The New York Bankers Association ("NYBA") is comprised of community, regional and money center commercial banks in New York State. In the aggregate, NYBA's members have more than 220,000 employees and assets in excess of $1 trillion. NYBA regularly appears as amicus curiae before courts in cases that raise significant legal issues relating to banking.

NYBA is concerned with plaintiff's contention that HSBC Bank USA ("HSBC") may be found liable for damages under 42 U.S.C. 1983 for doing nothing more than following State-mandated procedures regarding a restraining notice served pursuant to NY CPLR 5222. Plaintiff's theory, if true, could force banks to defend innumerable lawsuits arising from purely involuntary actions by banks in their performance of normal business operations. NYBA is also concerned that plaintiff's proposed rule requiring banks (rather than debtors) to identify whether funds held in certain debtor accounts are exempt from attachment would disrupt well-established, judicially-approved procedures, impose heavy financial and administrative burdens on banks, and fail to accomplish plaintiff's goal of minimizing delays experienced by debtors seeking to access exempt funds. NYBA respectfully submits that plaintiff has misstated the law under Section 1983, the Due Process and Supremacy Clauses of the Constitution, and 42 U.S.C. 407(a), and that this Court should affirm the District Court's decision dismissing the case.¹

Plaintiff-appellant Bernie Huggins ("plaintiff") brought this action against HSBC after the bank restrained his account, as it was required to do under state law, in response to a restraining notice received from plaintiff's judgment creditor, Spring Creek Associates, L.P. ("Spring Creek"). Spring Creek's notice was much like the other 160,000 restraining notices that HSBC receives each year.² HSBC had done nothing to initiate or solicit the notice. By restraining plaintiff's account as directed by state law, HSBC ensured the maintenance of the status quo pending any claim of exemption by plaintiff. Actual seizure of the funds could be accomplished only through service upon the bank of a separate "execution" by a sheriff or support collection unit. See NY CPLR 5222(b). If HSBC had permitted plaintiff to withdraw from his account non-exempt money subject to the restraining notice, HSBC could have been found in contempt of court and liable to Spring Creek for the entire amount withdrawn. See Mazzuka v. Bank of N. Am., 280 N.Y.S.2d 495 (N.Y. Civ. Ct. 1967).

Even though (i) HSBC was a passive recipient of the notice; (ii) HSBC did exactly what New York law required by following procedures previously upheld by this Court; and (iii) HSBC was subject to possible penalty if it disobeyed the notice, plaintiff seeks damages from the bank under Section 1983. Plaintiff claims that HSBC is liable under Section 1983 and that CPLR 5222 violates the Due Process and Supremacy Clauses of the Constitution. Meanwhile, plaintiff has abandoned his claims for injunctive and declaratory relief and damages against New York (which enacted Section 5222) and Spring Creek (which caused its application and enforcement here). See Plaintiff-Appellant's Brief ("Appellant's Br.") at 7.

The District Court's grant of summary judgment to HSBC should be affirmed. Plaintiff's claims for injunctive and declaratory relief are now moot. Plaintiff's only remaining claim for damages against HSBC is unavailing because HSBC did not act "under color of state law" within the meaning of Section 1983. HSBC simply complied with New York procedures. To hold otherwise would produce the absurd result of requiring banks to defend themselves against lawsuits that complained about conduct mandated by State law. Because plaintiff cannot proceed under Section 1983, this Court does not need to address his claims under the Due Process and Supremacy Clauses.

In the event this Court does address plaintiff's claims, New York's post-judgment attachment procedures are not invalid under federal law. Contrary to plaintiff's contentions, due process does not require that banks bear the burden of checking whether each restraining notice would affect the subset of debtors whose accounts contain only exempt Social Security funds. This conclusion is buttressed by the decision of the U.S. Department of Treasury ("Treasury") not to impose a similar requirement on banks when Treasury issued final guidance for the Electronic Transfer Account ("ETA") program for recipients of federal benefits payments. Notice of Electronic Transfer Account Features, 64 Fed. Reg. 38510, 38512-13 (1999) ("Notice"). Treasury expressly considered and rejected various proposals that would have required banks to identify and protect exempt funds on behalf of debtor recipients. See id. Finally, New York's procedures do not violate Social Security's anti-attachment provision.

