Appendix — Flagg v. Yonkers Savings & Loan Ass'n
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APPENDIX A — OPINION OF THE UNITED STATES
COURT OF APPFALS FOR THE SECOND CIRCUIT
DECIDED JANUARY 21, 2005
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
August Term, 2004
(Argued: November 18, 2004 Decided: January 21, 2005)
Docket No. 04-1948-CV
Hans W. FLacc AND EILEEN S. FLAGG, on behalf of
themselves and all others similarly situated,
Plaintiffs-Appellants,
—V.—-
YONKERS SAVINGS AND LOAN ASSOCIATION, FA,
also known as Yonkers Financial,
Defendant-Appellee.
Before:
Oakes, CALABRESI, and StRAvuB, Circuit Judges.
Appeal from a judgment of the United States District
Court for the Southern District of New York (William C.
Conner, Judge) dismissing the complaint pursuant to Federal
Rule of Civil Procedure 12(b)(6). Affirmed
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Straus, Circuit Judge.
The small universe of facts germane to the present appeal
is set forth in the decision of the District Court, reported at
Flagg v. Yonkers Sav. & Loan Ass'n, 307 F.Supp.2d 565
(S.D.N.Y.2004). We recite them here only briefly.
Plaintiffs-Appellants Hans and Eileen Flagg (the
“Flaggs”) entered into a mortgage agreement with defendant-
appellee Yonkers Savings and Loan Association (“Yonkers”)
on June 12, 1998. Pursuant to that agreement, and consistent
with federal laws and guidelines that regulate Yonkers as a
federal savings association, the Flaggs deposited funds into
an escrow account from which property taxes, insurance, and
other fees associated with the mortgaged property were to
be paid. In relation to these escrow funds, the mortgage
agreement provided that “Lender will not be required to pay
me any interest or earnings on the Funds unless either (i)
Lender and I agree in writing at the time I sign this Security
Instrument, that Lender will pay interest on the Funds; or
(ii) the law requires Lender to pay interest on the Funds.”
The principal issue on appeal is whether “the law” so
required.
Until May 2002 Yonkers did not pay interest to the Flaggs
on funds held in the escrow account. In May 2002 Yonkers
merged with Atlantic Bank of New York (“Atlantic”),
a wholly-owned subsidiary of the National Bank of Greece.
After this merger Atlantic began to pay interest on the funds
held in the Flaggs’ mortgage escrow account. The Flaggs
subsequently sued Yonkers based on New York statutes,
New York common law, and the Fifth Amendment to the
erie tt a as
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United States Constitution, seeking declaratory judgment and
compensation for past interest that they allege is owed to
them under New York law for the pre-merger period. Yonkers
moved for dismissal for failure to state a claim upon which
relief could be granted. The Flaggs cross-moved for summary
judgment. By its March 8, 2004, decision, the District Court
granted Yonkers’s motion and denied the Flaggs’ motion as
moot based on its determination that federal law and
regulations had preempted the field of mortgage escrow
accounts held by federal savings associations and its finding
that federal law did not mandate payment of interest on such
accounts. The Flaggs now appeal. We affirm.
DISCUSSION
The Flaggs raise three issues on appeal. First, they
maintain that New York State law required that Yonkers pay
them interest on their mortgage escrow account. Second, they
contend that the contract governing their mortgage escrow
account incorporated New York law, thereby obligating
Yonkers to pay interest on the account under the contract.
Third, the Flaggs assert that the District Court erred in
dismissing their Fifth Amendment claim. We do not find
merit in any of these arguments.
I. Federal Law Preempts the Field of Mortgage Escrow
Accounts Held by Federal Savings Associations.
New York law requires “mortgage investing institutions”
to pay interest on mortgage escrow accounts on a quarterly
basis at a rate of “not less than two percentum per year based
on the average of the sums so paid for the average length of
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Appendix A
time on deposit or a rate prescribed by the banking board
pursuant to section fourteen-b of the banking law and
pursuant to the terms and conditions set forth in that section
whichever is higher.” N.Y. Gen. Oblig. Law § 5-601;
see also N.Y. Banking L. § 14-b (describing the power of the
New York Banking Board to prescribe minimum rates of
interest to be paid on residential mortgage escrow accounts).
Looking at Yonkers’s failure to pay interest on their mortgage
escrow account through the lens of these statutory provisions
the Flaggs cannot be blamed for thinking that they were
denied something due to them. No matter how intense their
outrage, however, they cannot claim that they suffered any
injustice because preemptive exercise of federal authority
by the Office of Thrift Supervision freed Yonkers, as a federal
Savings association, from any obligation to pay interest on
mortgage escrow accounts under New York law.
Pursuant to the authority granted to it by the Home
Owners’ Loan Act, 12 U.S.C. § 1461 et seg. (“HOLA”), the
Office of Thrift Supervision (“OTS”), which operates under
the aegis of the Department of Treasury to provide for,
inter alia, the “examination, safe and sound operation, and
regulation of savings associations,” 12 U.S.C. § 1463(a)(1),
has “authority [that] is preemptive of any state law purporting
to address the subject of the operations of a Federal savings
association.” 12 C.F.R. § 545.2. Seized of this authority, the
OTS has “occupie[d] the entire field of lending regulation
for federal savings associations.” 12 C.F.R. § 560.2(a).
Among these are “laws purporting to impose requirements
regarding ... [e]scrow accounts.” 12 C.F.R. § 560.2(b).
In exercise of this asserted authority, the OTS has removed
all legal obligations that federal savings associations may
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Appendix A
have to pay interest on mortgage escrow accounts, “allowing
such matters to be governed by the loan contract.” 48
Fed.Reg. 23032.01, 23039 (May 23, 1983). Based on these
statutory and regulatory sections, the District Court found
that OTS regulations preempted state law in areas affecting
federal savings and loan institutions. Flagg, 307 F.Supp.2d
at 574-75.
On appeal the Flaggs do not contest the District Court’s
determination that the OTS has preempted state law with
respect to the provision of interest on mortgage escrow
accounts; rather, the Flaggs contend that this OTS action
exceeds the authority granted to it by HOLA and is an
arbitrary and unreasonable exercise of its regulatory power.
We do not agree. Consistent with the District Court, we find
that the exercise of authority here is neither arbitrary nor
unreasonable and is within the broad grant of power to the
OTS contained in HOLA.
“Federal regulations have no less pre-emptive effect than
federal statutes. Where Congress has directed an
administrator to exercise his discretion, his judgments are
subject to judicial review only to determine whether he has
exceeded his statutory authority or acted arbitrarily. When
the administrator promulgates regulations intended to pre-
empt state law, the court’s inquiry is similarly limited.” Fid.
Fed. Sav. & Loan Ass’n. v. de la Cuesta, 458 U.S. 141, 153-
154 (1982) (internal citations omitted); see also La. Pub.
Serv. Comm’n. v. F.C.C., 476 U.S. 355, 374 (1986) (“[A]
federal agency may pre-empt state law only when and if it is
acting within the scope of its congressionally delegated
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authority.... [T]he best way of determining whether
Congress intended the regulations of an administrative
agency to displace state law is to examine the nature and
scope of the authority granted by Congress to the agency.”
(internal citations omitted)).
This evaluation is usually informed by a presumption in
favor of the authority of state law in areas of activity
traditionally 2ilocated to the supervisory organs of the various
states. See Rice v. Santa Fe Elevator Corp., 331 U.S. 218,
230 (1947). The presumption against federal preemption
disappears, however, in fields of regulation that have been
substantially occupied by federal authority for an extended
period of time. See United States v. Locke, 529 U.S. 89, 108
(2000). Regulation of federally chartered banks is one such
area. See Barnett Bank, N.A. v. Nelson, 517 U.S. 25, 32-33
(1996) (citing cases dating to 1877 that document the long
history of federal regulations’ preempting of state laws that
purport to govern federally chartered banks); Bank of Am. v.
City and County of San Francisco, 309 F.3d 551, 558 (9th
Cir.2002) (tracing the history of federal preemption of state
laws that purport to govern federally chartered banks to
McCulloch v. Maryland, 17 U.S. 316 (1819)).
HOLA, in pertinent part, provides that “[t]he Director
[of the OTS] may issue such regulations as the Director
determines to be appropriate to carry out the responsibilities
of the Director or the Office,” 12 U.S.C. § 1463(a)(2)
(emphasis added), and that “the Director is authorized, under
such regulations as the Director may prescribe, to provide
for the organization, incorporation, examination, operation,
and regulation of associations to be known as Federal
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savings associations.” Id. § 1464(a) (emphasis added). This
is an extremely broad grant of power that provides ample
authority for the Director’s efforts to enforce consistent,
nationwide regulations affecting lending practices, by
preempting, inter alia, “state laws purporting to impose
requirements regarding . . . [e]scrow accounts.” 12 C.F.R.
§ 560.2(b).
While the propriety of this particular use of regulative
power by the OTS appears to present a novel question in this
Circuit, there is ample analogous precedent to demonstrate
that this exercise of preemption is within reason and HOLA’s
grant of authority. In de la Cuesta, for example, the Supreme
Court was asked to consider the OTS’s authority to
promulgate and enforce 12 C.F.R. § 545.8, which regulates
the inclusion of “due-on-sale clauses” in mortgage
agreements. In that regulatory provision, the Federal Home
Loan Bank Board, the predecessor to the OTS, exhibits a
clear intention to pre-empt state regulations dealing with due-
on-sale clauses incorporated into mortgage agreements. 458
US. at 154, 158. Relying on the legislative history of HOLA
and the language of the statute, the Supreme Court held that
preemption of mortgage contracts was a reasonable exercise
of the broad authority granted to the regulator by authority
of HOLA. Jd. at 159-67. Similarly, in Bank of America v.
City and County of San Francisco, the Ninth Circuit Court
of Appeals was asked to review the authority of the OTS to
establish and enforce regulations affecting ATM charges.
309 F.3d at 558. Relying in part on 12 C.F.R. § 560.2, the
court held that HOLA and OTS regulations have preempted
the field of law affecting ATM transactions with federal
savings associations and, therefore, have preempted
conflicting local rules. Jd. at 560-61.
= Ae ge mere RE
8a
Appendix A
We cannot discern a critical difference between these
cases and the one at bar. HOLA gives a broad grant of
authority to the OTS. We see no basis for concluding that
the use of that authority here is outside the authority of the
OTS.
We also find that the OTS’s use of its authority in this
case is not arbitrary. We recognize the potential interest that
the OTS has in providing for consistency across the field of
mortgage accounts offered by federal savings associations.
See 12 C.F.R. § 560.2 (stating desire to “give federal savings
associations maximum flexibility to exercise their lending
powers in accordance with a uniform federal scheme of
regulation” as a motive for exercise of OTS preemptive
authority over, inter alia, “[e]scrow accounts’). The choice
made here, to relieve institutions of any legal duty to pay
interest on escrow funds while preserving the possibility that
individual institutions and their clients may negotiate
provision of some interest, provides a consistent nationwide
playing field while giving individual institutions a level of
flexibility. This achievement alone demonstrates that
preemption in this field is sensible enough to dodge
accusations of arbitrariness in the abstract.
More concretely, the Flaggs claim that the OTS
regulation releasing federal savings associations from
responsibility to pay interest on escrow funds is unreasonable
and without authority because it is inconsistent with
provisions of the Real Estate Settlement Procedures Act
(“RESPA”), 12 U.S.C. § 2601 et seq. The purpose of RESPA
is to address “certain abusive practices that have developed”
in relation to the disclosure of information regarding the
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“nature and costs of the [real estate] settlement process.”
12 U.S.C. § 2601. RESPA generally requires that lenders
disburse escrow funds in an appropriate and timely manner
and that they provide regular reporting of such
disbursements.' Authority to establish rules and regulations
governing RESPA is assigned to the Secretary of Housing
and Urban Development. See 12 U.S.C. §§ 2602(1)(B)(6),
2617.
Most germane to the present case is RESPA’s interest in
effecting a “reduction in the amounts home buyers are
required to place in escrow accounts established to insure
the payment of real estate taxes and insurance.” 12 U.S.C.
