Alert May 13, 2014

Supreme Court Seeks Federal Government Opinion on National Bank Act Preemption of State Foreclosure Law

Considering a petition for certiorari filed by Federal National Mortgage Association in a case concerning which state’s law governs a national bank’s authority to serve as trustee under a deed of trust—the state in which the bank is located, or the state in which the secured property is located—the Supreme Court invited the Solicitor General to weigh in. Following a non-judicial foreclosure, Fannie Mae filed an unlawful detainer action seeking to remove a borrower from her home. During a hearing on the unlawful detainer action, the borrower argued that under Utah law, a subsidiary of the national bank who conducted the foreclosure, could not serve as a trustee under Utah law. In particular, the borrower argued that under Utah law, only members of the Utah State Bar or title insurance companies with an office in Utah had the authority to serve as a trustee. Fannie Mae countered that federal law preempted Utah law, and thus allowed the subsidiary to conduct the foreclosure sale. The lower court agreed, and the borrower appealed. Ultimately, the issue made its way to the Utah Supreme Court, which rejected Fannie Mae’s argument, ruling that a Utah statute restricting trustees to in-state attorneys and licensed title insurance companies barred the national bank from serving as trustee. The Utah Supreme Court also rejected Fannie Mae’s argument that the National Bank Act allows a national bank to act as a fiduciary when not inconsistent with state law, and should be construed to allow banks to serve as trustee whenever allowed by the law of the state in which the bank is located. Rather, the Utah Supreme Court held that the National Bank Act allowed a national bank to act as fiduciary whenever allowed by the law of state in which the secured property is located.

There is a circuit split over the question, including the United States Court of Appeals for the Tenth Circuit (in which Utah is located), which reached a contrary holding to the Utah Supreme Court in a case with similar facts. In fact, in Garrett v. ReconTrust, N.A. 546 Fed.Appx. 736 (10th Cir. 2013), the Tenth Circuit concluded that the National Bank Act provided “no direction” on the question at hand and gave deference to the federal regulator. The United States Court of Appeals for the Fourth Circuit has also issued a related decision (see Jaldin v. ReconTrust, 539 Fed.Appx. 97 (4th Cir. 2013)). The Supreme Court of the United States has not yet determined whether to accept certiorari, and assuming the Solicitor General accepts the Supreme Court’s invitation to weigh in, it remains to be seen which party’s position the Solicitor General will support.