STATUS OF IMPORTANT BANKING CASES. March 1, 2006

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1 1120 Connecticut Avenue, NW Washington, DC BANKERS World-Class Solutions, Leadership & Advocacy Since 1875 OFFICE OF THE GENERAL COUNSEL STATUS OF IMPORTANT BANKING CASES March 1, 2006 NEW THIS MONTH: Page 4: Page 9: Page 21: Page 32: Antitrust: The Supreme Court narrows the scope of per se violations under the Sherman Act. Dagher v. Saudi Refining. Arbitration: The Supreme Court reaffirms enforceability of arbitration clauses even where underlying contract may be void or illegal. Cardegna v. Buckeye Check Cashing. Credit Unions: NCUA reacts to the ABA s challenge to illegal underserved expansions in Utah; credit union trade associations and others intervene in Pennsylvania. ADA: Interesting ruling regarding applicability of the Americans with Disabilities Act to ATMs. Commonwealth of Mass. v. E*Trade Access, Inc. DO YOU HAVE A CASE THAT SHOULD BE HERE? If you are aware of litigation or other proceedings that would be of interest to ABA members, please let us know! Contact Greg Taylor at gtaylor@aba.com Nothing contained in this report is to be considered as the rendering of legal advice for specific cases, and readers are responsible for obtaining such advice from their own legal counsel. This report is intended for educational and informational purposes only. 2005, 2006, American Bankers Association. Not-for-profit reproduction is authorized without prior permission provided that the source is credited.

2 2 For Your Convenience Updates to the case entries appear in bold print, and New cases that are added to the list are in bold print and marked with a star in the margin. ANTITRUST 1. Brennan v. Concord EFS Inc., et al.: This is one of a series of putative class-action suits brought in the United States District Court for the Northern District of California by individuals who have paid foreign ATM fees for the use of an ATM. The plaintiffs allege violations of federal antitrust laws against several large financial institutions (including VISA and MasterCard, and Concord EFS, the entity that manages the interchange system among various banks and ATMs). The basic allegations are that the fees paid by ATM customers exceed the costs associated with the transactions, and that customers have no choice but to pay the fees as there are limited or no market alternatives. Those cases are: Pamela Brennan, et al. v. Concord EFS, Inc., et al., SBA Peter Sanchez v. Concord EFS, Inc., et al., VRW Deborah Fennern v. Concord EFS, Inc., et al., VRW Miller v. Concord EFS Inc., et al., VRW Melissa Griffin, et al. v. Concord EFS, Inc., et al., VRW Cecilia Salvador, et al. v. Concord EFS, Inc., et al., VRW The Court has consolidated the cases with Brennan as the lead case. By order dated January 26, 2005, the court stayed the proceedings in the Sanchez, Fennern, Miller, and Griffin cases. On May 4, 2005, the court in the Brennan denied the motions by Citibank, Suntrust, Bank of America, Bank One Corp, Bank One NA and JPMorgan Chase to dismiss the complaint for failure to state a per se antitrust claim. The Court, however, granted motions to dismiss First Data, Bank One Corp, and JPMorgan Chase on the ground that the Complaint failed to adequately to allege their participation in the purported conspiracy. The Plaintiffs were given leave to file an amended complaint, and did so on May 24, 2005.

3 3 A hearing/scheduling conference was held on July 13, 2005, to address the discovery plan and any outstanding pleading issues. Concord filed a motion for partial summary judgment on July 21, As grounds for its motion, Concord asserts that there was no horizontal price-fixing claim for the time period February 1, 2001, to the present as a matter of law. They argue that since February 1, 2001, the Star network has not been operated as a joint venture; rather, it has been owned and operated by a single entity, Concord. As a result, Concord argues that there could be no horizontal price-fixing agreement regarding the setting of the ATM interchange fee. On December 5, 2005, Magistrate Judge Larson entered an order compelling Bank of America Corporation, a party in the case, to answer discovery propounded to it by plaintiffs. Bank of America Corporation objected to the scope of the requests, arguing that it was not obligated to produce potentially responsive documents or provide information with respect to its wholly-owned subsidiaries, which include Bank of America, NA. The Court disagreed, finding that documents and information in the possession of a wholly owned subsidiary was within the control of Bank of America Corporation, and that plaintiffs did not have to direct separate discovery requests to Bank of America, NA. to get that information. On December 8, 2005, the Judge presiding over the case, the Honorable Vaughn Walker, recused himself. The hearing on the motion for partial summary judgment (and the issue of class certification) set for December 8, 2005 was vacated. The case was reassigned to the Honorable Saundra Brown Armstrong. On February 9, 2006, Judge Armstrong issued an order recusing herself. The case has been reassigned to the Honorable Judge Charles R. Breyer. A case management conference has been set for May 5, In re: Payment Card Interchange Fee and Merchant Discount Antitrust Litigation, (Case No. 1:05-md JG-JO)(Eastern District New York). This is a consolidation of 23 separate suits (eight actions in the Southern District of New York, three actions in the District of Connecticut, two actions in the Northern District of California, one action in the Northern District of Georgia, and nine actions in the Eastern District of New York) into a multi-district class action lawsuit against Visa USA, MasterCard, Inc., and dozens of major banks alleging that they colluded in setting excessive credit card fees, in violation of applicable federal antitrust laws. The cases were consolidated after a ruling from the Multidistrict Litigation Panel on October 19, The litigation focuses upon interchange fees, which retail merchants pay to issuing banks to receive payments for transactions on the banks cards. The complaints allege that the contracts, combinations, conspiracies, and understandings allegedly entered into by the numerous defendants harm competition and cause the members of the class to pay supra-competitive,