§ 2601(b)(3). Specifically, 12 U.S.C. § 2609(a) limits the
amount of money that a borrower can be required to deposit
in an escrow account established for the purpose of paying
taxes, fees and insurance. The Flaggs argue that this provision
modifies or supercedes HOLA because the New York
requirement that lenders pay interest on escrow funds reduces
the overall amount of money that a borrower needs to
contribute in order to pay taxes, fees, and insurance
premiums. Given this, the Flaggs contend that rules
governing provision of interest on escrow accounts must give
way to the authority of both RESPA and the Department of
Housing and Urban Development, though other aspects of
1. That the OTS understands its obligations to issue regulations
consistent with RESPA is evident by its disclosure rules, which
specifically reference RESPA. See 48 Fed.Reg. 23032. That Yonkers
attempted to abide by these legislative rules is evidenced in the
mortgage agreement, which discusses legal limits on amounts that
Yonkers may require the Flaggs to deposit in escrow and describes
Yonkers’s duties of reporting and disclosure.
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Appendix A
federal savings associations’ activities will remain under the
authority of HOLA and the OTS. Given that New York law
in this case provides added consumer benefits, the Flaggs
conclude that the OTS would exceed its RESPA limited
authority were it to preempt New York law in this
circumstance. While creative, we do not find this argument
persuasive for two principal reasons.
First, RESPA and HOLA are not coextensive. RESPA
applies to all mortgage loans that are “federally related.”
12 U.S.C. § 2602. HOLA applies to federal savings
associations. 12 U.S.C. § 1463. By design, then, RESPA
regulates a narrow field of financial transactions engaged in
by a broad group of financial institutions, cf. 12 U.S.C.
§ 2606 (describing exempted transactions), while HOLA
regulates a specific breed of financial institutions in respect
of all of their transactions and activities, see, e.g., Fid. Fed.
Sav. & Loan Ass’n. v. de la Cuesta, 458 U.S. 141 (1982)
(due-on-sale clauses); Bank of Am. v. City and County of San
Francisco, 309 F.3d 551 (9th Cir.2002) (ATM charges).
Given that HOLA deals with institutions and RESPA
deals with transactions, it simply does not make sense to
read RESPA as superceding HOLA and preventing the OTS
from asserting regulatory authority over the policies and
practices of federal savings associations with respect to
escrow accounts. The more sensible reading of these statutes
is that federal savings associations, like all grantors of
mortgage loans, must abide by RESPA as interpreted by the
Secretary of Housing and Urban Development. The OTS
cannot, therefore, promulgate rules and regulations that are
contrary to RESPA. That this is so does not, however, exclude
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Appendix A
the OTS from preempting the field of rules governing federal
Savings associations and establishing nationwide regulations
governing these institutions that are consistent with federal
law, including RESPA.?
Second, the Flaggs’ reliance on RESPA’s statement of
purpose found at 12 U.S.C. § 2601(b)(3) is misplaced. RESPA
is meant to regulate the amount of money that a borrower is
required to deposit in escrow by tying that amount to the
costs the escrow fund is meant to secure. RESPA is not,
however, designed to reduce the dollar costs of taxes, fees,
and insurance premiums. RESPA can, and does, accomplish
its task by setting rules on required escrow contributions.
That this system may, in the end, be more expensive to
borrowers than, say, keeping their money in interest-bearing
accounts to pay their own bills, does not violate RESPA’s
Stated goal of “reduc[ing] the amounts home buyers
are required to place in escrow accounts.” 12 U.S.C.
§ 2601(b)(3).
The Flaggs express some concerns that mortgage
contracts are prepared by lending institutions and constitute
contracts of adhesion. However, this particular contract
specifically provides an opportunity for mortgagees of
Yonkers to negotiate, by separate agreement, payment of
interest on escrow accounts. It cannot, therefore, be a contract
of adhesion. Moreover, the Flaggs do not appear to have
attempted to negotiate interest terms on their escrow account.
2. We have considered the Flaggs’ argument that 12 U.S.C.
§ 2616 bars preemption. For those reasons stated that deal with the
general relationship between RESPA and HOLA, we find this
argument to be without merit.
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Appendix A
Having failed to take advantage of the invitation extended
in the contract, the Flaggs’ argument that the contract, by
virtue of disparities in power between the parties, was
effectively a contract of adhesion fails to persuade. Their
argument is only made less persuasive when one considers
that Atlantic, which currently is host to the Flaggs’ account,
does pay interest on mortgage escrow accounts. This fact
suggests that the mortgage-lender marketplace is inhabited
by lenders who do pay interest on mortgage escrow accounts,
providing both options and bargaining power to borrowers
such as the Flaggs.
II. The Mortgage Contract Does Not Incorporate State Law.
The Flaggs contend that, even if Yonkers was not bound
by New York law requiring payment of interest on mortgage
escrow accounts, their contract with Yonkers incorporated
New York law, therefore requiring that Yonkers pay interest
to the Flaggs under the contract. In support of this argument,
the Flaggs point to section fifteen of the contract, titled “Law
that Governs this Security Instrument.” That section reads,
in its entirety:
This Security Instrument is governed by federal
law and the law that applies in the place where
the Property is located. If any term of this Security
Instrument or of the Note conflicts with the law,
all other terms of this Security Instrument and of
the Note will still remain in effect if they can be
given effect without the conflicting term. This
means that any terms of this Security Instrument
and of the Note which conflict with the law can
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Appendix A
be separated from the remaining terms, and the
remaining terms will still be enforced.
This section of the contract, is, by title and content, a choice
of law provision. While contracts may incorporate particular
laws as contract terms, the contract must do so with
specificity. General choice of law provisions do not
accomplish this task. See Shaw Group, Inc. vy. Triplefine Int’l
Corp., 322 F.3d 115, 123 (2d Cir.2003) (without clear
language of incorporation, a general choice of law provision
was held not to have incorporated New York arbitration law
into a contract).
The contract specifically states that Yonkers will not pay
interest on the account unless required by law. Since, per
HOLA and OTS regulations, Yonkers is not required by law
to pay interest, the contract does not commit Yonkers to pay
interest to the Flaggs on this mortgage escrow account.
Ill. The Flaggs’ Fifth Amendment Claim Fails.
The Flaggs claim that Yonkers’s failure to pay interest
on amounts held in the mortgage escrow account constituted
an uncompensated taking in violation of their Fifth
Amendment rights. The District Court granted Yonkers’s
motion to dismiss this claim based primarily on its finding
that there was no state action. Flagg v. Yonkers Sav. & Loan
Ass ‘n., 307 F.Supp.2d 565, 585 (S.D.N.Y.2004). We agree.
“Because the United States Constitution regulates only
the Government, not private parties, a litigant claiming that
his constitutional rights have been violated must first
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establish that the challenged conduct constitutes ‘state
action.”” United States v. Int’l. Bhd. of Teamsters, 941 F.2d
1292, 1295 (2d Cir.1991). “[S]tate action requires both an
alleged constitutional deprivation ‘caused by the exercise of
some right or privilege created by the State or by a rule of
conduct imposed by the State or by a person for whom the
State is responsible,’ and that ‘the party charged with the
deprivation must be a person who may fairly be said to be a
state actor.’” Am. Mfrs. Mut. Ins. Co. v. Sullivan, 526 U.S.
40, 50 (1999) (quoting Lugar v. Edmondson Oil Co., 457
U.S. 922, 937 (1982)). While Yonkers’s election not to pay
interest to the Flaggs on their escrow account may qualify as
an “exercise” of a “privilege created by the State,” its action
is not “fairly attributable to the State,” Sullivan, 526 U.S. at
50, and, therefore, it was not a “state actor” for purposes of
evaluating the legal merits of the Flaggs’ takings claim.
Though Yonkers is a “federal savings association,” it is
a private corporation, not a state agency. “For the conduct of
a private entity to be fairly attributable to the state, there
must be such a close nexus between the State and the
challenged action that seemingly private behavior may be
fairly treated as that of the State itself.” Cranley v. Nat’l Life
Ins. Co., 318 F.3d 105, 111 (2d Cir.2003) (internal quotations
omitted). A nexus of “state action” exists between a private
entity and the state when “the state exercises coercive power,
is entwined in the management or control of the private actor,
or provides the private actor with significant encouragement,
either overt or covert, or when the private actor operates as a
willful participant in joint activity with the State or its agents,
is controlled by an agency of the State, has been delegated a
public function by the state, or is entwined with governmental
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Appendix A
policies.” Jd. at 112 (internal quotations and alterations
omitted). By these well-established standards, no nexus
existed between the OTS and Yonkers’s decision not to pay
interest on the Flaggs’ escrow account.
While federal law freed Yonkers, as a federal savings
association, from any legal duty to pay interest on mortgage
escrow accounts, there was no federal mandate prohibiting
Yonkers from paying interest to the Flaggs or any other
mortgagee-client. Neither did any state agent advise or
command that Yonkers not pay interest on mortgage escrow
accounts. In fact, the OTS was neutral on the subject, leaving
negotiation of interest payments on escrow accounts to the
contracting parties. Neither the OTS nor any other state
agency was party to the Flaggs’ contract with Yonkers. There
was no OTS-Yonkers joint enterprise; and no state function
was delegated to Yonkers as a mortgagor. In short, Yonkers
was a private entity participating in a regulated field of
activity. Yonkers’s actions were consistent with the law, to
be sure, but obedience to the law alone does not create a
sufficient nexus with the state to sustain a finding of “state
action.”
We have reviewed all of appellants’ remaining arguments
and find each of them to be without merit. For the foregoing
reasons, the judgment of the District Court is AFFIRMED.
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APPENDIX B — OPINION AND ORDER OF THE
UNITED STATES DISTRICT COURT FOR THE
SOUTHERN DISTRICT OF NEW YORK
DATED MARCH 8, 2004
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
03 CIV. 5133 (WCC)
HANS W. FLAGG and EILEEN S. FLAGG, on behalf of
themselves and all others similarly situated,
Plaintiffs,
-against-
YONKERS SAVINGS AND LOAN ASSOCIATION,
FA (a/k/a Yonkers Financial),
Defendant.
OPINION AND ORDER
CONNER, Sr. D.J.:
Plaintiffs Hans W. Flagg and Eileen S. Flagg, on behalf
of themselves and all others similarly situated, bring this
action against defendant Yonkers Savings and Loan
Association, a/k/a Yonkers Financial (“Yonkers”),' seeking
1. Defendant is a federal savings and loan association with its
principal office in Yonkers, New York. (Complt.§ 7.) It was acquired
by Atlantic Bank of New York (“Atlantic Bank”) in May 2002 as the
result of a merger between Atlantic Bank and defendant’s holding
company parent, Yonkers Financial Corporation. (/d.)
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Appendix B
declarations: (1) pursuant to 28 U.S.C. § 2201 that federal
law neither preempts nor precludes the applicability of New
York statutes requiring the payment of interest on escrow
accounts; (2) pursuant to 28 U.S.C. § 2202 that defendant’s
actions in connection with the mortgages of plaintiffs and
the putative class violated N.Y. Gen. Osiic. Law § 5-601;
Gen. Bus. Law § 349, BanxinGc Law §§ 14-b and 6-k, REAL
Prop. Tax Law § 953(2) and constitute breach of contract
and unjust enrichment; and (3) pursuant to 28 U.S.C. § 2202
that plaintiffs and the putative class are entitled to
compensatory damages or disgorgement or restitution in an
amount to be determined at trial.” In the alternative, should
this Court hold that the federal regulations preempt the state
statutes, plaintiffs seek a declaration that the federal
regulations constitute a taking under the Fifth Amendment
that entitles them to just compensation. Plaintiffs also seek
certification of this case as a class action pursuant to Fed. R.
Civ. P. 23 with plaintiffs certified as class representatives.’
Defendant has moved pursuant to Fed. R. Civ. P. 12(b)(6) to
dismiss the Complaint with prejudice for failure to state a
claim on which relief can be granted. Plaintiffs have cross
moved pursuant to Fed. R. Civ. P. 56 and 23 for summary
judgment and class certification. For the reasons set forth
herein, we grant defendant’s Rule 12(b)(6) motion to dismiss
2. This Court has subject matter jurisdiction pursuant to
28 U.S.C. §§ 1331, 1367 and 2201-02.
3. We reserve judgment on the class certification issue because
we need reach it only if plaintiffs establish a basis for defendant’s
liability under either the New York statutes or the Fifth Amendment.
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Appendix B
the Complaint with prejudice and deny as moot plaintiffs’
Rule 56 cross motion for summary judgment.‘
BACKGROUND
The facts underlying this dispute are simple and
undisputed. Plaintiffs entered into a mortgage contract with
defendant on June 12, 1998, in connection with a loan on
their residence in Scarsdale, New York. (Pls. Rule 56.1 Stmt.
