PARKS v. MBNA AMERICA BANKRespondent's Supplemental Letter BriefCal.May 16, 2012___SUPREMF COURT COPY ARNOLD & PORTER LLP Laurence J. Hutt State Bar No. 06629 Laurence.Hutt@aporter.com +1 213.243.4100 - +1 213.243.4199 Fax 777 South Figueroa Street Forty-Fourth Floor Los Angeles, CA 90017-5844 SUPREME COURT May 16, 2012 FILED The Honorable Chief Justice Tani Cantil-Sakauye MAY 16 20TL and Associate Justices of the California Supreme Court San Francisco, CA 94102 Deputy Re: Allan Parks v. MBNA America Bank N.A., Case No. 8183703 Honorable Chief Justice Cantil-Sakauye and Associate Justices: Respondent MBNA America Bank, N.A. (“MBNA”) submits this supplemental letter brief in response to the Court’s Order of April 25, 2012, requesting briefing on “the significance, if any, of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Pub.L. No. 111-203 July 21, 2010) 124 Stat. 1376) and the Office of the Comptroller of the Currency’s regulatory response.” The Dodd-Frank Wall Street Reform and ConsumerProtection Act (“DFA”’) contains provisionsrelating to preemption of state law by the National Bank Act (“NBA”) (12 U.S.C. § 21 et seq.) and the implementing regulations of the Office of the Comptroller of the Currency (“OCC”). Those DFAprovisions becameeffective prospectively on July 21, 2011, more than seven years after Parks filed his claim against MBNA. Accordingly, the DFA has no impact on this case. Nevertheless, to the extent the statute and the OCC’s regulatory response are considered, they confirm by implication that Parks’ claim is preempted by the NBA and the OCC’s preemption regulations. I. Contextual Background The DFA wasenacted on July 21, 2010, as a meansto addressthe financialcrisis precipitated by the collapse of the housing market in 2007 and 2008. Thestatute includes measures to improve systemic stability, prevent losses associated with failing financial firms, increase transparency throughout financial markets, and protect consumers. With respect to the latter goal, the DFA established a new ConsumerFinancial Protection Service on the Attorney General and the District Attorney Required by Cal. Bus. & Prof. Code § 17209 and Cal. Rules of Court, Rule 8.29 “ARNOLD & PORTERLLP Bureau (“CFPB”), and transferred to it many of the responsibilities of other federal banking agencies understatutes pertaining to consumerprotection. The DFAalso eliminated the Office of Thrift Supervision (“OTS”), the federal regulator of savings andloanassociations (“savings banks”), and transferredits responsibilities to the OCC. Concurrently with that transfer, the DFA madethe standard for preemption ofstate law as applied to federal savings banks the sameasthe standard that has traditionally applied with respect to national banks under the NBA. The DFA made the NBA preemption standard explicit by express reference to the U.S. Supreme Court’s landmark NBA preemption decision, Barnett Bank ofMarion County, N.A. v. Nelson (1996) 517 US.25. The above-referenced transfers of authority and related provisions on preemption took effect on the DFA’s “Designated Transfer Date,” which, by determination of the Secretary of the Treasury, was July 21, 2011. (See 12 U.S.C. § 5551 note [“Effective and Applicability Provisions”); id. § 5582 [Designated transfer date”]; Designated Transfer Date, 75 Fed. Reg. 57,252, 57,252 (Sept. 20, 2010).) Because Parksfiled his claim more than seven yearsearlier, the DFA does not govern the preemption questionsraised here. But, as explained below, the DFA supports the conclusion reachedbythetrial court, and by the Ninth Circuit in Rose v. Chase Bank USA, N.A. (9th Cir. 2008) 513 F.3d 1032,that claims such as Parks’ are preempted. I. Scope of the DFA Provisions on NBA Preemption The provisions of the DFA addressing NBA and OCC preemptionofstate law are primarily set forth in DFA Section 1044 (124 Stat. at 2014-17), which has been codified at 12 U.S.C. § 25b (“Section 25b”). Section 25b specifically focuses on preemption of “State consumerfinancial laws,” which it defines as “State law[s] that do[] not directly or indirectly discriminate against national banks and that directly and specifically regulate[] the