In a significant ruling, the U.S. Court of Appeals for the Ninth Circuit affirmed the dismissal of a consumer’s state law claims against a federal credit union on federal preemption grounds. The putative class action plaintiff’s claims challenged the credit union’s $15 dollar returned-check fee under California’s Unfair Competition Law (UCL), arguing it was an “unfair” and “unlawful” business practice, especially since the check the plaintiff deposited was declined without any funds being made available to him. The Ninth Circuit upheld the district court’s ruling that the plaintiff’s state law unfair competition claim was preempted by 12 C.F.R. § 701.35, which states expressly that state laws regulating bank fees do not apply to federal credit unions.
Congress vested rulemaking authority over federal credit unions in the National Federal Credit Union Administration, an independent agency. Nonetheless, the plaintiff argued that the California UCL statute transcended § 701.35(c)’s preemption clause. The panel disagreed, finding that “all state laws that regulate account fees — general, specific, or otherwise — have no application to federal credit unions.”
Judge Owens, writing for the panel, opined, “It is difficult to imagine preemption language more explicit than this,” highlighting the clarity of the regulation’s text. The court further noted that allowing state laws to govern fee practices would “directly undermine the deregulatory objectives underlying § 701.35(c)” and “overlook the unique role that a federal credit union member plays in the governance of the union.” Specifically, unlike other financial institutions, federal credit union members have a direct say in fee-setting and can force out directors who impose unreasonable fees.
The plaintiff’s argument that because § 701.35(c) preempts only state laws that “regulate” the fees that federal credit unions charge, a “generally applicable” law like the one at issue falls outside of the preemptive reach of § 701.35(c), was also rejected. The court reasoned that such an interpretation would create an “utterly irrational loophole” where states could target federal credit unions simply by relying on statutes that, on their face, have nothing to do with bank accounts or fees.
Our Take
The decision is an important preemption win, as consumer and class action lawyers like to use the broad language of state unfair competition laws to assert claims they cannot assert directly. The ruling also highlights the unique regulatory framework governing federal credit unions, which operate under a dual chartering system allowing them to choose between federal and state oversight.