4 1; Complt. § 6.) That contract included a provision
governing funds held in escrow by defendant to pay for, inter
alia, taxes, assessments and insurance, entitled “Lender’s
Obligations.” (Pls. Rule 56.1 Stmt. § 2.) This provision
provides in relevant part:
Lender will not be required to pay me any interest
or earnings on the funds unless either (1) Lender
and I agree in writing, at the time I sign this
Security Instrument, that Lender will pay interest
on the Funds; or (11) the law requires Lender to
pay interest on the Funds.
With respect to the governing law, the mortgage agreement
states:
This Security Instrument is governed by
federal law and the law that applies in the place
4. See Westchester Day Sch. v. Vill. of Mamaroneck, 236
F.Supp.2d 349, 351 (S.D.N.Y.2002) (Conner, J.) (“[P]laintiff’s motion
for partial summary judgment is granted, thereby rendering moot
defendants’ motion to dismiss.”).
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Appendix B
where the Property is located. If any term of this
Security Instrument or of the Note conflicts with
the law, all other terms of this Security Instrument
and of the Note will remain in effect if they can
be given effect without the conflicting term. This
means that any terms of this Security Instrument
and of the Note which conflict with the law can
be separated from the remaining terms, and the
remaining terms will still be enforced.
(Pls. Rule 56.1 Stmt. § 3 (emphasis added).) Pursuant to this
agreement, plaintiffs deposited more than $4,000 into the
escrow account with defendant at the time that their loan
closed, and the balance of that account sometimes exceeded
$6,000 during the life of that loan. (Jd. 4] 4.) Defendant never
paid plaintiffs interest on that account before Yonkers merged
with Atlantic Bank in May 2002. (/d. 4 5.) After the merger,
Atlantic Bank began to pay plaintiffs interest on their escrow
account. (/d. { 6.)
DISCUSSION
I. Standard of Review
On a motion to dismiss pursuant to Fed. R. Civ. P.
12(b)(6), the court must accept as true all of the well pleaded
facts and consider those facts in the light most favorable to
the plaintiff. See Warth v. Seldin, 422 U.S. 490, 501 (1975);
Hertz Corp. v. City of New York, | F.3d 121, 125 (2d
Cir.1993); In re AES Corp. Sec. Litig., 825 F.Supp. 578, 583
(S.D.N.Y.1993) (Conner, J.). On such a motion, the issue iS
“whether the claimant is entitled to offer evidence to support
|
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Appendix B
the claims.” Scheuer v. Rhodes, 416 U.S. 232, 236 (1974),
overruled on other grounds by Davis v. Scherer, 458 U.S.
183 (1984). A complaint should not be dismissed for failure
to state a claim “unless it appears beyond doubt that the
plaintiff can prove no set of facts in support of his claim
which would entitle him to relief.” Padavan v. United States,
82 F.3d 23, 26 (2d Cir.1996) (quoting Hughes v. Rowe, 449
U.S. 5, 10 (1980)). Generally, “[c]onclusory allegations or
legal conclusions masquerading as factual conclusions will
not suffice to prevent a motion to dismiss.” 2 James Wm.
Moore et al., Moore’s Federal Practice § 12.34[1][b] (3d
ed.1997); see also Hirsch v. Arthur Andersen & Co., 72 F.3d
1085, 1088 (2d Cir.1995). Allegations that are so conclusory
that they fail to give notice of the basic events and
circumstances of which the plaintiff complains, are
insufficient as a matter of law. See Martin v. N.Y. State Dept
of Mental Hygiene, 588 F.2d 371, 372 (2d Cir.1978).
Il. Whether the New York Escrow Account Interest
Statutes are Preempted
Defendant claims that regulations implemented by the
Office of Thrift Supervision (“OTS”) pursuant to the Home
Owners Loan Act, 12 U.S.C. § 1464(a) (the “HOLA
Regulations”) preempt those New York state statutes that
require the payment of interest on escrow funds because those
regulations completely occupy the field of regulating federal
Savings associations and do not require interest payments in
the absence of a written agreement to that effect. (Def. Mem.
Supp. Mot. Dismiss at 4, 8.) Defendant also claims that the
preemptive effect of these regulations is not vitiated by the
2la
Appendix B
Real Estate Settlement Procedures Act of 1974 (“RESPA”).
(Id. at 10.) Plaintiffs contend otherwise. We begin our
analysis with a review of the statutes and regulations at issue.
A. Review of the State and Federal Statutes and
Regulations at Issue
The HOLA Regulations are promulgated pursuant to
12 U.S.C. §§ 1463(a)° and 1464(a).° With respect to federal
5. 12 U.S.C. § 1463 governs the supervision of federal savings
associations and provides in relevant part: “The Director [of the
Office of Thrift Supervision] may issue such regulations as the
Director determines to be appropriate to carry out the responsibilities
of the Director or the Office.” Jd. § 1463(a)(2).
6. 12 U.S.C. § 1464(a) provides:
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 (including
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 investment powers
conferred by this section are intended to encourage such
institutions to provide credit for housing safely and
scundly.
22a
Appendix B
preemption as to the operation of federal savings associations,
12 C.F.R. § 545.2 provides generally:
The regulations in this Part 545 are
promulgated pursuant to the plenary and exclusive
authority of the Office to regulate all aspects of
the operations of Federal savings associations, as
set forth in section 5(a) of the Act. This exercise
of the Office's authority is preemptive of any state
law purporting to address the subject of the
operations of a Federal savings association.
Id. (emphasis added). The HOLA Regulation governing
preemption with respect to the lending and investment
practices of federal savings associations is 12 C.F.R.
§ 560.2(a), which provides:
Pursuant to sections 4(a) and 5S(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 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
23a
Appendix B
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 authorized
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 purposes of this
section, “state law” includes any state statute,
regulation, ruling, order or judicial decision.
Id. (emphasis added). Section 560.2 also provides
“illustrative examples” of “the types of state laws preempted
by paragraph (a) of this section” and states that they “include,
without limitation, state laws purporting to impose
requirements regarding ... Escrow accounts, impound
accounts, and similar accounts.” Jd. § 560.2(b)(6) (emphasis
added). Section 560.2 then sets forth a list of state laws that
are not preempted; this list does not mention escrow accounts
or other laws relating to interest. See id. § 560.2(c).* This
7. 12 C.F.R. § 560.110 is entitled “Most Favored Lender Usury
Preemption” and is not relevant in the present case.
8. Specifically, 12 C.F.R. § 560.2(c) provides:
State laws of the following types are not preempted
to the extent that they only incidentally affect the lending
(Cont’d)
24a
Appendix B
chapter does not contain a regulation specifically requiring
the payment of interest by lenders on funds held in escrow
accounts.
New York has, however, several state statutes governing
mortgage lending institutions that do require the payment of
interest on escrow accounts. N.Y. Gen. OBLIG. Law § 5-601
provides in relevant part:
Any mortgage investing institution which
maintains an escrow account pursuant to any
agreement executed in connection with a mortgage
(Cont’d)
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
(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.
25a
Appendix B
on any one to six family residence occupied by
the owner or on any property owned by a
cooperative apartment corporation, . . . located in
this state shall, for each quarterly period ir. which
such escrow account is established, credit the
same with dividends or interest at a rate of not
less than two per centum per year based on the
average of the sums so paid for the average length
of time on deposit or a rate prescribed by the
banking board pursuant to section fourteen-b of
the banking law and pursuant to the terms and
conditions set forth in that section whichever is
higher. The banking board shall prescribe by
regulation the method or basis of computing any
minimum rate of interest required by this section
and any such minimum rate shall be a net rate
over and above any service charge that may be
imposed by any mortgage lending institution for
maintaining an escrow account...
With respect to specific escrow accounts, N.Y. Real Prop.
Tax Law § 953 prescribes the duties and responsibilities of
mortgage investing institutions concerning real property tax
escrow accounts and provides, inter alia, that:
Every mortgage investing institution subject
to the provisions of section fourteen-b of the
banking law shall pay at least the minimum rate
of interest on each real property tax escrow
account as prescribed therein except that any such
mortgage investing institution shall not be
26a
Appendix B
required to pay such minimum rate of interest on
real property tax escrow accounts established for
non-mortgagors.
Id. § 953(2). N.Y. Banking Law § 6-k(2)(b) governs the duties
of mortgage investing institutions relating to real property
insurance escrow accounts and provides that “[every
mortgage investing institution shall pay at least the minimum
rate of interest on each real property insurance escrow account
as prescribed therein].” The interest rates to be paid under
these state escrow provisions are set by the state banking
board pursuant to procedures set forth in N.Y. Banking Law
§ 14-b.?
B. Preemption Analysis
“Within constitutional limits, federal preemption of state
law is found where Congress has explicitly expressed its
intent to preempt, or where the nature and object of the federal
9. Section 14-b also defines the term “mortgage investing
institution” as utilized in that section and in N.Y. GEN. OBLIG. LAW
§ 5-601; the definition encompasses a variety of financial institutions,
including “federal savings and loan association ... which makes,
extends or holds a mortgage on any one to six family residence
occupied by the owner or any property owned by a cooperative
apartment corporation. . . located in this state.” Jd. § 14-b(5). Section
14-b defines “escrow account” as “any account established pursuant
to an agreement between a mortgagor and a mortgage investing
institution whereby the mortgagor pays to the mortgage investing
institution or his designee amounts to be used for the payment of
insurance premiums, water rents or any similar charges, and shall
also include real property tax escrow accounts as defined in title
three-A of article nine of the real property tax law.” Jd. § 14-b(6).
27a
Appendix B
laws and regulatory scheme show Congress’ intent to occupy
the entire field.” Ingham Micro, Inc. v. Airborne Cargo Exp.,
Inc., 154 F.Supp.2d 834, 838 (S.D.N.Y.2001). The Second
Circuit has described the Supremacy Clause origin of the
preemption doctrines:
The Supremacy Clause of the United States
Constitution provides that “[t]his Constitution,
and the Laws of the United States which shall be
made in Pursuance thereof ... shall be the
supreme Law of the Land.” U.S. Const. art. VI,
cl. 2. State law is preempted explicitly where
Congress states an intent to occupy a field and to
exclude state regulation. State law is preempted
implicitly where the federal interest in the subject
matter regulated is so pervasive that no room
remains for state action, indicating an implicit
intent to occupy the field, or where the state
regulation at issue conflicts with federal law or
stands as an obstacle to the accomplishment of
its objectives.
Rondout Elec., Inc. v. N.Y. State Dep't of Labor, 335 F.3d
162, 166 (2d Cir.2003) (citing, inter alia, Fid. Fed. Sav. &
Loan Ass'n v. de la Cuesta, 458 U.S. 141, 153 (1982)), cert.
denied, 124 S.Ct. 1045 (2004). Moreover, “[fJederal law may
preempt state regulation in whole or in part.” Id.
“Federal regulations have no less preemptive effect than
federal statutes.” de la Cuesta, 458 U.S. at 153. When
Congress “has directed an administrator to exercise his
discretion, his judgments are subject to judicial review only
28a
Appendix B
to determine whether he has exceeded his statutory authority
or acted arbitrarily.” Jd. at 153-54. This limited inquiry
applies to regulations promulgated with the intention of
preempting state law. Jd. at 154. Thus, if the administrator’s
““choice represents a reasonable accommodation of
conflicting policies that were committed to the agency’s care
by the statute, [the courts] 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.’” Jd. (quoting United States v. Shimer, 367 U.S.
374, 383 (1961)). Finally, a “pre-emptive regulation’s force
does not depend on express congressional authorization to
displace state law; moreover, whether the administrator failed
to exercise an option to promulgate regulations which did
not disturb state law is not dispositive.” /d.
In determining whether the HOLA Regulations preempt
state law, we must consider “whether the regulations evidence
a desire to occupy a field completely. ... Pre-emption,
[however], should not be inferred, however, simply because
the agency’s regulations are comprehensive.” R.J. Reynolds
Tobacco Co. v. Durham County, N.C., 479 U.S. 130, 149
(1986) (citations omitted) (citing de la Cuesta, 458 U.S. at
153-54, and Hillsborough County v. Automated Med. Labs.,
Inc., 471 U.S. 707, 716-18 (1985)) (noting that “the present
statutes and regulations that guide this monitoring and the
warehouse proprietor’s own conduct with respect to the
imported goods are not so comprehensive as to leave no room
for North Carolina’s assessment of ad valorem taxes” in
concluding that Congress has not “exercised its power under
the Supremacy Clause to pre-empt ad valorem state taxation
of imported goods that are stored in customs-bonded
29a
Appendix B
warehouses and that are destined for domestic markets”).
Moreover, “as long as a federal statute contains an express
preemption clause, it is wholly unnecessary and inappropriate
to import notions of implied preemption through conflict into
the express preemption analysis.” Dow Agrosciences LLC v.