4 4 exorbitant, and fixed prices for General Purpose Network Services, and raise prices paid by all of their retail customers. The suit seeks damages, as well as declaratory and injunctive relief. On February 24, 2006, the Magistrate Judge Orenstein appointed as plaintiffs' co-lead counsel the following three law firms: Robins, Kaplan, Miller & Ciresi L.L.P.; Berger & Montague, P.C.; and Lerach, Coughlin, Stoia, Geller, Rudman & Robbins, L.L.P. 3. Dagher v. Saudi Refining, Inc. (United States Supreme Court, Case No , ). The American Bankers Association, the Consumer Bankers Association, and The Financial Services Roundtable appeared as an amicus Dagher v. Saudi Refining, Inc. The primary issue in Dagher is whether price setting by a joint venture may be deemed to be per se unlawful. Dagher involves an antitrust class action against Shell Oil and Texaco with respect to the formation of two joint ventures (one for the eastern U.S., one for the western U.S.), which completely merged the companies' operations in the production and sale of gasoline. Although Shell and Texaco merged their operations, the ventures continue to sell both Texaco and Shell branded gasoline separately. The plaintiffs in Dagher allege that the sale of the two brands of gasoline at the same price constitutes horizontal price fixing between Shell and Texaco, and is per se unlawful. The Ninth Circuit agreed, even though the formation of the joint ventures had been reviewed and approved by the FTC and the State Attorneys General (after the parties agreed to divest certain assets). On February 28, 2006, the United States Supreme Court reversed the Ninth Circuit. Justice Thomas, writing for the Court, reaffirmed that the per se rule of antitrust liability applies only to narrow classes of conduct that are so plainly anticompetitive that no elaborate study of the industry is needed to establish their illegality. Dagher concluded that while integrated joint venture's price-setting activities may be price-fixing in the literal sense, it cannot be price-fixing in the antitrust sense. The Court also found that the ancillary restraints doctrine has no application when the challenged business practice involves a "core activity of the joint venture itself -- namely, the pricing of the very goods produced and sold" by the joint venture. While not a banking case in the strictest sense, the decision is likely to strengthen the industry s litigating position in a number of important antitrust cases, including the litigation (see above) that is currently pending in California and New York. A copy of the decision is attached as a PDF file.

5 5 4. In re: Currency Conversion Fee Antitrust Litigation, (Case No. 1:01-md WHP, Southern District of New York.). Plaintiffs allege violations of the Sherman Act, 15 U.S.C. 1 et seq., the Truth in Lending Act ("TILA"), 15 U.S.C et seq., and the South Dakota Deceptive Trade Practices Act ("DTPA"), arising from an alleged price-fixing conspiracy among VISA and MasterCard and their member banks concerning foreign currency conversion fees. The factual background underlying these actions is set forth in the Court s prior opinions. See In re Currency Conversion Fee Antitrust Litig., 229 F.R.D. 57, 2005 WL (S.D.N.Y. June 16, 2005) ("Currency Conversion IV"); In re Currency Conversion Fee Antitrust Litig., 361 F. Supp. 2d 237 (S.D.N.Y. 2005) ("Currency Conversion III"); In re Currency Conversion Fee Antitrust Litig., 224 F.R.D. 555 (S.D.N.Y. 2004) ("Currency Conversion II"); In re Currency Conversion Fee Antitrust Litig., 265 F. Supp. 2d 385 (S.D.N.Y. 2003) ("Currency Conversion I"). On March 9, 2005, the Court denied in part motions by Chase and Citigroup to stay the litigation and to compel arbitration. Chase and Citibank appealed the court's denial of these motions to the Second Circuit. On June 16, 2005, the district court denied a motion to reconsider its March ruling, which also involves issues of class composition. Plaintiffs subsequently moved the court, pursuant to 28 U.S.C. 1292(b), for certification of an interlocutory appeal. This motion was granted on August 9, 2005, and an appeal was filed with the United States Court of Appeals for the Second Circuit, In re Currency Conversion Fee Antitrust Litig., (Case No ). On June 30, 2005, plaintiffs filed with the Second Circuit a petition for leave to appeal the class certification order excluding certain cardholders (In re Currency Conversion Fee Antitrust Litig., Case No ) pursuant to Rule 23(f) of the Federal Rules of Civil Procedure. A motion to certify subclasses related to Diners Club was filed on September 30, On December 7, 2005, the Court partially granted the motion to certify, and partially granted Defendant s motion to compel arbitration. The Court certified the following Diners Club subclasses: A damages subclass comprised of all Diners Club general purpose cardholders who were assessed a foreign transaction fee or surcharge for using such cards to purchase goods and/or services in foreign currencies. An antitrust injunctive relief subclass comprised of all Diners Club general purpose cardholders. A TILA injunctive relief subclass comprised of all Diners Club general purpose consumer cardholders. Defendants' motion to stay the claims of Diners Club cardholders in favor of arbitration pursuant to Section 3 of the FAA was granted in part. The Court required three subclasses of customers to arbitrate their claims pursuant to their

