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FLAGG v. YONKERS SAVINGS AND LOAN ASSOCIATION

March 8, 2004.

HANS W. FLAGG and EILEEN S. FLAGG, on behalf of themselves and all others similarly situated, Plaintiffs, -against- YONKERS SAVINGS AND LOAN ASSOCIATION, FA (a/k/a YONKERS FINANCIAL), Defendant


The opinion of the court was delivered by: WILLIAM CONNER, Senior District Judge Page 1

OPINION AND ORDER

Plaintiffs Hans W. Flagg and Eileen S. Flagg, on behalf of themselves and all others similarly situated, bring this action against defendant Yonkers Savings and Loan Association, a/k/a Yonkers Financial ("Yonkers"),*fn1 seeking declarations: (1) pursuant to 28 U.S.C. § 2201 that federal law neither preempts nor precludes the applicability of New York statutes requiring the payment of interest on escrow accounts; (2) pursuant to 28 U.S.C. § 2202 that defendant's actions in connection with the mortgages of plaintiffs and the putative class violated N.Y. GEN. OBLIG. LAW § 5-601; GEN. Bus. LAW § 349, BANKING LAW §§ 14-b and 6-k, REAL PROP. TAX LAW § 953(2) and constitute breach of contract and unjust enrichment; and (3) pursuant to 28 U.S.C. § 2202 that plaintiffs and the putative class are entitled to compensatory damages or disgorgement or restitution in an amount to be determined at trial.*fn2 In the alternative, should this Court hold that the federal regulations preempt the state statutes, plaintiffs seek a declaration that the federal regulations constitute a taking under the Fifth Amendment that entitles them to just compensation. Plaintiffs also seek certification of this case as a class action pursuant to FED. R. CIV. P. 23 with plaintiffs certified as class representatives.*fn3 Defendant has moved pursuant to FED. R. CIV. P. 12(b)(6) to dismiss the Complaint with prejudice for failure to state a claim on which relief can be granted. Plaintiffs have cross moved Page 2 pursuant to FED. R. CIV. P. 56 and 23 for summary judgment and class certification. For the reasons set forth herein, we grant defendant's Rule 12(b)(6) motion to dismiss the Complaint with prejudice and deny as moot plaintiffs' Rule 56 cross motion for summary judgment.*fn4

BACKGROUND

  The facts underlying this dispute are simple and undisputed. Plaintiffs entered into a mortgage contract with defendant on June 12, 1998, in connection with a loan on their residence in Scarsdale, New York. (Pls. Rule 56.1 Stmt. ¶ 1; Complt. ¶ 6.) That contract included a provision governing funds held in escrow by defendant to pay for, inter alia, taxes, assessments and insurance, entitled "Lender's Obligations." (Pls. Rule 56.1 Stmt. ¶ 2.) This provision provides in relevant part:
Lender will not be required to pay me any interest or earnings on the funds unless either (i) Lender and I agree in writing, at the time I sign this Security Instrument, that Lender will pay interest on the Funds; or (ii) the law requires Lender to pay interest on the Funds.
With respect to the governing law, the mortgage agreement states:
This Security Instrument is governed by federal law and the law that applies in the place where the Property is located. If any term of this Security Instrument or of the Note conflicts with the law, all other terms of this Security Instrument and of the Note will remain in effect if they can be given effect without the conflicting term. This means that any terms of this Security Instrument and of the Note which conflict with the law can be separated from the remaining terms, and the remaining terms will still be enforced.
(Pls. Rule 56.1 Stmt. ¶ 3 (emphasis added).) Pursuant to this agreement, plaintiffs deposited more than $4,000 into the escrow account with defendant at the time that their loan closed, and the balance Page 3 of that account sometimes exceeded $6,000 during the life of that loan. (Id. ¶ 4.) Defendant never paid plaintiffs interest on that account before Yonkers merged with Atlantic Bank in May 2002. (Id. ¶ 5.) After the merger, Atlantic Bank began to pay plaintiffs interest on their escrow account. (Id. 16.)

