will apply to

a federal question.”

All of these cases recognize that where the federal

government has chosen to regulate a particular activity or

field, as it has done with respect to the lending activities of

federal savings banks like Chevy Chase, neither states nor

private parties can elect to ignore such federal law in favor of

preempted state law, because state law _ necessarily

incorporates the preemptive federal scheme.

Thus, in analyzing the effect of a choice-of-law provision in

an arbitration agreement, the Third Circuit differentiated

between what it called “horizontal” choice-of-law — “whether

the laws of State X or State Y supply the relevant rule of

decision” — and “vertical” choice-of-law: “whether the rule of

decision is supplied by the laws of State X or by federal law.”

Roadway Package Sys., Inc. v. Kayser, 257 F.3d 287, 293-94

(3d Cir.), cert. denied, 534 U.S. 1020 (2001). On the latter

choice, the court explained:

Judge-made _choice-of-law. doctrines (and,

accordingly, attempts by contracting parties to

influence their application with choice-of-law

clauses) have no applicability to answering this

question because the relevant rule is supplied by

the Constitution itself: a valid federal law

preempts any state law purporting to regulate the

same issue. See U.S. Const. Art. VI.

Id. at 293-94. In other words, the Supremacy Clause

precludes courts from ruling that parties have elected state

law over preemptive federal law by means of a contractual

choice-of-law provision.

Similarly, in Fantastic Fakes, Inc., 661 F.2d 479, the Fifth

Circuit specifically considered whether a choice-of-law

provision in a copyright license that designated Georgia law

meant that such state law would supersede rights and

obligations created by federal copyright law. See id. at 482-

83. The court held that the choice-of-law provision could not

be read in that fashion because preemptive federal law cannot

be nullified by state law. Jd. at 483. Accordingly, the court

held that the choice-of-law provision could be read only to

mean that Georgia law applied to the extent not otherwise

preempted by federal law. Id. See also Atkinson, 866 F.2d at

398.

OTS itself has reached the same conclusion. In an opinion

letter issued just two weeks after the decision below, OTS

stated that “reference to federal law and state law in a choice-

of-law provision includes the preemptive effect of federal

law” and does not obligate the lender to follow the preempted

New York state law. OTS Opinion Letter P-2003-7 (Oct. 6,

2003). (App. 101la-108a.) Citing Fidelity, OTS explained

that the reference to state law in the choice-of-law provision

“does not nullify or negate the preemptive effect of federal

law.” (App. 106a.) Accordingly, OTS opined that the lender

was not obligated to pay interest on escrow accounts, which is

required by New York law but not by federal law.’

The court below attempted to evade the clear conflict with

Fidelity and the lower federal courts’ interpretation of it by

“distinguishing” these cases on facially erroneous grounds

that merely confirm the court’s fundamental

misunderstanding of the controlling law. The court below

claimed that Fidelity was different than the instant case

because Fidelity involved a “direct conflict between federal

regulations permitting due-on-sale clauses in mortgage

agreements and restrictions placed by the California Supreme

Court on the exercise of the clauses.” (App. 36a.)* But this

> OTS’s interpretation and application of its own field

preemption regulations is, of course, entitled to substantial

deference. See Lyng v. Payne, 476 U.S. 926, 939 (1986);

Udall v. Tallman, 380 U.S. 1, 16 (1965).

* In a similar“vein, the Court of Appeals mistakenly

concluded that there is no conflict between the notice

requirements of TILA and the notice requirements of Subtitle

9 because TILA does not preempt state disclosure laws.

(App. 35a-36a.) The court failed to take into account that

because OTS has occupied the field of lending regulation,

including regulation of disclosures, TILA effectively becomes

the applicable disclosure standard for federal savings

associations and, insofar as they are concerned, preempts state

Footnote continued on next page

b Adee =.

purported distinction is both factually inaccurate and legally

erroneous. First, the conflict here is precisely the same as the

Fidelity conflict. In neither Fidelity nor the instant case did

state law prohibit what federal law required. As this Court

noted, federal law permitted, but did not require, the due-on-

sale clauses allegedly proscribed by state law. Fidelity, 458

U.S. at 155. Here, federal regulations permitted, but did' not

require, Chevy Chase to give notice of amendments to its

cardholders that are prohibited as insufficient under

Maryland’s Subtitle9. In both cases, then, state law is

preempted because it prohibits what federal law allows and

therefore creates an “obstacle to the accomplishment and

execution of the full purposes and objectives” of the federal

government. Fidelity, 458 U.S. at 156 (quoting Hines v.

Davidowitz, 312 U.S. 52, 67 (1941)). See also, Barnett Bank

of Marion County, N.A. v. Nelson, 517 U.S. 25, 31 (1996).

Indeed, this is undisputed, since, as respondents conceded and

the Court of Appeals held, Maryland’s “Subtitle 9 is

preempted” because it imposes “additional requirements [on]

a credit agreement with a federal savings association” and

thus is “inconsistent with OTS’s expressed intention to

‘occupy the entire field of lending regulation for federal

Footnote continued from previous page

disclosure laws. See Bank of Am. v. City & County of San

Francisco, 309 F.3d 551, 565-66 (9th Cir. 2002) (anti-

preemption provision of Electronic Fund Transfer Act does

not preserve state or local laws preempted by the Home

Owners’ Loan Act). OTS made this point explicitly in

promulgating its field preemption regulations. See 61 Fed.

Reg. 50951, 50965-66. Yet the Court of Appeals either

ignored or did not understand this basic fact. (App. 35a-36a.)

ye eee

savings associations.” (App. 21a.)° Thus, as in Fidelity, the

restrictions placed by the Maryland Court of Appeals on the

notice provided by Chevy Chase — through interpretation of a

choice-of-law provision — is in direct conflict with federally

authorized activity. (App. 36a.)

In any event, it is legally irrelevant whether state law is

preempted because it directly conflicts with federal law or

because the federal government has occupied the field. In

either case, the preemptive federal law is incorporated into

state law and thus, under Fidelity, a choice of Maryland law

necessarily incorporates the preemptive federal law. Thus,

the kind or source of federal preemption is utterly immaterial

to the question of whether a choice-of-law provision may

incorporate federal law. Consequently, the lower court’s

interpretation of Fidelity as disapproving only those choice-

of-law provisions where the promisor binds itself to a state

law that affirmatively violates a “conflicting federal law” is

clearly without merit. (App. 35a.) Indeed, so interpreting

Fidelity would nonsensically reduce it to reflect nothing more

than the basic contract law principle that a promise to perform

an illegal act is unenforceable.

° This conclusion simply recognizes the obvious point

that Subtitle 9 is preempted because OTS occupies the entire

field of regulation of the lending operations of federal lenders,

“leaving no room for the States to supplement federal law.”

N.W. Cent. Pipeline Corp. v. State Corp. Comm’n, 489 U.S.

493, 509 (1989). See also Cal. v. ARC Am. Corp., 490 U.S.

93, 100 (1989) (state laws are preempted either when they

conflict with federal law or when the federal government has

occupied the field); La. Pub. Serv. Comm’n v. F.C.C., 476

U.S. 355, 368-69 (1986) (states may not regulate where

Congress or a federal agency acting within the scope of its

delegated authority has occupied the field).

For the same reason, the Court of Appeals’ attempt to

distinguish Jones is unavailing. The decision below stated

that Jones was “inapposite” because it involved ERISA, “a

‘deliberately expansive’ statute designed to make regulation

of employee benefit plans an exclusively federal concern.”

(App. 38a (quoting Jones, 1992 U.S. Dist. LEXIS 12303, at

*7).) Again, this does not factually distinguish the instant

case because OTS, pursuant to broad statutory authorization,

has likewise promulgated “deliberately expansive”

regulations designed to make lending regulation of federal

savings institutions “an exclusively federal concern.” And,

again, there is no legal significance to this “distinction”

because it is conceded that Subtitle 9 is preempted by the

OTS regulation, and Fidelity applies to all preempted laws,

without regard to how they are preempted.

The lower court’s efforts to distinguish other squarely

conflicting cases were similarly meritless. Fantastic Fakes

and Roadway Package System were “distinguished” on the

ground that they did not involve “preemption,” but rather

“contract interpretation.” (App. 37a.) As established above,

however, both cases squarely held that a choice-of-law

provision could not be “interpreted” to mean that a

subordinate state law was elected over a superior federal law

— reasoning that is irreconcilable with the result reached by

the Maryland Court of Appeals.

Moreover, for the reasons already indicated, Wolens

provides no support for the decision below.® Neither Wolens

nor any of the other cases cited by the court below even

suggests that the requirements of a preempted state law can

become private contractual undertakings merely because the.

° The cases applying Wolens have recognized that its

exception to the preemptive effect of federal law “is a narrow

one.” Breitling, 45 F. Supp. 2d at 184.

state law is mentioned in a choice-of-law provision. (App.

29a.)’ Wolens teaches only that, if Chevy Chase had

voluntarily included specific provisions in the Cardholder

Agreement promising to give notice of amendments to the

Agreement in a manner not required by federal law, such

express contractual obligations could be enforced without

regard to preemption. But Chevy Chase did not do so. The

supposed contractual notice requirements that the plaintiffs

seek to impose on Chevy Chase can be found only by looking

outside of the contract to Subtitle 9 and importing that

preempted law’s requirements into the Cardholder Agreement

’ See Volt Info. Scis. v. Bd. of Trs. of Leland Stanford

Junior Univ., 489 U.S. 468 (1989) (Federal Arbitration Act

does not preempt state procedures governing the conduct of

arbitration proceedings, and therefore parties may contract to

apply state rules and procedures to such proceedings); Ass’n

of Int’l Auto. Mfrs. v. Comm’r, Mass. Dep’t of Envtl. Prot.,

208 F.3d 1 (1st Cir. 2000) (Massachusetts emission standards

are preempted by federal Clean Air Act and were not

embodied in any independent contractual obligations);

ProCD, Inc. v. Zeidenberg, 86 F.3d 1447 (7th Cir. 1996)

(express terms and conditions of contract are not preempted

by the federal Copyright Act); Cent. States S.E. & S.W. Areas

Health & Welfare Fund v. Pathology Labs., 71 F.3d 1251 (7th

Cir. 1995), cert. denied, 517 U.S. 1233 (1996) (ERISA did

not preempt bills for medical services that were not covered

by welfare benefit plan). The remaining cases cited by the

lower court hold simply that express contractual warranty

claims are uc! preempted by federal law. See Martin v. Ford

Motor Co., 914 F. Supp. 1449 (S.D. Tex. 1996); Kawamata

Farms, Inc. v. United Agric. Prods., 948 P.2d 1055 (Haw.

1997); Wallace v. Parks Corp., 629 N.Y.S.2d 570 (App. Div.

1995).

by means of the choice-of-law provision. Such an endeavor

is exactly what Wolens (and Fidelity) prohibits. 513 U.S. at

233.

In short, Wolens in no way suggests that the mention of

Subtitle 9 in the “Governing Law” provision of the

Cardholder Agreement could represent an incorporation by

reference of that law’s requirements as private contractual

undertakings. (App. 38a-40a.) In fact, Fidelity and the

uniform line of lower federal authorities subsequent to

Fidelity emphatically state that the Supremacy Clause

prohibits such an interpretation.

In sum, the Maryland Court of Appeals’ decision not only

conflicts directly with Fidelity and the decisions of other

federal courts; it misapplies Wolens in a way that is likely to

create mischief and confusion, particularly among the state

courts, about the proper application of the Supremacy Clause

in contract cases. This Court should grant certiorari in order

to eliminate the conflict and to restore order in a previously

settled area.

Il. THE DECISION BELOW WILL SUBVERT

UNIFORM OTS REGULATION OF FEDERAL

LENDERS AND WILL UNDERMINE PREEMPTION

IN OTHER AREAS IN WHICH THE FEDERAL

GOVERNMENT HAS OCCUPIED THE FIELD

The decision below, although manifestly erroneous, cannot —

be disregarded as the isolated product of a lower federal or

state court. Rather, it is a detailed pronouncement by the

highest court of the State of Maryland, and the first decision

on this issue by the highest court of any state. Choice-of-law

provisions exist in virtually every consumer and commercial

contract. See Roadway Package Sys., 257 F.3d at 292.

Pursuant to the opinion below, any such contract between a

federal lender and its customers could be interpreted pursuant

to state law contract principles to mean that the lender has

obligated itself to comply with otherwise preempted state law.

Thus, unless it is promptly reversed, the decision will serve as

precedent for other states to impose their regulatory and

consumer protection laws on federal lenders, regardless of

OTS’s uniform national regulatory scheme. OTS’s regulatory

scheme would have little vitality in such circumstances.*

The Maryland court’s decision is particularly damaging

because it turns the OTS regulations on their head. Those

regulations contain a “savings clause,” which preserves basic

state “contract and commercial laws” to the extent such laws

“only incidentally affect the lending operations of federal

savings institutions.” 12 C.F.R. § 560.2(c) (emphasis added).

(App. 56a.) The “savings clause” merely reflects that federal

savings institutions are not immune from the basic

infrastructure of generally applicable laws, such as state

uniform commercial codes and tort laws, that underlie

commercial transactions. See 61 Fed. Reg. 50951, 50966. It

obviously does not provide a basis for interpreting a choice-

of-law provision to incorporate concededly preempted state

laws that directly and substantially affect lending operations.

See id. Not only does Fidelity preclude such “contract

interpretation” as a general matter, but OTS, as noted, has

* Nor can the effect of the decision be minimized simply

because the Court of Appeals did not finally decide the

contract interpretation question but rather remanded the case

to the trial court to determine whether the Cardholder

Agreement obligated Chevy Chase to follow the notice

provisions of Subtitle 9. (App. 42a.) The mischief results

from the Court of Appeals’ holding that a choice-of-law

provision can be interpreted to nullify preemptive federal law.

Once that proposition is accepted, state courts can ignore the

Supremacy Clause and apply state law contract principles to

convert preempted state ‘aw into private contractual

obligations. :

expressly confirmed that its regulations do preempt any such

application of choice-of-law provisions to revive preempted

“consumer protection” statutes. Any potential ambiguity in

this regard was eliminated by what OTS stated in

promulgating this provision:

OTS wishes to make clear that the purpose of

paragraph (c) is to preserve the basic infrastructure

of basic state laws that undergird commercial

transactions, not to open the door to state

regulation of lending by federal savings

associations. ... For these purposes, paragraph (c)

is intended to be interpreted narrowly. Any doubt

should be resolved in favor of preemption.

