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Ninth Circuit Rules Federal Law Does Not Preempt California Debtor Protection Law - Aguayo v. U.S. Bank

August 10, 2011

As Rubidoux personal bankruptcy attorneys, we often have clients who are fighting repossession of their vehicles or have already had vehicles repossessed. Here in California, we are fortunate to have laws that protect consumers during this kind of transaction (though they do not generally stop repossession). One such law is the Rees-Levering Act, which gives auto companies certain responsibilities when they repossess a debtor's vehicle. That Act was the basis for the lawsuit in Aguayo v. U.S. Bank et al., a Ninth U.S. Circuit Court of Appeals decision that reinstated a lawsuit by Jose Aguayo of southern California. The Ninth ruled that Aguayo may sue U.S. Bank under the Act for illegally attempting to collect the balance of his car loan after repossession.

Aguayo bought a car in Glendale in 2003, but fell behind a few years later. The loan was assigned by the dealership to U.S. Bank, which repossessed the car in August 2007. It then sent Aguayo a letter containing various legally required legal notices. This letter contained some, but not all, of the notice requirements set down by the Act. U.S. Bank later sold the car, but did not receive enough to pay off the loan, so it sought to recover the rest from Aguayo. Aguayo then filed a class-action lawsuit against the bank to stop its debt-collection efforts, arguing that under the Act, it cannot seek to recover the loan deficiency when it failed to provide all of the legally required notice. U.S. Bank moved the case to federal court, then sought to dismiss it under the federal National Bank Act, arguing that the NBA and federal regulations put forth by the Office of the Comptroller of the Currency preempt the Act because they interfere with federal authority to regulate banking business. The district court agreed and dismissed the case, and Aguayo appealed.

The Ninth Circuit started by observing that there are two cornerstones of preemption: Congressional intent is paramount, and courts must assume the States retain their traditional policing powers unless Congress clearly intended otherwise. U.S. Bank's claims failed this test. Consumer protection, the purpose of the Act, is a traditional state concern, it said. The district court overcame this by finding express preemption written into the NBA, because it found that notices required by the Act were "disclosures" within the meaning of the NBA. The Ninth Circuit disagreed. The notices required under the Act were not "disclosures" as the word is generally understood, the court said, because they were not general disclosures of previously hidden information, but rather, communications of a specific claim or demand. Furthermore, the NBA contains a "savings" clause that expressly says the NBA does not preempt state laws regarding rights to collect debts. And finally, the Ninth also found that OCC regulations do not preempt the Act because of a similar savings clause reserving debt collection regulations for the states. Thus, the Ninth reserved the district court and remanded Aguayo's lawsuit.

This decision is good news for Californians facing deficiency collection proceedings and for clients of our Fullerton individual bankruptcy lawyers. Because a deficiency collection or deficiency lawsuit only happens after the property has already been repossessed, the person being sued is generally already struggling financially. This decision gives debtors another avenue to defend against deficiency collection efforts, although of course it only applies when the lender fails to follow the Rees-Levering Act. For that reason, it may indirectly benefit far more consumers, by giving lenders another incentive to follow the law. As Los Angeles County consumer bankruptcy attorneys, we always prefer that lenders follow consumer protection laws now over having to file a lawsuit later to stop unfair collection efforts.

If you're deep in debt and you cannot see a realistic way to pay your way out of it, you should talk to Howard Law PC. For a free, confidential case evaluation, send us an email or call today at 1-800-872-5925.

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