Bates, 332 F.3d 323, 329-30 (5th Cir.2003) (footnotes
omitted) (discussing Cipollone v. Liggett Group, Inc., 505
U.S. 504, 517, 531-32, 544 (1992) (plurality opinior)),
petition for cert. filed, 72 U.S.L.W. 3184 (U.S. Sept. 9, 2003)
(No. 03-388). Thus, if the legislation includes a specific
preemption provision, “‘the Court’s task is one of statutory
interpretation—only to identify the domain expressly
preempted by the provision.” Dow Agrosciences, 332 F.3d
at 330 n.12 (quoting Cipollone, 505 U.S. at 532 (Blackmun,
J., concurring in part and dissenting in part)).
Defendant, citing the preamble to the HOLA Regulations
and several opinion letters authored by OTS’s chief counsel,
claims that the HOLA Regulations preempt the New York
escrow statutes because they expressly occupy the entire field
of lending by federal associations and leave the payment of
interest on escrow accounts to be governed by the loan
agreement. (Def. Mem. Supp. Mot. Dismiss at 4-6, 8.) In
response, plaintiffs claim that the regulations, preamble and
interpretive letters are unreasonable as applied and entitled
to no deference because the HOLA Regulations could not
occupy the entire field since they do not include a regulation
governing the payment of interest in connection with escrow
accounts and specifically defer to RESPA with respect to such
accounts. (Pls. Mem. Supp. Summ. J. at 9-11, 16.) We
conclude that the New York escrow account interest statutes
are preempted because the HOLA Regulations occupy the
entire field of governing federal loan associations.
30a
Appendix B
1. The Preemptive Language of the Regulations
Occupation of the entire field is primarily evinced by
the plain text of the applicable regulations. For example,
12 C.F.R. § 560.2(a), the Regulation that governs federal
preemption in the lending and investment practices of federal
savings associations,"® states explicitly that it “occupies the
entire field of lending regulation for federal savings
associations” and that such associations “may extend credit
without regard to state laws purporting to regulate or
otherwise affect their credit activities.” Jd. (emphasis added).
Indeed, as stated previously, the express exemptions from
preemption under this regulation are indisputably
inapplicable in the present case. See supra notes 7-8. Most
tellingly, state laws pertaining to escrow accounts are
explicitly included as an “illustrative example” of state laws
that are preempted by the OTS regulations. Jd. § 560.2(b).
2. The Preamble and the Regulatory History
This evidence of OTS’s preemptive intent is further
reinforced by the preamble to 12 C.F.R. § 560.2, as published
in the Federal Register. According to the preamble, § 560.2
was intended to “set| j forth OTS’s longstanding position,
as developed in case law and legal opinions by both OTS
and its predecessor, the FHLBB,["'] and as reflected in
10. Section 560.2 is related to, but distinct from § 545.2, which
is the regulation that governs preemption of state laws in the general
operation of federal savings associations. See supra Part II.A.
11. FHLBB is the abbreviation for Federal Home Loan Bank
Board.
3la
Appendix B
§ 545.2, on the federal preemption of state laws affecting
the lending activities of federal savings associations.” It was
promulgated when OTS moved “‘its lending regulations out
of Part 545 and, thus, separate[d] them from its general
preemption regulation, § 545.2.” OTS Final Rule, 61
Fed.Reg. 50,951, 50,965 (Sept. 30, 1996) (codified at 12
C.E.R. pts. 545, 556, 560, 563, 566, 571 and 590). Indeed,
the new preemption regulation was expressly intended “to
confirm and carry forward [OTS’s] existing preemption
position.” Jd.
Substantively, the HOLA Regulations are silent on the
topic of the payment of interest on escrow accounts. This
silence is by design; in 1983, the FHLBB promulgated
regulations that “remove[d] the [existing] substantive
provisions pertaining to escrow accounts, allowing such
matters to be governed by the loan contract, and in their place
require a more detailed disclosure about the accounts.” Rules
and Regulations of Federal Home Loan Bank Board,
48 Fed.Reg. 23,032, 23,039 (May 23, 1983) (codified at
12 C.ER. pts. 523, 526, 541, 545, 555, 561 and 563). Among
these deleted provisions was a section requiring the payment
of interest on escrow accounts by lenders if the state wherein
the security dwelling was located had a statute requiring such
payments. See First Fed. Sav. & Loan Ass'n v. Greenwald,
591 F.2d 417, 420 n.3 (Ist Cir.1979) (describing previous
regulation). That provision was deleted because the 1983
revision “only referenc[es] the requirements of RESPA” and
allows lenders to “require escrow accounts to the extent
agreed to in the loan contract,” subject to new disclosure
requirements as to the escrow account’s purpose, computation
of amount paid and the rights of the lender if the borrower
— —————————————
A ee Nee
32a
Appendix B
fails to make escrow payments. Rules and Regulations of
Federal Home Loan Bank Board, 48 Fed.Reg. at 23,039.
3. Agency Interpretations of the HOLA Regulations
Moreover, our conclusion is consistent with the position
that OTS has taken with respect to the broad preemptive effect
of the HOLA Regulations on other matters. Indeed, in 1991,
OTS concluded that N.Y. REAL Prop. Tax Law § 953, a statute
at issue in this case, see supra Part II.A., was preempted by
the more general preemption statement of 12 C.F.R. § 545.2
“insofar as it purports to regulate interest payments, service
charges, and the disclosure of information on escrow accounts
for mortgages between Federal savings associations and their
borrowers.” Opinion Letter by Chief Counsel Harris
Weinstein, at 1 (Jan. 3, 1991). That letter noted the regulatory
history of the 1983 revision, and concluded that “escrow
accounts on mortgage loans are among the operations of
federal savings associations that are governed solely by
federal law.” Jd. at 3-4. Moreover, OTS has continued to
endorse a construction that gives broad preemptive effect to
the HOLA Regulations.'’? See Opinion Letter by Chief
12. Defendant has submitted an Opinion Letter by the Chief
Counsel of OTS commenting directly on the present case and
concluding that there is no obligation to pay interest because the
HOLA Regulations preempt the New York escrow statutes, a result
not changed by the choice of law provision in the mortgage. See
Opinion Letter by Chief Counsel Carolyn J. Buck, at 5 (Oct. 6, 2003).
This letter was drafted in response to a request by defendant’s counsel
for concurrence in a detailed analysis that was provided to OTS,
along with a copy of the letter from plaintiffs’ counsel to the Court
(Cont’d)
33a
Appendix B
Counsel Carolyn J. Buck, at 17-18 (Mar. 10, 1999) (relying
on 12 C.F.R. § 560.2 and examples cited therein to conclude
that the HOLA Regulations preempt application of the broad
provisions of the California Unfair Competition Act in a
manner that would apply to federally chartered loan
associations’ advertising, forced placement of hazard
insurance and charging of loan-related fees); Opinion Letter
by Chief Counsel Carolyn J. Buck, at 1 (Dec. 24, 1996)
(concluding with respect to credit card issuance by federally
chartered savings association that “federal law does not
preempt the cited Indiana law prohibiting fraudulent and
deceptive loan practices” but does preempt Indiana statutes
that “pertain to disclosure and loan-related charges” that are
within the purview of § 560.2). “An agency’s consistent
interpretation of its regulations is to be given controlling
weight unless plainly erroneous or inconsistent with the
regulation.” Taylor v. Vt. Dep't of Educ., 313 F.3d 768, 780
(2d Cir.2002). Moreover, this deference extends to
interpretive positions taken in opinion or policy letters issued
by the agency. See id. at 780 n.7. Given the preemptive
language of 12 C.F.R. § 560.2 and the various examples
discussed therein, OTS’s construction of that language is
(Cont’d)
advising us of the grounds, including RESPA, for their summary
judgment motion. (Weinstein Decl., Exs. 9-10.) Although we are
entitled to give deference even to those agency interpretations that
arise directly out of the present litigation, see, e.g., Barnhart v.
Walton, 535 U.S. 212, 221 (2002), we decline to give weight to the
letter in this case because it does not address the impact of RESPA
on plaintiffs’ contentions and thus fails to consider plaintiffs’ principal
argument against the federal preemption of the New York statutes.
See also infra Part II.C.
34a
Appendix B
neither inconsistent nor plainly erroneous, and thus is entitled
to deference by this Court. Indeed, our conclusion is in accord
with Wis. League of Fin. Insts., Ltd. v. Galecki, 707 F.Supp.
401 (W.D.Wis.1989), wherein the court concluded that a
Wisconsin state statute requiring lenders, including federally
chartered savings institutions, to pay interest on escrow
accounts was preempted explicitly by the statement in 12
C.F.R. § 545.2 and implicitly by the structure and purpose
of the federal regulations, which was to create flexibility in
the negotiation of escrow arrangements. Jd. at 404-06.
Accordingly, we disagree with plaintiffs’ contention that OTS
cannot occupy a field wherein it has not issued specific
regulations (Pls. Mem. Supp. Summ. J. at 11) and we
conclude that the New York escrow account interest statutes
are preempted by the HOLA Regulations.
C. Whether Preemption is Consistent with the HOLA
and RESPA Statutes
Plaintiffs claim, however, that this preemptive effect is
inconsistent with both HOLA and RESPA, to which OTS
has deferred with respect to escrow accounts. (Pls. Mem.
Supp. Summ. J. at 12-13.) We address each claim in turn.
1. Whether the HOLA Regulations are
Consistent with HOLA
With respect to HOLA, plaintiffs cite 12 U.S.C.
§ 1464(n)(1), and claim that HOLA specifically subjects
federal savings associations to state laws. Section 1464(n)
governs federal savings associations acting as trustees or in
35a
Appendix B
other fiduciary capacities. In particular, § 1464(n)(1)
describes the applicable permitting process:
The Director may grant by special permit to
a Federal savings association applying therefor the
right to act as trustee, executor, administrator,
guardian, or in any other fiduciary capacity in
which State banks, trust companies, or other
corporations which compete with Federal savings
associations are permitted to act under the laws
of the State in which the Federal savings
association is located. Subject to the regulations
of the Director, service corporations may invest
in State or federally chartered corporations which
are located in the State in which the home office
of the Federal savings association is located and
which are engaged in trust activities.
Furthermore, plaintiffs cite Jamaica Sav. Bank v. Lefkowitz,
390 F.Supp. 1357 (E.D.N.Y.), aff'd without opinion, 423 US.
802 (1975), in support of the proposition that a “federal
savings association is acting as a ‘trustee. . . or in [another]
fiduciary capacity’ in connection with the escrow deposits
of plaintiffs and the Class,” and thus is subject to the same
rights and conditions as state associations under § 1464(n)(1).
(Pls. Mem. Supp. Summ. J. at 12-13.)
We conclude that § 1464(n)(1) does not subject federal
savings associations to state laws with respect to the payment
of interest on escrow accounts. We do not read the language
of that subsection as imposing any specific substantive state
law standards on the conduct of federal savings associations
36a
Appendix B
acting as fiduciaries. Our reading is further reinforced
because § 1464(n) contains other subsections that do in fact
affirmatively and expressly direct federal savings institutions
to follow state laws with respect to deposits and oaths and
affidavits, namely, § 1464(n)(5)" and § 1464(n)(6)."4
Moreover, the section of Jamaica Savings Bank cited by
plaintiffs is inapposite because it does not relate to a
preemption issue; rather, it concluded that the New York
escrow account interest statutes did not amount to an
13. Section 1464(n)(5) provides:
Whenever the laws of a State require corporations
acting in a fiduciary capacity to deposit securities with
the State authorities for the protection of private or court
trusts, Federal savings associations so acting shall be
required to make similar deposits. Securities so deposited
shall be held for the protection of private or court trusts,
as provided by the State law. Federal savings associations
in such cases shall not be required to execute the bond
usually required of individuals if State corporations
under similar circumstances are exempt from this
requirement. Federal savings associations shall have
power to execute such bond when so required by the
laws of the State involved.
14. Section 1464(n)(6) provides:
In any case in which the laws of a State require that
a corporation acting as trustee, executor, administrator,
or in any capacity specified in this section, shall take an
oath or make an affidavit, the president, vice president,
cashier, or trust officer of such association may take the
necessary oath or execute the necessary affidavit.
37a
Appendix B
unconstitutional taking because the bank “did not obtain an
ultimate beneficial interest in the funds for itself,” but
nevertheless realized profits from their investment that should
be shared with mortgagors. 390 F.Supp. at 1363. Accordingly,
we conclude that the HOLA Regulations are not inconsistent
with the HOLA statute.