61 Fed. Reg. 50951, 50966-67 (emphases added).

Contrary to that admonition, the court below held that,

under 12 C.F.R. 560.2(c), a state regulation that directly

affects lending operations can be imposed on a federal

Savings association through a contractual choice-of-law

provision. Because the court determined that a reference to a

state’s laws in a choice-of-law provision should be analyzed

under state contract law, pursuant to the exception in 12

C.F.R. § 560.2(c), rather than analyzing whether the

particular state law allegedly being “chosen” is preempted by

OTS under 12 C.F.R § 560.2(a) and (b), the court widened the

exception to swallow the rule. The whole purpose of

contractual choice-of-law provisions is to designate which

state law to apply to a given contract (to the extent not

preempted by federal law). See Roadway Package Sys., 257

F.3d at 293-94; Fantastic Fakes, 661 F.2d at 483. Therefore,

the lower court’s misreading of the OTS regulations serves as

precedent for other state courts hostile to preemptive federal

regulation to eviscerate the OTS’s uniform national

regulatory regime. Federal savings institutions would once

again be subject to “undue regulatory duplication and

burden.” 12 C.F.R. § 560.2(a).

This is not merely a hypothetical concern. The federal

Office of the Comptroller of the Currency (“OCC”) has

recently proposed regulations for national banks that would

preempt state law in a manner similar to the OTS regulations

for federal savings institutions. See Bank Activities &

Operations, Real Estate Lending & Appraisals, 68 Fed. Reg.

46119 (Aug. 5, 2003). In response, the Attorneys General for

all fifty states, as well as the Virgin Islands and the District of |

Columbia, have submitted comments strenuously opposing

the adoption of such regulations and insisting that national

banks should be subject to the states’ consumer protection

laws. (App. 109a-141a.) The decision below provides a

powerful weapon to the states’ Attorneys General and courts

to overcome any attempt by OCC, as well as OTS, to

implement and maintain a uniform national set of regulations

that free federal lenders from duplicative and conflicting state

law requirements.

The potential ramifications of the Maryland decision go

well beyond the field of lending regulation. The extent to

which ERISA preempts state regulation of HMO’s and

medical insurance decisions is a subject of continuing

controversy. See, e.g., Difelice v. Aetna U.S. Healthcare, 346

F.3d 442 (3d Cir. 2003); Arana v. Ochsner Health Plan, 338

F.3d 433 (Sth Cir. 2003); Singh v. Prudential Health Care

Plan, Inc., 335 F.3d 278 (4th Cir.), cert. denied, 03-478, 2003

U.S. LEXIS 9007 (2003). Because contracts in this area also

contain choice-of-law provisions, the decision below will be

used to circumvent ERISA, even on matters in which it is

intended to compietely preempt state laws. More generally,

since states understandably seek the broadest scope for their

regulatory requirements, the decision provides a clear

roadmap for evading the federal government’s occupation of

any field to maintain state regulatory control of any parties

that have contracts with choice-of-law provisions.

To ensure that this does not occur and to maintain the

integrity of OTS’s uniform national regulatory regime, this

a —

eo ee ee a _ —

eee ee

hep ee eg ee eee

er SY BR oR er 2 ge

Court should grant review of the Maryland Court of Appeals’

decision.

CONCLUSION

The petition for a writ of certiorari should be granted.

Respectfully submitted,

MICHAEL A. CARVIN

Counsel of Record

JONES DAY

51 Louisiana Avenue, N.W.

Washington, D.C. 20001

(202) 879-3939

DAVID J. CYNAMON

GERARD M. BABENDREIER

ERICA S. SIMPSON

SHAW PITTMAN LLP

2300 N Street, N.W.

Washington, D.C. 20037 -

(202) 663-8000

Counsel for Petitioners

December 22, 2003

SATE

paencans ore a SELL OW OE PON IS Ther Ie : wera. ‘ ‘ %

aE RL DW PT MS The Ie Pe PR a ag ae ee IPT TERE EES SLE Te eens Gee aoe, See Eee ee ene a

NT a ic aL SMP AT d ME ONAN ADSI WD

APPENDICES

APPENDIX A

832 A.2d 812

Court of Appeals of Maryland.

Dale WELLS, et al.

CHEVY CHASE BANK, FS.B., et al.

No. 41 Sept. Term 2002.

Sept. 23, 2003.

F. Paul Bland, Jr. (Leslie Bruekner of Trial Lawyers

for Public Justice of Washington, DC,; John T. Ward,

Robert B. Kershaw of Ward Kershaw, P.A. of Baltimore;

Michael P. Malakoff of Malakoff, Doyle & Finberg, PC. of

Pittsburgh, PA), on brief, for appellants.

David J. Cynamon (Erica S. Simpson of Shaw Pittman

LLP, on brief), Washington, DC, for appellees.

Argued before BELL, C.J., ELDRIDGE, RAKER,

WILNER, CATHELL, HARRELL and BATTAGLIA, JJ.

BELL, Chief Judge.

In this case, we are asked to resolve whether a credit-

card agreement (the “Cardholder Agreement”), between

Dale Wells, Sharon Goldenberg and John Dovel, the

appellants, and Chevy Chase Bank, FS.B. and U.S.A.

Bank, N.A., the appellees, contractually bound the appel-

lees to comply with provisions of Subtitle 9, which address

the form of the notice required when a Cardholder Agree-

ment is amended, where the Cardholder Agreement in the

section captioned “Governing Law,” references Subtitle 9 of

the Commercial Law Article, Md.Code (1975, 2000

Repl.Vol.), §§ 12-901 -— 12-924 of the Commercial Law

oacabeesaeaiel

Article (“Subtitle 9”) and “applicable federal law.” Al-

though the parties agree that State laws purporting to

regulate the appellees’ lending activities have been pre-

empted by § 5(a) of the Homeowners Loan Act (“HOLA”)

12 U.S.C. 1464(a) and its implementing regulations, see 12

C.F.R. pt. 560, the appellants characterize the reference to

Subtitle 9 in the Cardholder Agreement as a provision in a

contract, which, notwithstanding federal preemption,

defines a particular aspect of the relationship between the

parties, the manner in which notice is to be given when

the Cardholder Agreement is amended. Consequently,

rather than because it was a failure to comply with state

law, the appellants seek to recover damages from the

appellees for breach of their contract with the appellants

to comply with Subtitle 9 when amending the Cardholder

Agreement. The Circuit Court for Baltimore City observed

that it “seems both implausible and inconsistent with

federal preemption to claim that a state regulatory scheme

was agreed to between [the] parties by a mere reference to

Subtitle 9” and, thus, rejected the appellants’ argument.

We do not agree. Accordingly, we shall reverse and remand

the case to the Circuit Court for further proceedings.

8 SDS UNRRT ET OREN

This is not the first occasion on which this case, the

parties to it and the issues presented by it, have been

before this Court. Wells v. Chevy Chase Bank, F:S.B., et al.,

363 Md. 232, 768 A.2d 620 (2001) (“Wells I”) was an appeal

taken from an order compelling arbitration. Preparatory to

addressing the substantive issue that case presented,

whether the appellants agreed to arbitrate, we summa-

rized the factual and procedural history of the case:

—— eee

“Plaintiffs’ first amended complaint alleges that

the Defendants, in a number of aspects, breached

the open end credit agreement (the Cardholder

Agreement) in effect between Plaintiffs, as card-

holders of credit cards issued by Chevy Chase,

and Chevy Chase, as card-issuing credit grantor.

“Prior to January 16, 1996, Chevy Chase had

maintained its home office in Maryland.’ The

Cardholder Agreement provided for an annual

fee, a minimum late charge fee of fifteen dollars,

described the method of computing the finance

charge, and stated that the ‘ANNUAL PER-

CENTAGE RATE will never exceed 24%’ With

respect to amendments the Cardholder Agree-

ment read:

‘We may amend the terms of this Agreement in

accordance with applicable law at any time. Also

we may at any time add new credit services, dis-

continue any credit services, or replace your card

with another card.’

“The Cardholder Agreement also contained a

‘Governing Law’ provision reading:

‘This Agreement is made in Maryland. It is gov-

erned by Subtitle 9 [‘Credit Grantor Revolving

Credit Provisions’] of Title 12 [‘Credit Regula-

tions’] of the Commercial Law Article of the

Maryland Annotated Code and applicable federal

laws.’

' Regulations of the Office of Thrift Supervision, United States

Department of the Treasury, state that “{a]ll operations of a Federal

Savings association shall be subject to direction from the home office.”

12 C.F.R. § 545.91.

Paper ame eae eee Here ese see ees Caper ee ea

“There was no mediation or arbitration provision

in the Cardholder Agreement.

“On or about January 16, 1996, Chevy Chase

moved its home office to Virginia. With the peri-

odic statements mailed in January and February

of 1996 to its cardholders, Chevy Chase included

a notice of change of terms of the Cardholder

Agreement. The notice of change took the form of

a restatement and revision of the Cardholder

Agreement, with the new or revised terms itali-

cized and, with respect to a waiver of jury trial

provision, both italics and all uppercase print

was used. Solely for purposes of this appeal, and

without indicating any opinion on whether the

Cardholder Agreement was effectively amended

or whether the amendments are substantively

valid, we shall call the product of the January

and February mailings the ‘Amended Agree-

ment.’ The Amended Agreement provided that it

was made in Virginia and was ‘subject to and

governed by Virginia law and applicable federal

law and regulations.’ The Amended Agreement

further recited that t]he parties agree that by

engaging in activities with or involving each

other, they are participating in transactions in-

volving interstate commerce.’

“Also contained in the Amended Agreement was

an alternative dispute resolution section which

in relevant part reads:

‘Mediation and Arbitration — Any controversy or

claim (“Claim”) between or among you and us or

our agents, employees and affiliates, including

but not limited to those arising out of or relating

to this Agreement or any related agreements, in-

cluding without limitation any Claim based on or

arising from an alleged tort, shall, at the request

and expense of the claiming party, be submitted

to mediation, using the rules of the American Ar-

bitration Association (“AAA”).’

‘If mediation fails to resolve the Claim within 30

days from the date of engagement, then the

Claim shall be determined by binding arbitra-

tion. (Mediation or Arbitration, as appropriate,

are sometimes referred to below as the ‘Proceed-

ing’.) Arbitration shall be conducted in accor-

dance with the United States Arbitration Act

(Title 9, U.S. Code), notwithstanding any choice

of law provision in this Agreement, and under

the rules of the AAA. Either you or we may, by

summary proceedings (e.g., a plea in abatement

or motion to stay further proceedings), bring an

action in any court having jurisdiction for the

sole purpose of compelling compliance with these

mediation and arbitration provisions.’

“On or about September 30, 1998, First U.S.A.”

purchased the credit card portfolio of Chevy

Chase.

“Plaintiffs instituted the ... action [in Wells I] in

January 1999. They allege that the defendants

breached the Cardholder Agreement by charging

interest in excess of twenty-four percent, by in-

creasing the interest on past balances, by failing

to provide legally required notice of the amend-

ments, by changing the method of calculating the

finance charge without proper notice, and by in-

creasing the late fees and over-limit fees without

proper notice. Plaintiffs also allege violation of the

Maryland Consumer Protection Act, Maryland

* One of the appellee’s in the case sub judice

5 aici carr e

Code (2000 Repl.Vol.), §§ 13-101(d) and 13-303(3)

of the Commercial Law Article (CL).”

Wells I, 363 Md. at 235-37, 768 A.2d at 621-22 (foot-

note omitted). This history applies as well to the case sub

Judice.

_ The Court identified the principal theory of the

appellants’ case as being that the Cardholder Agreement

had not been effectively amended and elucidated the

supporting rationale underlying it:

“Plaintiffs principally rely on CL § 12-912 that

addresses amendment of the agreement govern-

ing a revolving credit plan. In broad strokes, that

section requires, ‘at least 25 days before the ef- |

fective date of the amendment,’ a clear and con-

spicuous written notice, ‘if the amendment has

the effect of increasing the interest, finance

charges, or other fees and charges to be paid by

the borrower ... or altering the manner of their

computation.’ § 12-912(b)(1). The notice must in-

clude ‘[a] clear statement comparing the original

terms and the terms under the amended agree-

ment.’ § 12-912(b)(1)(i). The initial notice is also

to include ‘a statement that a second notice will

be sent in the borrower’s next periodic state-

ment.’ § 12-912(c)(7). Both notices are to be in ten

point type. Id. The notice is to advise of the card-

holder’s optional right to refuse the amendment

- and to describe the manner of refusing. § 12-

912(c)(7)(ii). Where, as here, the plan charges an

annual fee, rejection of the amendment entitles

the cardholder to ‘use the account pursuant to its

original, unamended terms, for ... the duration

of the time for which a fee was paid for use of the

plan.’ § 12-912(c)(5)(i)1.

“In addition, § 12-912(e) provides:

‘If the terms of the agreement governing the

plan, as originally drawn or amended[,] provide,

any amendment may, on or after the date on

which it becomes effective as to a particular bor-

rower, apply to all then outstanding unpaid in-

debtedness in the borrower’s account under the

plan, including any indebtedness which shall

have arisen out of purchases made or loans ob-

tained prior to the effective date of the amend-

ment.’”

Wells I, 363 Md. at 237-38, 768 A.2d at 622-23.

We noted, that in addition to moving to compel arbi-

tration, the appellees also argued in the trial court that

§ 12-912, on which the appellants principally relied, was

preempted by 12 C.F.R. § 560.2(a), a regulation of the

Office of Thrift Supervision (OTS) that undertakes to

“occupyl ] the entire field of lending regulation for federal

savings associations.” Jd. As indicated, the motion to

compel arbitration prevailed in the trial court, prompting

the appellants’ appeal.

In response, the appellees moved to dismiss the

appeal, arguing that the Maryland law permitting an

appeal from an order compelling arbitration was, itself,

preempted by 9 U.S.C. § 16(b)(2) of the Federal Arbitration

Act. This preliminary procedural issue, see Wells I, 363

Md. at 235, 768 A.2d at 621, was premised on the fact that

the arbitration order “‘was entered in the context of a

larger breach of contract dispute, the arbitration issue was

‘embedded’ in appellants’ contract and state statutory

claims, and therefore the Arbitration Order is not an

appealable ‘final decision’ for purposes of FAA § 16.’” Wells

I, 363 Md. at 242, 768 A.2d at 625, quoting the appellees’

brief, which cited In re Pisgah Contractors, 117 F.3d 133,

136 (4th Cir.1997).°

The Court resolved both the preliminary procedural

issue and the substantive issue in favor of the appellants

and, thus, reversed the judgment of the Circuit Court. As

to whether the parties agreed to arbitrate, it reasoned:

“The arbitration clause in the Amended Agree-

ment in this case is susceptible of but one rea-

sonable interpretation. The promise is to mediate

and, if necessary, arbitrate ‘at the request and

expense of the claiming party.’ The Plaintiffs are

the claiming parties, not the Defendants. This

conclusion is neither altered, nor the language

made ambiguous, by the provision in the next fol-

lowing paragraph reading: ‘Either you or we may,

by summary proceedings (e.g., a plea in abate-

ment or motion to stay further proceedings),

bring an action in any court having jurisdiction

* Pursuant to 9 U.S.C. 16(a)(3), “an appeal may be taken from... a

final decision with respect to an arbitration that is subject to this title.”