manner, content, or terms and conditions of any financial transaction... or any accountrelated thereto, with respect to a consumer.” (12 U.S.C. § 25b(a)(2).) Under Section 25b, a State consumerfinancial law will be preempted as applied to national banksif (1) it would have a discriminatory effect on a national bank in comparison with the effect of the law on a state-chartered bank; (2) it is preempted under a federal law other than the NBA;or (3) “in accordance with the legal standard for preemptionin the decision of the Supreme Court of the United States in Barnett Bank of Marion County, N.A. v. Nelson, Florida Insurance Commissioner, et al., 517 U.S. 25 (1996), the State consumerfinancial law prevents or significantly interferes with the exercise by the national bank of its powers.” (12 U.S.C. § 25b(b)(1).) Barnett Bank is the preemption decision the Ninth Circuit relied on in Rose in determining that claimsvirtually identical to Parks’ claim were preempted by the NBA. ARNOLD @ PORTER LLP (See 513 F.3d at 1038 [Weare . . . constrained by the holdings of Barnett Bank and Franklin to find that the NBA preempts the disclosure requirements of Cal. Civ. Code 1748.9, insofar as those requirements apply to national banks.”’].) As the Ninth Circuit recognized and MBNAhasargued throughoutthis litigation, Barnett Bank compels the conclusion that claims seeking to enforce Cal. Civ. Code § 1748.9 are preempted as applied to a national bank. Recently, a numberofcourts have considered suggestions that the DFA preemption provisions, now that they are effective, are applicable in cases involving conductprior to the Designated Transfer Date. As the United States Court of Appeals for the Sixth Circuit found in Molosky v. Washington Mutual, Inc. (6th Cir. 2011) 664 F.3d 109,it is clear they are not applicable to prior conduct. The DFA preemption provisions “cameinto effect on July 21, 2011, and have noretroactive effect.” (/d. at 113, fn. 1.) “There is no explicit statement from Congress that they are meantto be retroactive”; indeed, “[t]he Dodd-Frank Actitself declares that its contents should not be construed as retroactive.” (/d., citing 12 U.S.C. § 5553; Davis v. World Sav. Bank, FSB (D.D.C. 2011) 806 F. Supp. 2d 159, 167, fn. 5 [applying a 1996 OTS preemption regulation because the DFA amendmentsare notretroactive]; see also Williams v. Wells Fargo Bank N.A. (S.D. Fla. Oct. 14, 2011, No. 11-21233-CIV) 2011 WL 4901346,at *7, fn. 6 [“The claims involved in the presentaction aroseprior to July 21, 2011; accordingly, they are analyzed under the preemptionrules in effect prior to the changes imposed by the Dodd-Frank Act.”]; Sovereign Bank v. Sturgis (D. Mass. Mar. 22, 2012, Civil Action No. 11-10601- DPW) 2012 WL 1014607, at *14,fn. 9 [“Because the Sturgises’ loans were consummated before Dodd-Frank was enacted or effective, the new preemption standard is inapplicable in the instant case.”’].) In addition, even with respect to claims involving conduct occurring after July 21, 2011, the Section 25b provisions do not apply to the extent those claims arise out of contracts entered into before the DFA’s enactment. The DFAprovides, both with respect to Section 25b and the DFA consumerprotection standards to be implemented by the CFPB,that the statute: [S]hall not be construedto alter or affect the applicability of any regulation, order, guidance, or interpretation prescribed, issued, and established by the [OCC]or the [OTS] regarding the applicability of State law under Federal banking law to any contract entered into on or before the date of enactment of this Act, by national banks.... (DFA § 1043, 124 Stat. at 2014 [codified at 12 U.S.C. § 5553].) In light ofthis provision, whatever impact the DFA might have on preemption in the future, it has no effect on Parks’ claim, as Parks’ credit card agreement with MBNAwasentered into long before the DFA’s enactment. (See Nicol v. Wells Fargo Bank, N.A. (D. Or. Mar. 8, 2012, No. 11-cv-1406-SI)_ — F. Supp. 2d [2012 WL 775077, at *2]; Copeland-Turner v. ARNOLD & PORTER LLP Wells Fargo Bank, N.A. (D. Or. 2011) 800 F. Supp. 2d 1132, 1137-38; Thomas v. Bank of Am. Corp. (Ga. Ct. App. 2011) 711 S.E.2d 