By: Ben Denker
Volume X – Issue II – Spring 2025
I. INTRODUCTION
The Supreme Court’s 2024 decision to remand Cantero v. Bank of America to the Court of Appeals for the Second Circuit extended the conversation of federalism as it relates to banking. [1] The Court emphasized the importance of a precedent-based approach to evaluating when federal laws override state laws in banking questions, rather than establishing a black-and-white rule. This motivates the question: When do federal banking laws override, or preempt, state consumer protection statutes?
This article explores the framework that helps answer this question, first analyzing the concept of preemption, before looking into the preemption standard codified in the Dodd-Frank Wall Street Reform and Consumer Protection Act and derived from the Supreme Court’s 1996 ruling in Barnett Bank v. Nelson that informed the Cantero decision. Next, this article examines the unanimous Supreme Court decision in Cantero that remanded the case to the Second Circuit Court of Appeals. This analysis will contextualize this article’s argument for why relevant precedent may motivate a decision in favor of Cantero on remand in the Second Circuit.
II. PRE-EMPTION. THE NATIONAL BANK ACT, AND DODD-FRANK
The United States was founded on the principle of federalism. State governments and the federal government exercise power through laws simultaneously, which may result in conflicts when laws overlap. [2] When these conflicts arise, courts turn to the preemption doctrine. Preemption is the legal principle that determines when federal law overrides or preempts conflicting state law, with some exceptions. Preemption plays a significant role in balancing federal and state autonomy, especially in areas of legislation with many regulations at the state and federal levels, such as banking.
Congress has carved out exceptions to preemption, reinforcing the importance of state law. For instance, the McCarran-Ferguson Act (1945) declares that federal laws do not preempt state insurance regulations unless the federal statute “specifically relates to the business of insurance.” [3] This law affirms that states have the primary authority over insurance regulation, unlike national banks, which are more directly regulated by federal law.
National banks were established by the National Bank Act (1863), a foundational piece of legislation in banking law. It established the National Banking System and defined national banks as private U.S. banks that operate in multiple U.S. states and are regulated by the federal government. [4] Conflicts between state and federal law arise when state laws attempt to regulate the national banks that operate in those states. For example, a conflict would occur if JPMorgan Chase, a national bank, conducts a transaction in Nebraska that complies with federal law but violates a Nebraska state law where one of its branches is located. In this case, a court would determine whether the National Bank Act and other relevant federal laws preempt the Nebraska state law. Cantero v. Bank of America, which this article will closely examine, is an example of this kind of conflict.
When evaluating preemption cases in banking, courts often turn to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, known as Dodd-Frank, to determine whether the National Bank Act preempts state laws. After years of differing court rulings on a circuit-by-circuit basis, DoddFrank was enacted to provide courts with a uniform standard for evaluating preemption, in line with the Barnett Bank v. Nelson standard, which this article will discuss in detail. First, Dodd-Frank removed field preemption, or the automatic preemption of all state laws. [5] The act also outlines that the National Bank Act preempts a state law only if the state law meets one of two criteria: (i) it discriminates against national banks in favor of state-chartered banks, or (ii) it "prevents or significantly interferes with" the national bank’s exercise of its federally authorized powers. [6] Dodd-Frank and its references to Barnett Bank set the stage for legal battles such as Cantero, where courts must decide whether state protections for consumers can coexist with the broad powers granted to national banks.
III. BARNETT BANK v. NELSON
Dodd-Frank and the Cantero decision both draw on the reasoning from the Supreme Court decision in Barnett Bank v. Nelson. In 1996, Barnett Bank, a national bank that operated in a small Florida town in Marion County, challenged the constitutionality of a Florida state law that prohibited banks from selling most types of insurance. The state statute, § 626.988(2), mandated that no statelicensed “insurance agent” who is “owned or controlled by…a financial institution shall engage in insurance agency activities.” [7] In other words, a financial institution cannot sell insurance in Florida. The term ‘financial institution’ includes all banks except for those that are both “unaffiliated” and “located in a city having a population of less than 5,000.” [8] However, the relevant conflicting federal statute, 15 U. S. C. § 1012(b), outlines that any bank “located and doing business in any place” with a population of less than “five thousand” can “do business…by selling insurance.” [9] Barnett Bank, as an affiliated national bank operating in a town with less than five thousand people, received an order from the Florida State Insurance Commissioner, which ordered Barnett Bank’s insurance agency to stop selling insurance. Barnett Bank challenged this notion, contending that the federal law recognizing banks’ right to sell insurance preempts the Florida state law. In 1995, the local District Court and the Court of Appeals for the Eleventh Circuit ruled that the Florida law was not preempted by the federal law. They reasoned that the McCarran-Ferguson Act (1945), which details that “no act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State,” was intended to preserve state authority over insurance regulation unless Congress explicitly provides otherwise. Therefore, the Florida law was upheld as a valid exercise of state power in regulating the insurance industry. [10] Barnett Bank appealed the Eleventh Circuit’s decision to the Supreme Court.