Despite this apparently clear direction, the appellees relied on a

definition of “final decision” drawn by some federal cases, “one that

resolves an ‘independent’ action, in which the ‘sole issue before the

district court is the arbitrability of the [underlying] dispute.’” Wells v.

Chevy Chase Bank, F:S.B., et al., 363 Md. 232, 241-42, 768 A.2d 620,

625 (2001), quoting the appellees’s brief, which, in turn, quoted In re

Pisgah Contractors, 117 F.3d 133, 136 (4th Cir.1997) (quoting Hum-

phrey v. Prudential Sec., Inc., 4 F.3d 313, 317 (4th Cir.1993)). Thus, the

appellees argue, citing Pisgah and American Cas. Co. v. L-d, Inc., 35

F.3d 133, 136 (4th Cir.1994), “Where arbitration is only ‘one issue

among others for the district court to resolve,’ the arbitration issue is

considered to be ‘embedded,’ and an order compelling arbitration in

such a case is an unappealable interlocutory order within the meaning

of FAA § 16(b), even if the order compels arbitration of all substantive

claims involved in the dispute.”

for the sole purpose of compelling compliance

with these mediation and arbitration provisions.’

Ordering the claiming party to mediate and, ‘if

mediation fails’ to arbitrate, when the claiming

party has not requested mediation does not com-

pel compliance with the mediation and arbitra-

. tion clause provisions; rather, an order so

compelling exceeds those provisions.”

Wells I, 363 Md. at 251-52, 768 A.2d at 630.‘

Therefore, the issue we resolved in Wells I, related

solely to whether “the appellants ... agreed to arbitrate,”

id. at 235, 768 A.2d at 621. This was an issue related to,

but different from the issue the parties principally argued

which was whether the appellees’ attempt to amend the

Cardholder Agreement was effective. Although, the

gravamen of the complaint in Wells I, as it is in the case

* Neither party argued the plain meaning of the contract. We

noted, however, our discretion to consider the argument, even if a new

issue, especially when to do so avoids the need to decide a constitutional

issue, in this case, the preemption of § 12-912. Wells I, 363 Md. at 252,

768 A.2d at 631, citing Baltimore Sun Co. v. Mayor & City Council of

Baltimore, 359 Md. 653, 659, 755 A.2d 1130, 1133-34 (2000); Profes-

sional Staff Nurses Ass’n v. Dimensions Health Corp., 346 Md. 132, 138-

40, 695 A.2d 158, 160-61 (1997).

* As we explained, the appellees defended against the complaint in

Wells I “by moving, pursuant to the [Federal Arbitration Act], to compel

mediation/arbitration in accordance with the Amended Agreement.” Id.

at 238, 768 A.2d at 623. The trial court granted the appellees’ Motion to

Compel Arbitration, whereupon, the appellants noted an appeal from

the trial court’s order compelling arbitration. Responding to the appeal,

the appellees filed a Motion to Dismiss the Appeal arguing “[bJecause

the Arbitration Order here was entered in the context of a larger breach

of contract dispute, the arbitration issue was ‘embedded’ in appellants’

contract and state statutory claim, and therefore the Arbitration Order

is not an appealable ‘final order’ for purposes of the FAA § 16.”

10a

sub judice, centered on that latter question, this Court did

not address it. Indeed, we expressly did not venture an

opinion as to “whether the Cardholder Agreement was

effectively amended or whether the amendments are

substantively valid.” Jd. at 236, 768 A.2d at 622.

On remand, the question of whether arbitration was a

requirement having already been decided was squarely

before the court for resolution. As they had done in the

earlier action, the appellants argued that the Cardholder

Agreement had not been amended effectively and that the

appellees, therefore were in breach of the contractual

terms of the unamended Cardholder Agreement. Once

again, the appellants relied on the Governing Law provi-

sion of the Agreement, emphasizing that provision’s

reference to “Subtitle 9 of Title 12 of the Commercial Law

Article of the Maryland Annotated Code.”

The Circuit Court for Baltimore City, agreeing that

appellants’ claims are preempted by federal law, granted

the appellees’ motion to dismiss. It opined:

“(I]t is both ingenuous, and a trifle disingenuous to,

to admit that the specific state imposed notice re-

strictions are preempted by federal law, while at

the same time contend that the general reference

to Maryland law, as the governing law, specifically

reincorporates into the Cardholder Agreement

these provisions as private agreements. It seems

both implausible and inconsistent with federal pre-

emption to claim that a state regulatory scheme

was agreed to between the parties by the mere ref-

erence to Subtitle 9. This is a great deal beyond the

scope of preserving the traditional infrastructure of

state laws that undergird commercial transactions.

* * *

lla

“This court is convinced that to permit [appel-

lants] to thwart the admitted preemption of the

relevant law solely because of a general reference

to Maryland law, flies in the face of common

sense and contract interpretation. When the par-

ties mentioned Subtitle 9 [of Title 12] of the

Maryland Code and “applicable federal law” as

governing law, they did not incorporate the pro-

tections of a Maryland regulatory scheme into

the agreement. Had they meant to do that, they

could have done so in clear-cut terms. As the

Chaires [v. Chevy Chase Bank, 131 Md.App. 64,

748 A.2d 34 (2000), cert. denied, 359 Md. 334, 753

A.2d 1031 (2000),] case makes clear, they could

not waive federal preemption and could only

have intended that state law apply as ‘governing

law’ should ‘federal law’ not apply. There is no

basis for claiming that they entered into a pri-

vate agreement incorporating a complex and de-

tailed state regulatory scheme.”

The appellants noted an appeal to the Court of Special

Appeals and this Court issued, on its own initiative, a Writ

of Certiorari, Wells v. Chevy Chase, 369 Md. 570, 801 A.2d

1031 (2002), prior to any proceedings in the intermediate

appellate court.

Although, the appellants agree that Subtitle 9 is

preempted by HOLA and its implementing regulations,

they nevertheless insist that the appellees’ agreement to

comply with that subtitle’s relevant notice provisions and

protections may still be enforced. The appellants argue, in

other words, that while Subtitle 9 may not be invoked to

evaluate the adequacy of a credit agreement where there

is no agreement by the parties as to its applicability, when

there is such an agreement, federal preemption cannot

negate the appellees’ promise. They rely on American

12a

Airlines v. Wolens, 513 U.S. 219, 228-29, 115 S.Ct. 817,

823-824, 130 L.Ed.2d 715, 725-726 (1995), which they

submit stands for the proposition that parties to a com-

mercial transaction may elect, as a self-imposed, voluntary

undertaking, to follow otherwise preempted state law and

thus preserve state law claims for breach of contract. The

appellants also find support for their position in 12 C.F.R.

§ 560.2. Section (c) of that regulation exempts, inter alia,

contract and commercial laws “to the extent that they only

incidentally affect the lending operations of Federal

savings associations or are otherwise consistent with the

purposes of paragraph (a) of this section.” Consequently,

they argue that the claims they advance have been ex-

pressly excluded from the preemptive scope of HOLA and

the OTS regulations.

The appellees rejoin that the appellants have misin-

terpreted the governing law provision of the Cardholder

Agreement. Specifically, they characterize the appellants’

argument that the parties agreed to a notice regime

prescribed by an otherwise preempted statute as an

“attempt to impose Subtitle 9’s preempted regulatory

requirements on Chevy Chase through the back door of

the choice-of-law provision in the Cardholder Agreement.”

The appellants’ contract claim would not exist, they argue,

if the requirements of Subtitle 9 are not imposed on Chevy

Chase. Furthermore, they submit that a mere reference in

the ‘governing law” provision of the Cardholder Agreement

is insufficient to transform a preempted state law into a

private contract. With respect to the exception to preemp-

tion recognized in 12 C.F.R. § 560.2(c), they point out that,

in 61 Fed.Reg. 50951, 50966 (1966), the OTS noted the

narrowness of the exception:

13a

“OTS wishes to make clear that the purpose of

paragraph (c) is to preserve the traditional infra-

structure of basic state laws that undergird

commercial transactions, not to open the door to

state regulation of lending by federal savings as-

sociations. ... For these purposes, paragraph (c)

is intended to be interpreted narrowly. Any doubt

should be resolved in favor of preemption.”

The appellees rely on Chaires v. Chevy Chase Bank,

131 Md.App. 64, 748 A.2d 34, cert. denied, 359 Md. 334,

753 A.2d 1031 (2000), which they contend rejected the

precise argument, on virtually identical facts, being made

by the appellants. It also was correctly decided, they

maintain.

The appellants’ reliance on the Supreme Court’s

holding in Wolens is rejected by the appellees as being

“unsupported by an analysis of the holding in that case.”

Contending that, if relevant, it supports their position, the

appellees argue (citing Wolens, 513 U.S. at 233, 115 S.Ct.

at 826-827, 130 L.Ed.2d at 728-729) “[t]he Supreme Court

held in Wolens that claims based on state laws or policies

external to a contract, as opposed to the express terms of

the contract, are preempted by governing federal law. ...

[The appellants’] claims in this case are premised entirely

on the terms of Subtitle 9, all of which are external to the

Cardholder Agreement itself. Thus, those claims are

preempted.”

IT.

The federal preemption doctrine has its origin in the

Supremacy Clause of the United States Constitution. See,

U.S. Const., Art. VI, cl. 2. That Clause provides:

l4a

“This Constitution, and the Laws of the United

States which shall be made in Pursuance thereof;

and all Treaties made, or which shall be made,

under the Authority of the United States, shall

be the supreme Law of the Land; and the Judges

in every State shall be bound thereby, any Thing

in the Constitution or Laws of any State to the

contrary notwithstanding.”

The constitutional mandate imposed on this Court by

the Supremacy Clause requires this Court to declare state

law unenforceable to the extent that federal law expressly

so provides or the circumstances indicate that federal law

supercedes state law.

The rules governing preemption are well settled.’

Preemption may occur in one of three ways. Where Con-

gress has expressly stated its intent to preempt state law,

federal law prevails. Law v. Int'l Union of Operating

Engineers Local No. 37, AFL-CIO, 373 Md. 459, 467, 818

A.2d 1136, 1141 (2003) (citing Harrison v. Schwartz, 319

Md. 360, 364, 572 A.2d 528, 530, cert. denied, 498 U.S.

851, 111 S.Ct. 1438, 112 L.Ed.2d 110 (1990)); see also,

Becker v. Litty, 318 Md. 76, 86, 566 A.2d 1101, 1106 (1989).

Preemption of state laws also may still occur, even where

Congress has not expressly stated its intention in that

regard, if there is evidence of Congress’ intent to “occupy a

* While the law may be settled, the Supreme Court recently

remarked:

“This relatively clear and simple mandate has generated

considerable discussion in cases where we have had to dis-

cern whether Congress has preempted state action in a par-

ticular area.” Lorillard Tobacco Co., v. Reilly, 533 U.S. 525,

540, 121 S.Ct. 2404, 2414, 150 L.Ed.2d 532, 550 (2001).

de ented tt dewllten bee wi 4 oe i

15a

given field,” and the state law falls within that field.

Harrison, 319 Md. at 364, 572 A.2d at 530. Finally, state

law is preempted when “compliance with both federal and

state law is a physical impossibility.” Law, 373 Md. at 466-

67, 818 A.2d at 1141 (2003) (citing Sanders v. State, 57

Md.App. 156, 167, 469 A.2d 476, 482, cert. denied, 299 Md.

656, 474 A.2d 1345 (1984).

Determining whether a state law has been preempted

by federal law is ordinarily a question of “congressional

intent.” Fidelity Federal Savings and Loan Assoc., et. al.,

v. de la Cuesta, et al., 458 U.S. 141, 152, 102 S.Ct. 3014,

3022, 73 L.Ed.2d 664, 674 (1982); see also, Barnett Bank

N.A., v. Nelson, 517 U.S. 25, 30, 116 S.Ct. 1103, 1107, 134

L.Ed.2d 237, 243 (1996) (“[The preemption] question is

basically one of congressional intent”); FMC Corp., v.

Holliday, 498 U.S. 52, 56, 111 S.Ct. 403, 407, 112 L.Ed.2d

356, 363 (1990) (“in determining whether federal law

preempts a state statute, we look to congressional in-

tent.”); Malone v. White Motor Corp., 435 U.S. 497, 504, 98

S.Ct. 1185, 1190, 55 L.Ed.2d 443, 450 (1978) (“The purpose

of Congress is the ultimate touchstone” of preemption

analysis.) (quoting Retail Clerks Int'l Assoc. v. Schermer-

horn, 375 U.S. 96, 103, 84 S.Ct. 219, 223, 11 L.Ed.2d 179,

184 (1963)).

Moreover,

“[flederal regulations have no less pre-emptive

effect than federal statutes. Where Congress has

directed an administrator to exercise his discre-

tion, his judgments are subject to judicial review

only to determine whether he has exceeded his

statutory authority or acted arbitrarily. United

States v. Shimer, 367 U.S. 374, 381-382, 81 S.Ct.

16a

1554, 6 L.Ed.2d 908 (1962). When the adminis-

trator promulgates regulations intended to pre-

empt state law, the court’s inquiry is similarly

limited:

‘If [his] choice represents a reasonable accommo-

dation of conflicting policies that were committed

to the agency’s care by the statute, we should not

disturb it unless it appears from the statute or

its legislative history that the accommodation is

not one that Congress would have sanctioned. Id.

at 383, 81 S.Ct. 1554.’”

de la Cuesta, supra, 458 U.S. at 153-154, 102 S.Ct. at

3022-3023, 73 L.Ed.2d at 675. When reviewing the pre-

emptive effect of federal reguiations on state laws, a court

must not confine its inquiry to whether Congress intended

to preempt state law. Rather, the appropriate inquiry, the

Court instructs, considers whether the administrative

agency intended to preempt state law and whether the

action taken was within the delegation of authority by

Congress. Id., at 154, 102 S.Ct. at 3023, 73 L.Ed.2d at 676.

