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Financial Services Law Insights and Observations

First Circuit Holds State Law Claims Insufficient to Defeat HOLA Preemption Defense

State Issues

On April 3, the U.S. Court of Appeals for the First Circuit upheld the denial of a plaintiff’s state law claims in a case involving default interest charged on a credit card. Yeomalakis v. Federal Deposit Insurance Corporation, No. 08-1444, 2009 WL 884936 (1st Cir. Apr. 3, 2009). The plaintiff’s credit card issuer, Washington Mutual Bank (WaMu), charged an increased annual percentage rate (APR) on unpaid credit card balances on accounts where the holder defaulted. The increased rate was charged as of the first day of the billing cycle in which the default occurred. James Yeomalakis brought suit against WaMu to challenge this practice. The plaintiff claimed that WAMU (i) imposed an illegal penalty by retroactively increasing the APR and (ii) engaged in unfair and deceptive acts and practices in violation of Mass. Gen. Law ch. 93A, § 2, alleging that the retroactive increases were unfair and had not been adequately disclosed. The district court granted WaMu’s motion to dismiss the claims on the basis that both counts were preempted by the Home Owners’ Loan Act of 1933 (HOLA) and various regulations promulgated under HOLA, based on preemption of state interest rates (which includes penalties) and disclosures. On appeal, the plaintiff failed to make any plausible arguments as to why the penalty claim would not be preempted, and, further, the plaintiff provided no clear chapter 93A claim that would avoid preemption. The court of appeals indicated that the plaintiff could have alleged state contractual claims (that the card agreement did not permit the “retroactive” increase in APR) and/or state fraud claims, which may not be preempted by HOLA. However, the court pointed out that it is not the job of the court to provide arguments for a party that has not provided them, and the court upheld the lower court’s dismissal of the claims.