2. Whether the HOLA Regulations are
Consistent with RESPA
We next turn to plaintiffs’ claim that the HOLA
Regulations are inconsistent with RESPA because regulations
promulgated pursuant to that Act: (1) apply to post-closing
obligations such as interest payments on escrow accounts,
and (2) incorporate state escrow statutes that provide greater
consumer protection, such as New York’s escrow account
interest laws. (Pls. Mem. Supp. Summ. J. at 4-9.) Defendant
contends that RESPA does not blunt the preemptive effect
of the HOLA Regulations because the payment of interest
on escrow accounts is not a “settlement practice” under
RESPA. (Def. Mem. Supp. Mot. Dismiss at 10.) Accordingly,
we first address the purpose and scope of RESPA.
As stated in 12 U.S.C. § 2601, Congress enacted RESPA
because:
(a) The Congress finds that significant
reforms in the real estate settlement process are
needed to insure that consumers throughout the
Nation are provided with greater and more timely
information on the nature and costs of the
settlement process and are protected from
38a
Appendix B
unnecessarily high settlement charges caused by
certain abusive practices that have developed in
some areas of the country. ...
(b) It is the purpose of this chapter to effect
certain changes in the settlement process for
residential real estate that will result—
(1) in more effective advance
disclosure to home buyers and sellers of
settlement costs;
(2) in the elimination of kickbacks
or referral fees that tend to increase
unnecessarily the costs of certain
settlement services;
(3) in a reduction in the amounts
home buyers are required to place in
escrow accounts established to insure
the payment of real estate taxes and
insurance; and
(4) in significant reform and
modernization of local recordkeeping of
land title information.
With respect to escrow accounts, RESPA provides limitations
on the amount that lenders can require borrowers or
prospective borrowers to deposit into escrow accounts and
requires loan servicers to provide borrowers with account
statements and notifications of shortages. See 12 U.S.C.
39a
Appendix B
§ 2609. This provision is, however, silent about the payment
of interest. Finally, RESPA contains a savings provision
describing its interaction with state laws governing real estate
settlement practices, and expressly allowing state laws to
provide consumer protections greater than those contained
therein:
This chapter does not annul, alter, or affect,
or exempt any person subject to the provisions of
this chapter from complying with, the laws of any
State with respect to settlement practices, except
to the extent that those laws are inconsistent with
any provision of this chapter, and then only to the
extent of the inconsistency. The Secretary is
authorized to determine whether such
inconsistencies exist. The Secretary may not
determine that any State law is inconsistent with
any provision of this chapter if the Secretary
determines that such law gives greater protection
to the consumer. In making these determinations
the Secretary shall consult with the appropriate
Federal agencies.
12 U.S.C. § 2616 (emphasis added).
Accordingly, plaintiffs claim that the payment of interest
on escrow accounts is a “settlement practice” under RESPA
and therefore the Secretary may not preempt the New York
law that gives greater protection to the consumer. “Settlement
practice “ is not a term defined in RESPA’s definitions
40a
Appendix B
section, 12 U.S.C. § 2602. The definitions section does,
however, define the term “settlement services” to include:
any service provided in connection with a real
estate settlement including, but not limited to, the
following: title searches, title examinations, the
provision of title certificates, title insurance,
services rendered by an attorney, the preparation
of documents, property surveys, the rendering of
credit reports or appraisals, pest and fungus
inspections, services rendered by a real estate
agent or broker, the origination of a federally
related mortgage loan (including, but not limited
to, the taking of loan applications, loan processing,
and the underwriting and funding of loans), and
the handling of the processing, and closing or
settlement.
12 U.S.C. § 2602(3). The First Circuit has concluded that
the payment of interest om escrow accounts is not a
“settlement practice” within the scope of RESPA and that its
savings clause did not bar preemption of state laws’ requiring
such payments. Greenwald, 591 F.2d at 426. Although the
First Circuit did not explicate its reasoning, the district court
15. Greenwald ‘s preemption ruling was the result of an actual
conflict analysis that stemmed from the existence of a since-deleted
HOLA regulation governing the payment of interest on escrow
accounts, rather than the broader “occupying the field” conclusion
utilized in this Opinion and Order. 591 F.2d at 425-26. The RESPA
analysis is, however, equally appliciable because, as is discussed infra,
RESPA has no provision specifically concerning the payment of
interest on escrow accounts.
4la
Appendix B
in that case engaged in a temporal analysis that concluded
that “interest payment on tax escrow accounts, which can
continue long after the closing of the mortgage transaction
and which can continue to occur during the entire life of the
mortgage, is obviously not a settlement practice within the
meaning of the statute.” Greenwald v. First Fed. Sav. & Loan
Ass’n, 446 F.Supp. 620, 625 (D.Mass.197 8).
Plaintiffs claim that the Greenwald temporal analysis is
both legally incorrect and, in any event, rendered obsolete
by the 1990 enactment of 12 U.S.C. § 2605(g). (Pls. Mem.
Supp. Summ. J. at 5-6.) They contend that § 2605(g), as well
as § 2609(a)(2), which existed at the time of the Greenwald
decision, evince Congress’s desire to extend “settlement
practices” with respect to escrow accounts past the initial
closing. In response, defendant relies on the Greenwald
analysis with respect to RESPA’s applicability, but also claims
that RESPA was a remedial statute intended to improve
disclosure and prohibit abusive practices, not to impose on
lenders ne’. substantive obligations such as the payment of
interest on escrow accounts. (Def. Mem. Supp. Mot. Dismiss
at 11; Def. Reply Mem. Supp. Mot. Dismiss at 6.)
12 U.S.C. § 2605(g) provides:
If the terms of any federally related mortgage
loan require the borrower to make payments to
the servicer of the loan for deposit into an escrow
account for the purpose of assuring payment of
taxes, insurance premiums, and other charges with
respect to the property, the servicer shall make
payments from the escrow account for such taxes,
42a
Appendix B
insurance premiums, and other charges in a timely
manner as such payments become due.
Section 2609(a)(2) governs the amount that the lender may
require that the borrower place into escrow. It provides:
A lender, in connection with a federally
related mortgage loan, may not require the
borrower or prospective borrower . . . to deposit
in any such escrow account in any month
beginning with the first full installment payment
under the mortgage a sum (for the purpose of
assuring payment of taxes, insurance premiums
and other charges with respect to the property) in
excess of the sum of (A) one-twelfth of the total
amount of the estimated taxes, insurance
premiums and other charges which are reasonably
anticipated to be paid on dates during the ensuing
twelve months which dates are in accordance with
the normal lending practice of the lender and local
custom, provided that the selection of each such
date constitutes prudent lending practice, plus (B)
such amount as is necessary to maintain an
additional balance in such escrow account not to
exceed one-sixth of the estimated total amount of
such taxes, insurance premiums and other charges
to be paid on dates, as provided above, during the
ensuing twelve-month period: Provided, however,
That in the event the lender determines there will
be or is a deficiency he shall not be prohibited
from requiring additional monthly deposits in such
43a
Appendix B
escrow account to avoid or eliminate such
deficiency.
12 U.S.C. § 2609(a)(2).
We begin by noting that, in a relatively recent opinion,
the Ninth Circuit has approved Greenwald ‘s temporal “at
or before settlement” approach to the scope of RESPA’s
applicability in the context of whether a lender is required to
disclose the possibility that demand and reconveyance fees
will be assessed in the future. See Bloom v. Martin, 77 F.3d
318, 321 (9th Cir.1996). We, conclude, however, that the
Greenwald temporal analysis lacks continuing viability in
the context of escrow accounts because §§ 2605 and 2609
impose obligations on lenders that extend beyond the date
of the closing. Indeed, an Illinois federal district court has
noted that “RESPA applies not only to the actual settlement
process, however, but also to the servicing of federally
regulated mortgage loans.” MorEquity, Inc. v. Naeem, 118
F.Supp.2d 885, 900 (N.D.II1.2000). Nevertheless, we also
conclude that the payment of interest on escrow accounts
remains beyond the scope of RESPA, which therefore lends
no support for plaintiffs’ claim.
Congress enacted RESPA to require lenders to provide
better information and disclosure to consumers, thereby
protecting them from abusive practices such as, inter alia,
unnecessarily high closing and escrow charges. See 12 U.S.C.
§ 2601; MorEquity, 118 F.Supp.2d at 900. Put differently,
the scope of RESPA ends with the prevention of potentially
abusive charges against consumers; it is intended to protect
44a
Appendix B
consumers’ present capital.'® Accordingly, a lender’s
obligation to pay interest falls outside the scope of RESPA
and into the deregulated ambit of the mortgage agreement’s
terms.'’ We, therefore, conclude that the HOLA Regulations
16. Plaintiffs argue that the payment of interest on escrow
accounts does in fact impact the amount that borrowers are required
to pay out-of-pocket into those accounts, and therefore, falls within
the ambit of RESPA. (Pls. Reply Mem. Supp. Summ. J. at 3.) In
support of this contention, plaintiffs rely on the fact that most lenders
who pay interest do so in the form of a direct credit to the borrowers’
accounts. (/d.) Plaintiffs also rely on the “economic impact” of such
payments when they are made by separate check. (/d.) We disagree
with plaintiffs’ arguments because the mechanics of payment are
irrelevant; acceptance of their “economic impact” argument
conceivably would stretch RESPA to cover every collateral source
of income that might affect the amount of out-of-pocket funds that a
borrower would need to place into escrow—an interpretation that
we decline to adopt.
17. Plaintiffs also argue that it is unreasonable for OTS to make
the payment of interest on escrow accounts a matter of separate
contractual agreement, rather than regulation because such mortgage
agreements are contracts of adhesion offered to borrowers on a “take
it or leave it” basis. (Pls. Mem. Supp. Summ. J. at 14-15.) Accepting
plaintiffs’ representation as true, we nevertheless decline to pass on
the reasonableness of the HOLA Regulations because, inasmuch as
they are not inconsistent with HOLA or RESPA and there is no claim
that they are completely arbitrary, such an inquiry would be an
inappropriate judicial intrusion into the administrative rule-making
process. See, e.g., de la Cuesta, 458 U.S. at 169-70 (“Admittedly,
the wisdom of the Board’s policy [not banning the use of due-on-
sale clauses] is not uncontroverted. But neither is it arbitrary or
capricious. As judges, it is neither our function, nor within our
expertise, to evaluate the economic soundness of the Board’s
approach.”).
45a
Appendix B
are not inconsistent with RESPA and that they preempt the
New York escrow account interest statutes.'* Accordingly,
we grant defendant’s motion, deny plaintiffs’ cross motion,
and dismiss the First Cause of Action in the Complaint
seeking a declaration that federal law does not preempt or
preclude the applicability of the New York escrow account
interest statutes. We also grant defendant’s motion, deny
plaintiffs’ cross motion, and dismiss the Second, Third and
Fifth Causes of Action, as they are based on the preempted
state statutes.’
18. Plaintiffs, citing the “savings” statute, 12 U.S.C. § 2616
and regulations 24 C.F.R. §§ 3500.17(c)(8) and (d)(1)(C), also claim
that RESPA and the regulations promulgated thereunder specifically
incorporate state escrow statutes that provide greater consumer
protection. (Pls. Mem. Supp. Summ. J. at 8.) Although these
regulations clearly incorporate state laws that provide greater
consumer protections with respect to the existence of escrow accounts
and the amount of money that borrowers must deposit therein, the
payment of interest is beyond their scope because like the RESPA
statutes, they concern only payments by consumers.
19. Plaintiffs contend that their Third Cause of Action, based
on violations of N.Y. Gen. Bus. Law § 349, the deceptive business
practices statute, remains viable because defendant’s failure to
disclose the federal preclusion of the state escrow statutes constitutes
failure to disclose a material fact. (Pls. Mem. Supp. Summ. J. at 23-
24.) Defendant contends otherwise, and notes that compliance with
applicable federal regulations is a compete defense to claims of
deceptive business practices under § 349(d). (Def. Mem. Supp. Mot.
Dismiss at 19 n. 4.)
Section 349(d) provides that:
In any such action it shall be a complete defense that the
act or practice is, or if in interstate commerce would be,
(Cont'd)
46a
Appendix B
Ill. Whether the Mortgage Agreement Requires the
Payment of Escrow Interest
Defendant, relying on de Ja Cuesta, next contends that
the mortgage agreement’s interest and choice of iaw clauses
did not require it to pay interest on escrow accounts because
federal law is the only applicable “law” with respect to
whether defendant is required to make such payments.
Accordingly, defendant requests dismissal of the Fourth
Cause of Action in the Complaint. (Def. Mem. Supp. Mot.