In this case, we are concerned with Congressional

intent in enacting the HOLA and the intent of the OTS,

the federal agency charged with administering the HOLA,

when it promulgated the regulations to implement that

act. The HOLA was enacted by Congress largely in re-

sponse to the effect the Great Depression had on the

national housing market. See generally, Glendale Federal

Savings & Loan Assoc. v. Fox, 459 F.Supp. 903, 908

(C.D.Cal.1978). Its purposes were:

““To provide emergency relief with respect to

home mortgage indebtedness, to refinance home

mortgages, to extend relief to the owners of

homes occupied by them and who are unable to

Sle dee ale «Cah piace indele

17a

amortize their debt elsewhere, to amend the

Federal Home Loan bank Act, to increase the

market for obligations of the United States and

for other purposes.’ Preamble, 48 Stat. 128

(1933).”

A significant component of HOLA was the creation of

a “system of federal savings and loans associations.” Id. at

909. Rather than subject the operation of federal savings

and loans associations to state regulation, much of which

was “ill-advised” and the object of the remedial legislation,

Congress created the Home Owners’ Loan Corporation, the

predecessor of the Office of Thrift Supervision, id. at 908,

and “gave the Bank Board plenary authority over the

creation and operation of federal associations.” Id. at 909.

See § 5(a), which provides:

“In order to provide local mutual thrift institu-

tions in which people may invest their funds and

in order to provide for the financing of homes, the

Board is authorized, under such rules and regula-

tions as it may prescribe, to provide for the organi-

zation, incorporation, examination, operation, and

regulation of associations to be known ‘Federal

Savings and Loan Associations”, and to issue

charters therefor, giving primary consideration to

the best practices of local mutual thrifts and

home-financing institutions in the United States.

12 U.S.C. § 1464(a).”

Thus,

“Federal savings and loan associations were not

to be operated and regulated by what a particu-

lar state conceived to be the ‘best practices.’

Rather, the Bank Board was delegated by Con-

gress the authority to select from the prevailing

practices in all states what it deemed the best

18a

practices and to prescribe a nationwide system of

operation, supervision, and regulation which

would apply to all federal associations.”

Glendale Federal, 459 F.Supp. at 909.

Comprehensive rules and regulations have been

adopted by OTS and its predecessor agency concerning the

“powers and operations of every Federal savings and loan

association from its cradle to its corporate grave.” de la

Cuesta, supra, 458 U.S. at 145, 102 S.Ct. at 3018, 73

L.Ed.2d at 669, citing California v. Coast Fed. Sav. & Loan

Ass’n, 98 F.Supp. 311, 316 (S.D.Cal.1951). Critically

important to the analysis that governs the dispute sub

judice is, as we have seen, 12 C.F.R. § 560.2 (2002),’

promulgated by the OTS.

" As relevant, 12 C.F.R. § 560.2 (2002) provides:

“(a) Occupation of field. Pursuant to section 4(a) and 5(a)

of the HOLA, 12 U.S.C. 1463(a), 1464(a), OTS is authorized

to promulgate regulations that preempt state laws affecting

the operations of federal savings associations when deemed

appropriate to facilitate the safe and sound operation of fed-

eral savings associations to conduct their operations in ac-

cordance with the best practices of thrift institutions in the

United States, or to further other purposes of the HOLA. To

enhance safety and soundness and to enable federal savings

associations to conduct their operations in accordance best

practices (by efficiently delivering low-cost credit to the pub-

lic free from undue regulatory duplication and burden), OTS

hereby occupies the entire field of lending regulations for

federal savings associations. OTS intends to give federal

savings associations maximum flexibility to exercise their

lending powers in accordance with a uniform federal scheme

of regulation. Accordingly, a federal savings association may

extend credit as authorized under federal law, including this

part, without regard to state laws purporting to regulate or

(Continued on following page)

19a

Section (a) of the regulation makes clear that OTS

intended to occupy the “entire field of lending regulations

for federal savings associations” and that the regulations

it promulgated would preempt state laws, defined as “any

state statute, regulation, ruling, order or judicial decision,”

affecting operation of federal savings associations “when

deemed appropriate to facilitate the safe and sound

operation of federal savings associations to conduct their

operations in accordance with the best practices of thrift

institutions in the United States, or to further other

otherwise affect their credit activities, except to the extent

provided in paragraph (c) of this section or § 560.110 of this

part. For purposes of this section, ‘state law includes any

state statute, regulation, ruling, order or judicial decision.

“(b) Illustrative examples. Except as provided in § 560.110

of this part, the types of state laws preempted by paragraph

(a) of this section include, without limitation, state laws

purporting to impose requirements regarding:

“(4) The terms of credit, including amortization of loans

and the deferral and capitalization of interest and adjust-

ments to the interest rate, balance, payments due, or terms

of maturity of the loan, including the circumstances under

which a loan may be called due and payable upon the pas-

sage of time or a specified event external to the loan;

“9) Disclosure and advertising, including laws requiring

specific statements, information, or other content to be in-

cluded in credit applications forms, credit solicitations, bill-

ing statements, credit contracts, or other credit-related

documents and laws requiring creditors to supply copies of

credit reports to borrowers or applicants;

“(c) State laws that are not preempted. State laws of the

following types are not preempted to the extent that they

only incidentally affect the lending operations of Federal

savings associations or are otherwise consistent with the

purposes of paragraph (a) of this section:

“(1) Contract and commercial law.”

20a

purposes of the HOLA.” The kinds of laws preempted are

illustrated in section (b), including those purporting to

impose requirements regarding the terms of credit and

disclosure and advertising. See 12 C.F.R § 560.2(b)(4) and

12 C.F.R. § 560.2(b)(9). Section (c) exempts from preemp-

tion those state laws that only incidentally affect lending

operations or that are consistent with section (a)’s purpose

of “giv[ing] federal savings associations maximum flexibil-

ity to exercise their lending powers in accordance with a

uniform federal scheme of regulation.”

Subtitle 9, the Maryland statute at issue in the case,

contains the “Credit Grantor Revolving Credit Provisions.”

The term “Revolving credit plan” is defined to

“mean a plan that contemplates the extension of

credit under an account governed by an agree-

ment between the credit grantor and a borrower

under which:

“(1) the credit grantor permits the borrower

and, if the agreement governing the plan per-

mits, persons acting on behalf of or with the au-

thorization from the borrower to make purchases

or obtain loans from time to time;

“(2) The amounts of purchases and loans are

charged to the borrower’s account;

“(3) The borrower is required to pay the credit

grantor the amounts of all purchases and loans

charged to the borrower’s account under [the]

plan but has the privilege of paying amounts due

from time to time as agreed; and

“(4) Interest or finance charges may be charged

and collected by the credit grantor from time to

time on the amounts due under the plan.”

2la

Md.Code (1975, 2000 Repl.Vol.), § 12-901(e) of the

Commercial Law Article. Additional statutory provisions

in Subtitle 9 provide explicit directives for the regulation

of revolving credit plans in the State of Maryland, includ-

ing, without limitation, variation in interest rates, the

amount of fees and charges that may be imposed, and

procedures for amending revolving credit plans. Because

they impact how credit grantors may operate and conduct

their lending activities, which is inconsistent with OTS’s

expressed intention to “occupy the entire field of lending

regulation for federal savings-associations,” any attempt to

enforce these provisions as a matter of State law and as

additional requirements of a credit agreement with a

federal savings association must fail. The appellees appro-

priately conceded that Subtitle 9 qua Subtitle 9 is pre-

empted.°

Notwithstanding the concession, the appellants

pursue the appellees on a breach of contract theory. The

* Under the guidelines for preemption analysis set forth by the

OTS in 1998, a court’s “first step will be to determine whether the type

of law in question is listed in paragraph (b) [of 12 C.F.R. 560.2).” If so,

the analysis will end there; the law is preempted.” (61 Fed.Reg. 50951,

50966 (Sept. 30, 1996)). On the other hand:

“If the law is not covered by paragraph (b), the next ques-

tion is whether the law affects lending: If it does, then, in

accordance with paragraph (a), the presumption arises that

the law is preempted. This presumption can be reversed

only if the law can clearly be shown to fit within the con-

fines of paragraph (c). For these purposes, paragraph (c) is

intended to be interpreted narrowly. Any doubt should be

resolved in favor of preemption.”

Id. at 50996-50997. Looking to 12 C.F.R. 560.2(b)(4) and (b\(9), it is

manifestly obvious, as the trial court concluded, and all the parties

agree, that Subtitle 9 has been preempted.

ae ER,

22a

issue that must be resolved, therefore, is whether the

cause of action, or at least, the basis for the claimed

breach, is preempted.

The cause of action is not preempted. The OTS regula-

tions expressly exempt from preemption “contract and

commercial law ... that... only incidentally affect[s] the

lending operations of Federal savings associations or [is]

otherwise consistent with” the purpose of the regulations.

12 C.F.R. § 560.2(c). That intention was confirmed in 61

Fed.Reg. at 50966: “OTS wants to make clear that it does

not intend to preempt basic state laws such as state

uniform commercial codes and state laws governing real

property, contracts [or] torts... .” See also Derenco, Inc. v.

Benjamin Franklin Federal Savings & Loan Ass’n, 281 Or.

533, 577 P.2d 477, 481-88, cert. denied, 439 U.S. 1051, 99

S.Ct. 733, 58 L.Ed.2d 712 (1978) (applying state common-

law restitutionary principles to loan-related activities of

federal lenders); Fenning v. Glenfed, Inc., 40 Cal.App.4th

1285, 1295-99 (1995), review denied, 1996 Cal. LEXIS

1870 (1996) (suit against a federai thrift for fraud and

unfair business practices not preempted by HOLA nor its

implementing regulations); People ex rel Sepulveda uv.

Highland Federal Savings & Loan, 14 Cal.App.4th 1692,

1708, 19 Cal.Rptr.2d 555, cert. denied, sub nom.

Highland Fed. Sav. & Loan Ass’n v. California, 510

U.S. 928, 114 S.Ct. 338, 126 L.Ed.2d 282 510 U.S. 928,

(1993) (“we have found no provision of HOLA nor any

particular regulation, and none have been cited to us,

which expressly preempt the statutory action by the

People for unfair business practices and the causes of

action by the tenant plaintiffs for fraud, RICO violations,

etc.”); Siegel v. American Savings & Loan Ass’n, 210

Cal.App.3d 953, 258 Cal.Rptr. 746, 748-53 (1989) (suit

23a

based on a variety of state-law claims, including unfair

competition, breach of contract, and breach of agency duty,

permitted against federal lender); Konynenbelt v. Flagstar

Bank, 242 Mich.App. 21, 617 N.W.2d 706, 712-14 (2000)

(HOLA does not preempt common-law tort and contract

claims); Flanagan v. Germania, F-A., 872 F.2d 231, 234

(8th Cir.1989) (claim for tortious interference with con-

tract not preempted by HOLA); Tuxedo Beach Club Corp.

v. City Federal Savings Bank, 749 F.Supp. 635, 648

(D.N.J.1990) (private right of action under state consumer

protection law not preempted by HOLA);. Morse v. Mutual

Federal Savings & Loan of Whitman, 536 F.Supp. 1271,

1280-81 (D.Mass.1982) (“[tJhe fact that federal statutes or

regulations covering some aspects of a regulated area are,

by necessity, complex and detailed, does not imply that

Congress intended to occupy the entire field to the exclu-

sion of state law”).

Nor is a federal lenders’ contractual undertakings

preempted. The OTS regulations indicate that OTS “occu-

pies the entire field of lending regulations for federal

savings associations.” In that regard, they provide that,

consistent with OTS’s intent “to give federal savings

associations maximum flexibility to exercise their lending

powers in accordance with a uniform federal scheme of

regulation,” a federal savings association may extend

credit as authorizea «sr federal law ... without regard

to state laws purporting to regulate or otherwise affect

their credit activities.” Thus, the regulations apply only to

State law, which they define as including “any state

statutory regulation, ruling order or judicial decision.”

§ 560.2(a). See 61 Fed.Reg. 50591 at 10 (“the terms of the...

loan should be a matter of contract between the savings

24a

association and the purchaser”). Wolens, 513 U.S. 219, 115

S.Ct. 817, 130 L.Ed.2d 715, is instructive on this point.

In Wolens, the United States Supreme Court ad-

dressed the preemptive effect of the Airline Deregulation

Act of 1978(ADA), 49 U.S.C.App. § 1305,’ on state-imposed

regulation of the airline industry. There, the plaintiffs,

participants in American Airlines’ frequent flyer program,

AAdvantage, sued the Airline, challenging the retroactive

application to them of modifications the Airline made to

the program in 1988. 513 U.S. at 224-25, 115 S.Ct. at 822,

130 L.Ed.2d at 723 (describing American Airline’s AAdvan-

tage modifications which included the imposition of

capacity controls and blackout dates). Acknowledging and

conceding the right of the Airline to change the terms and

conditions of the program, the plaintiffs there complained

that the application of the program modifications retroac-

tively devalued the credits they had already earned and,

thus, violated the Illinois Consumer Fraud and Deceptive

Business Practices Act and was a breach of the Airline’s

* At issue in that case was the scope of § 1305(a)(1) of the Airline

Deregulation Act, “specifically, its application to a state-court suit,

brought by participants in an airline’s frequent flyer program, challeng-

ing the airline’s retroactive changes in terms and conditions of the

program.” American Airlines v. Wolens, 513 U.S. 219, 221-22, 115 S.Ct.

817, 820, 130 L.Ed.2d 715, 721 (1995). That section, a preemption

provision, provides: “No State ... shall enact or enforce a law, rule,

regulation, standard or other provision having the force and effect of

law relating to rates, routes, or service of any carrier.” Jd. at 222, 115

S.Ct. at 821, 130 L.Ed.2d at 722. Similar to the intent of the HOLA and

12 C.F.R. § 560.2(a) (2002), to avoid “undue regulatory duplication and

[state imposed regulatory] burden,” a key component of Congress’

mission in deregulating domestic air transport was “[t]o ensure that the

States would not undo federal deregulation with regulation of their

own.” Id.

25a

contract with them. Jd. at 225, 115 S.Ct. at 822, 130

L.Ed.2d at 723. The Supreme Court of Illinois denied the

plaintiffs the injunction they sought, holding that to issue

one would be a regulation of the Airline’s current render-

ing of service, but, opining that “only those State laws and

regulatioiis that specifically relate to and have more than

a tangen*ial connection with an airline’s rates, routes or

services” are preempted, allowed their breach of contract

and consumer actions to proceed. Jd at 225, 115 S.Ct. at

822, 1380 L.Ed.2d at 724. Having reconsidered that deci-

sion in light of the intervening decision in Morales v. Trans

World Airlines, Inc., 504 U.S. 374, 112 S.Ct. 2031, 119

L.Ed.2d 157 (1992), as instructed by the United States

Supreme Court, the Illinois court reconfirmed its earlier

decision validating the consumer and contract actions.