6 6 cardholder agreements based on the Second Circuit's decision in JLM Industries, Inc. v. Stolt-Nielsen SA, 387 F.3d 163 (2d Cir. 2004): Cardholders who opened new credit card accounts after this suit began; Cardholders who first became cardholders due to account acquisitions after this litigation began; and Cardholders whose first foreign exchange transaction on their credit card occurred after the addition of the arbitration clause to their card agreement. The Court also certified an interlocutory appeal to the Second Circuit on the issue of whether the Court properly applied the estoppel doctrine articulated in the JLM Industries case to enforce arbitration agreements against the cardholders with respect to the signatories, network defendants and the non-signatory banks. A cross appeal was filed in early January. 5. Schwartz v. Visa International Service, et. al, (California Supreme Court, Case No. S138751). This is a matter involving the disclosure of currency conversion/interchange fees to customers who use a credit card in a foreign country. The plaintiff, Adam Schwartz, brought suit against Visa International Service Association, Visa U.S.A. Inc., and MasterCard International Incorporated, alleging that they had misled consumers and charged hidden fees when their cards were used overseas. Schwartz s claims at trial were founded exclusively on California s Unfair Competition Law (UCL). Interestingly, the suit originally alleged state and federal antitrust theories to support his claims. Schwartz withdrew his antitrust and conspiracy allegations, pursuant to a trial court order, after appellants moved to stay this action pending resolution of a federal Multi- District Litigation class action (see Brennan v. Concord EFS Inc., et al., above) concerning the same issue. Thus, the claims tried to and resolved by the trial court in this case were founded exclusively on the UCL. The trial court filed its statement of decision on April 7, It found that several state and federal statutes, including the Areias Credit Card Full Disclosure Act of 1986 (Civ. Code, et seq.) and the Federal Truth in Lending Act (15 U.S.C et seq.) evidence a substantial legislative policy that consumers be informed of the costs related to the use of credit cards. The trial court held that Visa and MasterCard had violated this policy and had engaged in a deceptive business practice in violation of the UCL by designing, developing and implementing multi-currency conversion systems which intentionally deprived credit card customers of information concerning the cost of currency conversion. The trial court awarded respondent injunctive relief and ordered appellants to pay restitution. Visa and MasterCard were ordered to amend their operating rules, regulations and member agreements to require all U.S.

7 7 members who issue their respective credit cards and who bill their cardholders a currency conversion fee to make full and effective disclosure of the fee to consumers. The court further ordered Visa and MasterCard to restore the one percent currency conversion fee to all customers who were charged and paid the fee from February 15, 1996, to the present. On November 2, 2004, California voters approved State Ballot Initiative Proposition 64 which became effective the following day. (Cal. Const., art. II, 10, subd. (a).) Proposition 64 amended certain provisions of the UCL and the false advertising law. Before Proposition 64 was passed, an uninjured private party could bring an UCL action on behalf of the general public, and could obtain remedies for the benefit of nonparties. Proposition 64 amended the law to require that persons asserting claims under the relevant portion of the UCL must actually suffer an injury. On appeal, the key issue became applicability of Proposition 64 to the case. The plaintiff, Schwartz, did not allege that he was injured by appellants business practices. Indeed, Schwartz never had a MasterCard or Visa-branded credit card, nor had he ever used any credit card to make a purchase in a foreign currency. The California Appellate Court concluded that Proposition 64 applied to the case and reversed the trial court decision. The court concluded that Schwartz is not legally authorized to maintain this action against Visa and MasterCard because he did not suffer an injury from the defendants alleged business practices. The court remanded the case back to the trial court to determine whether Schwartz should be allowed to amend his complaint to substitute a plaintiff who meets the standing requirements of Proposition 64. On November 9, 2005, Schwartz filed a petition for review with the California Supreme Court. On December 14, 2005, the Court granted the petition for review. The Court ordered, however, that further action in the matter is deferred pending consideration and disposition of a related issue in two cases pending before the Court in Californians for Disability Rights v. Mervyn's, and Branick v. Downey Savings & Loan Association, or until further order of the court. ARBITRATION 6. Jenkins v. First American Cash Advance of Georgia, et al. (U.S. Supreme Court, Case No ). On February 18, 2005, the United States Court of Appeals for the Eleventh Circuit issued an opinion upholding a mandatory arbitration clause that included a class action waiver. The court s opinion also clarified which issues pertaining to a contract (unconscionability, illegality, etc.) are the proper subject of arbitration versus a legal challenge in federal court under the Federal Arbitration Act.