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Plaintiff challenges New York law through an attenuated damages claim against HSBC because his other claims are moot. The mootness doctrine is based on the rule under Article III of the Constitution that federal courts may adjudicate only actual, ongoing cases or controversies. See Lewis v. Cont'l Bank Corp., 494 U.S. 472, 477 (1990). Claims become moot when "the parties 'lack a legally cognizable interest in the outcome.'" Murphy v. Hunt, 455 U.S. 478, 481 (1982) (citation omitted); see also Muhammad v. City of New York Dep't of Corrections, 126 F.3d 119, 123 (2d Cir. 1997).

Plaintiff's claims for declaratory and injunctive relief are moot as to all defendants. Governor Pataki has been voluntarily dismissed from the lawsuit and injunctive relief sought from Spring Creek and HSBC was obtained when the money in plaintiff's account was released from restraint. Joint Appendix ("JA") 10, 32. The mere possibility that other restraining notices might be applied to plaintiff's account at some point in the future would not create a "case or controversy of 'sufficient immediacy and reality'" to give plaintiff standing to seek prospective relief from defendants." City of Los Angeles v. Lyons, 461 U.S. 95, 104 (1983) (quoting Golden v. Zwicker, 394 U.S. 103, 109 (1969)).³ Furthermore, these claims do not fall into the exception to mootness for situations "capable of repetition yet evading review." First, there is no "reasonable expectation that the same complaining party would be subjected to the same action again." Murphy, 455 U.S. at 484. Second, other Social Security recipients will not be precluded from challenging the provisions in issue. See Swan, 635 F.2d at 102 n.6.

In short, the only potentially justiciable claim still pursued by plaintiff is for unspecified monetary damages against HSBC under 42 U.S.C. 1983.⁴ Such a money damages claim does not give plaintiff standing to seek prospective relief. See City of Los Angeles, 461 U.S. at 105.

II. PLAINTIFF CANNOT SUE HSBC UNDER SECTION 1983 BECAUSE HSBC IS NOT A STATE ACTOR

Despite HSBC's total lack of connection to the underlying dispute between plaintiff and Spring Creek, plaintiff contends that HSBC is liable for damages under Section 1983 because HSBC froze his bank account under a restraining notice as required by state law. Plaintiff's claim fails because HSBC did not become a "state actor" merely by following state law.

The Supreme Court has made clear that conduct does not occur "under color of state law" within the meaning of Section 1983 unless both of the following requirements are met: (i) the alleged deprivation of federal rights "must be caused by the exercise of some right or privilege created by the State or by a rule of conduct imposed by the State or by a person for whom the State is responsible;" and (ii) "the party charged with the deprivation must be a person who may fairly be said to be a state actor." Lugar v. Edmondson Oil Co., 457 U.S. 922, 937 (1982) (emphasis added). In other words, the plaintiff must show not only that the defendant's actions were allowed or required by the State, but also that such actions are "chargeable to the State." Id. The Supreme Court's "repeated insistence" that plaintiffs meet both prongs reflects clear recognition of the "'essential dichotomy' between public and private acts" under Section 1983. Am. Mfrs. Mut. Ins. Co. v. Sullivan, 526 U.S. 40, 50, 53 (1999).

Plaintiff here cannot meet the second prong of the Lugar test because HSBC is a private party that took no action whatsoever that transformed its status to that of a state actor. Plaintiff contends that HSBC became a state actor under the so-called "state-compulsion" test because it complied with the dictates of CPLR 5222. Appellant's Br. at 27-33. This contention misstates the law. "[I]n a case involving a private defendant, the mere fact that the government compelled a result does not suggest that the government's action is 'fairly attributable' to the private defendant." Sutton v. Providence St. Joseph Med. Ctr., 192 F.3d 835, 838 (9th Cir. 1999); see also Brentwood Acad. v. Tenn. Secondary Sch. Athletic Assoc., 531 U.S. 288, 295 (2001) ("[S]tate action may be found if, though only if, there is such a 'close nexus between the State and the challenged action' that seemingly private behavior 'may be fairly treated as that of the State itself.'" (citation omitted)); Carey v. Cont'l Airlines, Inc., 823 F.2d 1402, 1404 (10th Cir. 1987); Johnson v. Chemical Bank, 1996 WL 706893, at *5 (S.D.N.Y. Dec. 9, 1996).