The Supreme Court addressed the actions separately.

It held that the consumer action was preempted. Wolens,

513 U.S. at 228, 115 S.Ct. at 824, 1380 L.Ed.2d at 725.

Using the National Association of Attorneys General’s

guidelines, invalidated in Morales, as a standard, the

Court observed:

° Section 1305(a)(1) of the ADA was also at issue in Morales v.

Trans World Airlines, Inc., 504 U.S. 374, 112 S.Ct. 2031, 119 L.Ed.2d

157 (1992). The Court, in that case, construed the phrase, “related to

[airline] rates, routes, or services,” to mean “having a connection with,

or reference to, airline ‘rates, routes, or services [.]’” id. at 384, 112

S.Ct. at 2037, 119 L.Ed.2d at 167. Consequently, the Court held that

Travel Industry Enforcement Guidelines, composed by the National

Association of Attorneys General (NAAG), purporting to govern, inter

alia, the content and format of airline fare advertising was preempted

by the ADA. Id. at 379, 112 S.Ct. at 2034-2035, 119 L.Ed.2d at 164-165.

26a

“the Illinois Consumer Fraud Act serves as a

means to guide and police the marketing prac-

tices of the airlines; the Act does not simply give

effect to bargains offered by the airlines and ac-

cepted by airline customers. In light of the full

text of the preemption clause, and of the ADA’s

purpose to leave largely to the airlines them-

selves, and not at all to States, the selection and

design of marketing mechanisms appropriate to

the furnishing of air transportation services, n4

we conclude that -§ 1305(a)(1) preempts plaintiffs’

claims under the Illinois Consumer Fraud Act.”

Wolens, 513 at 228, 115 S.Ct. at 823-824, 130 L.Ed.2d

at 725. It agreed with the Airline, “Congress could hardly

have intended to allow the States to hobble [competition

for airline passengers] through the application of restric-

tive state laws.” Id. at 228, 115 S.Ct. at 824, 130 L.Ed.2d

at 735-726.

The Court reached the opposite result with respect to

the contract action. It reasoned:

“We do not read the ADA’s preemption clause,

however, to shelter airlines from suits alleging no

violation of state-imposed obligations, but seek-

ing recovery solely for the airline’s alleged breach

of its own, self-imposed undertakings. As persua-

sively argued by the United States, terms and

conditions airlines offer and passengers accept

are privately ordered obligations “and thus do

not amount to a State’s ‘enactment or enforce-

ment [of] any law, rule, regulation, standard, or

other provision having the force and effect of law’

within the meaning of [§] 1305(a)(1).” ... Cf.

Cipollone v. Liggett Group, Inc., 505 U.S. 504,

526, 112 S.Ct. 2608, 120 L.Ed.2d 407 (1992) (plu-

rality opinion) (“[A] common-law remedy for a

27a

contractual commitment voluntarily undertaken

should not be regarded as a ‘requirement .. . im-

posed under State law’ within the meaning of

[Federal Cigarette Labeling and Advertising Act]

§ 5(b).”). A remedy confined to a contract’s terms

simply holds parties to their agreements — in this

instance, to business judgments an airline made

public about its rates and services.”

Id. at 228-29, 115 S.Ct. at 824, 130 L.Ed.2d at 725-726.

(Footnotes omitted). The Court rejected any suggestion

that the preemption provision applied to private contracts.

Noting the use of the word, “enforce,” and suggesting that

preemption might be extended to “even state-court en-

forcement of private contracts,” it concluded that “the

word series ‘law, rule, regulation, standard, or other

provision ... connotes official government-imposed poli-

cies, not the terms of a private contract,” and that “ the

ban on enacting or enforcing any law ‘relating to rates,

routes, or services’ is most sensibly read, in light of the

ADA’ overarching deregulatory purpose, to mean ‘states

may not seek to impose their own public policies or theo-

ries of competition or regulation on the operations of an air

carrier.” Jd. at 229 n. 5, 115 S.Ct. at 824 n. 5, 180 L.Ed.2d

at 726. The Court was not persuaded by the Airline’s

argument that the word, “law” should be read as including

“laws that govern the obligations imposed by contract.” Id.

n. 6.

Rejecting the Airline’s argument that the Department

of Transportation is the only competent monitor of its

undertakings, the Court reiterated the point that preemp-

tion applied to official government-imposed policies,

pointing out that

28a

“The ADA’s preemption clause, § 1305(a)(1), read

together with the FAA’s saving clause, stops

States from imposing their own substantive

standards with respect to rates, routes, or ser-

vices, but not from affording relief to a party who

claims and proves that an airline dishonored a

term the airline itself stipulated. This distinction

between what the State dictates and what the

airline itself undertakes confines courts, in

breach-of-contract actions, to the parties’ bar-

gain, with no enlargement or enhancement based

on state laws or policies external to the agree-

ment.” |

Id. at 232-33, 115 S.Ct. at 826, 130 L.Ed.2d at 728 (foot-

note omitted). Finally, the Court considered the argument

that the Court’s preemption position did not save the

plaintiffs’ claims because those claims “inescapably depend

on state policies that are independent of the parties’

intent,” Id. at 233-34, 115 S.Ct. at 826, 130 L.Ed.2d at 728-

729, and that to reach the merits of the claims, the state

court must first invalidate or limit the airline’s express

reservation to change the program rules contained in the

program contracts. Significantly, it responded:

“American’s argument is unpersuasive, for it as-

sumes the answer to the very contract construc-

tion issue on which plaintiffs’ claims turn: Did

American, by contract, reserve the right to

change the value of already accumulated mileage

credits, or only to change the rules governing

credits earned from and after the date of the

change? See Brief for Respondents 5 (plaintiffs

recognize that American ‘reserved the right to re-

strict, suspend, or otherwise alter aspects of the

Program prospectively,’ but maintain that Ameri-

can ‘never reserved the right to retroactively

diminish the value of the credits previously

29a

minish the value of the credits previously earned

by members’). That question of contract interpre-

tation has not yet had a full airing, and we inti-

mate no view on its resolution.”

Id. at 234, 115 S.Ct. at 826, 130 L.Ed.2d at 729.

For cases holding that undertakings voluntarily

assumed and reflected in private contracts and agree-

ments, see Volt Info. Scis. v. Bd. of Trs., 489 U.S. 468, 479,

109 S.Ct. 1248, 1255-56, 103 L.Ed.2d 488, 500 (1989);

Ass’n of Int'l Auto Mfrs. v. Comm’r, Mass. Dep’t of Envtl.

Prot., 208 F.3d 1, 7-8 (1st Cir.2000); ProCd, Inc. v. Zeiden-

berg, 86 F.3d 1447, 1454-1455 (7th Cir.1996); Cent. States

Health & Welfare Fund v. Pathology Labs., 71 F.3d 1251,

1254-1255 (7th Cir.1995); Martin v. Ford Motor Co., 914

F.Supp. 1449, 1454 (S.D.Tex.1996); Kawamata Farms, Inc.

v. United Agric. Prods., 86 Hawai'i 214, 948 P.2d 1055,

1080 (Haw.1997); Wallace v. Parks Corp., 212 A.D.2d 132,

629 N.Y.S.2d 570, 574 (1995).

Noting that the court stated that “the parties could

not elect to have state law govern over federal law,”

Chaires, 131 Md.App. at 79, 748 A.2d 34 (Footnote Omit-

ted), which they interpret as a resolution of the question

whether a contractual choice-of-law provision is preempted

by federal regulations intended to occupy the field at issue,

the appellees maintain, as we have seen, that Chaires is

dispositive of the issue presented in this case. They assert

further that it is consistent with all of the federal authori-

ties on that point, citing Fidelity Federal Savings and

Loan Assoc., et. al. v. de la Cuesta, et al., 458 U.S. 141,

152-153, 102 S.Ct. 3014, 3022, 73 L.Ed.2d 664, 674-675;

Brown v. Investors Mortgage Co., 121 F.3d 472, 476 (9th

Cir.1997); Atkinson v. Gen. Elec. Credit Corp., 866 F.2d

396, 398 (11th Cir.), cert. denied, 493 U.S. 815, 110 S.Ct.

30a

64, 107 L.Ed.2d 31 (1989); Fantastic Fakes, Inc. v. Pick-

wick Int'l, Inc., 661 F.2d 479, 483 (5th Cir.1981); Roadway

Package Sys., Inc. v. Kayser, 257 F.3d 287, 293-94 (8rd

Cir.), cert. denied, 534 U.S. 1020, 122 S.Ct. 545, 151

L.Ed.2d 423 (2001); Jones v. U.S. Fid. & Guar. Co., No. 90-

5005, 1992 WL 202327, at 4, 1992 U.S. Dist. Lexis 12303,

at *10 (E.D.La.1992). .

The appellees argue that Wolens does not mandate the

result that the appellants urge and, in fact, is really

inapposite. Characterizing the Wolens holding, consistent

with Smith v. Comair, Inc., 1384 F.3d 254, 258 (4th

Cir.1998) (“Wolens recognized that state contract claims

escape preemption only when courts would be confined to

the terms of the parties’ agreement.”); Breitling U.S.A.,

Inc. v. Fed. Express Corp., 45 F.Supp.2d 179, 184

(D.Conn.1999) (“In considering whether a breach of

contract action survives [] preemption, a reviewing court

is restricted to the actual terms of a party's bargain.”),”

" See also Stone v. Continental Airlines, Inc., 905 F.Supp. 823, 826

(D.Haw.1995); Lyn-Lea Travel Corp. v. American Airlines, 283 F.3d 282,

286-90 (5th Cir.2002) (holding plaintiff’s affirmative state law claims,

tortious interference with business relationships, breach of contract,

fraud, and violations of the Texas Deceptive Trade Practices Act,

preempted by the ADA, but holding its affirmative defense of fraudu-

lent inducement not preempted). Explaining the preemption decision,

the court said:

“Lyn-Lea’s claims for affirmative relief have a significant re-

lationship to the economic aspects of the airline industry.

Lyn-Lea asserts that (1) American intentionally interfered

with its business relationships with four customers and an

employee, luring the customers away with discounted fares;

and (2) American acted fraudulently and deceptively while

negotiating the Sabre CRS agreement with Lyn-Lea. The

first claim involves American’s dealings with customers,

(Continued on following page)

3la

cases applying it, as being “that claims based on state law

or policies external to a contract, as opposed to the express

terms of the contract, are preempted by governing federal

law,” they emphasize that the appellants’ claims are

premised wholly on the terms of Subtitle 9, “all of which

are external to the Cardholder Agreement itself.” The

appellees conclude, therefore, that the claims are pre-

empted, even under Wolens.

Chaires is not dispositive of the case sub judice. To be

sure, the choice of law provision at the center of the Court

of Special Appeals’s analysis, although conceded by the

parties to be ambiguous, is quite similar to the provision

under review in this case:

“This loan transaction is governed by Title 12,

Subtitle 10 of the Commercial Law Article of the

Annotated Code of Maryland.”

In addition, the FNMA/FHLMC uniform instruments

(deeds of trust) in that case indicated that “[l]oans are

originated under Title 12, subtitle 10 of the Commercial

Law Article of the Maryland Code.” Relying on this lan-

guage from the loan documents and certain letters written

to the Maryland Commission by Chevy Chase, Chaires,

131 Md.App. at 79, 748 A.2d at 42, the appellants in that

case argued that the appellees in that case “‘elected’

Maryland law and waived federal protection.” Id. Also,

they challenged the trial court’s construction of the choice

while the second relates to enforceability of the Lyn-Lea

contract. In other words, by its first claim, Lyn-Lea is seek-

ing the application of Texas common law in a way that

would regulate American’s pricing policies, commission

structure and reservation practices.” Id. at 287.

32a

of law provision, asserting that, being ambiguous, it

“should be interpreted by the intent of the parties.” Jd. The

intermediate appellate court rejected these arguments.

Relying on the provisions of 12 C.F.R. § 560.2 providing

that the regulations occupied the entire field of lending

and “are to be the governing law for certain activities,

including the charging of fees, by federal institutions,”

Chaires, 131 Md.App. at 79, 748 A.2d 34, that court held:

“[cjontrary to appellants’ argument that appellees elected

Maryland law over federal law, the parties could not elect

to have state law govern over federal law.” Jd. It then

concluded, “upon careful examination,” id. at 83, 748 A.2d

at 44-45, of the documents on which the appellants relied

to support their argument that the appellees “elected

Maryland law over federal law,” id.,

“The cited deed language, as well as the Septem-

ber 6, 1990 letter, simply indicate that appellees

were electing to have the Maryland law govern

the non-regulated portions of the contract. Al-

though appellees could have utilized a more gen-

eral choice of law language in the documents and

letters, appellees did not, as they could not, elect

state law over federal law for all aspects of the

loan contract.”

Id. at 85, 748 A.2d. at 45-46.

Whether the appellants’ claims are preempted and

whether the appellees contracted to comply with Subtitle 9

are separate and different questions, requiring different

analyses. The former is a defense requiring an analysis of

federal law and the determination of the impact the

relationship of the parties has on the ability of that law to

fulfill its intended goal. The latter involves contract

interpretation, discerning the parties’ intent, either actual

33a

or presumed. Contract interpretation, unlike the question

of federal preemption, is a matter of state law. Volt Info.

Scis. v. Bd. of Trs., 489 U.S. 468, 474, 109 S.Ct. 1248,

1253, 103 L.Ed.2d 488, 497 (1989) (“the interpretation of

private contracts is ordinarily a question of state law,

which this Court does not sit to review”).” The appellants

point out, accurately:

* Maryland has long adhered to the objective law of contract

interpretation and construction. Taylor v. NationsBank, 365 Md. 166,

178, 776 A.2d 645, 653 (2001); Wells v. Chevy Chase Bank, F'S.B., 363

Md. 232, 250-51, 768 A.2d 620, 629-31 (2001); Adloo v. H.T. Brown Real

Estate, Inc., 344 Md. 254, 266, 686 A.2d 298, 304 (1996). We explained

this principle in Taylor, supra, as follows:

“A court construing an agreement under this test must first

determine from the language of the agreement itself what a

reasonable person in the position of the parties would have

meant at the time it was effectuated. In addition, when the

language of the contract is plain and unambiguous there is

no room for construction, and a court must presume that the

parties meant what they expressed. In these circumstances,

the true test of what is meant is not what the parties to the

contract intended it to mean, but what a reasonable person

in the position of the parties would have thought it meant.

