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SECOND CIRCUIT AFFIRMS PREEMPTION OF STATE INCOME TAX REFUND ANTICIPATION LOAN STATUTE

On September 12, 2008, the United States Court of Appeals for the Second Circuit affirmed a district court decision construing certain provisions of a Connecticut statute regulating income tax refund anticipation loans (RALs) as inapplicable to national banks and to tax return services assisting national banks with such loans. Pacific Capital Bank, N.A. v. State of Conn., --- F.3d ---, 2008 WL 4191752 (2nd Cir., 2008). Interpreting the statute not to apply to national banks and tax return services assisting national banks avoided a constitutional problem.

Pacific Capital Bank, a national bank, challenged the constitutionality of the Connecticut statute regulating RALs, and alleged that the statute impaired its ability to undertake lending and lending-related activities as authorized by the National Bank Act (NBA). The statute, inter alia, prohibits the making of refund anticipation loans at any location other than a location in which the principal business is tax preparation and limits the interest rate that may be charged on such a loan. Conn. Gen. Stat. Ann. § 42-480. The district court held that Pacific Capital had standing to bring the action, even though the State of Connecticut had not tried to enforce the statute against Pacific Capital, because there was no apparent exemption for national banks with regard to the location and interest rate restrictions. Furthermore, Pacific Capital had changed its business practice to avoid violating the law and was offering the loans at little or no profit; this demonstrated “injury-in-fact.” Although the district court reasoned that the location and interest rate limitations, if applicable to a national bank, would be preempted by the NBA, the court construed these limitations as not applying to national banks and only applying to facilitators of RALs that are not partnering with national banks.

On appeal, the State of Connecticut contended that the district court erred in (i) ruling that Pacific Capital had standing, (ii) ruling that the NBA can preempt a state statute that regulates non-banks and (iii) interpreting the statute as inapplicable to facilitators partnering with national banks. With regard to standing, the Second Circuit Court determined that Pacific Capital had standing as the bank reasonably interpreted the statute as applying to it, and that enforcement of the statute against facilitators giving assistance to Pacific Capital, whose interest rates exceed the ceilings imposed by the statute, would cause injury to Pacific Capital by increasing its costs and/or limiting its access to potential customers.

In affirming the holding of the district court regarding the applicability of the statute, the Second Circuit Court relied on Watters for the principle that, when determining whether a state statute is preempted, the proper focus is not on whether the statute regulates national banks directly but rather on whether it significantly interferes with national banks’ authorized activity. See Watters v. Wachovia, 127 S.Ct. 1559 (2007). The Second Circuit determined that, if a state statute subjects non-bank entities to a punishment for acting as agents for national banks with respect to an activity authorized by the NBA, and thereby significantly interferes with national banks’ ability to carry on that activity, the statute cannot escape preemption on the theory that, on its face, it regulates only non-bank entities. Because a court should opt for an interpretation of state law that avoids constitutional problems, and because it was permissible to infer that the Connecticut legislature did not intend for the statute to impact the activities of national banks to the extent it would conflict with federal law, the Second Circuit court determined that the district court’s holding was appropriate.

This case follows on the heels of other recent cases supporting the extension of federal powers to bank agents, such as State Farm (see DLT Alert “Sixth Circuit Court Finds State Law Preempted as to Exclusive Agents of Federal Savings Bank,” Aug. 25, 2008) and Ayotte (see DLT Alert “First Circuit Affirms Preemption of State Gift Card Law in First Post-Watters Case,” June 1, 2007). Text

  • Mike Tomkies and Elizabeth Anstaett