The state-compulsion test does not control this case because that test originated, and has since primarily been recognized, in cases in which the government not a private party was the defendant. See Sutton, 192 F.3d at 836-37 (discussing early case law). The Supreme Court highlighted this distinction in Blum v. Yaretsky, 457 U.S. 991 (1982), emphasizing that the case before it an action by Medicaid recipients against New York State challenging certain decisions by private nursing homes regarding their patients was "obviously different from those cases in which the defendant is a private party and the question is whether his conduct has sufficiently received the imprimatur of the State so as to make it 'state' action for purposes of the Fourteenth Amendment." Id. at 1003 (emphasis added).⁵

The government's role as defendant in the state-compulsion cases is critical, as the case law and the facts of this case make plain. It is one thing for plaintiff to claim state action on the part of New York in causing, through HSBC, plaintiff's bank account to be frozen upon issuance of a creditor's restraining notice. It is quite another for plaintiff to claim that the bank should be held liable for damages under Section 1983 on the theory that it is the "state actor." The bank did not initiate the attachment procedures in issue and, upon receiving Spring Creek's notice, only followed State law on pain of being held in contempt of court. See CPLR 5222(b); Appellant's Br. at 30-31; JA 18.

None of the cases cited by plaintiff supports his vastly overbroad theory of state action. In each of them the defendant was the government, see Connecticut v. Doehr, 501 U.S. 1 (1991); Catanzano v. Dowling, 60 F.3d 113 (2d Cir. 1995), and/or the court found an additional factor beyond a private party's mere compliance with law as a predicate for state action. Unlike the defendants in all of these cases, HSBC is a private party that simply followed a clear (and previously upheld) State law as a matter of course in its business operations, and thereby became an involuntary participant in conduct alleged as unlawful.

Both Lugar and Doehr, for instance, involved claims against actual or potential creditors who had "invoke[ed] the aid of state officials to take advantage of state-created attachment procedures" and, therefore, had become "willful participant[s] in joint activity with the State or its agents." Lugar, 457 U.S. at 942, 941 (citation and internal quotation marks omitted); see also Doehr, 501 U.S. at 10-11. In Brentwood, a "close nexus" resulted from the "pervasive entwinement" between Tennessee's high schools and a not-for-profit athletic association which, although "nominally private," set standards followed by state schools and was run largely by school officials and employees. 531 U.S. at 295-302. In Chan v. City of New York, 1 F.3d 96 (2d Cir. 1993), this Court found that the close nexus test was met by a construction contract entered into by the private party and the City of New York, which was also a defendant. See id. at 106-07. Finally, in Adickes v. S.H. Kress Co., 398 U.S. 144 (1970), the Supreme Court held that a private restaurant could be a state actor if its waitress entered into a "conspiracy" with a policeman against a white customer who sat with African Americans, so that the restaurant became "a willful participant in joint activity with the States or its agents." See id., 398 U.S. at 152 (citation and internal quotation omitted).⁶ These rulings do not control the present case because HSBC did not act as a "willful" conspirator or participant in joint activity with any State agent; was not entwined with the State; and did not affirmatively invoke State procedures to serve its own self-interest.

To accept plaintiff's theory of state-compulsion in this case would be to make every bank indeed, every private party a state actor when it (or he or she) complies with a presumptively valid, generally applicable state law. This would put private parties in the untenable position of "defend[ing] those laws and pay[ing] any consequent damages, even though they bear no real responsibility for the violation of rights arising from the enactment of the laws." Sutton, 192 F.3d at 838-39. For example, a bank providing information about an account holder pursuant to a subpoena issued under state law, would, if the account holder sued the bank alleging a violation of a federal right, automatically bear responsibility for defending that law and paying damages if found liable.⁷ Absent "some affirmative indication that Congress, the Supreme Court, or this court intended for every private entity to 'be dragooned into defending [state] law,'" this Court should not adopt such a requirement. Id. at 839 (quoting Printz v. United States, 521 U.S. 898 (1997)); cf. Brentwood, 531 U.S. at 295-96 (observing that no "set of circumstances" is "absolutely sufficient" for finding state action).