Consequently, the clear and unambiguous language of an

agreement will not give away [sic] to what the parties

thought that the agreement meant or intended it to mean.”

365 Md. at 178-179, 776 A.2d at 653 (citing General Motors Acceptance

Corp. v. Daniels, 303 Md. 254, 261, 492 A.2d 1306, 1310 (1985).

Moreover, “whether a contract is ambiguous is ordinarily determined by

the court as a question of law.” Calomiris v. Woods, 353 Md. 425, 434,

727 A.2d 358, 362, citing State Highway Admin. v. Bramble, 351 Md.

226, 239, 717 A.2d 943, 949 (1998). See also JBG/Twinbrook Metro Ltd.

v. Wheeler, 346 Md. 601, 625, 697 A.2d 898, 911 (1997) (“The interpreta-

tion of a written contract is ordinarily a question of law for the court.”);

Suburban Hospital v. Dwiggins, 324 Md. 294, 306, 596 A.2d 1069, 1075

(1991), quoting Gordy v. Ocean Park, Inc., 218 Md. 52, 60, 145 A.2d 273,

277 (1958) (“‘As a general rule, the construction or inierpretation of all

(Continued on following page)

34a

“Federal preemption is a defense that argues

that even if plaintiffs’ state law contract claims

are correct — i.e. even if Chevy Chase had prom-

ised to follow “subtitle 9 of the Maryland Com-

mercial Code” with respect to the notice it would

give cardholders of amendments, and even if it

broke that promise — federal law bars those

claims. The contract interpretation issue, by con-

trast, raises the question of whether or not the

language of the contract specifying Subtitle 9 re-

quires Chevy Chase to comply with the credit

card amendment provisions of Subtitle 9.”

Although purporting to decide the issue on preemp-

tion grounds, at bottom, Chaires was decided on contract

interpretation principles. To be sure, the Court of Special

Appeals is correct, where there is a conflict between

federal and state law or where federal regulations preempt

a field, state law may not be elected over federal law in

that field. Here, however, the court acknowledged that 12

C.F.R. § 560.2(c) excludes some state laws from preemp-

tion and that it was reasonable for the parties in that case

to include a choice of law provision. Chaires, 131 Md.App.

at 83, 748 A.2d at 44-45. But rather than addressing the

preemption issue directly, the court analyzed the parties’

agreement, including extraneous documents, and decided

written instruments is [initially] a question of law for the court... .’”);

Rothman v. Silver, 245 Md. 292, 296, 226 A.2d 308, 310 (1967) (“If a

written contract is susceptible of a clear, unambiguous and definite

understanding, ... its construction is for the court to determine.”).

Because the determination of ambiguity is a question of law, not fact,

the determination is subject to a de novo review by appellate courts.

Calomiris, supra, 353 Md. at 434, 727 A.2d at 362.

35a

what the appellees in that case intended:” “it appears that

the appellees were not attempting to opt for Maryland law

over federal law, but were attempting to include a choice of

law provision to govern the areas not preempted by the

federal regulations.”

Moreover, by emphasizing that the parties could not

“elect to have state law govern over federal law,” the court

suggests that there was a conflict between federal and

state law. Where that occurs, preemption in favor of the

federal law necessarily follows. See de la Cuesta, 458 U.S.

at 152, 102 S.Ct. at 3022, 73 L.Ed.2d at 675. In this case,

as the appellants point out, “[t]here is no conflicting

federal law for Chevy Chase to have selected Subtitle 9

‘over.’” See Williams v. First Gov’t Mort. and Investors

Corp., 176 F.3d 497, 500 (1999), in which the D.C. Circuit

held that the federal Truth in Lending Act did not preempt

the District of Columbia Consumer Protection Procedures

Act, noting that

“Nothing in TILA or its legislative history sug-

gests that Congress intended the Act’s disclosure

regime to provide the maximum protection to

which borrowers are entitled nationwide; states

remain free to impose greater protections for bor-

rowers. First Government has identified no way

in which the CPPA would defeat TILA’s purposes,

nor has it suggested how joint applicability of the

two statutes would subject it to conflicting obli-

gations.”

Id. at 500. The appellees’ response, that

* We do not address whether the Court of Specials Appeals applied

the law appropriately.

36a

“TILA and its implementing regulations estab-

lish a uniform federal scheme for disclosure of -

credit terms, applicable to all creditors including

federal savings associations, and OTS has ex-

pressly precluded any state regulation of such

disclosures insofar as federal savings associa-

tions like Chevy Chase are concerned,”

is not persuasive. It relies only on 12 C.F.R. § 560.2(a) and

fails to take account of the exemption in § (c).

The other cases the appellees cite are no more persua-

sive. In de la Cuesta, unlike in this case, there was direct

conflict between federal regulations permitting due-on-

sale clauses in mortgage agreements and restrictions

placed by the California Supreme Court on the exercise of

the clauses, which was resolved in favor of preemption.

458 U.S. at 154-56, 102 S.Ct. at 3023-3024, 73 L.Ed.2d at

675-677. In Brown v. Investors Mortgage Co., supra, 121

F.3d 472, and Atkinson v. Gen. Elec. Credit Corp., supra,

866 F.2d 396, the court rejected the argument that a

general choice of laws provision was effective to avoid the

preemptive effect of Depository Institutions Deregulation

and Monetary Control Act of 1980 (DIDMCA) when the

agreement otherwise indicated the contrary intent. In

Brown, the court commented:

“This language does not address federal law or

the relation between state and federal law. The

fact that the parties chose to apply the laws of

Washington, rather than the laws of another

state, does not mean the parties decided that

federal law should not apply.”

121 F.3d at 476. In Atkinson, to the court, it was “readily

apparent that the parties intended that DIDMCA apply.”

866 F.2d at 398.

————————

37a

Fantastic Fakes, Inc. v. Pickwick Int'l, Inc., supra, 661

F.2d 479, 483 does not directly involve the question of

preemption. Thus, the statement to which the appellees

refer, that “[a] choice of law provision, therefore, merely

designates the state whose law is to be applied to the

extent its use is not preempted by nor contrary to the

policies of the,” 661 F.2d at 483, applicable federal law, has

little relevance to this discussion. It is significant that, in

that case, the court engaged in extensive contract inter-

pretation. Jd. at 483-84. Neither is Roadway Package Sys.,

Inc. v. Kayser, supra, 257 F.3d 287, 293-94 apposite. There,

the court held that contracting parties may opt out of the

FAA’s default vacatur standards and fashion their own.

257 F.3d at 288. It was in this context that the court stated

that the generic choice-of-law clause, indicating that the

agreement in that case “shall be governed by and con-

strued in accordance with the laws of the Commonwealth

of Pennsylvania,” “sheds little, if any, light on the parties’

intent,” and thus rejected Kayser’s argument that it

should be “read as expressing a desire to opt out of the

FAA’s default regime and to incorporate arbitration rules

borrowed from Pennsylvania law.” Jd. It is significant that

the court characterized the issue as simply a matter of

contract construction, id., “not one of choice-of-law or

preemption.” Jd. at 294. It is also significant that the court -

acknowledged that a different result would have been

appropriate had the parties agreed that “any controversy

shall be settled by arbitration in accordance with the

terms of the Pennsylvania Uniform Arbitration Act.” Jd. at

297.

Finally Jones v. U.S. Fid. & Guar. Co., supra, No. 90-

5005, 1992 WL 202327, 1992 U.S. Dist. Lexis 12303 is

inapposite. It involved the Employment Retirement

- |

‘|

eesti

38a

Income Security Act, 29 U.S.C. §1144(a) (ERISA), a

“deliberately expansive” statute designed to make regula-

tion of employee benefit plans an exclusively federal

concern. Hansen v. Continental Ins. Co., 940 F.2d 971, 979

(5th Cir.1991), citing Pilot Life Ins. Co. v. Dedeaux, 481

U.S. 41, 107 S.Ct. 1549, 95 L.Ed.2d 39 (1987). Thus, the

statute expressly preempts state law where it relates to

any ERISA Plan.“ See Degan v. Ford Motor Co., 869 F.2d

889, 893 (5th Cir.1989) (all “common law contract and tort

claims based upon laws of generai application, that is, not

specifically related to insurance or employee severance or

discrimination are preempted by ERISA.”).

Despite its protestations to the contrary,” implicit in

the appellees’ Wolens argument is the notion that, in

contracts where preemption is an issue, even though

federal law may exempt contracts from preemption, all of

the terms of the parties’ contract must be set forth in the

contract, none of the principal provisions may be supplied

by reference. They read the passage from Wolens, prohibit-

ing “enlargement or enhancement [of the parties’ bargain]

* 29 U.S.C. § 1144(a) provides:

“Except as provided in subsection (b) of this section, the

provisions of this title and title IV shall supersede any and

all State laws insofar as they may now or hereafter relate to

any employee benefit plan[.]”

'* The appellees state that they “never contended that the narrow

exception in 12 C.F.R. § 560.2(c) is limited to contractual provisions that

mimic[ ] state law, rather than incorporating state law by reference. On

the other hand, the appellees characterize the Wolens Court as

“distinguish[ing] ... between claims that are based on the express

terms of the contract, which are not preempted and claims that involve

“enlargement or enhancement based on state laws or policies external

to the agreement,” which are preempted.

—————Sk eee

39a

based on state laws or policies external to the agreement”

to mean that, as the appellants put it, “federal law does

not preempt a private party from undertaking obligations

spelled out in a contract, but does preempt a party from

undertaking contractual obligations by reference in a

contract to some body of rules ‘external’ to the contract.”

Not only does such a distinction make absolutely no sense,

it fails to distinguish between the preemption issue and

the contract interpretation issue. The latter is, as we have

seen, a question of state law. Maryland law recognizes that

parties may agree to define their rights and obligations by

reference to documents or rules external to the contract.

Kirby & McGuire, Inc. v. Board of Education, 210 Md. 383,

385, 123 A.2d 606, 608 (1956) (“It is clear, too, that by

virtue of the incorporation by reference of the contract into

the bond and of the other documents into the contract, the

bond and all of the documents are t= be read and con-

strued together, as if set forth in the »vud.”); Ray v. Wil-

liam G. Eurice & Bros., Inc., 201 Md. 115, 128, 93 A.2d

272, 279 (1952) (“The lower court seemingly attached

significance to the fact that the plans and specifications

were not physically fastened to the contract document

which was executed, although it specifically and explicitly

referred to both. In this situation physical attachment has

not the significance so attributed to it. It is settled that

where a writing refers to another document that other

document, or so much of it as is referred to, is to be inter-

preted as part of the writing.”). See Hartford Accident &

Indem. Co. v. Scarlett Harbor Assocs. Ltd. P’ship, 346 Md.

122, 128, 695 A.2d 153 (1997).

The Wolens Court drew no such distinction. And the

courts applying Wolens do not draw such a distinction

either. The distinction that the Court drew was between

40a

what is required, as a matter of law, without any necessity

for a specific agreement to that effect, and what a party

voluntarily agrees to do, without regard to what the law

might require in the absence of that agreement. It is the

law or policy that applies to any agreement made by

parties that is external to, not a part of, the parties’

bargain, not the fact that terms of the agreement are

supplied by reference. The cases applying Wolens, includ-

ing those on which the appellees rely, prove the point.

In Breitling U.S.A., Inc. v. Fed. Express Corp., supra.,

45 FSupp.2d 179, Breitling sought to recover damiages

under an agreement providing that FedEx was liable only

for its own negligence, by interposing the doctrine of

waiver. The court held, “because Breitling seeks to impose

common law principles and policies on the agreement

between the two parties, Breitling’s claims are preempted

by the ADA.” Jd. at 183-84. The common law principle was

not included in the contract, but would ordinarily have

been applicable to the contract as a matter of law. Simi-

larly, in Smith v. Comair, Inc., supra, 134 F.3d 254, a

passenger’s breach of contract action against Comair and

Delta Airlines for refusal to allow him to board his flight

was held to be preempted. The court was persuaded by the

effect of Comair’s federal defenses on the preemption

question, noting “[b]ecause Comair invokes defenses

provided by federal law, Smith’s contract claim can only be

adjudicated by reference to law and policies external to the

parties’ bargain and, therefore, is preempted under the

ADA.” Id. at 258. It also pointed to the fact that the action

implicated the airline’s discretion and/or duty under

federal law, id., and the practical effect on federal law: “If

passengers could challenge airlines’ boarding procedures

under general contract claims alleging failure to transport,

4la

we would allow the fifty states to regulate an area of

unique federal concern — airlines’ boarding practices.” Id.

at 258-59, citing Hodges v. Delta Airlines, Inc., 44 F.3d

334, 339 (5th Cir.1995) (en banc).

To like effect, see, Travel All Over the World, Inc. v.

Kingdom of Saudi Arabia, 73 F.3d 1423 (7th Cir.1996), in

which the court, applying Wolens, permitted a contract

action to proceed, id. at 1432, but also held the claim for

punitive damages to be preempted, opining, “Rather than

merely holding parties to the terms of a bargain, punitive

damages represent an ‘enlargement or enhancement [of

the bargain] based on state laws or policies external to the

agreement.” Id. at 1432 n. 8. Deerskin Trading Post, Inc.

v. United Parcel Service of America, 972 F.Supp. 665, 672-

73 (N.D.Ga.1997) (breach of contract claim not preempted

but prayer for punitive damages and injunctive relief is,

because such relief goes beyond the parties’ agreement);

Richmond Capital Corp. v. Federal Express Corp., 29

F.Supp.2d. 737, 740 (M.D.La.1998); Manning v. Skywest

Airlines, 946 F.Supp. 767, 769 (C.D.Cal.1996) (although

involving a tort action, the analysis is supportive of non-

preemption and indeed non preemption was held).

Nor are the appellees correct “that the requirements

of Subtitle 9 can be imposed on Chevy Chase.” It is true

that Subtitle 9 is a state law, as defined by 12 C.FR.

§ 560.2(a) and, thus, falls within the category of state

imposed obligations that regulation preempts. It is not

true that Subtitle 9 is required by a state statutory regula-

tion, ruling, order or judicial decision to be complied with

in this case. It is in this case only because the agreement

between the parties refer to it and do so in the context of

the notice to be given in the event that the agreement is

amended. Indeed, that agreement was prepared by Chevy

42a

Chase; it was not imposed on Chevy Chase as a matter of

law. :

To be sure, the disputed contract provision has been

included, as we have seen, in the section of the Cardholder

Agreement dealing with “Governing Law,” rather than the

section covering amendments. In addition, it refers both to

Subtitle 9 and “applicable federal law. Contract interpreta-

tion will determine what the agreement means, the intent

of the parties in entering into this agreement, Chevy

Chase’s intent in drafting it and, in particular, the scope

and extent of the parties’ obligations and rights under it.

