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Decohen v. Capital One, N.A., No. 11-2161

Decided: December 26, 2012

In this case, the Fourth Circuit considered whether a federal statute, the National Bank Act (“NBA”), preempted a Maryland law, the Credit Grantor Closed End Provisions (“CLEC”), with respect to a debt cancellation provision in a retail installment contract.

The plaintiff and a local car dealer entered into this retail installment contract for the purchase of a used motor vehicle.  Pursuant to the contract, the purchase price would be financed by the dealer, and it would be subject to a bargained-for debt cancellation agreement.  This agreement, in turn, provided that in the event that the car was totaled a portion of the remaining debt would be cancelled.  After the plaintiff purchased the car, the dealer negotiated the retail installment contract to Capitol One, N.A., a national bank regulated by federal banking laws.  When the car was later totaled, and the insurance proceeds were insufficient to cover the total amount outstanding on the loan, the Capital One demanded that the plaintiff make payment to satisfy the remaining loan balance.  In response, the plaintiff filed suit against both the national bank and the local dealer, claiming breach of contract and a violation of the CLEC.

Under Maryland state law, to be proper, a debt cancellation agreement must cancel all of the remaining debt on a contract when insurance proceeds do not cover the outstanding balance of the loan.  In contrast, federal regulations promulgated under the NBA provide only that a debt cancellation agreement must cancel a portion of the remaining debt.  The Fourth Circuit thus had to determine whether the retail installment contract, sought to be enforced by the national bank, was governed by Maryland law or if that law had been preempted by federal law.  According to the court, the relevant federal regulations explicitly governed debt cancellation agreements entered into by a national bank.  Here, the credit was extended by a local lender and only later was the loan assigned to the national bank.  And because the “[fe]deral regulations of national banks do not encompass such a situation” and because “Congress had not occupied the field with regard to debt cancellation agreements, the Maryland law was neither expressly preempted nor field preempted by federal law.  Thus, the court held that the plaintiff had properly stated a claim for breach of contract on the basis of Capital One’s refusing to abide by the terms of the CLEC under Maryland law.

Full Opinion

-John C. Bruton, III