Finally, the result urged by plaintiff is foreclosed by the Supreme Court's decision in Walker v. City of Birmingham, 388 U.S. 307 (1967) upholding the criminal contempt convictions of civil rights marchers who engaged in protests prohibited by a city ordinance and state court injunction. The ordinance and court injunction "unquestionably raise[d] substantial constitutional issues." Id. at 316-17. The Supreme Court nevertheless held that it was "for the court of first instance to determine the validity" of these rules, and, therefore, the marchers still could be punished under the rules unless they first obtained appropriate judicial relief nullifying them. Id. Applied here, Walker precludes plaintiff from seeking to hold HSBC liable for its innocent compliance with New York attachment rules, where plaintiff failed to obtain a court order setting aside the disputed rules before HSBC applied them to his account. Accordingly, HSBC cannot be deemed a state actor and plaintiff's claim against it under Section 1983 fails.

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III. HSBC'S COMPLIANCE WITH CPLR 5222 DID NOT VIOLATE THE DUE PROCESS CLAUSE

Even assuming HSBC acted "under color of state law" within the meaning of Section 1983 when it froze plaintiff's bank account, such action did not violate plaintiff's due process rights. In McCahey v. L.P. Investors, 774 F.2d 543 (2d Cir. 1985), this Court held that procedures similar to those that HSBC was required to follow here afford sufficient due process to judgment debtors whose moneys are exempt from attachment. Plaintiff's argument that the Court should "re-weigh" the due process factors for bank accounts that contain only electronically-deposited Social Security payments is without merit.

A. Due Process Does Not Prohibit States From Requiring Debtors To Assert Statutory Exemptions For Funds

Due process does not require rewriting of New York law so that the burden for claiming statutory exemptions is transferred from debtors to third-party banks. In McCahey, as here, the State's attachment procedures were initiated when the attorney for the judgment creditor issued a restraining notice to the holder of plaintiff's property. See id. at 546. Upon receipt of the notice, the bank was forbidden from releasing plaintiff's funds upon pain of punishment of contempt of court. See id.; CPLR 5222(b). In addition, the judgment creditor was required to mail a copy of the notice to plaintiff no later than four days after service on the bank, 774 F.2d at 546; CPLR 5222(d), and to alert plaintiff that: (i) that monies in her account could be exempt from legal process if, for example, they were from Social Security or welfare; (ii) if the plaintiff believed any money taken or held under the restraining notice was exempt, she should contact the issuer of the notice and also consider contacting an attorney; and (iii) CPLR 5239 and 5240 provided procedures through which exemptions could be determined. See id. at 546; CPLR 5222(e). If plaintiff wished to dispute the creditor's seizure of her account, plaintiff could either initiate a "special proceeding" prior to execution against her account, or seek a protective order. See 774 F.2d at 546; CPLR 5239, 5240.

The plaintiff in McCahey contested these procedures in part on the ground that, "if ex parte orders are permitted, they must be issued only by neutral judicial officers on the basis of affidavits submitted by judgment creditors disclaiming knowledge of the existence of any exemptions the debtor may assert." 774 F.2d at 550. The Court rejected this argument, observing that "the debtor is in the best position to provide evidence of the exemption and may legitimately be required to carry the burden of proving its existence." Id. (emphasis added). The McCahey Court likewise rejected plaintiff's contention that due process entitled her to notice and a hearing before the creditor's issuance of a restraining notice. This Court noted the Supreme Court's guidance that "the existence of the underlying judgment [is] sufficient 'notice of what will follow.'" Id. at 547 (quoting Endicott-Johnson Corp. v. Encyclopedia Press, Inc., 266 U.S. 285, 288 (1924)).