This will require application of the familiar canons of

construction, to which we earlier referred. Supra at n. 12.

JUDGMENT OF THE CIRCUIT COURT FOR BAL-

TIMORE CITY REVERSED. CASE REMANDED TO

THAT COURT FOR FURTHER PROCEEDINGS CON-

SISTENT WITH THIS OPINION. COSTS TO BE PAID

BY THE APPELLEES.

RAKER, Judge, dissenting.

I respectfully dissent. I would affirm the judgment of

the Circuit Court for Baltimore City on the grounds set

forth by the trial judge, namely, that all of the plaintiff’s

claims are preempted by federal law.

On the question of whether this action is exempt from

federal preemption, the Circuit Court stated the following:

“This court is convinced that to permit [appel-

lants] to thwart the admitted preemption of the

relevant law solely because of a general reference

to Maryland law, flies in the face of common

sense and contract interpretation. When the par-

ties mentioned Subtitle 9 of the Maryland Code

43a

and ‘applicable federal law’ as governing law,

they did not incorporate the protections of a

Maryland regulatory scheme into the agreement.

Had they meant to do that, they could have done

so in clear-cut terms. As the Chaires case makes

clear, they could not waive federal preemption -

and could only have intended that state law ap-

ply as ‘governing law’ should ‘federal law’ not ap-

ply. There is no basis for claiming that they

entered into a private agreement incorporating a

complex and detailed state regulatory scheme.”

The Circuit Court got it right. See Chaires v. Chevy

Chase Bank, 131 Md.App. 64, 748 A.2d 34 (2000); Fidelity

Fed. Sav. & Loan Ass’n v. de la Cuesta, 458 U.S. 141, 102

S.Ct. 3014, 73 L.Ed.2d 664 (1982).

44a

APPENDIX B

IN THE CIRCUIT COURT

FOR BALTIMORE CITY, MARYLAND

Dale Wells, et. al.

)

tae )

Plaintiffs ) Civil No.

v. ) C-99-000202

Chevy Chase Bank, F.S.B.,

et. al. )

Defendants )

ORDER REGARDING DEFENDANTS’

MOTION TO DISMISS

Defendants, Chevy Chase Bank, F.S.B. (“Chevy

Chase”) and First USA Bank, N.A. (“First USA”) move this

Court to dismiss Plaintiffs First Amended Complaint

contending that state laws upon which these claims are

based are preempted by federal law.

BACKGROUND AND FACTS

The Plaintiff held credit cards issued by Chevy Chase,

which subsequently sold its credit card operations to First

USA. These cards were held and used pursuant to contrac-

tual terms set forth in Chevy Chase’s Cardholder Rules

and Regulations and Notice of Cardholders Rights.

(“Cardholder Agreement”)

Plaintiff contends that Subtitle 9 of Title 12 of the

Commercial Law Article of the Maryland Code (“Subtitle

9”) was incorporated into the Cardholder Agreement by its

“governing law” provision. They rely upon the notice

45a

requirements of that subtitle to establish a breech of that

agreement by the Defendants. The Plaintiffs case arises

from the January, 1996 Chevy Chase decision to move its

home office from Maryland to Virginia, and amend its

choice of law provisions in the Cardholder Agreement from a

the law of Maryland to the law of Virginia.

It is alleged that the Defendants’ then replaced the

Maryland Agreement with a new one, which is referred to

as the “Virginia Document.” Under this document, many

of the terms and conditions to which cardholders were

held were no longer subject to limitations alleged to exist

under the original cardholder agreement entered into

when Chevy Chase’s home office was the state of Mary-

land. Specifically, Plaintiffs point to the notice require-

ments of Maryland law, which they allege, were violated

when Defendants changed from the Maryland Agreement

to the Virginia Agreement. Without going in to detail

unnecessarily, it is alleged by the Plaintiffs that they

suffered financial loss as a result of changes in the terms

and conditions of credit, which occurred subsequent to the

Defendants’ move to Virginia. Plaintiffs believe these

changes are illegal because they were made without the

notices required by Maryland law.

All parties agree that Subtitle 9, and the relevant

notice requirements and protections are preempted by the

Homeowners Loan Act (“HOLA”) 12 U.S.C. Section 1463G

and its implementing regulations. Pursuant to the adop-

tion of HOLA, the Federal Office of Thrift Supervision,

(“OTS”) and its predecessor, the Federal Home Loan Bank

Board (“The Bankboard”) “adopted comprehensive rules

and regulations concerning the powers and operations of

every Federal Savings and Loan Association from its

cradle to its corporate grave.” California v. Coast Fed.

iii

46a

Sav. And Loan Ass’n, 98F Sup 311, 316 (S.D. Cal. 1951).

Accordingly, both sides agree that federal law preempts

Maryland law regarding the notice that must be sent to a

cardholder prior to the change of terms and conditions of a

Cardholder Agreement. Regardless, Plaintiffs insist that

the notice provisions of “Subtitle 9” may still be enforced.

They base this claim on the allegation that the protections

of Subtitle 9 were agreed to by the Plaintiffs and Chevy

Chase and/or First USA, as a result of specific contractual

language contained within the Cardholder Agreement in

its “governing law” provision.

On these subjects the agreement states:

“Amendments —- we may amend the terms of

this Agreement in accordance with appli-

cable law at any time. Also, we may at any

time add new credit services, discontinue

any credit services, or replace your card

with another card.”

And with respect to notice, the Cardholder Agreement

merely says:

“Notices — any notice that we want to give

you will be considered given when we ei-

ther deliver it to you personally or place it

in the United States mail, postage prepaid,

at your last address shown on our records.

A notice given to any one of you is consid-

ered to be a notice to all of you.” |

However, Plaintiffs believe that their cause of action

can survive this Motion to Dismiss solely because of an

additional paragraph contained within the Cardholder

Agreement dealing with the issue of “governing law.” On

that subject the agreement specifically states:

47a

Governing Law - This Agreement is made

in Maryland. It is governed by Subtitle 9 of

Title 12 of the Commercial Law Article of

the Maryland Annotated Code and applica-

ble federal laws.

Plaintiffs insist that this reference to Subtitle 9 of

Title 12, as “governing law” incorporates within the

Cardholder Agreement as a “private agreement” all the

protections contained specifically within that Subtitle

including the various requirements concerning notice

which are the bases of this cause of action.

THE ISSUE

Does the reference in the “governing law” provision of

the Cardholder Agreement to “Subtitle 9 ... and applica-

ble federal laws” incorporate Subtitle 9 as a private

agreement between Cardholders and the Defendants

which can be enforced despite the admitted preemption of

Subtitle 9 by federal law?

DECISION

Analysis of this case begins with a discussion of

Chaires v. Chevy Chase Bank, 131 Md. App. 64 (2000), a

Court of Special Appeals decision dealing with the same

issue of federal preemption. In that case, the Plaintiffs

sued Chevy Chase alleging illegal conduct through charg-

ing of loan fees in excess of those permitted under Section

12-401 et. seg. of the Commercial Law Article. Just as in

this case, Chevy Chase moved for Summary Judgment

contending that federal law preempted state law viola-

tions. The Court of Special Appeals affirmed the trial court

48a

decision granting Chevy Chase’s Motion for Summary

Judgment.

In Chaires, Plaintiffs opposed Chevy Chase’s Motion

of Summary Judgment arguing that the parties had

elected that the transactions be controlled pursuant to

Maryland law. This is an argument very similar to the

assertion made by Plaintiffs in the case at bar. In that

case, the Court of Special Appeals rejected this argument

in sweeping terms stating:

*Contrary to appellant’s argument that

appellees elected Maryland law over fed-

eral law, the parties could not elect to have

state law govern over federal law. The Code

of Federal Regulations (“CFR”), 12CFR, Sec.

560.2 expressly provides that the federal

regulations occupy the entire field of fed-

eral lending, and the federal regulations

are to be the governing law for certain ac-

tivities, including the charging of fees by

federal institutions.” 131 Md. App. 64, 79.

In analyzing this issue the Court of Special Appeals

stated:

“However, upon careful examination of

these documents, it appears that the appel-

lees were not attempting to opt-for_Mary-

land law over federal law, but were

attempting to include a choice of law provi-

sions to govern areas not preempted by

federal regulations. The appellees could not .

and were not waiving any federal protec-

tions.” 131 Md. App. 64 at 83.

This analysis by the Court of Special Appeals could be

applied with equal force to this case. This is particularly

sateen

49a

evident since the paragraph that the Plaintiffs primarily

rely upon deals with governing law. Significantly, this

paragraph does not express the intent to incorporate into

the agreement the detailed provisions and protections of

Maryland law, but rather only to choose the applicable

law, should federal law not apply.

In order to escape from the effects of federal preemp-

tion while acknowledging its breadth, the Plaintiffs

contend that by referencing the Maryland law, the Defen-

dants have entered into a voluntary undertaking to adhere

to the specific requirements of Subtitle 9, which otherwise

may not be applied as a result of federal preemption.

To support this contention the Plaintiffs rely heavily

upon the holding of the Supreme Court in American

Airlines Inc. v. Wolens, 513 U.S. 219 (1995). That case

involved claims that state law could properly be applied to

support a lawsuit alleging various violations of “frequent

flyer agreements” between federally regulated airlines and

individual customers. There, the Supreme Court held “we

do not read the Airline Deregulation Act’s preemption

clause; however, to shelter airlines from suits alleging no

violation of state imposed obligations but seeking recovery

solely for the airlines alleged breech of its own, self im-

posed undertakings.” 515 U.S. 219, 228-229 (1995) (em-

phases added). In that case the “undertakings” involved

were agreements with customers regarding the use of

frequent flyer miles.

Plaintiffs contend that Wolens stands for the proposi-

tion that Chevy Chase could, through its contract, voiun-

tarily agree to a variety of restrictions that could be

interpreted as self imposed undertakings. Plaintiffs go on to

argue that the governing law provisions of the Cardholders

50a

Agreement amount to a self-imposed undertaking to

incorporate into the agreement, the requirements of

Maryland Law. These specifically include the various

notice provisions upon which the Plaintiffs chiefly rely in

making their claim in this case.

Plaintiffs reliance on the holding in American Air-

lines Inc. v. Wolens, et al, is unsupported by an analysis

of the holding in that case. There, the Supreme Court held

that preemption did not preclude a lawsuit by customers

attacking the retroactive modification of the terms and

conditions under which Plaintiffs used previously earned

“Frequent Flyer” benefits. The court held that such obliga-

tions were “self-imposed undertakings” and “privately

ordered obligations” that did not “amount to a state’s

enactment or enforcement (of) any law, rule regulation,

standard, or other provision having the force and effect of

law.” 513 U.S. 219, 228 (1995).

The logic of Wolens makes it plain that the Court was

denying preemption based solely upon the fact that the

frequent flyer agreements were not the result of any

state’s “enactment or enforcement [of] any law, rule or

regulation.” 513 U.S. 219, 229 (1995). They were clearly

private undertakings. In contrast here Plaintiffs are

unquestionably trying to enforce state-imposed laws and

regulations. It is patently obvious that this is precisely

what federal preemption was intended to preclude.

Consistent with this analysis is the view of OTS that

12 CFR Section 560.2(c) means that “. . . the purpose of

paragraph (c) is to preserve the traditional infrastructure

of basic state laws that undergird commercial transac-

tions, not to open the door to state regulations of lending by

federal savings associations. ... For these purposes, -

aia

5la

paragraph (c) is intended to be interpreted narrowly. Any

doubt should be resolved in favor of preemption.” 61 Fed.

Reg. 50951, 50966 (1996) (emphasis added).

This Court believes that it is both ingenious, and a

trifle disingenuous, to admit that the specific state im-

posed notice restrictions are preempted by federal law,

while at the same time contend that the general reference

to Maryland law, as the governing law, specifically rein-

corporates into the Cardholder Agreement these provi-

sions as private agreements. It seems both implausible

and inconsistent with federal preemption to claim that a

state regulatory scheme was agreed to between parties by

the mere reference to Subtitle 9. This is a great deal

beyond the scope of preserving the traditional infrastruc-

ture of state laws that undergird commercial transactions.

It is clear that the intent of federal regulations was to

permit federal savings associations to operate under

federal regulations free from regulatory obligations as

imposed by the State. A review of Subtitle 9, of Article 12,

makes it apparent that what is imposed therein is a state

imposed regulatory scheme. A commonsensical review of

those provisions finds them to be totally inconsistent with

the suggestion that they are merely general principals of

commercial law, which would not interfere with a federal

regulatory scheme. Article 12 of the Maryland Code is

described generally as “Credit Regulations” and Subtitle 9

is entitled “Credit Grantor Revolving Credit Provisions.”

They are a detailed regulatory scheme covering in minute

detail the terms of credit and credit agreements.

This Court is convinced that to permit Plaintiffs to

thwart the admitted preemption of the relevant law solely

because of a general reference to Maryland law, flies in the

52a

face of common sense and contract interpretation. When

the parties mentioned Subtitle 9 of the Maryland Code

and “applicable federal law” as governing law, they did not

incorporate the protections of a Maryland regulatory

scheme into the agreement. Had they meant to do that,

they could have done so in clear-cut terms. As the Chaires

case makes clear, they could not waive federal preemption

and could only have intended that state law apply as

“governing law” should “federal law” not apply. Supra. p.

4. There is no basis for claiming that they entered into a

private agreement incorporating a complex and detailed

state regulatory scheme.

Accordingly, this Court finds the state law basis for

Plaintiffs claims are preempted by federal law and grants

Defendant’s Motion to Dismiss.

CONCLUSION

Therefore, for the aforementioned reasons, it is this 14

day of November 2001, ORDERED that the Defendant’s

Motion to Dismiss be GRANTED.

John M. Glynn

Judge

ORIGINAL SIGNATURE ON FILE

AT CLERK’S OFFICE

ce:

F. Paul Bland, Jr., Esq.

John T. Ward, Esq.

Michael P. Malakoff, Esq.

David J. Cynamon, Esq.

53a

APPENDIX C

CONSTITUTION OF THE UNITED STATES

ARTICLE VI - DEBTS VALIDATED - SUPREME

LAW OF LAND - OATH OF OFFICE

Clause 2. Supreme Law of Land

This Constitution, and the Laws of the United States

which shall be made in Pursuance thereof; and all Treaties

made, or which shall be made, under the Authority of the

United States, shall be the supreme Law of the Land; and

the Judges in every State shall be bound thereby, any

Thing in the Constitution or Laws of any State to the

Contrary notwithstanding.