In 1996, Justice Stephen Breyer delivered the unanimous opinion of the Court in favor of Barnett Bank, structuring his reasoning around two key points. First, he addressed the question of whether the federal statute preempts the state law and set aside consideration of the McCarran-Ferguson Act. When analyzing two laws, the first step is to determine whether they are in "irreconcilable conflict"—whether one law poses an obstacle to the fulfillment or execution of the other. [11] The court found this to be the case, holding that the federal statute’s language signals a broad interpretation of power that the state law limits. This is demonstrated through the language of the federal statute, which grants banks the power to sell insurance in “addition to the powers now vested by law in national [banks].” [12] The court highlights that the choice of the word power has historically signified a grant of authority not usually restricted by, but instead typically overriding, any conflicting state law. [13] Furthermore, the court reasoned that preemption cases “take the view that normally Congress would not want States to forbid… the exercise of a power that Congress explicitly granted” unless Congress explicitly allows a state to do so. [14] In other words, unless statutory language leaves room for state influence in a particular law, courts have historically understood that states should not be able to impede the exercise of that federal law The court subsequently addressed why the McCarran-Ferguson Act, also called the “antipreemption rule,” does not apply in this case: the act itself references that it does not apply when the federal statute “specifically relates to the business of insurance.” [15] On the surface, this language seems to present the obvious conclusion that it does not apply. Challenges arise when one considers the exact diction of the statute, such as the word ‘specifically.’ The Supreme Court reasoned that based on how the court had previously interpreted the word ‘specifically,’ the federal statute does indeed ‘specifically’ relate to the business of insurance. Hence, the anti-preemption rule does not apply.
The Barnett Bank standard, then, established that when a federal law gives national banks the authority to engage in a specific activity, courts must assess whether a conflicting state law “prevents or significantly interferes with the exercise by the national bank of its powers.” If a state law does interfere, it is generally considered preempted, unless Congress clearly states otherwise. However, Barnett Bank did not establish a clear line to determine when a state law “significantly interferes with the national bank’s exercise of its powers.” [16] This ruling provides the framework for analyzing Cantero, in which a New York state law creates a conflict with federal law.
The court subsequently addressed why the McCarran-Ferguson Act, also called the “antipreemption rule,” does not apply in this case: the act itself references that it does not apply when the federal statute “specifically relates to the business of insurance.” [15] On the surface, this language seems to present the obvious conclusion that it does not apply. Challenges arise when one considers the exact diction of the statute, such as the word ‘specifically.’ The Supreme Court reasoned that based on how the court had previously interpreted the word ‘specifically,’ the federal statute does indeed ‘specifically’ relate to the business of insurance. Hence, the anti-preemption rule does not apply.
The Barnett Bank standard, then, established that when a federal law gives national banks the authority to engage in a specific activity, courts must assess whether a conflicting state law “prevents or significantly interferes with the exercise by the national bank of its powers.” If a state law does interfere, it is generally considered preempted, unless Congress clearly states otherwise. However, Barnett Bank did not establish a clear line to determine when a state law “significantly interferes with the national bank’s exercise of its powers.” [16] This ruling provides the framework for analyzing Cantero, in which a New York state law creates a conflict with federal law.