The decisions of other courts of appeals similarly make clear that, consistent with due process, states may require judgment debtors to claim exemptions in post-attachment proceedings. See e.g., Reigh v. Schleigh, 784 F.2d 1191 (4th Cir. 1986); Dionne v. Bouley, 757 F.2d 1344, 1344 (1st Cir. 1985); Finberg v. Sullivan, 634 F.2d 50 (3d Cir. 1980); Duranceau v. Wallace, 743 F.2d 709, 711-13 (9th Cir. 1984); Brown v. Liberty Loan Corp., 539 F.2d 1355, 1362-69 (5th Cir. 1976); see also Phillips v. Bartolomie, 121 Cal. Rptr. 56, 60 (Cal. Ct. App. 1975) ("It is eminently reasonable to place the burden of applying for and proving that the wages are exempt on the debtor" (citation and internal quotation omitted). Although in Dionne and Finberg the courts found that certain aspects of the states' laws were constitutionally deficient, these decisions left intact the basic structure of those laws which made debtors, rather than creditors or garnishees, responsible for claiming (or disclaiming) statutory exemptions. See Finberg, 634 F.2d at 62 (rejecting contention that creditor must submit affidavit); Dionne, 757 F.2d at 1352.

Notwithstanding uniform precedent on the issue, plaintiff contends that HSBC violated his due process rights because HSBC "easily" and "quickly" could have determined that all of the funds in his account were exempt. Appellant's Br. At 14, 40. Because, according to plaintiff, the tracking system for electronic deposit allows banks to identify funds received from Social Security, due process requires banks to disregard restraining notices that affect accounts containing only such funds. This claim is without merit. Even assuming plaintiffs' factual assertions about banks' tracking capabilities are correct which they are not, see infra Part III.B his proposed rule would dramatically shift the burden of claiming exemptions from the debtor to a third-party garnishee. The Due Process Clause does not require such a change. Because "a state legislature has the resources and opportunities to consider the needs and rights of creditors or debtors generally in light of numerous factors . . . a court should be very reluctant to substitute a judicial policy preference for a legislative scheme" in this area. Motz & Baida, The Due Process Rights of Postjudgment Debtors and Child Support Obligors, 45 Md. L. Rev. 61, 78 (1986); see also Reigh, 784 F.2d at 1197. Although plaintiff here might appropriately direct his proposed scheme to the New York legislature, it is not properly before this Court. See McCahey, 774 F.2d at 551 (that New York could create "simplified" attachment procedures does not mean they are required by due process). Accordingly, this Court should reject plaintiff's due process claim.

B. Weighing Relevant Due Process Factors Demonstrates That Current New York Attachment Procedures Are Constitutional

In any event, consideration of the relevant due process factors shows New York procedures to be constitutional. The factors to be considered include the competing interests at stake, the risk of erroneous deprivation under existing procedures, and the value of substitute procedures. See McCahey, 774 F.2d at

548-49 (citing Mathews v. Eldridge, 424 U.S. 319, 334-35 (1976)).⁸ Contrary to plaintiff's contentions (Appellant's Br. at 33-44), a new requirement that banks protect solitary-use accounts would offer little additional protection to benefits recipients and would impose a heavy burden on banks.

1. Requiring Banks To Claim Exemptions Would Still Cause Delays And Offer Little Advantage To Recipients

Plaintiff's proposed rule offers little likely value to Social Security recipients compared to the current system because the rules still would result in delayed access to funds, create inefficiency by shifting the burden away from the parties best positioned to seek prompt action, and at best help only a limited number of recipients, all at the cost of introducing greater complexity and confusion to the attachment process.

Plaintiff mistakenly assumes that a rule requiring banks to disregard restraining notices for accounts containing only Social Security funds would eliminate all delays that debtors have in accessing these funds. This assumption ignores practical reality. Under such a rule, banks still would have to temporarily freeze targeted accounts to allow time for banks to determine whether, in fact, the accounts contain only exempt funds. If banks did not do so, debtors in receipt of copies of restraining notices (which they are entitled to have under New York law) would simply withdraw their funds and impose potential liability for these amounts on the banks. See Section 5222(b); Mazzuka, 280 N.Y.S.2d at 1056-58.