371, 376-77.) Equally significant, the above-quoted provision confirmsthe validity of the OCC preemption regulation that applies to Parks’ claim: 12 C.F.R. § 7.4008 (“Section 7.4008”). Section 7.4008 obviously is a “regulation . . . prescribed, issued, and established by the [OCC] . . regarding the applicability of State law under Federal banking law,” and Congress expressly preserved its application here. (12 U.S.C. § 5553.) If Congress had any doubt aboutthe validity of Section 7.4008,surely it would not have expressly prescribed its continued application. In sum, the DFA provisions on NBA and OCCpreemption, while inapplicable in this case, provide additional support for the conclusion that, as the Ninth Circuit held in Rose andthetrial court held here, claims such as Parks’ are preempted. II. The OCC’s Regulatory Response Like the DFA provisions themselves, the OCC’s response to them confirmspoints previously made by MBNAregarding preemption under Barnett Bank andthe validity of the OCC’s preemption regulations, including Section 7.4008. In response to the DFA, the OCC proposed and, following a period of public comment, adopted regulations integrating the OTS functions into the OCC and implementing the related DFA provisions on NBA and OCC preemptionofstate law. (Office of Thrift Supervision Integration; Dodd-Frank Act Implementation, 76 Fed. Reg. 43,549 (July 21, 2011) [final rule].) As part of that rulemaking, the OCC reviewedits preemption regulations adopted in 2004,including Section 7.4008, to ensure their consistency with the DFA. The OCC foundno substantive inconsistency, but determined that a few revisions to the 2004 regulations would help clarify that they specifically implemented the U.S. Supreme Court’s standard for NBA preemptionasarticulated in Barnett Bank. First, the OCC addedto the preemption regulations an express reference to “the decision of the Supreme Court in Barnett Bank.” (See id. at 43,565-66.) Second, the OCC removedfrom the regulations their reference to preemption of state laws that “obstruct, impair, or condition” a national bank’s ability to exercise fully its federally granted powers. (See id. at 43,556.) As the OCC noted, the “obstruct, impair, or condition” formulation for preemption was intendedto reflect the precedents cited in Barnett Bank. (Id.) In Barnett Bank, the U.S. Supreme Court, citing prior preemption case law, referred to NBA preemptionofstate law that would “impair”the exercise of national bank powers; “condition[]” the exercise of a national bank’s powers on the state’s permission (unless the NBAitself imposed such a condition); “encroc[h] on the rights and privileges of national banks’”; “‘destro[y] or hampe[r]’ national banks’ ARNOLD & PORTER LLP functions”; or otherwise “‘interfere with, or impair [national banks’] efficiency in performing the functions by which they are designed to serve[the Federal] Government.’” (517 U.S. at 33-34, emphases added, quoting Anderson Nat’l Bank v. Luckett (1944) 321 U.S. 233, 247-52; McClellan v. Chipman (1896) 164 U.S. 347, 358 Nat’l Bank v. Commonwealth (1869) 76 U.S. (9 Wall.) 353, 362.) As the OCC explained regarding the DFArevisions, it had considered in 2004 that the “obstruct, impair, or condition” language essentially reflected the various preemption formulations and precedentscited in Barnett Bank. (76 Fed. Reg. at 43,556.) However,since the “obstruct, impair, or condition” language apparently had caused some confusion and misunderstanding, the OCC determinedthat “[e]liminating this language from [its] regulations will remove any ambiguity that the conflict preemption principles of the Supreme Court’s Barnett decision are the governing standard for national bank preemption.” (/d.) However, as the OCCalso recognized, a proper application of Section 25b must take into account the full reasoning underlying Barnett Bank — notjust one phrase from the Barnett Bankopinion. Thus, neither the “obstruct, impair, or condition” language northe “prevents or significantly interferes” phrase referred to in Section 25b can serve as the sole test for preemption in accordance with Barnett Bank. Rather, any andall ofthe variousformulations