High Court Cantero Case Won’t Stem Federal, State Law Conflicts

In Cantero v. Bank of America, the US Supreme Court declined to decide whether Bank of America Corp. must pay interest on New York mortgage borrowers’ escrow accounts. Whether or not the case returns to the high court, the underlying legal principles certainly will.

Numerous industries and activities are regulated at both the federal and state levels. The Constitution’s Supremacy Clause makes federal law the “supreme Law of the Land,” superseding or “preempting” conflicting state law. The hard part is identifying when there is a conflict.

The Cantero case arises out of mortgage loans made by a federally chartered, or “national,” bank. Federal law gives national banks power to make and service mortgage loans. Banks typically require the borrower to make monthly payments into an escrow account for taxes and insurance together with monthly mortgage payments.

Although federal law regulates certain aspects of those accounts, it doesn’t require they pay interest. New York law does. Bank of America refused to pay interest on escrow accounts in New York, however, arguing that federal law conflicts with and therefore preempts the state law. Alex Cantero and other mortgage borrowers sued.

The US Court of Appeals for the Second Circuit agreed with Bank of America, concluding that New York was attempting to “control” the way the bank exercises its federal-law banking powers. The Supreme Court decided the Second Circuit’s “control” analysis is contrary to both Supreme Court precedent, as set out in Barnett Bank of Marion County v. Nelson, and a provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Both Barnett Bank and Dodd-Frank deny states the power to apply their consumer protection laws to national banks if the law “prevents or significantly interferes with” the bank’s exercise of its federally provided powers. The court concluded that the Second Circuit’s test put too big a thumb on the side of federal preemption. It didn’t, however, accept the plaintiffs’ invitation to declare that the New York statute is not preempted. Instead, it sent the case back to the Second Circuit to reconsider under the correct standard.

Unfortunately for the non-lawyer trying to make sense of all this, there is no one preemption standard. Congress often inserts language into federal statutes describing their effect on state law. In those instances, the statutory language is the standard, which may vary from one statute to another.

Some federal statutes are silent on their preemptive effect. The court then applies one of several different tests depending on the pervasiveness of the federal scheme and the court’s sense of the respective interests of the federal and state governments in the field.

In the field of banking law, there’s a long history of parallel state and federal chartering and regulatory systems, and the court provides relatively more room for state law and federal law to coexist. By contrast, safety regulation of nuclear power plants has been almost exclusively a federal concern, leaving relatively less room for state law.

The Supreme Court sees a steady diet of preemption cases. If anything, the volume may increase in the coming years. While neither political party can get everything it wants in Congress, there are dark-blue states like New York dominated by Democrats and dark-red states like Texas dominated by Republicans. Both sides may seek to achieve at the state level what they can’t at the federal level. Opponents will argue these state laws conflict with federal law.

We’ve already seen a prominent example. In 2012, the Supreme Court decided, in Arizona v. United States, that Congress has “reserved for itself” the field of immigration law, thus preempting an Arizona statute. As politically homogeneous states increasingly wish to decide hot-button social, environmental, and economic issues for themselves, the Supreme Court may confront more preemption questions in highly polarized settings.

The case is Cantero v. Bank of America, U.S., No. 22-529, decided 5/30/24.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Paul G. Mahoney is professor at University of Virginia School of Law. He served as dean of the law school from 2008 to 2016.

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