8 8 The plaintiff, Charlene Jenkins, obtained a series of loans from First American Cash Advance of Georgia/First National Bank in Brookings. The types of lending transactions at issue in this case are commonly referred to as payday loans. In connection with each loan, the plaintiff executed an arbitration agreement, and agreed to waive her right to participate in a class action against the defendants. Notwithstanding these contractual provisions, plaintiff brought a class action suit alleging that the loan agreements were contracts of adhesion and violated Georgia usury laws. The defendants removed the suit to federal district court, and moved to stay the proceedings and compel arbitration. The district court denied the motion, finding that the arbitration agreements were unconscionable. This ruling was appealed, and the Eleventh Circuit reversed. The court found that the Federal Arbitration Act applied to the transactions at issue because they involved interstate commerce. Under the Federal Arbitration Act, a written arbitration provision is valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract. 9 U.S.C. 2 (2000). This language has been interpreted by the Eleventh Circuit as meaning that the Federal Arbitration Act allows state law to invalidate an arbitration agreement, provided the law at issue governs contracts generally and not arbitration agreements specifically. Bess v. Check Express, 294 F.3d 1298, 1306 (11 th Cir. 2002). The Supreme Court has recognized that generally applicable contract defenses, such as fraud, duress, or unconscionability, may be applied to invalidate arbitration agreements. The Supreme Court has also distinguished between claims that challenge the contract generally and claims that challenge the arbitration provision itself. See Prima Paint Corp. v. Flood & Conklin, Mfg. Co., 388 U.S. 395, (1967). Defenses or claims that relate to the contract as a whole, and not just the arbitration provision alone, must be resolved in arbitration. Benoay v. Prudential Bache Sec., Inc., 805 F.2d 1437 (11 th Cir. 1986). Using this analytical framework, the court then turned to the plaintiff s claims. Regarding her contention that the loan agreements were contracts of adhesion, the court ruled that the Federal Arbitration Act does not permit a federal court to consider claims alleging that the contract as a whole was adhesive. That issue, the court ruled, was for an arbitrator to decide. Turning to her claim that the class action waiver was unconscionable, the court found that it had jurisdiction to entertain the issue, and ruled that arbitration agreements precluding class action relief are valid and enforceable. As for the issue of whether the underlying loans violated Georgia usury laws and are, therefore, void ab initio, the court ruled that an arbitrator, and not a federal court, should determine whether the underlying transactions are illegal and void. On April 29, 2005, Jenkins petition for rehearing and rehearing en banc was denied. A petition for a Writ of Certiorari from the United States Supreme Court was filed on September 12, The Court denied the petition on February 27, 2006.

9 9 7. John Cardegna v. Buckeye Check Cashing, Inc. (No , U.S. Supreme Court). In a 7-1 decision (Justice Thomas dissenting), the United States Supreme Court reaffirmed long-standing precedent and reversed a decision by the Supreme Court of Florida that invalidated an arbitration provision contained in a consumer loan contract. The case, John Cardegna v. Buckeye Check Cashing, Inc., involved the interpretation of the Federal Arbitration Act and its application in circumstances where a contract containing an arbitration agreement is alleged to be void or illegal. The fundamental issue in dispute was which entity a court or an arbitrator is entitled to rule on a plaintiff's challenge to the legality of the underlying contract. Contrary to federal case law, the Florida Supreme Court ruled that it would not enforce an otherwise-valid arbitration clausewhen it is alleged that the underlying agreement is void or illegal. Cardegna involved a challenge to a loan agreement that required a borrower to arbitrate any dispute. Plaintiff alleged that the loan agreement was usurious and violated Florida law, but did not challenge the validity of the arbitration clause. The Florida Supreme Court declined to enforce the arbitration provision, finding that where a contract is alleged to be void due to illegality it would be contrary to Florida law and public policy to enforce any portion of the agreement because there are no severable, or salvageable, parts of a contract found illegal and void under Florida law. Writing for the Court, Justice Scalia held that the Court's prior rulings in Prima Paint Corp. v. Flood & Conklin, Mfg. Co. and Southland Corp. v. Keating established three propositions that mandated a reversal: "First, as a matter of substantive federal arbitration law, an arbitration provision is severable from the remainder of the contract. Second, unless the challenge is to the arbitration clause itself, the issue of the contract's validity is considered by the arbitrator in the first instance. Third, this arbitration law applies in state as well as federal courts." Applying these rules, the Court concluded that "because respondents challenge the Agreement, but not specifically its arbitration provisions, those provisions are enforceable apart from the remainder of the contract." As a result, the question of whether the underlying agreement is illegal "should therefore be considered by an arbitrator, not a court." The American Bankers Association and the Florida Bankers Association submitted an amici brief which supported the enforcement of the Federal Arbitration Act and the reversal of the Florida Supreme Court's decision in the case. A copy of the decision is attached as a PDF file.

