Homeowners ask the justices to enforce a New York consumer-protection law against banks

Petitions of the week

The Petitions of the Week column highlights a selection of cert petitions recently filed in the Supreme Court. A list of all petitions we’re watching is available here.

A response to the mortgage crisis of 2007, the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010 ushered in a host of new federal rules and oversight for the financial sector. This week, we highlight cert petitions that ask the court to consider, among other things, whether that federal regime supersedes a longstanding state-level regulation on banks.

Many mortgage lenders require a financial tool called an “escrow account” for people who buy homes. These accounts hold extra money from borrowers to cover property taxes and home-insurance payments that accrue throughout the life of a mortgage.

Initially, banks were not required to pay interest to homeowners on money held in escrow accounts. Some lenders took advantage of these functionally interest-free loans by requiring borrowers to maintain escrow funds far exceeding the amount needed to cover taxes and insurance on their homes. States began cracking down on this practice in the 1970s by passing laws that require banks to pay interest on money held in these accounts. In New York, for example, banks must pay at least 2% interest on funds held in escrow.

In 2010, Alex Cantero took out a mortgage with Bank of America to purchase a home in Queens. He and two other homeowners later sued the bank for refusing to pay them interest on the money in their escrow accounts in violation of New York’s law.

The U.S. Court of Appeals for the 2nd Circuit ruled that Bank of America need not heed the state’s 2% interest requirement. Dodd-Frank, the 2nd Circuit reasoned, built on the nation’s two-tiered banking system tracing back to the National Bank Act of 1864, which prevents states from interfering with the federal powers of national banks. Because one of those powers is financing the purchase of homes, and Bank of America is a nationally chartered bank, the court concluded that the National Bank Act “preempts” New York’s law.

In Cantero v. Bank of America, Cantero and the other homeowners ask the justices to reverse the 2nd Circuit. They argue that a major cause of the 2007 mortgage crisis was the 2004 decision by the Office of the Comptroller of the Currency to exempt national banks from a host of state consumer-protection laws under the National Bank Act, and that Dodd-Frank in response codified a 1996 decision by the Supreme Court permitting states to regulate national banks under the National Bank Act as long as they do not “significantly interfere” with the banks’ federal powers. New York’s 2% minimum interest requirement on escrow accounts, they insist, falls far below that threshold.

On Tuesday, the court rescheduled a petition filed by Flagstar Bank challenging a nearly identical law in California that places a 2% minimum interest rate on escrow accounts. The delay is presumably in anticipation of Bank of America’s pending response to Cantero’s petition. Unlike the 2nd Circuit, the U.S. Court of Appeals for the 9th Circuit found California’s law to be consistent with the National Bank Act, as amended by Dodd-Frank. Both Flagstar and Cantero emphasize the profoundly destabilizing effect of this conflict on the national banking industry.

A list of this week’s featured petitions is below:

Dickenson v. Johnson
22-517
Issues: (1) Whether district courts may be required to use the inherently subjective and effectively unreviewable factors to determine common-fund fee awards set out in Johnson v. Georgia Highway Express, Inc. despite the court’s rejection of the that approach in Perdue v. Kenny; (2) whether district courts may be required to calculate common-fund attorney’s fees only as a percentage of the fund, or may instead award fees based on the attorney’s lodestar; and (3) whether the U.S. Court of Appeals for the 11th Circuit may mandate that district courts adopt a 25% “benchmark” for percent-of-fund attorney’s fee awards.

Cantero v. Bank of America
22-529
Issue: Whether the National Bank Act preempts the application of state escrow-interest laws to national banks.

Wofsy v. de Fontbrune
22-531
Issues: (1) Whether, under the first of the four copyright fair-use factors, a scholarly book that is “offered for sale” for use in academic and related settings is a commercial or non-commercial work; (2) whether, for purposes of the second fair-use factor, a work’s level of creativity is a distinct inquiry from whether that work is sufficiently original to be copyrightable, or whether a work that meets the threshold for copyrightability is automatically considered creative; and (3) whether, where a representational photograph is reproduced in its entirety because a partial photograph would not be a useful depiction of its subject, the third fair-use factor is neutral or weighs against fair use.

Yassin v. Weyker
22-533
Issue: Whether state and local police officers are immune from suit under 42 U.S.C. § 1983 whenever they are federally cross-deputized as members of joint state-federal task forces.