  DISCUSSION

 I. Standard of Review

  On a motion to dismiss pursuant to FED. R. CIV. P. 12(b)(6), the court must accept as true all of the well pleaded facts and consider those facts in the light most favorable to the plaintiff. See Warth v. Seldin, 422 U.S. 490, 501 (1975); Hertz Corp. v. City of New York, 1 F.3d 121, 125 (2d Cir. 1993); In re AES Corp. Sec. Litig., 825 F. Supp. 578, 583 (S.D.N.Y. 1993) (Conner, J.). On such a motion, the issue is "whether the claimant is entitled to offer evidence to support the claims." Scheuer v. Rhodes, 416 U.S. 232, 236 (1974), overruled on other grounds by Davis v. Scherer, 468 U.S. 183 (1984). A complaint should not be dismissed for failure to state a claim "unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Padavan v. United States, 82 F.3d 23, 26 (2d Cir. 1996) (quoting Hughes v. Rowe, 449 U.S. 5, 10 (1980)). Generally, "[c]onclusory allegations or legal conclusions masquerading as factual conclusions will not suffice to prevent a motion to dismiss." 2 JAMES WM. MOORE ET AL., MOORE'S FEDERAL PRACTICE § 12.34 [l][b] (3d ed. 1997); see also Hirsch v. Arthur Andersen & Co., 72 F.3d 1085, 1088 (2d Cir. 1995). Allegations that are so conclusory that they fail to give notice of the basic events and circumstances of which the plaintiff complains, are insufficient as a matter of law. See Martin v. N.Y.S.tate Dep't of Mental Hygiene, 588 F.2d 371, 372 (2d Cir. 1978). Page 4

 II. Whether the New York Escrow Account Interest Statutes are Preempted

  Defendant claims that regulations implemented by the Office of Thrift Supervision ("OTS") pursuant to the Home Owners Loan Act, 12 U.S.C. § 1464(a) (the "HOLA Regulations") preempt those New York state statutes that require the payment of interest on escrow funds because those regulations completely occupy the field of regulating federal savings associations and do not require interest payments in the absence of a written agreement to that effect. (Def. Mem. Supp. Mot. Dismiss at 4, 8.) Defendant also claims that the preemptive effect of these regulations is not vitiated by the Real Estate Settlement Procedures Act of 1974 ("RESPA"). (Id. at 10.) Plaintiffs contend otherwise. We begin our analysis with a review of the statutes and regulations at issue.

  A. Review of the State and Federal Statutes and Regulations at Issue

  The HOLA Regulations are promulgated pursuant to 12 U.S.C. § 1463(a)*fn5 and 1464(a).*fn6 Page 5 With respect to federal preemption as to the operation of federal savings associations, 12 C.F.R. § 545.2 provides generally:
The regulations in this Part 545 are promulgated pursuant to the plenary and exclusive authority of the Office to regulate all aspects of the operations of Federal savings associations, as set forth in section 5(a) of the Act. This exercise of the Office's authority is preemptive of any state law purporting to address the subject of the operations of a Federal savings association.
Id. (emphasis added). The HOLA Regulation governing preemption with respect to the lending and investment practices of federal savings associations is 12 C.F.R. § 560.2(a), which provides:

  Pursuant to sections 4(a) and 5(a) of the HOLA, 12 U.S.C. § 1463(a), 1464(a), OTS is authorized to promulgate regulations that preempt state laws affecting the operations of federal savings associations when deemed appropriate to facilitate the safe and sound operation of federal savings associations, to enable federal savings associations to conduct their operations in accordance with the best practices of thrift institutions in the United States, or to further other purposes of the HOLA. To enhance safety and soundness and to enable federal savings associations to conduct their operations in accordance with best practices (by efficiently delivering low-cost credit to the public free from undue regulatory duplication and burden), OTS hereby occupies the entire field of lending regulation for federal savings associations. OTS intends to give federal savings associations maximum flexibility to exercise their lending powers in accordance with a uniform federal scheme of regulation. Accordingly, federal savings associations may extend credit as authorized under federal law, including this part, without regard to state laws purporting to regulate or otherwise affect their credit activities, except to the extent provided in paragraph (c) of this section or § 560.110 of this part.*fn7 For purposes of this section, "state law" includes any state statute, regulation, ruling, order or judicial decision. Page 6

 Id. (emphasis added). Section 560.2 also provides "illustrative examples" of "the types of state laws preempted by paragraph (a) of this section" and states that they "include, without limitation, state laws purporting to impose requirements regarding . . . Escrow accounts, impound accounts, and similar accounts." Id. § 560.2(b)(6) (emphasis added). Section 560.2 then sets forth a list of state laws that are not preempted; this list does not mention escrow accounts or other laws relating to interest. See id. § 560.2(c).*fn8 This chapter does not contain a regulation specifically requiring the payment of interest by lenders on funds held in escrow accounts.