IV. CANTERO v. BANK OF AMERICA
On May 30th, 2024, the U.S. Supreme Court unanimously decided Cantero v. Bank of America, ruling that the Second Circuit Court of Appeals had applied an incorrect standard in their decision in favor of Bank of America, remanding the case back to the court. In August 2010, the plaintiff, Alex Cantero, purchased a home in New York with a Bank of America mortgage. [17] Cantero’s mortgage mandated that he deposit money into an escrow account, a type of savings account used to hold funds for payments of items related to a purchased property, such as property taxes. [18] Bank of America did not pay interest on Cantero’s escrow deposits, in line with federal law, including the National Bank Act of 1864 (NBA), which does not require banks to pay interest on escrow accounts. Cantero filed suit, alleging that Bank of America had violated New York General Obligations Law (GOL) § 5-601, which mandates a minimum interest rate for escrow accounts held by mortgage institutions like Bank of America. [19] The District Court originally held that no part of the National Bank Act or federal law preempted the New York law. The Second Circuit reversed this decision, concluding that the New York law “would exert control over” national banks’ power related to escrow accounts, and was therefore preempted. [20]
Kavanaugh, delivering the opinion, first analyzed the Dodd-Frank guidelines as they relate to Cantero. Since the first prong of the preemption guidelines—whether the law discriminates against national banks as compared to state banks—does not apply, Kavanaugh moved on to the second prong: whether the state law “prevents or significantly interferes with the exercise by the national bank of its powers.” [21] Barnett Bank, as explained in the previous section, did not establish a key test to determine interference and instead looked to court precedent by examining how courts have interpreted the language of federal statutes. Kavanaugh writes that other courts must do the same in evaluating future national bank preemption cases—they can use similar historical precedents, such as Barnett Bank, and apply those principles to the present decision. According to Kavanaugh, the Second Circuit Court of Appeals did not apply this reasoning in their decision in favor of Bank of America. Instead, the Second Circuit relied on a specific line of cases that would “preempt virtually all state laws that regulate national banks.” [22] In other words, the Second Circuit Court of Appeals attempted to delineate a clear standard for preemption cases that—in the Supreme Court’s view—is an “extreme” solution in favor of federal law. Instead, Kavanaugh’s opinion underscores the importance of “a practical assessment of the nature and degree of the interference caused by a state law” and a “nuanced comparative analysis” using precedent. [23]
This reasoning led the Supreme Court to reject the Second Circuit’s broad approach to preemption, instead emphasizing a precedent-based analysis, and sending the case back to the Second Circuit for reconsideration.
V. POSSIBLE ARGUMENTS ON REMAND
On remand, the Second Circuit will reconsider whether New York’s interest-on-escrow law significantly interferes with national banks’ powers under the Barnett Bank expectation of a case-by-case evaluation of precedent. The Supreme Court’s reasoning for vacating the decision rested on requiring a more nuanced, comparative analysis of court precedent. To this end, the court referenced several notable cases on preemption that will likely play a significant role on remand: Franklin National Bank of Franklin Square v. New York (1954), Fidelity Federal Savings & Loan Association v. De la Cuesta (1982), Anderson National Bank v. Luckett (1944), First National Bank of San Jose v. California (1923), National Bank v. Commonwealth (1869), and McClellan v. Chipman (1896). This section will analyze the most relevant cases to Cantero and how they support arguments against and for preemption.
i. Arguments Against Preemption
In Fidelity Federal Savings & Loan Association v. De la Cuesta, a California judicial rule prohibited the enforcement of a type of financial clause except in instances “where the lender’s security is impaired.” [24] The Supreme Court held that California’s rule was preempted by federal law because it conflicted with federal regulations intended “to ensure the financial stability” of federal savings associations. An opponent of preemption, who would support the state statute, may argue that this example presents a case more severe than Cantero. The California state law prevented banks from enforcing a type of financial clause; in contrast, the New York State law in Cantero does not appear to conflict with core national banking functions. [25] The lack of severity of the New York State law is especially reinforced by other banks’ compliance with the law. For instance, Wells Fargo and other national banks “[have] complied with NYGOL § 5-601 and similar interest-on escrow laws enacted by other states,” suggesting that the burden is neither substantial nor unusual. [26] Unlike in Fidelity Federal Savings, where it was impossible for banks to comply with both federal and state regulations, Cantero presents a case in which compliance with both is already occurring. This suggests that the New York law may not meet the higher threshold of significant interference.
