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Washington, D.C. - The U.S. Supreme Court on Thursday overturned a Second Circuit decision that had exempted Bank of America NA from class action litigation related to a New York escrow interest law, stating that the lower court's preemption analysis lacked necessary nuance.

In a unanimous opinion, the high court vacated the 2022 decision and instructed the Second Circuit to reevaluate its preemption analysis in Cantero v. Bank of America. Consumers accused the bank of not complying with a New York law requiring the payment of interest on escrow accounts.

More than a dozen states have similar laws mandating minimum interest amounts on homeowner funds held in escrow. Bank of America argued that, as a national bank, it is not required to comply with New York's law, and the Second Circuit had agreed.

Under the Dodd-Frank Act, national banks are exempt from state laws that "preempt or significantly interfere with" their banking powers. The Second Circuit interpreted this standard broadly, asserting that it includes any state law attempting to "exert control over" a national bank's powers. Consequently, the court held that the New York escrow interest law is preempted.

However, the Supreme Court determined that the Second Circuit failed to apply the preemption standard properly, emphasizing that it necessitates "a practical assessment of the nature and degree of the interference" caused by the state law in question. Justice Brett Kavanaugh, writing for the unanimous court, noted that the Second Circuit used a "categorical test that would preempt virtually all state laws regulating national banks," contrary to the nuanced standard required by Dodd-Frank.

The court's decision referenced the 1996 landmark ruling in Barnett Bank of Marion County NA v. Nelson, which established that some non-discriminatory state laws regulating national banks are preempted. The Supreme Court concluded that the Second Circuit's analysis did not align with the standards set by Dodd-Frank and Barnett Bank, necessitating a remand for further proceedings consistent with the Supreme Court's opinion.

The case is Cantero et al. v. Bank of America NA, case number 22-529, in the Supreme Court of the United States.