10 10 8. Discover Bank v. Superior Court of Los Angeles County (Boehr, Real Party in Interest) (California Supreme Court S140411). This is a series of cases involving the enforceability of an arbitration clause added to a credit card agreement by a statement stuffer sent to the customer. On January 7, 2003, a California court upheld the enforceability of an arbitration clause added by statement stuffer to a credit card agreement. Mandel v. Household Bank (Nevada). (Cal. App. 4th, No. GO29531) (also listed as Shea v. Household Bank). The court, however, did not uphold a prohibition against class action arbitrations. Such a provision was, according to the court, unconscionable. The ABA appeared as amicus curiae in that case. One week later, in Discover Bank v. Superior Court of Los Angeles County (Boehr, Real Party in Interest) (Cal. App. 2d, No. B161305), a different appellate division of the California state court of appeals specifically disagreed with the Mandel decision and enforced the arbitration clause as written, including its prohibition against class action arbitrations. The California Supreme Court granted review in both state cases. On August 13, ABA and two co-sponsors filed amici brief in Boehr contending that the Federal Arbitration Act requires that arbitration clauses be enforced as written, preempting any state law or court decision to the contrary. On June 27, 2005, the Supreme Court of California issued its opinion in Boehr, finding that at least under some circumstances the law in California is that class action waivers in consumer contracts of adhesion are unenforceable, whether the consumer is being asked to waive the right to class action litigation or the right to class-wide arbitration. The Court also found that the Federal Arbitration Act does not preempt California law in this respect. The Court remanded the case back to the Court of Appeal to determine whether the choice of law provision in the consumer agreement requires the application of Delaware law to the case, and whether the Delaware choice-of-law provision is enforceable or unenforceable as contrary to California public policy. On remand, the appellate court denied a motion to send the matter back to the trial court. The choice of law issue was argued and submitted on November 22, The Court issued its decision on December 7, 2005, finding the Delaware choice of law provision in the agreement to be enforceable. In analyzing whether the choice of law provision was enforceable, the Court looked to section 187 of the Restatement Second of Conflict of Laws (Restatement), finding that the initial task for the Court was to determine whether (1) the chosen state has a substantial relationship to the parties or their transaction, or (2) whether there is any other reasonable basis for the parties choice of law. If either test is met, the Court must next determine whether the chosen state s law is contrary to a fundamental policy of California. If there is no conflict, the Court will enforce the parties choice of law. If, however, there is a fundamental conflict with California law, the Court must next determine whether California has a materially greater interest than the chosen state in the determination of the

11 11 particular issue. (Rest., 187, subd. (2).) If California is deemed to have a materially greater interest than the chosen state, the contractual choice of law provision will not be enforced. Running through the analysis, the Court found that Delaware had a substantial relationship to the parties given that (1) Discover Bank was chartered in Delaware, and (2) Delaware law requires that [a] revolving credit plan between a [Delaware-chartered] bank and an individual borrower shall be governed by the laws of [Delaware]. (Del. Code Ann., tit. 5, 956.) The Court then concluded that, under Delaware law, class action waivers are not unconscionable. The most interesting and significant portion of the court s analysis focused on whether class action waivers present a fundamental conflict with California law, and whether California has a materially greater interest than Delaware in the determination of this issue. The Court expressly declined to rule on the fundamental conflict issue, finding instead that, even if such a conflict existed, California did not have a materially greater interest in the outcome of the litigation than Delaware. The Court found that although Boehr is a California resident, his suit asserts two claims under Delaware law and none under California law. The suit is brought on behalf of a putative nationwide class, against a bank that is domiciled in Delaware. The Court ruled that Delaware s interest is demonstrably greater than California s because (1) Delaware is home to the sole defendant, not just (like California) home to some portion of the putative class, (2) Delaware has demonstrated by statute its concern that Delaware law should apply to claims between Delaware banks and their cardholders, and (3) Boehr is asserting claims under Delaware law alone. While Boehr declined to rule on the issue of whether a class action waiver presents a fundamental conflict with California law, two other California appellate courts have taken up the issue, both finding that class action waivers can present such a conflict under California law. Several days after the Court issued its opinion in Boehr, the California Court of Appeals for the First District issued a ruling in Klussman v. Cross Country Bank, (California Appellate Court, First Appellate District, Case No. A108572) (decision at 2005 WL ), which concluded that Delaware s approval of class action waivers, especially in the context of a take it or leave it arbitration clause is contrary to fundamental public policy in California. A similar result was reached in Aral v. Earthlink, Inc., (California Appellate Court, Second Appellate District, Case No. B177146)(decision at 2005 WL ), finding that California has a materially greater interest than Georgia where only California claims are asserted on behalf of a California-only class of plaintiffs. A petition for review at the California Supreme Court was filed on January 18, 2006.