Dismiss at 13-14, 19.) Plaintiffs argue in response that, as
an ambiguous contract of adhesion, the mortgage agreement
should be construed against the lender that drafted it and
(Cont’d)
subject to and complies with the rules and regulations
of, and the statutes administered by, the federal trade
commission or any official department, division,
commission or agency of the United States as such rules,
regulations or statutes are interpreted by the federal trade
commission or such department, division, commission
or agency or the federal courts.
We conclude that plaintiffs’ action under § 349 fails to state a claim
for which relief can be granted because the federal regulations
completely preempt the state escrow account interest statutes, and
defendant is in compliance with the applicable federal requirements.
Moreover, “[c]onsumer fraud claims may not be predicated upon fully
disclosed facts,” Negrin v. Norwest Mortgage, Inc., 263 A.D.2d 39,
50, 700 N.Y.S.2d 184 (2d Dep’t 1999), and “the parties are presumed
to have contracted with knowledge of [the] law.” Alexander Muss &
Sons v. Rozany, 170 Misc.2d 890, 891, 655 N.Y.S.2d 238 (1996)
(citing Dolman v. U.S. Trust Co. of N.Y., 2 N.Y.2d 110, 116, 138
N.E.2d 784, 157 N.Y.S.2d 537 (1956)).
47a
Appendix B
interpreted as expressly incorporating the New York escrow
statutes. (Pls. Mem. Supp. Summ. J. at 18-21.)
As stated previously, the interest provision provides in
relevant part:
Lender will not be required to pay me any interest
or earnings on the funds unless either (i) Lender
and I agree in writing, at the time I sign this
Security Instrument, that Lender will pay interest
on the Funds; or (ii) the law requires Lender to
pay interest on the Funds.
(Pls. Rule 56.1 Stmt. ¥ 3 (emphasis added).) With respect to
the governing law, the mortgage agreement states in relevant
part that “this Security Instrument is governed by federal
law and the law that applies in the place where the Property
is located.” (Jd. (emphasis added).)
Defendant’s contentions present an issue of contract
interpretation under New York state law. Contract
interpretation presents a question of law for the court if the
contract is clear and unambiguous. See, e.g., United States
ex rel. AWL Indus., Inc. v. Site Remediation Servs. Corp., 92
F.Supp.2d 132, 135 (E.D.N.Y.2000) (citing Briarwood
Towers 85th Co. v. Guterman, 136 A.D.2d 456, 458, 523
N.Y.S.2d 98 (1st Dep’t 1988)). Moreover, “[wJhether or not
a writing is ambiguous is a question of law to be resolved by
the courts.” W.W.W. Assocs., Inc. v. Giancontieri, 77 N.Y.2d
157, 162, 566 N.E.2d 639, 565 N.Y.S.2d 440 (1990). ““Where
the terms of a contract are ambiguous and susceptible to more
than one meaning, the court may consider evidence outside
48a
Appendix B
of the contract as an aid to interpret the meaning of the
language that the parties chose.” United States ex rel. AWL
Indus., 92 F.Supp.2d at 135. “The language at issue will be
deemed ambiguous if it is capable of more than one meaning
when viewed objectively by a reasonably inteliigent person
who has examined the context of the entire integrated
agreement.” /d. (internal quotation marks omitted).
Residential mortgage agreements such as the contract at
issue in the present case frequently are preprinted form
contracts of adhesion that are offered by lenders on a “take it
or leave it” basis that deprives prospective borrowers the
opportunity to negotiate terms effectively. Jamaica Sav. Bank,
390 F.Supp. at 1362; see also In re Parker, 269 B.R. 522,
530 (D.Vt.2001). Plaintiffs assert, and defendant does not
deny, that the mortgage in the present case is such a contract.
Accordingly, we will interpret the terms of the agreement in
accordance with the standards applicable to contracts of
adhesion, and construe it against defendant in case of “doubt
or ambiguity.” See, e.g., Jacobson v. Sassower, 66 N.Y.2d
991, 993, 489 N.E.2d 1283, 499 N.Y.S.2d 381 (1985)
(“In cases of doubt or ambiguity, a contract must be construed
most strongly against the party who prepared it, and favorably
to a party who had no voice in the selection of its language.”’).
Thus, as in the analogous insurance policy context, defendant
as drafter has the burden of “establish[ing] that the words
and expressions used not only are susceptible of the
construction sought by [the drafter] but that it is the only
construction which may fairly be placed on them.” Lachs v.
Fid. & Cas. Co., 306 N.Y. 357, 365, 118 N.E.2d 555 (1954)
(construing airline trip insurance policy purchased from
vending machine).
49a
Appendix B
New York contract law permits parties to incorporate by
reference statutes as terms of their contracts. See, e.g., Walter
H. Poppe Gen. Contracting, Inc. v. Town of Ramapo, 280
A.D.2d 667, 668, 721 N.Y.S.2d 248 (2d Dep’t 2001). Indeed,
although the preemption doctrine prohibits parties to a
contract from electing to have state law govern over federal
law, they nevertheless remain free to include as terms of their
agreement state law directives that otherwise would be
preempted by federal law. See, e.g., Wells v. Chevy Chase
Bank, ES.B., 377 Md. 197, 224, 231, 832 A.2d 812 (2003)
(construing credit card contract referring to state commercial
law that had otherwise been preempted by HOLA and noting
that “[w]hether the appellants’ claims are preempted and
whether the appellees contracted to comply with Subtitle 9
are separate and different questions, requiring differing
analyses.”), petition for cert. filed, 72 U.S.L.W. 3451 (U.S.
Dec. 22, 2003) (No. 03-918). State laws that become terms
of the agreement between the contracting parties are
enforceable by a breach of contract action, unless federal
law has specifically preempted the breach of contract action
as well. See Am. Airlines, Inc. v. Wolens, 513 U.S. 219, 233
(1995) (concluding that the preemption provision of the
Airline Deregulation Act of 1978 barred state consumer fraud
statutory claims against airline, but permitted breach of
contract actions based on ticket agreemenis). State law
provisions may be included as contract terms either explicitly
as text or incorporated by reference. Wells, 377 Md. at
228-29.
A general choice-of-law clause is, however, insufficient
as a matter of law to incorporate by reference preempted state
laws as the terms of a contract. Holding that “the ‘law of the
50a
Appendix B
jurisdiction’ includes federal as well as state law,” the United
States Supreme Court has concluded that parties did not agree
to be bound by state or local law with respect to due-on-sale
clauses when their agreement contained a provision stating
that a “deed is to be governed by the ‘law of the jurisdiction’
in which the property is located.” de la Cuesta, 458 U.S. at
158 n.12. The cases following de la Cuesta demonstrate that,
in order to be considered more than just a general choice-of-
law clause, a contract provision purporting to incorporate
state law as a contract term must actually cite the relevant
state laws to that effect. Compare Gavey Props./762 v. First
Fin. Sav. & Loan Ass'n, 845 F.2d 519, 523 (Sth Cir.1988)
(concluding that the parties did not “contract out of the federal
provision by specifically choosing Texas law in their loan
agreements” when clause stated that “‘[i]t is the intention of
the parties hereto to conform strictly to the applicable laws
of the state of Texas and the United States of America and
judicial and/or administrative interpretations thereof
regarding the contracting for, charging and receiving of
interest for the use of detention of money.’”), and MorEquity,
118 F.Supp.2d at 898 n. 5 (concluding that preempted Illinois
usury laws did not apply, despite mortgages’ choice-of-law
provision “indicating that the security interest will be
governed by federal law and the law of the jurisdiction in
which the property is located”), with Wells, 377 Md. at 201,
231-32 (concluding that the parties incorporated by reference
state statutes as contract terms when credit card
agreement’s governing law provision provided that
“{t]his Agreement is made in Maryland. It is governed
by Subtitle 9 of Title 12 of the Commercial Law
S5la
Appendix B
Article of the Maryland Annotated Code and applicable
federal laws.”).”°
Construing the choice-of-law provision in the present
case against defendant, we conclude that, as a matter of law,
that clause is unambiguous and does not in any way evince
either party’s intent to incorporate the New York escrow
statutes into the agreement.”' A clause providing that the
20. Indeed, in Wells, the Maryland Court of Appeals noted
further that:
It is true that Subtitle 9 is a state law, as defined by
12 C.F.R. § 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
regulation, ruling, order or judicial decision to be
complied with in this case. /t 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 Chase; it was not imposed on Chevy
Chase as a matter of law.
377 Md. at 231 (emphasis added).
21. Plaintiffs state that after Atlantic Bank succeeded Yonkers
as their mortgage servicing institution in 2002, Atlantic Bank paid
them escrow interest under the same contract both originally and
after refinancing. (Pls. Mem. Supp. Summ. J. at 21.) Plaintiffs claim
that this action proves that the choice-of-law provision was intended
to require the lender to pay interest on escrow accounts. (/d.)
Assuming the relevance of Atlantic Bank’s post-merger actions in
divining the intent of its predecessor-in-interest at the time that
(Cont'd)
52a
Appendix B
agreement is “governed by federal law and the law that
applies in the place where the Property is located,” (Pls. Rule
56.1 Stmt. § 3 (emphasis added)), does not have the
specificity required as a matter of law to incorporate
otherwise preempted state statutes into the mortgage
agreement, particularly when the Supremacy Clause
implications are taken into account. Permitting such a broad
choice-of-law clause to incorporate preempted state statutes
as contract terms would defy the reality that the constitutional
doctrine of preemption is as meaningful in New York as it is
in the other forty-nine states.” Accordingly, we grant
defendant’s motion, deny plaintiffs’ cross motion, and dismiss
plaintiffs’ Fourth Cause of Action.
(Cont’d)
Yonkers entered into the loan agreement with plaintiffs, we cannot
consider that subsequent conduct because we have concluded at the
outset that the mortgage’s choice-of-law clause is unambiguous as a
matter of law. See, e.g., Nat’l Bank of N. N.Y. v. Shaad, 60 A.D.2d
774, 775, 400 N.Y.S.2d 965 (4th Dep’t 1977) (“The language of the
security agreements being clear and unambiguous, the subsequent
conduct of the parties with respect to the transactions may not be
considered for the purpose of varying or contradicting the plain
meaning of the agreements.”); accord Hauser v. W. Group Nurseries,
Inc., 767 F.Supp. 475, 485 (S.D.N.Y.1991).
22. Indeed, the New York legislature recognized the
applicability of the preemption doctrine in this context, and
specifically conflict preemption. N.Y. Banking Law § 14-b provides
in relevant part that “In no event shall interest be required to be paid
on escrow accounts where ... the payment of such interest would
violate any federal law or regulation.” Jd. § 14-b(4)(ii).
53a
Appendix B
IV. Plaintiffs’ Fifth Amendment Claim
Defendant contends that plaintiffs’ alternative Fifth
Amendment claim should be dismissed because its
compliance with federal regu’ations rendering the payment
of interest a matter of private choice does not constitute the
state action requisite for a viable Takings Clause claim.
(Def. Mem. Supp. Mot. Dismiss at 21-23.) Plaintiffs contend
in response that it is the OTS Regulations themselves that
are the unconstitutional state action because they take
plaintiffs’ escrow interest and give it to defendant, and that
the taking of interest from the owner of the principal
constitutes a taking under the Fifth Amendment. (Pls. Mem.
Supp. Summ. J. at 24-25.) We conclude that defendant’s
failure to pay interest on plaintiffs’ escrow account did not
violate the Fifth Amendment Takings Clause.
The Takings Clause of the Fifth Amendment to the
United State Constitution prohibits a taking of private
property for “public use, without just compensation.”
U.S. Const., amend. V. It is beyond cavil that governmental
action is required to trigger the application of this clause, it
does not apply to private parties who are not state or
governmental actors. See, e.g., Fid. Fin. Corp. v. Fed. Home
Loan Bank of S.F., 792 F.2d 1432, 1435 (9th Cir.1986)
(acknowledging issue, but not deciding whether federal home
loan bank was a governmental actor for Fifth Amendment
purposes), cert. denied, 479 U.S. 1064 (1987); N. ¥. N.H. &
H.R. Co., First Mortgage 4% Bondholders’ Comm. v. United
States, 305 F.Supp. 1049, 1055 (S.D.N.Y.1969), vacated on
other grounds sub. nom., New Haven Inclusion Cases, 399
U.S. 392 (1970). The state or governmental action
54a
Appendix B
requirement is satisfied if the complained-of conduct is
“fairly attributable” to the state. Am. Mfrs. Mut. Ins. Co. v.
