A recent preemption decision by the U.S Court of Appeals for the Sixth Circuit may give a boost to national banks defending litigation challenging their fee-related practices. In Monroe Retail, Inc. v. RBS Citizens, N.A., issued on December 14, 2009, the Sixth Circuit ruled that a national bank’s authority under the National Bank Act (NBA) to collect fees preempts any interpretation of Ohio law that would otherwise prevent the bank from deducting its service fee before remitting the remaining funds in a garnished deposit account to the garnishors.

Although addressed to state garnishment laws, the Sixth Circuit’s decision should be helpful to national banks, particularly those facing the numerous class actions filed around the country attacking overdraft fees. Ballard Spahr lawyers are defending several of such class actions, which involve depositors' claims under state law that the "high to low" order and other practices used by their banks to post checking account transactions improperly increased overdraft fees. Monroe provides support for the national banks' position that any application of state law to their posting practices is preempted by the NBA and Office of the Comptroller of the Currency (OCC) regulations. 

The Ohio law requires an immediate freeze of all funds in the debtor's bank account upon receipt of a garnishment order and provides for a $1 fee to the bank. When the funds in a garnished account were insufficient to satisfy both the banks' service fees and the garnishment orders, the practice of the defendant national banks was to deduct the service fees, which ranged from $25 to $80, before turning over the remaining account funds to the garnishors. In their class action complaint, the plaintiff garnishors alleged that the banks' service fees were additional garnishment fees, beyond the $1 allowed by Ohio law, and that by deducting their service fees before turning over the account funds, the banks had illegally converted funds belonging to the garnishors to their own use in violation of Ohio’s immediate freeze requirement.  

Affirming the district court's dismissal of the conversion claim, the Sixth Circuit held that the plaintiffs' interpretation of Ohio law significantly interfered with a national bank’s authority under the NBA and OCC regulations to establish and charge fees. According to the Sixth Circuit, the Ohio law would de facto mandate a $1 service fee and the method for recovering that fee. 

To support their position, the banks submitted a 2007 opinion they had obtained from the OCC.  In that opinion, the OCC stated its view that because a national bank's authority to establish and charge fees includes the authority to determine the order in which such fees are posted to a depositor's account, a national bank may collect a garnishment service fee without regard to whether it reduces the funds available to the garnishors. Finding the OCC's view persuasive, the Sixth Circuit concluded that Ohio's immediate freeze requirement was "unduly burdensome on national banks because it mandates the order in which those banks [when responding to a garnishment order] carry out their daily account-balancing and account-management functions."  (Dissenting from the majority, one of the two appellate court judges on the panel that heard the case concluded that preemption was inappropriate because the Ohio laws were of general applicability with only an incidental effect on national banks.)

Ballard Spahr's Consumer Financial Services Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws throughout the country, and its skill in litigation defense and avoidance (including pioneering work in pre-dispute arbitration programs).   For more information, please contact group Chair Alan S. Kaplinsky, 215.864.8544 or kaplinsky@ballardspahr.com; Vice Chair Jeremy T. Rosenblum, 215.864.8505 or rosenblum@ballardspahr.com; John L. Culhane, Jr., 215.864.8535 or culhane@ballardspahr.com; Martin C. Bryce, Jr., 215.864.8238 or bryce@ballardspahr.com; Barbara S. Mishkin, 215.864.8528 or mishkinb@ballardspahr.com; or Mark J. Furletti, 215.864.8138 or furlettim@ballardspahr.com.

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