UNITED STATES CODE ANNOTATED

TITLE 12. BANKS AND BANKING

CHAPTER 12 - SAVINGS ASSOCIATIONS

§ 1464. Federal savings associations

(a) In general

In order to provide thrift institutions for the deposit of

funds and for the extension of credit for homes and other

goods and services, the Director is authorized, under such

regulations as the Director may prescribe —

(1) to provide for the organization, incorporation,

examination, operation, and regulation of associations

to be known as Federal savings associations (includ-

ing Federal savings banks), and

(2) to issue charters therefor,

giving primary consideration of the best practices of thrift

institutions in the United States. The lending and invest-

ment powers conferred by this section are intended to

54a

encourage such institutions to provide credit for housing

safely and soundly.

CODE OF FEDERAL REGULATIONS

TITLE 12 - BANKS AND BANKING

CHAPTER V - OFFICE OF THRIFT SUPERVISION

DEPARTMENT OF THE TREASURY

PART 560 - LENDING AND INVESTMENT

Current through November 21, 2003; 68 FR 65827

§ 560.2 Applicability of law.

(a) Occupation of field. Pursuant to sections 4(a) and

5(a) of the HOLA, 12 U.S.C. 1463(a), 1464(a), OTS is

authorized to promulgate regulations that preempt state

laws affecting the operations of federal savings associa-

tions when deemed appropriate to facilitate the safe and

sound operation of federal savings associations, to enable

federal savings associations to conduct their operations in

accordance with the best practices of thrift institutions in

the United States, or to further other purposes of the

HOLA. To enhance safety and soundness and to enable

federal savings associations to conduct their operations in

accordance with best practices (by efficiently delivering

low-cost credit to the public free from undue regulatory

duplication and burden), OTS hereby occupies the entire

field of lending regulation for federal savings associations.

OTS intends to give federal savings associations maximum

flexibility to exercise their lending powers in accordance

with a uniform federal scheme of regulation. Accordingly,

federal savings associations may extend credit as author-

ized under federal law, including this part, without regard

to state laws purporting to regulate or otherwise affect

their credit activities, except to the extent provided in

paragraph (c) of this section or § 560.110 of this part. For

55a

purposes of this section, “state law” includes any state

statute, regulation, ruling, order or judicial decision.

(b) Illustrative examples. Except as provided in

§ 560.110 of this part, the types of state laws preempted by

paragraph (a) of this section include, without limitation,

state laws purporting to impose requirements regarding:

(1) Licensing, registration, filings, or reports by

creditors;

(2) The ability of a creditor to require or obtain

private mortgage insurance, insurance for other collateral,

or other credit enhancements;

(3) Loan-to-value ratios;

(4) The terms of credit, including amortization of

loans and the deferral and capitalization of interest and

adjustments to the interest rate, balance, payments due,

or term to maturity of the ioan, including the circum-

stances under which a loan may be called due and payable

upon the passage of time or a specified event external to

the loan;

(5) Loan-related fees, including without limitation,

initial charges, late charges, prepayment penalties, servic-

ing fees, and overlimit fees;

(6) Escrow accounts, impound accounts, and similar

accounts;

(7) Security property, including leaseholds;

(8) Access to and use of credit reports;

56a

(9) Disclosure and advertising, including laws

requiring specific statements, information, or other con-

tent to be included in credit application forms, credit

solicitations, billing statements, credit contracts, or other

credit-related documents and laws requiring creditors to

supply copies of credit reports to borrowers or applicants;

(10) Processing, origination, servicing, sale or pur-

chase of, or investment or participation in, mortgages;

(11) Disbursements and repayments;

(12) Usury and interest rate ceilings to the extent

provided in 12 U.S.C. 1735f-7a and part 590 of this chap-

ter and 12 U.S.C. 1463(g) and § 560.110 of this part; and

(13) Due-on-sale clauses to the extent provided in 12

U.S.C. 1701j-3 and part 591 of this chapter.

the following types are not preempted to the extent that

they only incidentally affect the lending operations of

Federal savings associations or are otherwise consistent

with the purposes of paragraph (a) of this section:

(1) Contract and commercial law;

(2) Real property law;

(3) Homestead laws specified in 12 U.S.C. 1462a(f);

(4) Tort law;

(5) Criminal law; and

(6) Any other law that OTS, upon review, finds:

(i) Furthers a vital state interest; and

57a

(ii) Either has only an incidental effect on lending

operations or is not otherwise contrary to the purposes

expressed in paragraph (a) of this section.

ANNOTATED CODE OF MARYLAND

COMMERCIAL LAW

TITLE 12. CREDIT REGULATIONS

SUBTITLE 9 - CREDIT GRANTOR REVOLVING

CREDIT PROVISIONS

§ 12-901. Definitions

(a) In this subtitle the following words have the mean-

ings indicated.

(b)(1) “Credit grantor” means any individual, corpora-

tion, business trust, estate, trust, partnership, association,

two or more persons having a joint or common interest, or

any other legal or commercial entity making a loan or

other extension of credit under this subtitle which is

incorporated, chartered, or licensed pursuant to State or

federal law, the lending operations of which are subject to

supervision, examination, and regulation by a State or

federal agency or which is licensed under Title 12, Subtitle

4 of the Financial Institutions Article or is a retailer.

(2) “Credit grantor” includes:

(i) Any bank, trust company, depository institution,

or savings bank having a branch in this State;

(ii) Any subsidiary of a bank holding company, as

defined in the federal Bank Holding Company Act of

1956’ as amended, which is domiciled, doing business,

' 12 U.S.C.A. § 1841 et seq.

58a

and offering a revolving credit plan involving the is-

suance of credit devices in this State; and

(iii) Any person who acquires or obtains the assignment

of a revolving credit plan made under this subtitle.

tion, government or governmental subdivision or agency,

trust, individual, or other entity receiving a loan or other

extension of credit under this subtitle.

(d) “Consumer borrower” means an individual receiving a

loan or other extension of credit under this subtitle for

personal, household, or family purposes or an individual

receiving a commercial loan or other extension of credit for

any commercial purpose not in excess of $75,000, secured

by residential real property.

(e) “Revolving credit plan” or “plan” means a plan that

contemplates the extension of credit under an account

governed by an agreement between a credit grantor and a

borrower under which:

(1) The credit grantor permits the borrower and, if

the agreement governing the plan permits, persons

acting on behalf of or with authorization from the

borrower to make purchases or obtain loans from time

to time;

(2) The amounts of purchases and loans are charged

to the borrower’s account;

(3) The borrower is required to pay the credit gran-

tor the amounts of all purchases and loans charged to

the borrower’s account under the plan but has the

privilege of paying amounts due from time to time as

agreed; and

(4) Interest or finance charges may be charged and

collected by the credit grantor from time to time on

the amounts due under the plan.

59a

(f) “Purchase” means an extension of credit for a pur-

chase of real or personal, tangible or intangible property,

or an extension of credit for services, licenses, taxes,

official fees, fines, private or governmental obligations, or

any other thing of value, including a charitable contribu-

tion.

(g) “Loan” means a cash advance to be paid to or for the

account of the borrower.

(h) “Credit device” means any card, plate, check, draft,

identification code, or other means of identification con-

tempiated by the agreement governing the plan.

(i{1) “Outstanding unpaid indebtedness” means on any

day the total amount of purchases and loans charged to

the borrower’s account under the plan which is out-

standing and unpaid at the end of the day, after adding

the aggregate amount of any new purchases and loans

charged to the account that day and deducting the aggre-

gate amount of any payments and credits applied to the

account that day.

(2) If the agreement governing the plan permits, -

“outstanding unpaid indebtedness” may include the

amount of any interest, finance charges, and additional

charges, including late or delinquency charges, that

have accrued in the account and are unpaid at the end of

the day.

(j) “Nonconsumer borrower” means any borrower other

than a consumer borrower.

(k) “Commercial loan” and “extension of credit for a

commercial purpose” mean an extension of credit made:

(1) Solely to acquire an interest in or to carry on a

business or commercial enterprise; or

60a

(2) To any business or commercial organization.

(1) “Residential real property” means owner-occupied real

property having a dwelling on it designated principally as

a residence with accommodations for not more than four

families.

§ 12-902. Authorized practices

(a) Any credit grantor may, subject to the other provi-

sions of this subtitle:

(1) Offer and extend credit under a revolving credit

plan to a borrower and in that connection charge and

collect the interest, finance charges, and other charges

permitted by this subtitle; ve

(2)i) Take any security as collateral as may be accept-

able to the credit grantor.

(ii) If real property is taken as security, the credit

grantor shall record the entire line of credit when the

credit plan is established.

(b) Without limiting subsection (a) of this section, credit

may be extended under a revolving credit plan by a credit

grantor’s acquisition of obligations arising out of the

honoring of a credit device made available to a borrower

under a plan, whether directly or indirectly by means of

telephone, point of sale terminal, automated teller ma-

chine or other electronic or similar device, or through the

mails, by:

(1) Amerchant;

(2) A bank or other financial institution chartered or

organized under the laws of this or any other state, the

District of Columbia, the United States or any district,

6la

territory, or possession of the United States, or any for-

eign country;

(3) Any other person or entity; or

(4) A government or governmental subdivision or

agency.

§ 12-903. Collecting interest or finance charges

(a)(1) Acredit grantor may charge and collect interest or

finance charges under the plan on the outstanding unpaid

indebtedness in the borrower’s account under the plan at

any daily, weekly, monthly, annual, or other periodic

percentage rate as the agreement governing the plan

provides, if the effective rate of simple interest does not

exceed 24 percent per year. The rate of interest chargeable

on a plan must be expressed in the agreement as a simple

interest rate or rates.

(2) The repayment terms for a plan extended to a

consumer borrower may not include a provision under

. which the consumer borrower may be required to pay a

balloon payment at maturity. However, the adjustment

of payment amounts, due to fluctuations in unpaid bal-

ance or rate of interest, may not be deemed to result in a

balloon payment.

(3) Ifthe plan is secured by a lien on residential real

property, the credit grantor may, in addition to the peri-

odic percentage rate charge authorized under subsection

(a)(1) of this section, charge and collect at the time the

plan is entered into by the borrower points, loan origina-

tion fees, loan discount fees, and similar fees, provided

that:

(i) All such fees, when combined with any finder’s

fee imposed by a mortgage broker under § 12-804 of

—

62a

this title, may not exceed 10 percent of the maxi-

mum amount of credit made available to the bor-

rower under the plan;

(ii) The documents evidencing the plan specifically

enumerate any such fees;

(iii) The borrower agrees in writing to pay. those

fees; and

(iv) The fees are disclosed to the borrower in ac-

cordance with the federal Truth in Lending Act’

(b) With respect to a revolving credit plan of a consumer

borrower, interest may be calculated on an amount not in

excess of the average of the outstanding unpaid indebted-

ness for the applicable billing period, determined by

dividing the total of the amounts of outstanding unpaid

indebtedness for each day in the applicable billing period

by the number of days in the billing period, or on an

amount calculated by another balance computation

method specified in the agreement.

agreement governing the plan is monthly, a billing period

shall be deemed to be monthly if the last day of each

billing period is on the same day of each month or does not

vary by more than 4 days.

(d)(1) Notwithstanding subsections (a) and (b) of this

section:

(i) If the outstanding balance of purchase obliga-

tions under an open-end credit plan is paid in full

* 15 U.S.C.A. § 1601 et seq.

63a

within 25 days after the end of a prior billing pe-

riod, a finance charge or interest may not be im-

posed on a consumer borrower with respect to such

balance for the period from the end of the prior bill-

ing period to the date of the payment in full; and

(ii) If there is no purchase balance at the begin-

ning of a current billing period or if full payment of

an outstanding balance from a prior billing period

is made under subparagraph (i) of this paragraph

within 25 days after the end of the prior billing pe-

riod, a finance charge or interest may not be im-

posed on a consumer borrower with respect to any

purchase obligation added to the account during the

current billing period from the date of purchase to

the end of the current billing period.

(2) Notwithstanding paragraph (1) of this subsection, if

the agreement governing a plan so provides, a finance

charge or interest may be imposed from the date of pur-

chase, if the agreement does not provide any charge

permitted by § 12-905(a) of this subtitle.

§ 12-904. Variable rates

(a) If the agreement governing the revolving credit plan

so provides, the periodic percentage rate of interest or

finance charges under the plan may vary in accordance

with an index or formula that:

(1) Is made readily available to and verifiable by the

borrower;

(2) Is beyond the control of the credit grantor; and

(3) May be within the control of the borrower.

(b) The periodic percentage rate, as varied, may be made

applicable to all outstanding unpaid indebtedness on or

64a

after the effective date of the variation, including any

indebtedness arising out of purchases made or loans

obtained prior to the variation.

exceed the maximum rate permitted pursuant to § 12-

903(a)(1) of this subtitle.

(d) If a formula used under subsection (a)(3) of this

section measures credit risk, the periodic percentage rate

of interest or finance charges:

(1) Shall be lower for any consumer borrower meas-

ured as more credit worthy under the formula; and

(2) If the formula considers delinquency or arrearages,

may not be raised unless a consumer borrower is at least

2 months in arrears in payment.

§ 12-905. Additional fees or charges authorized

(a) With respect to an unsecured open end credit plan,

fees or charges may not be imposed on a consumer bor-

rower in addition to interest or finance charges as permit-

ted by this subtitle, except as follows:

(1) Ifthe plan is offered by a seller of goods or services,

or both, and may be used only for the purchase or lease

of the seller’s goods and services, the seller may charge

one of the following fees:

(i) An annual charge in any amount the agree-

ment provides for the privileges made available to

the consumer borrower under the plan;

(ii) A transaction charge or charges in such

amount or amounts as the agreement may provide

for each separate purchase under the plan; or

65a

(iii) A minimum charge for each scheduled billing

period under the plan during any portion of which

there is an outstanding unpaid indebtedness under

the plan.

(2) If the plan is offered by any other credit grantor,

the credit grantor may impose any or all of the following

fees:

(i) An annual charge in any amount the agree-

ment provides for the privileges made available to

the consumer borrower under the plan;

(ii) A transaction charge or charges in such

amount or amounts as the agreement may provide

for each separate purchase or loan under the plan;

and .

(iii) A minimum charge for each scheduled billing

period under the plan during any portion of which

there is an outstanding unpaid indebtedness under

the plan.

(3) Notwithstanding the provisions of paragraph (2) of

this subsection, if the credit agreement provides, a

credit union may make loans or extend credit to its

members incorporating the same terms and conditions

as a federal credit union is permitted under federal law

and regulations relating to:

(i) An over the limit fe

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