Ninth Circuit Finds California Debt Collection Law Is Not Preempted

On August 1, the U.S. Court of Appeals for the Ninth Circuit held that the National Bank Act and regulations promulgated thereunder do not preempt the California Rees-Levering Act's (Act) provision that the lender may not collect a deficiency unless certain notices are given to the borrower before the lender sells a repossessed vehicle. Aguayo v. U.S. Bank, Case No. 09-56679 (9th Cir. Aug. 1, 2011). The borrower sued its lender, a national bank, alleging that the bank sold his vehicle without giving him the required notices. The District Court found that the Act's requirements were preempted and granted the bank's motion to dismiss. On appeal, the Ninth Circuit reversed and remanded for further proceedings. The Ninth Circuit noted that 12 C.F.R. § 7.4008 - a regulation promulgated by the OCC preempting certain state laws related to non-real estate loans - contains a savings clause providing that it does not preempt state laws related to rights to collect debts. The Ninth Circuit determined that the savings clause applied to the Act because debt collection, including the right to repossess property, is a fixture of state law, not federal law. The Ninth Circuit added that the bank chose to use its right to self-help repossession under state law, but now claims that it no longer needs to comply with state law to collect any remaining debt. The Ninth Circuit found that this inconsistency demonstrates that the bank's debt collection efforts fall within the savings clause and thus are not preempted. The bank argued that recovering a deficiency falls within the bank's lending power, and thus more than incidentally affects lending powers and therefore does not fall within the reach of the savings clause. The Ninth Circuit, however, found that there is no loan at this point, but only an outstanding debt for which the bank seeks to recover by using a state law remedy. After finding that the savings clause applies to the Act's notice requirements, the Ninth Circuit then addressed whether express preemption is still available under the provision in § 7.4008 preempting state laws related to disclosures in credit-related documents. The Ninth Circuit held that the notice requirements in the Act operate differently from disclosure requirements, and that a debt collection notice is not a credit-related document because the lending relationship has ended. Therefore, the notice requirements do not fall within the scope of the express preemption provision in § 7.4008. As a result, the bank lost the right to obtain a deficiency after selling the repossessed car because it did not give the required notice.