9th Circuit Panel Finds HOLA Does Not Preempt State Law Breach of Contract Claim

A three-judge panel for the U.S. Court of Appeals for the Ninth Circuit recently held that a state law breach of contract claim was not preempted by the federal Home Owners’ Loan Act (HOLA) in a case where the borrowers alleged that their lenders miscalculated the interest rates on their loans.  Specifically, the Ninth Circuit found that a common law breach of contract claim was a law that only incidentally affected the lending operations of federal savings associations, which is an exemption contemplated by 12 C.F.R. § 560.2(c).

In this case, the borrowers (plaintiffs) filed a putative class action against their lenders (defendants) in a Washington state court alleging multiple breach of contract claims based on the lenders’ alleged miscalculation of interest on their loans.  The lenders subsequently removed the case to federal court under diversity jurisdiction.

First, the Ninth Circuit panel found that the district court erred in holding that the borrowers’ “Interest Rate Calculation” breach of contract claim was preempted by HOLA.  Second, the panel affirmed the grant of summary judgment in the lenders’ favor as to the borrowers’ “Use of Unapproved Indexes” breach of contract claim.  The Court also affirmed the district court’s denial of the borrowers’ motion for discovery sanctions.  Finally, in light of the determination that HOLA did not preempt the borrowers’ claim, the panel vacated the district court’s ruling on attorneys’ fees and mandated that each side bear their own costs on appeal.

On the issue of preemption, the panel applied the three-step framework prescribed by the Office of Thrift Supervision (OTS), set forth in 12 C.F.R. § 560.2, to determine whether HOLA preempts a state common law breach of contract claim.  As background, the OTS is authorized under HOLA to promulgate regulations that preempt state laws affecting the operations of federal savings associations.  The panel found that the borrowers’ “Interest Rate Calculation” breach of contract claim imposed no banking regulations and only incidentally affected the lending operations of federal savings associations.  Such a law is exempt from preemption under HOLA.  Thus, the lenders could not be excused from complying with a contractual obligation simply because it related to the subject matter of the OTS regulation that provided grounds for preemption.  The Court remanded this claim for further proceedings.

Regarding the separate “Use of Unapproved Indexes” breach of contract claim, the panel determined that the lenders validly obtained approval to use a different index to calculate the interest rates on the borrowers’ loans.  Thus, the panel affirmed the grant of summary judgment in the lenders’ favor.

Finally, the panel vacated the district court’s ruling on attorneys’ fees because the district court erred in dismissing the borrowers’ claim as preempted by HOLA.  Instead, the panel mandated that both sides bear their own costs on appeal.

The case is Campidoglio LLC v. Wells Fargo & Co.