12 12 CONSUMER PROTECTION 9. Sola v. Washington Mutual Bank, F.A., (9 th Cir. No ). On April 26, 2004, the U.S. District Court for the Central District of California (CV ) dismissed a complaint filed on October 20, 2003, by a consumer class alleging a variety of Truth in Lending, Home Owners Loan Act, and Washington State law claims based on WAMU s promotional materials dealing with its overdraft protection options. Notwithstanding the promotional statements, Don t worry, we ll cover you and Automatic Protection, the deposit account agreement and the monthly customer account statements preserved the ability of WAMU to exercise discretion in its payment of overdrafts. The district court granted WAMU s motion to dismiss after ruling that the overdraft charges were not interest under the HOLA and not finance charges under TILA. Plaintiffs appealed the dismissal to the Ninth Circuit on May 17, and a coalition of consumer groups filed as amici on September 23, OTS filed an amicus brief on November 19; ABA and California Bankers Association filed an amici brief on November 29. Briefing is now complete, and the case was argued in Pasadena on February 9, Wachovia Bank, N.A. v. Burke, Case No , United States Supreme Court). This case presents a challenge to Connecticut's requirement that a state-chartered nonbank mortgage subsidiary of a national bank must be licensed under the rules applicable to other mortgage lenders. Wachovia filed a motion for summary judgment in the district court, with ABA and other co-sponsors filing an amici brief supporting the motion. The court granted the motion, deferring to the Comptroller's interpretation of the "visitorial powers" provision of the National Bank Act as exclusive and preemptive. The Connecticut Attorney General filed a notice of appeal to the United States Court of Appeals for the Second Circuit on June 30, ABA and others filed an amici brief in support of Wachovia on November 8, On July 11, 2005, the Second Circuit affirmed in part and reversed in part the District Court s decision. In its opinion, the Second Circuit agreed that the National Bank Act and implementing regulations promulgated by the Office of the Comptroller of the Currency preempted the application of the state laws in question to Wachovia Mortgage Corporation, an operating subsidiary of Wachovia Bank, N.A. The Second Circuit, however, disagreed with the District Court on the issue of whether Connecticut s attempt to regulate Wachovia Bank s operating subsidiary gave rise to an action under 42 U.S.C. 1983, finding that the National Bank Act does not provide national banks with rights enforceable under The Court of Appeals issued its mandate on August 5, On September 13, 2005, Commissioner Burke filed a petition seeking a writ of certiorari from the United States Supreme Court. An amicus brief supporting that petition was filed by the Solicitor General of Florida. The case was considered at the Court s December

13 13 2, 2005, conference. On December 5, 2005, the Court invited the Solicitor General to file a brief in this case expressing the views of the United States. 11. Wachovia Bank, et al., v. Watters, CA No (6 th Cir.). This case was filed against the Commissioner of the Michigan Office of Financial and Insurance Services during the summer of It seeks to challenge an attempt by the Michigan Office of Insurance and Financial Services to exert supervisory authority over Wachovia s mortgage subsidiary. A motion for summary judgment was filed in this case as well, and supporting amici briefs were filed by Consumer Mortgage Coalition, ABA and others on January 30, On August 30 th, 2004, the District Court granted the motion and ruled that the OCC s visitorial powers and the recently promulgated visitorial regulations were valid, thereby preempting state supervisory authority over Wachovia s mortgage subsidiary. The court stated that "[a]lthough the state of Michigan maintains an interest in protecting its citizens, those compelling policy reasons do not undermine the reasonableness of the OCC s regulation. Wachovia s motion for damages pursuant to 42 U.S.C was denied. The case was appealed to the United States Court of Appeals for the Sixth Circuit in October, Interestingly, the Court denied a motion by the Comptroller of the Currency to appear and present argument. On December 19, 2005, the Sixth Circuit affirmed the District Court s decision, finding that the OCC s preemption regulation regarding the application of State law to operating subsidiaries was not in excess of the agency s statutory authority, and that it represents a reasonable, non-arbitrary, interpretation of the National Bank Act. A petition for rehearing was denied on January 18, The mandate was issued on January 26, Office of the Comptroller of the Currency v. Eliot Spitzer, The Clearing House Association, L.L.C. v. Eliot Spitzer, Attorney General of the State of New York, ( cv (L) & cv(CON))(Second Circuit). These are two related cases orignially filed in the United States District Court for the Southern District of New York. At issue is the exclusive nature of the OCC s visitorial powers over national banks and their operating subsidiaries pursuant to 12 U.S.C The New York Attorney General, Eliot Spitzer, sent document requests to a number of national banks (including Citibank, JP Morgan Chase, HSBC USA Bank, and Wells Fargo Bank) seeking HMDA information. In connection with at least one request, the Attorney General threatened the issuance of a formal subpoena or the initiation of enforcement proceedings if information was not forthcoming. The OCC and a coalition of national banks The Clearinghouse Association filed separate suits to enjoin the Attorney General from, in essence, examining the banks/operating subsidiaries in question. The suits allege that the Attorney General lacks the authority to enforce the provisions of the Equal Credit

14 14 Opportunity Act or other laws that concern the banking activities of national banks or their operating subsidiaries, except as specifically authorized by federal law. On August 5, 2005, the Attorney General filed an answer in both cases, and filed a counterclaim against the OCC. The counterclaim sought to invalidate the OCC s preemption regulations, 12 C.F.R , as being contrary to plain statutory language, congressional intent, and judicial precedent. He sought a declaration that the National Bank Act does not divest the Attorney General of his statutory and common law authority to enforce non-preempted state laws against national banks and their operating subsidiaries. The ABA, the Consumer Bankers Association, and The Financial Services Roundtable filed an amicus brief on behalf of The Clearinghouse Association. A consolidated oral argument/trial was conducted in both cases on September 7, 2005, before the Honorable Sidney H. Stein. On October 12, 2005, the court ruled in favor of the OCC and The Clearing House Association. District Court Judge Sidney Stein granted a permanent injunction for The Clearing House and OCC, ruling that the Attorney General s investigation into national banks residential mortgage lending activities is prohibited by the National Bank Act. The court found that the OCC's regulations implementing section 484 (12 C.F.R ) were valid, ruling that [t]he OCC has read the limitation on visitorial powers in light of the basic objectives of the National Bank Act: to create a uniform system of national banks, comprehensively and exclusively regulated by federal law. The available legislative history does not contravene the OCC s conclusion that even as states are free to enact legislation substantively governing national banks banking activity, the enforcement of those laws is properly vested in the OCC, not in state officials. The New York Attorney General appealed the decisions in both cases to the United States Court of Appeals for the Second Circuit on November 7, The appeals have been consolidated. 13. Bankwest v. Baker, (No CC, 11th Cir.). This appeal presents the question of whether the Georgia may regulate agency agreements between instate payday stores and out-of-state banks. The statute at issue, Ga. Code Ann to (2004), targets Georgia businesses and precludes in-state payday stores from directly making loans in Georgia. To avoid this direct prohibition, payday stores have entered into agency agreements whereby the stores procure such payday loans for out-of-state banks, but nonetheless, retain an economic interest in the loans. The Georgia statute restricts in-state payday stores from acting as agents for out-of-state banks in one, limited circumstance: where the agency agreement grants the in-state agent the predominate economic interest in the bank s loan, which means that the payday stores hold more than 50% of the revenues from the loan. See Ga. Code Ann (b)(4).