  New York has, however, several state statutes governing mortgage lending institutions that do require the payment of interest on escrow accounts. N.Y. GEN. OBLIG. LAW § 5-601 provides in relevant part:

  Any mortgage investing institution which maintains an escrow account pursuant to any agreement executed in connection with a mortgage on any one to six family residence occupied by the owner or on any property owned by a cooperative apartment corporation, . . . located in this state shall, for each quarterly period in which such escrow account is established, credit the same with dividends or Page 7 interest at a rate of not less than two per centum per year based on the average of the sums so paid for the average length of time on deposit or a rate prescribed by the banking board pursuant to section fourteen-b of the banking law and pursuant to the terms and conditions set forth in that section whichever is higher. The banking board shall prescribe by regulation the method or basis of computing any minimum rate of interest required by this section and any such minimum rate shall be a net rate over and above any service charge that may be imposed by any mortgage lending institution for maintaining an escrow account. . . .

 With respect to specific escrow accounts, N.Y. REAL PROP. TAX LAW § 953 prescribes the duties and responsibilities of mortgage investing institutions concerning real property tax escrow accounts and provides, inter alia, that:
Every mortgage investing institution subject to the provisions of section fourteen-b of the banking law shall pay at least the minimum rate of interest on each real property tax escrow account as prescribed therein except that any such mortgage investing institution shall not be required to pay such minimum rate of interest on real property tax escrow accounts established for non-mortgagors.
Id. § 953(2). N.Y. BANKING LAW § 6-k(2)(b) governs the duties of mortgage investing institutions relating to real property insurance escrow accounts and provides that "[every] mortgage investing institution shall pay at least the minimum rate of interest on each real property insurance escrow account as prescribed therein." The interest rates to be paid under these state escrow provisions are set by the state banking board pursuant to procedures set forth in N.Y. BANKING LAW § 14-b.*fn9 Page 8

  B. Preemption Analysis

  "Within constitutional limits, federal preemption of state law is found where Congress has explicitly expressed its intent to preempt, or where the nature and object of the federal laws and regulatory scheme show Congress' intent to occupy the entire field." Ingham Micro, Inc. v. Airborne Cargo Exp., Inc., 154 F. Supp.2d 834, 838 (S.D.N.Y. 2001). The Second Circuit has described the Supremacy Clause origin of the preemption doctrines:
The Supremacy Clause of the United States Constitution provides that "[t]his Constitution, and the Laws of the United States which shall be made in Pursuance thereof . . . shall be the supreme Law of the Land." U.S. CONST, art. VI, cl. 2. State law is preempted explicitly where Congress states an intent to occupy a field and to exclude state regulation. State law is preempted implicitly where the federal interest in the subject matter regulated is so pervasive that no room remains for state action, indicating an implicit intent to occupy the field, or where the state regulation at issue conflicts with federal law or stands as an obstacle to the accomplishment of its objectives.
Rondout Elec., Inc. v. N.Y. State Dep't of Labor, 335 F.3d 162, 166 (2d Cir. 2003) (citing, inter alia, Fid. Fed. Sav. & Loan Ass'n v. de la Cuesta, 458 U.S. 141, 153 (1982)), cert. denied, 124 S.Ct. 1045 (2004). Moreover, "[f]ederal law may preempt state regulation in whole or in part." Id.

  "Federal regulations have no less preemptive effect than federal statutes." de la Cuesta, 458 U.S. at 153. When Congress "has directed an administrator to exercise his discretion, his judgments are subject to judicial review only to determine whether he has exceeded his statutory authority or acted arbitrarily." Id. at 153-54. This limited inquiry applies to regulations promulgated with the intention of preempting state law. Id. at 154. Thus, if the administrator's "`choice represents a Page 9 reasonable accommodation of conflicting policies that were committed to the agency's care by the statute, [the courts] should not disturb it unless it appears from the statute or its legislative history that the accommodation is not one that Congress would have sanctioned.'" Id. (quoting United States v. Shimer, 367 U.S. 374, 383 (1961)). Finally, a "pre-emptive regulation's force ...


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