Anderson National Bank v. Luckett, National Bank v. Commonwealth, and McClellan v. Chipman present key pieces of evidence in favor of Cantero and against preemption. The Supreme Court found on three occasions that the state statutes conflicting with federal law were reasonable and not subject to preemption because they were “designed to accomplish legitimate state purposes.” [27] In Luckett, the state law helped protect dormant deposits; [28] in McClellan, it prevented “insolvent debtors from making preferential transfers to favored creditors,” [29] and in Commonwealth, it enabled the collection of a state tax owed by bank shareholders. [30] Furthermore, the Anderson court even explicitly outlined that “in this case, the State—[did] not…interfere with any authorized function of the bank.” [31] Similarly, in Cantero, opponents of preemption could argue that a mandate for interest constitutes a reasonable payment to borrowers, which fulfills a legitimate state purpose and does not interfere with the operation of the bank.
ii. Arguments in Favor of Preemption
Proponents of preemption can argue that the state law places an unreasonable burden on national banks. They may reference the Supreme Court’s reasoning in Watters v. Wachovia Bank (2007), in which a Michigan law authorized a state official to exercise “visitorial authority” over the subsidiary of a national bank. The Court outlined that this was an “unduly burdensome and duplicative state regulation” and outlined that states “can exercise no control over national banks, nor in any way affect their operation, except in so far as Congress may see proper to permit.” [32]
Proponents of preemption would also likely point to the “numerous” courts that found state laws regulating the national bank account fees to be preempted by federal law. For example, in Baptista v. JPMorgan Chase Bank (2011), an appeals court ruled that a Florida law prohibiting check-cashing fees for non-account holders was preempted by the National Bank Act. The court reasoned that state law significantly interfered with the bank’s power to collect fees. [33] Key to the court’s decision was that the law prohibited the banks’ exercise of a power, placing an undue burden on the bank.
Similarly, in NNDJ, Inc. v. National City Bank (2008), a court held that a Michigan law’s effort to prohibit national banks from charging a check-cashing fee to non-account holders was also preempted by the National Bank Act. [34] The court reasoned that the check-cashing fees were integral to the “business” of banking, so regulating the fees would significantly interfere with the bank’s ability to exercise its powers. Furthermore, the court noted that state variation in check-cashing fee regulations would alter the uniformity sought by the framers of the National Bank Act. Similarly, in Cantero, Bank of America could argue that the requirement for interest payments disrupts the operation of the bank and would create unintended state variation in banking regulation, disrupting National Bank Act uniformity.
Both arguments of whether New York’s interest-on-escrow law significantly interferes with national banks' powers under the Barnett Bank standard are compelling. Opponents of preemption argue that the law serves a legitimate state purpose, similar to the statutes upheld in Anderson, McClellan, and Commonwealth, and that its impact is minimal, as evidenced by other banks’ compliance with the state law. On the other hand, proponents of preemption contend that the law imposes an undue burden on national banks, citing cases such as Watters, Baptista, and NNDJ, in which courts ruled for preempting state regulations that impacted national bank operations.
VI. WHY CANTERO’S CASE MAY BE PERSUASIVE
The Second Circuit Court of Appeals may find the evidence against preemption more compelling and rule in favor of Cantero as a result. Precedent demonstrates that courts have been willing to rule against preemption in circumstances where the state law imposes a minimal burden on a national bank. Several cases suggest this to be the case: In Luckett, McClellan, and Commonwealth, courts held that state laws mandating national banks to conduct certain financial payments did not significantly interfere with banks’ powers and served a legitimate state interest, and were therefore not preempted by conflicting federal law. Thus, in Cantero, Bank of America may find it difficult to persuade the court that interest rates on escrow accounts significantly interfere with the national banks’ power. This argument is especially weak given that other national banks, such as Wells Fargo, have complied with the New York state law, and that 14 other states mandate interest in mortgage escrow accounts, suggesting the burden is not unusual. [35] Proponents of preemption may rely on cases such as Baptista and NNDJ to support their case. A key distinction is that in these cases, courts ruled in favor of the banks because state laws prohibited banks from collecting fees, directly limiting an explicit power granted to banks by the Office of the Comptroller of the Currency. [36] The New York law, however, merely requires banks to pay interest on escrow accounts, which does not interfere with any core bank function outlined as bank powers, such as the collection of fees.
VII. CONCLUSION
This article examined whether New York state’s law mandating interest on escrow mortgage accounts “prevents or significantly interferes” with national banks’ powers under the standard outlined in Barnett Bank and the regulations outlined in the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Supreme Court vacated the Second Circuit’s ruling in favor of Bank of America, holding that the court failed to conduct a nuanced, comparative analysis of preemption precedent consistent with Barnett Bank. In light of this remand, the Second Circuit will hear new arguments. The petitioners will likely focus their arguments on the minimal burden that conducting financial payments to customers imposes on national banks, as demonstrated in precedent, and the legitimate state interest in consumer protection. Bank of America, the respondents, will attempt to underscore that state laws interfering with banking powers harm banks’ ability to operate.