Sullivan, 526 U.S. 40, 50 (1999). In Cranley v. Nat'l Life
Ins. Co. of Vt., 318 F.3d 105 (2d Cir.2003). the Second Circuit
described the close public-private nexus required for conduct
to be “fairly attributable” to the government:
For the conduct of a private entity to be “fairly
attributable” to the state, there must be “such a
‘close nexus between the State and the challenged
action’ that seemingly private behavior ‘may be
fairly treated as that of the State itself.’” . . . “The
purpose of [the close-nexus] requirement is to
assure that constitutional standards are invoked
only when it can be said that the State is
responsible for the specific conduct of which the
plaintiff complains.” .. .
The determination of whether the specific
conduct of which the plaintiff complains
constitutes state action is a “necessarily fact-
bound inquiry.” ... A challenged activity by a
private entity may be deemed state action when
the state exercises “coercive pov er,” is “entwined
in [the] management or control” of the private
actor, or provides the private actor with
“significant encouragement, either overt or
covert,” or when the private actor “operates as a
willful participant in joint activity with the State
or its agents,” is “controlled by an agency of the
State,” has been delegated a “public function” by
the state, or is “entwined with governmental
policies.” ...
pans ee
55a
Appendix B
Id. at 111-12 (citations omitted) (quoting, inter alia,
Brentwood Academy v. Tenn. Secondary Sch. Athletic Ass'n,
531 U.S. 288, 295 (2001) and Blum v. Yaretsky, 457 US.
991, 1004 (1982)). A private entity is not, however, “a state
actor where its conduct is not compelled by the state but is
merely permitted by state law.” Cranley, 318 F.3d at 112.
Indeed, that a corporate entity is chartered by the government
does not make it a government actor because “[alll
corporations act under charters granted by a government”
and “[e]ven extensive regulation by the government does not
transform the actions of the regulated entity into those of the
government.” S.F. Arts & Athletics, Inc. v. United States
Olympic Comm., 483 U.S. 522, 543-44 (1987).
Indeed, compliance with applicable laws and regulations
during the course of corporate conduct does not render a
corporation a state actor, even if that conduct causes other
parties to suffer some financial or other deprivation. For
example, in San Francisco Arts & Athletics, the plaintiffs,
promoters of the “Gay Olympic Games,” claimed that the
United States Olympic Committee (the “USOC”) enforced
the Amateur Sports Act granting it exclusive use of the word
“Olympics” and associated symbols in a discriminatory
manner that violated the Fifth Amendment’s Due Process
Clause. 483 U.S. at 543. The Supreme Court held that the
USOC was not a governmental actor, despite the fact that it
was chartered and partially funded by Congress, and subject
pica a iam ee ee aaa |
56a
Appendix B
to other congressional requirements. /d. The Court concluded
that the:
USOC’s choice of how to enforce its exclusive
right to use the word “Olympic” simply is not a
governmental decision. There is no evidence that
the Federal Government coerced or encouraged
the USOC in the exercise of its right. At most,
the Federal Government, by failing to supervise
the USOC’s use of its rights, can be said to
exercise “[m]ere approval of or acquiescence in
the initiatives” of the USOC.
Id. at 547 (alteration in original).
Similarly, in Cranley, the Second Circuit held that the
reorganization of a domestic mutual insurance company into
a stock insurance company, made in accordance with Vermont
state insurance laws that required the approval of the
insurance commissioner, did not constitute the state action
necessary for the plaintiffs to state a claim under the Takings
and Contract Clauses.” 318 F.3d at 109-10, 112. The court
noted that “the State did not instigate the reorganization”
and that the commissioner’s role was limited to ensuring that
the insurance company complied with disclosure
requirements and that the reorganization would not prejudice
23. See also Tancredi v. Metro. Life Ins. Co., 316 F.3d 308, 313
(2d Cir.) (concluding in New York insurance demutualization case
that “a regulatory agency’s performance of routine oversight functions
to ensure that a company’s conduct complies with state law does not
so entwine the agency in corporate management as to constitute state
action”), cert. denied, 123 S.Ct. 2610 (2003).
57a
Appendix B
insurance policyholders financially. Jd. at 112. The Second
Circuit stated that the reorganization “plan itself was
voluntarily conceived, approved and executed by the
management and membership of a private company.” /d. at
112-13.
We conclude that defendant’s failure to pay plaintiffs
interest on their mortgage escrow accounts did not constitute
a taking in violation of the Fifth Amendment because
defendant, although a federally chartered savings and loan,
was not a governmental actor. In the present case, defendant’s
actions constituted a permissible exercise of the options
available to it under the applicable federal lending
regulations. Indeed, plaintiffs have not submitted any
evidence of governmental coercion or encouragement of
defendant’s conduct in drafting the escrow account interest
clause of the mortgage loan agreement.” Accordingly, we
dismiss plaintiffs’ Sixth Cause of Action.
24. Accordingly, plaintiffs’ reliance on Phillips v. Washington
Legal Found., 524 U.S. 156 (1998) and Webb’s Fabulous Pharmacies,
Inc. v. Beckwith, 449 U.S. 155 (1980), for the proposition that the
taking of interest from the owner of the principal by government
action is a taking subject to the Fifth Amendment is unavailing
because there has been no government action in the present case for
purposes of that claim. (Pls. Mem. Supp. Summ. J. at 24-25.)
58a
Appendix B
CONCLUSION
For all of the foregoing reasons, defendant’s Rule
12(b)(6) motion to dismiss the Complaint is granted in its
entirety without leave to replead and plaintiffs’ cross motion
for summary judgment pursuant to Rule 56 is denied as
moot.”
SO ORDERED.
Dated: White Plains, NY
March 8, 2004
s/ William C. Conner
Senior United States District Judge
25. The issue of liability having been decided entirely in
defendant’s favor, we need not address plaintiffs’ Rule 23 class
certification claims.
en
59a
APPENDIX C — ORDER OF THE UNITED STATES
COURT OF APPEALS FOR THE SECOND CIRCUIT
DENYING PETITION FOR REHEARING
FILED FEBRUARY 15, 2005
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
Tuurcoop Marsuatt U.S. Court House
40 FoLey SQUARE
New York 10007
Roseann B. MacKechnie
CLERK
Date: 2/15/05
Docket Number: 04-1948-cv
Shori Title: Flagg v. Yonkers Savings
DC Docket Number: 03-cv-5133
DC: SDNY (WHITE PLAINS)
DC Judge: Honorable William Conner
At a stated Term of the United States Court of Appeals
for the Second Circuit, held at the Thurgood Marshall United
States Courthouse, Foley Square, in the City of New York,
on the 15" day of February two thousand five.
Present:
Hon. James L. Oakes
Hon. Guido Calabresi
Hon. Chester J. Straub
CIRCUIT JUDGES,
60a
Appendix C
Hans W. Flagg and Eileen S. Flagg, on behalf of themself
and all others similarly situated,
Plaintiffs-Appellants,
Vv
Yonkers Savings and Loan Association, FA, also known as
Yonkers Financial,
Defendant-Appellee.
A petition for panel rehearing having been filed herein by
Appellants
Upon consideration thereof, it is
Ordered that said petition be and it hereby is DENIED.
For the Court,
Roseann B. MacKechnie, Clerk
By: s/ Tracy W. Young
Motion Staff Attorney
6la
APPENDIX D — PRINCIPAL STATUTES AND
REGULATIONS INVOLVED
New York General Obligations Law (“GOL”)
Section 5-601:
Interest on deposits in escrow with
mortgage investing institutions. Any mortgage
investing institution which maintains an escrow
account pursuant to any agreement executed in
connection with a mortgage on any one to Six
family residence occupied by the owner or on any
property owned by a cooperative apartment
corporation, . . . and located in this state shall, for
each quarterly period in which such escrow
account is established, credit the same with
dividends or interest at a rate of not less than two
per centum per year based on the average of the
sums so paid for the average length of time on
deposit or a rate prescribed by the banking board
pursuant to section fourteen-b of the banking law
and pursuant to the terms and conditions set forth
in that section whichever is higher.
Title 12 United States Code, Section 2616 (RESPA)
(“State law unaffected; inconsistant Federal and State
provisions”):
This chapter does not annul, alter, or affect, or
exempt any person subject to the provisions of
this chapter from complying with, the laws of any
State with respect to settlement practices,
except to the extent that those laws are
‘nconsistent with any provision of this chapter,
and then only to the extent of the inconsistency.
The Secretary is authorized to determine whether
mE |
62a
Appendix D
such inconsistencies exist. The Secretary may not
determine that any State law is inconsistent with
any provision of this chapter if the Secretary
determines that such law gives greater protection
to the consumer.
Title 12 United States Code, Section 1463(a) (Home
Owners’ Loan Act (“HOLA”)):
(a) Federal savings associations
(1) In general
The Director shall provide for the
examination, safe and sound operation,
and regulation of savings associations.
(2) Regulations
The Director may issue such
regulations as the Director determines
to be appropriate to carry out the
responsibilities of the Director or the
Office.
(3) Safe and sound housing credit to be
encouraged
The Director shall exercise all
powers granted to the Director under
this chapter so as to encourage savings
associations to provide credit for
housing safely and soundly.
63a
Appendix D
Title 12 United State Code, Section 1464(a) (HOLA):
(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 (including 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 investment powers conferred by this
section are intended to encourage such institutions
to provide credit for housing safely and soundly.
12 C.ER. § 545.2 (OTS Federal Preemption Regulation):
The regulations in this part 545 are promulgated
pursuant to the plenary and exclusive authority
of the Office to regulate all aspects of the
operations of Federal savings associations, as set
forth in section 5(a) of the Act. This exercise of
64a
Appendix D
the Office’s authority is preemptive of any state
law purporting to address the subject of the
operations of a Federal savings association.
12 C.F.R. § 560.2 (OTS Occupation of the Field
Regulation):
(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 associations 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 authorized under
federal law, including this part, without regard to
state laws purporting to regulate or otherwise
65a
Appendix D
affect their credit activities, except to the extent
provided in paragraph (c) of this section or Sec.
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 Sec. 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: .. .
* * *
(6) Escrow accounts, impound accounts, and
similar accounts[.]
‘Suprame Courl, U.S.
@) FILEC
No. 04-1553 JUL 27 2005
OFFICE OF THE CLERK {
IN THE
Supreme Court of the United States
Hans W. FLAGG AND EILEEN S. FLAGG, on behalf of themselves
and all others similarly situated,
Petitioners,
v.
YONKERS SAVINGS AND LOAN ASSOCIATION, FA,
aiso known as Yonkers Financial,
Respondent.
ON PETITION FOR A Writ OF CERTIORARI TO THE
UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT
<r neers me
“een ea
BRIEF IN OPPOSITION
ROBERT HERMANN
Counsel of Record
W. EDWARD BRIGHT
DOREEN KLEIN
THACHER Prorritt & Woop LLP
Two World Financial Center
New York, New York 10281
(212) 912-7400
Attorneys for Respondent
195600 g
COUNSEL PRESS
(800) 274-3321 + (800) 359-6859
COUNTER-STATEMENT OF THE
QUESTIONS PRESENTED
1. Are there compelling reasons for this Court to review
the Second Circuit’s decision upholding the District Court’s
dismissal of the complaint where the Second Circuit
concluded that (a) lending and investment regulations of the
federal Office of Thrift Supervision which preempt New York
statutes that impose upon a federal savings association the
obligation to pay interest on escrow funds for New York
residential mortgages' are consistent with congressional
intent, and (b) the federal Real Estate Settlement Procedures
Act does not supersede the federal Home Owners Loan Act
or prevent the Office of Thrift Supervision from asserting
its regulatory authority over federal thrifts in connection with
escrow accounts?
2. Are there compelling reasons for this Court to review
the Second Circuit’s decision upholding the District Court’s
decision that Respondent’s exercise of its option not to pay
interest on escrow funds, as permitted under the Office
of Thrift Supervision regulations, was not a taking of
Petitioners’ property without just compensation, in violation
of the Fifth Amendment to the United States Constitution?
1. The New York statutes at issue (the “New York Escrow
Statutes”) are: Section 5-601 of the New York General Obligations
Law; Section 14b and Section 6-k(2)(b)b of the New York Banking
Law; and Section 953(2) of the New York Real Property Tax Law.
ll
TABLE OF CONTENTS
COUNTER-STATEMENT OF THE QUESTIONS
PRESENTED
Sa @:@ #48 5656.05.64). 8 BR 2S SS OOS. 6 6 6 ee SAS
TABLE OF CONTENTS
a oe ow oD gk be ee Ok ae Te ae ee ee tee ae be
TABLE OF CITED AUTHORITIES
COUNTER-STATEMENT OF THE CASE .......