"[T]echnological developments" (Appellant's Br. at 34) notwithstanding, banks would have to do more than take a "quick look" (id. at 40) at targeted accounts to determine whether special treatment was appropriate. First, banks would have to identify those accounts that consist solely of electronic deposits of funds presumptively exempt under statute. This step would require banks to review account records to ensure that no funds were potentially traceable to non-exempt sources. For many accounts, banks would be unable perform these reviews quickly. This is especially true where records necessary for inspection have been archived or are maintained on obsolete computer systems or computer systems of banks taken over through acquisition or merger. Moreover, if plaintiff's proposed rule were adopted, recipients of other types of presumptively exempt benefits, such as Supplemental Security Income (42 U.S.C. 1383), Veteran's (38 U.S.C. 5301), and Federal Railroad Retirement (45 U.S.C. 231m(a)) benefits,⁹ undoubtedly would demand that banks also protect those funds.

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Second, a determination that certain monies were received from Social Security does not answer whether they are statutorily exempt from legal process under Section 407(a) (or a comparable statute), because such monies can be garnished to collect unpaid child support or alimony. See 42 U.S.C. 659; Knickerbocker v. Norman, 938 F.2d 891 (8th Cir. 1991). Accordingly, banks would have to implement procedures sufficient to support a determination that all relevant funds are legally exempt. Plaintiff makes the unrealistic suggestion that banks trying to decide whether an exception to exemption applies could simply make a "phone call to the creditor." Appellant's Br. at 22. This cannot be the sole method available to banks because debtors would seek to hold banks liable if they mistakenly froze accounts based on misinformation furnished orally by creditors. Banks understandably might insist on more formal procedures, such as an affidavit or other written confirmation from the creditor. Regardless of the procedures used, some delay would be inevitable.

Misalignment of incentives under the plaintiff's rule would create additional inefficiency. Judgment debtors, not banks, are in the best position to take the initiative in asserting exemptions. The debtors have prompt notice of restraint under Section 5222, an incentive to act quickly if they depend on the money, and quick access to all of the relevant information supporting their exemptions. See McCahey, 774 F.2d at 550. Banks, by contrast, must balance the debtors' interests in prompt access with their own interest in minimizing liability. Although banks would have no stake in who ultimately received disputed funds, they would be forced to defend against the claims of debtors, on the one hand, and creditors on the other. Thus banks would play a role similar to that of an interpleader defendant which must join all interested parties in a dispute to obtain judicial protection from potential claims by them. See NY CPLR Commentaries 5222:4 at p. 207 (McKinney 1997). Given these realities, delays under the proposed rule might be comparable to or longer than delays under New York's current procedures, which, as the McCahey Court found, provide debtor recipients with an "opportunity for a prompt hearing," id. at 553.¹⁰

Furthermore, only a very narrow subset of benefits recipients those whose accounts contain solely exempt funds received by electronic deposit conceivably could benefit from plaintiff's proposed rule. Under this rule, banks would have to review all of the accounts targeted by incoming restraining notices. But critically, plaintiff does not and cannot contend that banks should be compelled to assert exemptions on behalf of recipients with commingled accounts. See Appellant's Br. at 8. There is no single method by which presumptively-exempt funds could be segregated and, in any event, it would be unreasonably complex for banks to implement such a procedure on a broad scale. See NCNB Fin. Servs. v. Shumate, 829

F. Supp. 178, 180-81 (W.D. Va. 1993) (concluding, after conducting tracing analysis, that only some of Social Security recipient's bank funds were entitled to exemption); cf. United States v. Banco Cafetero Panama, 797 F.2d 1154, 1158-61 (2d Cir. 1986) (addressing "problematic" task of tracing proceeds of drug transactions in bank accounts also used for legitimate transactions). If plaintiff's proposal were that banks should identify all moneys traceable to electronically-deposited Social Security in all accounts, his due process argument would be even weaker because of the even longer delays and heavier burden on banks that would result. See infra Part III.B.2 (discussing burden).