Based on the precedent favoring state laws that impose financial payment burdens on national banks, the Second Circuit may find that preemption does not apply in this case, holding that New York’s law does not significantly interfere with national banks' powers. A ruling against preemption could empower more states to enforce similar interest regulations. Conversely, a ruling in favor of preemption could broaden the scope of preemption, making it more difficult for states to regulate national banks.
Regardless of the court’s decision, this contest between state and federal law illustrates the continuous tension between state and federal authority in banking regulation, which has existed since the founding of the United States. Amid increased legal challenges between federal and state authorities, particularly over the executive branch, [37] the balance of federal and state law, especially in banking, is more important than ever. [38]
Endnotes
[1] Cantero v. Bank of America, 602 U. S. ___ (2024)
[2] Schweitzer, Dan. The Law of Preemption, October 2011. https://www.naag.org/wp-content/uploads/2020/10/TheLaw-of-Preemption-2d-ed.-FINAL.pdf.
[3] 15 U.S.C. § 6701 (1999)
[4] 12 U.S.C. § 38 (1874)
[5] Cantero v. Bank of America
[6] 124 Stat. 1376 - Dodd-Frank Wall Street Reform and Consumer Protection Act (2010)
[7] Fla. Stat. § 626.988(2)
[8] Fla. Stat. § 626.988(1)(a)
[9] Act of Sept. 7, 1916 (Federal Statute), 39 Stat. 753
[10] McCarran-Ferguson Act, § 2(b), 59 Stat. 34, 15 U. S. C. § 1012(b)
[11] Barnett Bank of Marion Cty., N. A. v. Nelson, 517 U.S. 25 (1996)
[12] Barnett Bank v. Nelson
[13] Barnett Bank v. Nelson
[14] Barnett Bank v. Nelson
[15] Barnett Bank v. Nelson
[16] Cantero v. Bank of America
[17] Cantero v. Bank of America
[18] “What Is Escrow and How Does It Work?” Virginia Credit Union, 2025. https://www.vacu.org/learn/yourhome/home-buying/what-is-escrow-and-how-does-it-work.
[19] New York General Obligations Law (GOL) § 5-601
[20] Cantero v. Bank of America
[21] Cantero v. Bank of America
[22] Cantero v. Bank of America
[23] Cantero v. Bank of America
[24] Fidelity Federal Savings & Loan Association v. De la Cuesta
[25] New York General Obligations Law (GOL) § 5-601
[26] Bank of America Respondent’s Trial Brief, Cantero v. Bank of America, No. 22-259 (2024), https://www.aba.com/-/media/documents/amicus-briefs/01252024-cantero-v-bank-of-americana.pdf?rev=51a0e96fbf514664a8e386bca8e05910
[27] Bank of America Respondent’s Trial Brief, Cantero v. Bank of America No. 22-259 (2024).
[28] Anderson Nat'l Bank v. Luckett, 321 U.S. 233 (1944)
[29] McClellan v. Chipman, 164 U.S. 347 (1896)
[30] National Bank v. Commonwealth, 76 U.S. 353 (1869)
[31] Bank of America Respondent’s Trial Brief, Cantero v. Bank of America
[32] Watters v. Wachovia Bank, N. A., 550 U.S. 1 (2007)
[33] Baptista v. JPMorgan Chase Bank, N.A., No. 10-13105 (11th Cir. 2011)
[34] NNDJ, Inc. v. Nat'l City Bank, 540 F. Supp. 2d 851 (E.D. Mich. 2008)
[35] “What Is Escrow and How Does It Work?” Virginia Credit Union, 2025.
[36] NNDJ, Inc. v. Nat'l City Bank
[37] Conroy, Meredith. “Trump’s Record Number of Executive Orders Are Testing the Limits of Presidential Power.” ABC News, February 6, 2025. https://abcnews.go.com/538/trumps-record-number-executive-orders-testing-limitspresidential/story?id=118535046
[38] “New Challenge on Trump Administration’s Attempt to ‘Terminate’ New York’s Congestion Pricing Program.” Earthjustice, March 6, 2025. https://earthjustice.org/press/2025/new-challenge-to-trump-administration-attempt-toterminate-new-yorks-congestion-pricing-program.