COUNTER-STATEMENT OF PROVISIONS OF
LAW INVOLVED
Ye. oe eS 6 BOR eo eS 2S 8 CeO eee RS
COUNTER-STATEMENT OF FACTS
REASONS FOR DENYING THE PETITION
Point |
THE SECOND CIRCUIT CORRECTLY
CONCLUDED THAT HOLA AND THE
HOLA REGULATIONS PREEMPT THE
NEW YORK ESCROW STATUTES ......
A. The HOLA Regulations Are Based Upon
Reason And Within HOLA’s Authority
e 8 6 (2°82 )S © O28 SEE KOR SCA Sole. Cee ee Ore ee 8
B. Congress Did Not Intend RESPA Or
HUD To Regulate A Federal
Association’s Obligation To Pay Interest
Ce TOW nn is a eas
il
a)
iil
Contents
Page
Point Il
THE HOLA REGULATIONS DO NOT
CONSTITUTE A CONSTITUTIONAL
TRIOS 59s es dee Oe 21
A. A Federal Instrumentality Is Not A State
MRO hc eo ed Ora ee
B. The Bank’s Compliance With Federal
Regulations Does Not Render Its
Conduct “Fairly Attributable” To The
NE eek ea wer eee ess 23
Point III
THIS CASE IS NOT APPROPRIATE
FOR REVIEW BECAUSE IT POSES NO
IMPORTANT FEDERAL AND CONSTI-
EAs Ps PRO 6 ha pesos cae wce eee a ea
CRP RR es iS nee eek peewee eee 26
iv
TABLE OF CITED AUTHORITIES
Page
Cases
American Mfrs. Mut. Ins. Co. v.
Delores Scott Sullivan;
526 U.S. SCID) eo i a es ee eee
Andrews v. Federal Home Loan Bank of Atlanta,
O98 Fi26 218 (4 Cw 1999) es ee ak: 0
Bank of America v. Citv and County of
San Francisco,
TOF F356 SN APE ZOOS} oe ee is 6, 20
Bank One v. Guttau,
190 F.3d 644 (8th Cir. 1999) os ee. 20
Blum v. Yaretsky,
RAT ee EE CPD ee ca we ee eee Ea ae 25
Bloom v. Martin,
72 £30 SEB TONC i 198) 3 Se 16
Boulware v. Crossland Mortg. Corp.,
291 F368 26 Cat Cir FOZ): Fis eee 16
Conference of Fed. Sav. and Loan Ass ‘ns v. Stein,
604 6.20 1256 (90h Cir. T9TSE Sei ees 8
Ernst & Ernst v. Hochfelder,
Ren FOO e Tee obs Ok eo a eee 16
Cited Authorities
Page
Federal Nat. Mortg. Ass'n v. Lefkowitz,
390 F. Supp. 1364 (S.D.N.Y. 1975) 05 occa hy ta
Fidelity Fed. Sav. and Loan Ass'n vy. de la Cuesta,
BO Gr Pt CEE. ove ba eke ceha a passim
First Fed. Sav. & Loan Ass'n of Jackson County v.
First Fed. Sav. & Loan Ass'n of Huntsville,
446 F. Supp. 210 (N.D. Ala. 1978) ........... 22
First Fed. Sav. and Loan Ass'n of
Lake Worth v. Brown,
oie ye Bysee is) Gh ek) Gee enemies 10
Greenwald y. First Fed. Sav. Loan Ass'n of Boston,
446 F. Supp. 620 (D. Mass. 1978) ............ 10
Haehl v. Washington Mut. Bank, F-A,,
277 F. Supp. 2d 933 (S.D. Ind. 2003) ......... 10
International Paper Co. v. Ouellette,
Bee ase PC EOTS 5 oc cause aces sd seca bios 20
Jamaica Sav. Bank v. Lefkowitz,
390 F. Supp. 1357 (E.D.N.Y.), aff'd, 423 U.S. 802
CPUs s br alee kas Coa aerate eee 11
Lugar v. Edmondson Oil Co., Inc.,
Fe Sie PEE ETRE 8 Re CORES ARG OR 25
VI
Cited Authorities
Page
Marquette Nat. Bank of Minneapolis v. First of
Omaha Service Corp.,
cat Oi Meo, eS Di, IER i Bana gga ONS 22
Medtronic, Inc. v. Lohr,
518 U.S. 470 (1996), cert. denied, 538 U.S. 1069
CP a ic eer ee kee Sew RE ee i eek bes F422
MorEquity, Inc. vy. Naeem,
118 F. Supp. 2d 885 (N.D.IIl. 2000) .......... 14
Pedraza v. United Guar. Corp.,
114 F. Supp. 2d 1347 (S.D. Ga. 2000) ......... 16
San Francisco Arts & Athletics, Inc. v.
United States Olympic Committee,
GF Ae PERRET oh ck eke bo a ek ee
Thomas v. Ocwen Federal Bank FSB,
EGE WER DAT ST AGA, , EUET 2c ce x shes 16-17
Udall v. Tallman,
ee Ree Pe at ee Rew eee 12
United States v. Locke,
BE AEs ER ei ee eae ee 6. 20
Wisconsin League of Financial Institutions,
Ltd. v. Galecki,
707 F. Supp. 401 (W.D.Wis. 1989) ........... 10, 13
vil
Cited Authorities
Page
Statutes
2 Giese & POEM AD el hs ces coo ce ee an 7
2 UA 2 8 PSOLON CE 6 oss chistes eee eee. 2
SBaR See Be |: eperrereer ere ee ne nn ae L,2
i, USC, G ZOOS) 6 eo ee eee 19
be BAL. © OCR 6 ee ere een te eee 14
2 USC. § 206th), (0) eT eae 15
Ea es © 2000. 22 vias pane ieee ae 2) 435.49
Regulations
2 CTR: SS? Bae a ea ee 2,8
24 P RE SAS IMA ios ae ey sok Sa 9
2 GER POE ee is een ee a ee |
52 Pe RD. bo ik cd kee ek ee 2,8
[2 © ER. § SOG. AMO) oe fi ae eee ees 10
EOC ACR OG POE a oo ce ee ee 17
COUNTER-STATEMENT OF THE CASE
Federal regulations preempt any state law that would require
a federal savings association to pay interest on escrow funds in
the absence of the written agreement of the parties to the
mortgage that the lender will pay interest. Section S(a) of
the Home Owners Loan Act, 12 U.S.C. § 1464(a) (“HOLA”),
as implemented by the Office of Thrift Supervision (“OTS”)
Lending and Investment Regulations, 12 C.F.R. Part 560 (the
“HOLA Regulations”).
The HOLA Regulations further Congress’ intent to give
the OTS plenary authority to regulate all aspects of the lending
operations of federal thrifts, thus ensuring a single set of uniform
federal laws and regulations applicable to the thrifts’ operations
nationwide. The federal regulatory framework, which relieves
federal thrifts of the obligation to pay interest on escrow accounts
while preserving the customer’s right to negotiate for a different
arrangement with the federal thrift, has a rational basis and is
within the scope of the OTS’ statutory authority.
Petitioners’ contrary contention, that the Real Estate
Settlement Procedures Act (“RESPA™) governs a lender's
obligation to pay interest on escrow accounts is, simply put,
wrong. Petitioners wrongly assume the purpose of RESPA is to
govern all aspects of escrow accounts. They then posit
erroneously that RESPA is intended to govern a federal thrift’s
obligation to pay escrow interest. From this weak set of premises,
they argue that the HOLA Regulations are inconsistent with
RESPA and must give way. Even the Department of Housing
and Urban Development (“HUD”), the agency appointed by
Congress to implement RESPA, has stated unequivocally that
RESPA does not grant it authority to regulate interest on escrows.
Because Petitioners’ thesis is wrong, their conclusion is wrong.
tm
Petitioners similarly have no basis for their claim that,
because Petitioners did not seek or obtain the voluntary
agreement for the payment of interest which federal law
contemplates, Respondent, a private corporation, engaged in a
“taking” of their property without just compensation under the
Fifth Amendment to the United States Constitution. Any viable
“taking” claim requires conduct by a state actor. Yonkers Savings
and Loan Association, F.A. (the “Bank”, a federally-chartered
savings and loan association, 1s not a state actor.
COUNTER-STATEMENT OF PROVISIONS
OF LAW INVOLVED
Contrary to Petitioners’ characterization of Congress’ intent
with respect to preemption of state laws, RESPA does not govern
all aspects of escrow accounts. In particular, RESPA and its
savings provision, 12 U.S.C. § 2616, do not evince an intent to
block preemption of state escrow laws pertaining to interest on
escrow accounts.
In addition to the OTS Regulations identified by Petitioner
~ 12 C.F.R. §§ 545.2 and 560.2 — the statutory authority for the
OTS Regulations demonstrates Congress’ intent to give the OTS
plenary authority to regulate the lending operations of federal
thrifts. See 12 U.S.C. § 1462a(b)(2) (“The Director may
prescribe such regulations and issue such orders as the Director
may determine to be necessary for carrying out this chapter and
all other laws within the Director's jurisdiction”); § 1463(a)(2)
(“The Director may issue such regulations as the Director
determines to be appropriate to carry out the responsibilities of
the Director or the Office”); § 1464(a) (the OTS is authorized
“under such regulations as the Director may prescribe to provide
for the organization, incorporation, examination, operation and
2. Atlantic Bank of New York is the successor by merger to the
Bank.
regulation of associations to be known as Federal savings
associations”).
COUNTER-STATEMENT OF FACTS
The factual background recited by Petitioners was either
admitted by Respondent for purposes of Petitioners’ summary
judgment motion only, or was alleged in Petitioners’ Complaint
and deemed admitted for purposes of Respondent's motion to
dismiss the Complaint.
Although Petitioners correctly assert that they commenced
a class action on behalf of themselves and other similarly situated
borrowers, the District Court declined to address Petitioners’
Rule 23 class certification claims in light of its decision granting
Respondent’s motion to dismiss the Complaint in its entirety
and without leave to replead.
The Second Circuit affirmed the judgment of the District
Court, which granted Respondent’s motion to dismiss the
Complaint without leave to replead, denied Petitioners’ motion
for summary judgment as moot, and declined to decide
Petitioners’ motion for class certification. The Second Circuit
found no merit in the issues that Petitioners raised on appeal,
namely, that New York law requires that the Bank pay them
interest on their mortgage escrow account and that the District
Court erred in dismissing their Fifth Amendment claim.
The Second Circuit rejected Petitioners’ contention that the
OTS’ preemption of state law pertaining to escrow interest
exceeds the authority granted the OTS by HOLA and is an
arbitrary and unreasonable exercise of its regulatory power.
The Court began its analysis by noting that regulations intended
to preempt state law are subject to judicial review only to
determine whether the agency administrator has exceeded his
statutory authority or acted arbitrarily. The Court noted that there
4
was no presumption against federal preemption in the regulation
of federally chartered banks, because that area had been
substantially occupied by federal authority for a long time.
Further, the Court examined the statutory authority of the OTS
Director to issue regulations, finding it “an extremely broad
grant of power that provides ample authority” for the OTS to
enforce consistent, nationwide regulations affecting lending
practices by preempting state laws purporting to impose
requirements concerning escrow accounts.
Though noting that the particular OTS regulation at issue
here had not previously come before it, the Second Circuit found
ample analogues and precedent to demonstrate that this exercise
of preemption was within reason and within HOLA’s grant of
authority, including this Court’s decision in Fidelity Fed. Sav.
and Loan Ass'n v. de la Cuesta, 458 U.S. 141 (1982).
OTS Regulations, the Court emphasized, expressly contemplate
that the individual parties may provide for the payment of interest
by negotiating for that provision. The Court concluded that this
provided a level of flexibility that defeated any accusation of
arbitrariness.
The Court rejected Petitioners’ claim that the OTS
regulation was unreasonable and unauthorized as inconsistent
with RESPA. First, the Court held that RESPA and HOLA are
not coextensive, because “RESPA regulates a narrow field of
financial transactions engaged in by a broad group of financial
institutions” while “HOLA regulates a specific breed of financial
institutions in respect of all of their transactions and
activities. ... Given that HOLA deals with institutions and
RESPA deals with transactions,” the Court held that it made no
sense to read RESPA as superseding HOLA and preventing the
OTS from regulating a federal thrift’s obligation to escrow
interest. Second, the Court rejected Petitioners’ interpretation
of the purpose of RESPA as designed to reduce the expenses
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