for preemption referred to in Barnett Bank mayserveto indicate whether the application of a particular state law to a national bank would “stan[d] as an obstacle to the accomplishment and execution ofthe full purposes and objectives of Congress.” (Barnett Bank, 517 U.S.at 31, citation and internal quotation marks omitted.) Indeed, the California Court of Appeal, Fourth District, recently recognized this very point in its opinion in Wells Fargo Bank, NA y. Baker (2012) 204 Cal. App. 4th 1063. At issue there was the applicationto a national bank of an Iowastatute requiring that, in order to be deemeda “resident” of Iowa, a corporation not formed under Iowa law (such as a national bank) hadto obtain a certificate of authority to transact business in the state. The Court of Appeal considered whetherthe application of the lowa requirement was inconsistent with, and therefore preempted by, the NBA,given that the NBA “provides that banks shall have power[t]o exercise ... all such incidental powers asshall be necessary to carry on the business of banking.” (/d. at 1069, quoting Watters v. Wachovia Bank, N.A. (2007) 550 U.S.1, 7, internal quotation marks omitted.) Relying on Watters, Barnett Bank, and other NBA preemption precedent, the court reasoned that the Iowa law would be preempted by the NBAif its effect was to “frustrate, destroy, interfere with, or hamper national banks’ exercise of their powers,”or if it were to “curtail or hinder a national bank’s efficient exercise of any [banking] power,” including if it “infringed” on national banks’ powerto sue or otherwise “placfed] a burden on the ability ofa national bankto efficiently conduct their business.” (Id. at 1070-71, emphasesadded,citations omitted.) ARNOLD & PORTER LLP Although obtaining a certificate of authority to do business in a state is essentially a ministerial process involving the submission ofproof of corporate existence and good standing, the court nevertheless foundthat, “[i]n light of the long standingrule that the States cannot interfere with a national bank’s exercise of its powers,. . . it [is] implausible that Congress intended to limit the National Bank Act’s preemptive scope such that States may require national banksto obtain certificates of authority to use their long-arm statutes.” (Jd. at 1072, emphasis added,citing Barnett Bank, 517 U.S.at 33-34; Watters, 550 U.S. at 11.) Because the Iowacertificate of authority requirement “infringes uponnational banks’ powerto sue as fully as natural persons,” the Court of Appeal held the requirement preempted by the NBA. (/d., emphasis added.) The OCC’s regulatory response to the DFA implements this same understanding: that the standard for preemption under Barnett Bank does not hinge on anyparticular terms, whether “obstruct, impair, or condition” or “preventsor significantly interferes.” The “preventsorsignificantly interferes” phrase, as the OCC noted,is “part of the Court’s discussion ofits reasoning; an observation made describing other Supreme Court precedentthatis cited in the Court’s decision.” (76 Fed. Reg. at 43,555.) Neither it nor any other single phrase in Barnett Bank can serve as a “stand-alone standard, divorced from the reasoning of the decision.” (/d.) It is clear from Barnett Bank’s reference to multiple linguistic tests for NBA preemption that “the reasoning of the decision . . includes, but is not bounded by, the ‘prevent or significantly interfere’ formulation.” (Id.) Indeed, if Congress had intended otherwise in the DFA, there would have been no need to qualify the “preventsor significantly interferes”criterion by stating that it must be applied “in accordance with the legal standard for preemption in the decision of the Supreme Court of the United States in Barnett Bank.” (12 U.S.C. § 256(b)(1)(B).) Construing Section 25b as prescribing only a “preventsor significantly interferes” test for preemption would renderthe statute’s reference to Barnett Bank mere surplusage, contrary to well-established principles of statutory construction. Finally, in reviewing its 2004 preemption regulations as part of implementing Section 25b, the OCC carefully reconsidered whether the rules’ reference to preemption of specific types of state laws, including disclosure requirements such as Cal. Civ. Code § 1748.9, is consistent with the standard for conflict preemption in Barnett Bank. (76 Fed. Reg. at 43,557.) With respect to state disclosure requirements, the OCC confirmed that: [D]isclosure laws that impose requirements that predicate the exercise of national banks’ deposit-taking or lending powers on compliance with state-dictated disclosure requirements clearly present a significant interference, within the meaning of Barnett, with the exercise of those national bank powers. This type of law falls squarely within the precedent recognized in the Supreme Court’s Barnett decision, notably the Franklin Nat'l Bank decision specifically discussed and relied upon in Barnett. ARNOLD & PORTER LLP (Id. at 43,557 & fn. 51, citing Barnett Bank, 517 U.S.at 33; Franklin Nat'l Bank of Franklin Square v. New York (1954) 347 U.S. 373; Am. Bankers Ass'n v. Lockyer (E.D. Cal. 2002) 239 F. Supp. 2d 1000, 1014-18; Rose, 513 F.3d 1032.) IV. Conclusion This Court need not consider the DFA in deciding the preemption questions presented in this case. The DFA does not govern preemption of Parks’ claim. However, both the statute and the OCC’s regulatory response confirm by implication that, as the Ninth Circuit held in Rose, any such claims are preempted under Barnett Bank. ARNOLD & PORTER LLP By: Anarance’\,thet /:30M LAURENCEJ. HUTT Counselfor Respondent MBNA America Bank, N.A., now known as FIA Card Services, N.A. PROOF OF SERVICE Allan Parks vy. MBNA America Bank, N.A. I am employedin the State of California. I am over the age of 18 and not a partyto the above-entitled action. My business address is Three Embarcadero Center, San Francisco, CA, 94111. On May16, 2012,I served the foregoing document described as a RESPONDENT’S SUPPLEMENTAL LETTERBRIEF,byplacing a true copy thereof enclosed in sealed envelopes addressed as follows: Michael R. Vachon Law Office of Michael Vachon, Esq. 17150 Via del Campo, Suite 204 San Diego, CA 92127 Counselfor PlaintiffandAppellant District Attorney for the County of Orange 401 Civic Center Drive Santa Ana, CA 92701 Sheldon H.Jaffe Deputy Attorney General California Department of Justice 455 Golden Gate Ave., Suite 11000 San Francisco, CA 94102-7004 Clerk of the Court California Superior Court, County of Orange Civil ComplexCenter 751 West Santa Ana Blvd. Santa Ana, CA 92701 Clerk of the Court California Court of Appeal Fourth Appellate District Division Three 601 West Santa Ana Blvd Santa Ana, CA 92701 Office of the Comptroller of the Currency Litigation Department Attn: Douglas Jordan, Senior Counsel 250 E Street SW Washington, D.C. 20219-4515 Appellate Coordinator Office of the Attorney General Consumer Law Section 300 S. Spring Street Los Angeles, CA 90013-1230 David M. Arbogast Arbogast Bowen LLP - 11400 W. Olympic Boulevard, 2nd Floor Los Angeles, CA 90064 J. Mark Moore Spiro Moss LLP 11377 W. Olympic Boulevard, Fifth Floor Los Angeles, CA 90064-1683 James R. McGuire Rita F. Lin Aaron D. Jones Morrison & Foerster LLP 425 Market Street San Francisco, CA 94105 Bruce E. Clark Sullivan & Cromwell LLP 125 Broad Street New York, NY 10004 Achyut J. Phadke Sullivan & Cromwell LLP 1870 Embarcadero Road Palo Alto, CA 94303 By U.S. mail. I enclosed the documentin a sealed envelope or package addressed to the personsat the addresses above and YI placed the envelopefor collection and mailing, following our ordinary business practices. I am readily familiar with this business’ practice for collecting and processing correspondence for mailing. On the same day the correspondenceis placed for collection and mailing, it is deposited in the ordinary course of business with the United States Postal Service, in a sealed envelope with postage fully prepaid. J am employedin the State of California where the mailing occurred. The envelope or package wasplacedin the mail at San Francisco, CA. M STATE:I, Bonnie Hastings, declare under penalty of perjury under the laws ofthe | State of California that the foregoing is true andcorrect. Executed on May 16, 2012, at San Francisco, CA. Bonne Netinyeye Bonnie Hastings