15 15 Four state-chartered banks from South Dakota and Delaware filed suit alleging that the state law was preempted by 27(a) of the Federal Deposit Insurance Act ( FDIA ), 12 U.S.C. 1831d(a), which protects the right of state-chartered banks to export interest rates. The district court denied the plaintiffs motion for a preliminary injunction enjoining the enforcement of the Georgia Act. The banks appealed this decision to the United States Court of Appeals for the Eleventh Circuit. On June 10, 2005, the Eleventh Circuit issued an opinion finding that the District Court did not abuse its discretion in denying the plaintiffs request for preliminary injunctive relief. The Court concluded that 27(a) does not preempt the Georgia statute. The Court found that: There was no field preemption by the FDIA in this area because the host state s consumer and fraud laws still apply to the exporting state banks. 12 U.S.C. 1820(h)(1)(A) (providing that the state bank supervisor may examine branches operated in such state by an out-of-state bank for the purpose of determining compliance with host state laws, including those governing banking, community reinvestment, fair lending, consumer protection, and permissible activities ). There was no conflict preemption by the FDIA as it was possible to comply with both federal and state law without substantially impairing any right created by the federal law. There was no express preemption by the FDIC as the language of 27(a) refers only to state banks, and does not address non-bank businesses, such as payday stores. The court found that the scope of 27(a) is quite narrow and restricted to one element of any loan by out- of-state banks: the interest rate. This, in the court s view, left the state legislature free to regulate an out-of-state bank s procurement and collection practices in Georgia. On December 28, 2005, the Court vacated the panel s opinion and granted a motion for rehearing en banc. 14. Miller v. Bank of America, (Cal. App., First Appellate District, No. A110137). On December 30, 2004, the California Superior Court for the County of San Francisco issued a Statement of Decision in litigation that challenges the ability of banks to take and enforce setoffs for overdrafts or account fees in connection with accounts containing Social Security payments under California law. Most observers thought that this issue was fairly settled in 2002 with the Ninth Circuit s decision in Lopez v. Washington Mutual Bank, FA.. Lopez holds that the federal statutes protecting Social Security and Supplemental Security Income benefits from execution, levy, attachment, garnishment, or other legal process do not prevent a bank from using these types of funds to satisfy account

16 16 overdraft charges. Lopez also concluded that claims seeking to invalidate the setoffs based upon State consumer-protection statutes were preempted by federal law. The California court system, however, has breathed new life into the issue by relying upon State law to take a stance that is directly contrary to the conclusion reached by the Ninth Circuit. Like Lopez, the issue in Miller centers upon the legal right of a bank here, Bank of America to automatically debit accounts containing Social Security payments and other governmental benefits for overdrafts and insufficient funds (NSF) fees. Unlike Lopez, the court s decision found against Bank of America, ruling that the bank s practices violated the rule set forth in a 1974 California Supreme Court decision, Kruger v. Wells Fargo Bank. The court in Kruger held that banks could not exercise their right of setoff against deposits containing unemployment and disability benefits that were protected from creditor claims. The trial court in Miller used this venerable State precedent as a springboard for finding that Bank of America s practices had violated provisions of the California Consumer Legal Remedies Act, the California Unfair Competition Law, and the California False Advertising Act. The trial court s decision has, for now, awarded the class plaintiffs (1.1 million account holders) in excess of a billion dollars in restitution and damages. Final judgment was entered by the trial court on March 4, An appeal was filed on May 16, 2005, with the California Court of Appeals, First Appellate District. Bank of America has petitioned the court for a stay of the lower court s decision. The California Bankers Association, the American Bankers Association, and the United States of America submitted amici briefs in support of this petition. On May 24, 2005, the court temporarily stayed the lower court s judgment subject to further order of the court. On August 17, 2005, the Court issued an order setting the sequence in which the case will be briefed. Bank of America and amici (including the ABA and the United States) have filed substantive briefs on the merits. On November 22, 2005, the Appellate Court granted a stay of the lower court s judgment pending the appeal, finding that Bank of America had demonstrated that it would suffer irreparable injury absent a stay, that respondents would not be disproportionately affected by a stay, and that substantial issues will be raised on appeal. 15. Rhonda J. Closson and Ariana Nash v. Bank of America, et al., (Case No. CGC , Superior Court of the State of California, County of San Francisco). This is a putative class action suit against Bank of America that challenges the method by which overdraft fees for debit cards are processed and calculated. The plaintiffs allege that Bank of America has programmed its computer system to post a day s transactions to a customer s account in descending dollar amount order rather than chronologically. In other words, plaintiffs allege that the highest dollar value transactions are debited first, a process that they contend is designed to generate more overdrafts and intentionally increase the amount of overdraft fees charged to customers. The complaint alleges that Bank of America has violated the Consumers Legal Remedies Act, and the California Business and

