Supreme Denies Cert in Fourth Circuit Federal Preemption Case

By Joe Patry

In Jaldin v. ReconTrust Company, N.A., 539 Fed. App. 97 (4th Cir. 2013), the borrowers sued Bank of America, N.A. (“BANA”) and ReconTrust Company, N.A. (“ReconTrust”) relating to foreclosure notices they received.  ReconTrust was named as the trustee on a Virginia Deed of Trust.  Id. at 99.  A Virginia statute, Va. Code Ann. §55-58.1, provides that only companies which are formed under Virginia law or that have their principal place of business in Virginia may be named as trustees on Virginia Deeds of Trust.  Id. at 100.  The borrowers alleged that ReconTrust violated Virginia law when it was named as the trustee on their Deed of Trust.  Id.  Although a foreclosure has not yet occurred on their property, they sought damages for foreclosure notices they received and sought to invalid ReconTrust’s appointment as a trustee.  Id. at 99.

On an issue of first impression, BANA and ReconTrust argued that the Virginia statute is preempted under the National Banking Act, because it interfered with their powers to act as national banks.  Id.  at 100.  They also argued that the statue violated the National Banking Act, because Virginia treats Virginia-based banks differently from National Banks – i.e., a Virginia-based bank may be named as a trustee on a Virginia Deed of Trust but a national bank may not.  Id. at   The trial court dismissed the case and found that the federal statute was preempted.  Id. at 102.

The United States Court of Appeals for the Fourth Circuit affirmed, and found that the Virginia statute substantially interfered with the power of federal banks to engage in mortgage lending and foreclose, because it prevented ReconTrust from being named as a trustee in Virginia.  Id. at 101.  Because the Virginia statute conflicted with federal law, it was preempted.  Id. at 102.  Further, the Fourth Circuit noted that the Virginia statute conflicts with the National Banking Act, which prohibits states from treating state-based banks differently from national banks, to prevent states from giving local banks a competitive advantage.  Id.

Subsequently, the borrowers filed a certiorari petition with the United States Supreme Court, which denied certiorari in an order issued May 19, 2014.  Although, of course, the denial of a certiorari petition does not have precedential value and merely lets the lower court decision stand, this decision has the practical impact of removing potential uncertainty over actions taken by national banks which are appointed as trustees on Virginia Deeds of Trust.

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