17 17 Professions Code. Bank of America filed an answer on November 18, 2005, denying that the plaintiffs are entitled to any relief. Among the affirmative defenses raised by Bank of America is the argument that the prosecution of the suit against Bank of America constitutes an impermissible and unlawful attempt to exercise visitorial powers over national banks, and that the causes of action are preempted by federal law. The Court held a case management conference on January 23, 2006, to discuss the progress of discovery in the case. The conference was continued until March 22, Simon Gift Card Litigation. These are related actions seeking enforcement/clarification of state laws affecting the sale of gift cards by Simon Property Group. SPGGC, Inc., v. Thomas F. Reilly, (Civ. No RCL (D. Mass.)); Commonwealth of Massachusetts v. Simon Property Group, (Civ. No RCL (D. Mass)). This is a pair of related suits that focus upon the application of the Massachusetts Gift Certificate statute and the Consumer Protection Act. Simon Property Group, a large mall owner, sells gift cards that it alleges are issued by Bank of America. In November 2004, the Massachusetts Attorney General filed suit against Simon Property Group in state court, alleging that it had violated the Massachusetts statutes by charging dormancy fees against the cards balances and causing the cards to expire after one year. The suit was promptly removed to federal court, citing the presence of a federal question, i.e., whether the National Bank Act preempted the state gift card laws. Simon Property Group also filed a suit of its own in federal court, seeking a declaration that because the cards are issued by Bank of America, the National Bank Act preempts state law. On January 5, 2005, the OCC weighed in with a letter to the parties which was promptly submitted to the federal court by the Massachusetts Attorney General opining that the National Bank Act did not preempt state law. The OCC explained that, in its view, the National Bank Act did not completely preempt state law as prescribed in the recent Supreme Court decision Beneficial National Bank v. Anderson because the state gift card statute had not been supplanted by a federal statute creating an exclusive cause of action. The OCC also advised the parties that, in its view, it did not believe that the restrictions on Simon Property Group s fees by the state law would be subject to substantive preemption by Part 7 (Subpart D Preemption) of the OCC s regulations, or by the National Bank Act. On February 18, 2005, the District Court remanded the Attorney General s action against Simon Properties (Case No. 1:04-CV-2422-RCL) back to state court, where it was originally filed, presumably finding that no federal question existed in the case that provides a basis to assert federal jurisdiction.

18 18 On June 8, 2005, the District Court dismissed Simon s suit against the Attorney General without prejudice, pending the resolution in the Massachusetts state court in Commonwealth of Massachusetts v. Simon Property Group. SPGGC, Inc., v. Kelly A. Ayotte, Attorney General (CV SM (D. New Hampshire); New Hampshire Attorney General v. Simon Property Group, Inc. (Case No. 1:04-cv JD (D. New Hampshire)). This is the second in a trio of cases involving Simon Property Group. The New Hampshire Attorney General filed an action in state court to enforce state consumer laws that would limit Simon Property Group s Gift Card program. Simon Property Group filed a declaratory judgment action in federal court, challenging the constitutionality of the state statutes and arguing that the New Hampshire Consumer Protection Act is preempted by the National Bank Act. Simon Gift Card also removed the Attorney General s enforcement action into federal court. The federal district court remanded the Attorney General s suit against Simon Properties back to the state court. On October 17, 2005, the Merrimack County Superior Court ruled that the cards sold by Simon Property Group in the Mall of New Hampshire, Pheasant Lane Mall, and the Mall at Rockingham Park violate state law because they have expiration dates and charge fees that cause them to lose value over time. However, the court stayed enforcement of the state law pending the outcome of Simon s suit in federal court. With regard to Simon Properties declaratory judgment action in federal court, on March 14, 2005, the district court issued an order denying the Attorney General s motion to dismiss. The Attorney General had moved to dismiss the case citing a lack of federal jurisdiction. The court denied the motion, finding that the court had federal question jurisdiction to hear Simon s claims. The Attorney General has filed an answer in the case, and filed renewed motions to dismiss. The Attorney General s motion argued that (1) the federal court should abstain from ruling under both the Younger and Pullman doctrines of abstention, and (2) Simon s arguments that the New Hampshire law is preempted or conflicts with the Commerce Clause of the U.S. Constitution is incorrect. This motion was denied on May 20, On August 15, 2005, SPGGC filed a Third Amended Complaint, updating the allegations in the suit to address a number of substantive issues raised in the litigation. SPGGC alleges that Bank of America, N.A. is the national bank that had issued the Simon Visa Giftcard under its original terms and conditions from the inception of the program in August 2001 until February 1, The Complaint alleges that, during this time period, there was no direct contract between Simon and Bank of America