Thus, under plaintiff's actual proposal that banks identify accounts containing solely Social Security funds, the potential class of beneficiaries would be limited, and possibly quite small. Deposit of even a single check could cause a recipient's account to lose its solitary-use status. At the same time, the new procedure would disserve many recipients by confusing them about the level of protection to which they are entitled. For example, a debtor who has forgotten that she made a deposit of non-Social Security funds into her account might erroneously assume that all restraining notices served on her account are without force. Consequently, she might fail to take prompt action to release exempt funds in response to a notice.

Contrary to plaintiff's contention that banks would face only a "de minimis" burden (Appellant's Br. at 43) in complying with his proposed requirement, the burden on banks would be significant. Reviewing account records to ensure that all funds were from presumptively exempt sources would be time-consuming, especially for older accounts and accounts obtained from other banks through acquisition or merger. Banks would have to hire more staff to conduct these reviews or make expensive investments in the creation and maintenance of new computer information files. Banks also would incur additional substantial expense in creating and operating a decision-making system that necessarily would apply to all accounts affected by restraining notices, not just those that are ultimately shown to have only exempt funds received by electronic deposit.

More importantly, by coming under an obligation to assert exemptions in favor of certain debtors, banks would be forced to undertake the unprecedented task of asserting legal defenses on behalf of account holders, thereby increasing banks' potential liability. A mere clerical error in either the maintenance or the review of the account could result in a claim that an exemption defense had been mistakenly asserted or foregone. Disputes similarly could arise over the banks' determinations whether funds are excepted from exemption because they are sought for alimony or child support. These circumstances, in turn, would give banks a significant incentive to insist on judicial protection for its exemption determinations through an interpleader action involving the debtor and creditor. Resort to such a cumbersome process would impose expense on banks and interfere with their ability to make low-cost accounts available to Social Security recipients.

Other factors also weigh against a finding that New York's current procedures are unconstitutional. First, plaintiff's proposed requirement would disserve creditors because it would further complicate post-judgment attachment proceedings by introducing a third stakeholder, the bank. The judgment creditor's interests in these proceedings "are straightforward: a swift, sure and inexpensive mechanism for collecting judgments." McCahey, 774 F.2d at 549; see also Dionne, 757 F.2d at 1352. Plaintiff's rule would be contrary to these interests because it would require creditors possibly to litigate against banks that hold the debtors' assets.

Second, assuming arguendo the federal government's interest in encouraging electronic deposit of benefits should be considered under due process, this interest similarly weighs against plaintiff because the added burden on banks resulting from the new procedure would discourage their participation in the ETA program, which is entirely voluntary. See 31 C.F.R. 208.5 ("A federally-insured financial institution shall be eligible, but not required, to offer ETAs as Treasury's Financial Agent.").

Finally, Treasury considered and rejected procedures similar to those proposed by plaintiff here when Treasury created the ETA program for recipients of federal benefits payments. See 31 C.F.R. Part 208; Notice at 38512-13. Treasury had proposed to restrict the types of funds that could be deposited in an ETA in order "to reduce the potential that funds in an ETA would be subject to attachment." Notice, at 38512. However, in its final rule, Treasury declined to adopt this restriction. Id., at 38513. In addition, Treasury rejected the requests of consumer organizations that it "prohibit attachment of all funds" in ETAs, or, alternatively, that "when presented with an attachment order, financial institutions should determine which funds are attachable (or not attachable) as a way to assist recipients." Id., at 38512-13. This Court should not second-guess Treasury's considered judgment that banks should not be burdened with a requirement that they assert exemptions on behalf of benefits recipients. Notably, the requirements that Treasury did impose on financial institutions regarding attachment are consistent with the States' long-standing practice of requiring debtors to claim exemptions.¹¹

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Unable to show that HSBC violated his due process rights when it froze his bank account, plaintiff contends that HSBC's actions violated the Social Security Act's anti-attachment provision, 42 U.S.C. 407(a). Plaintiff's argument fails because Section 407(a) prohibits only (in certain circumstances) the attachment of actual funds received from the government, not legal process that temporarily freezes bank accounts in which such funds may be deposited. In any event, an interpretation of the Act that forbids the temporary freezing of accounts to allow adjudication of applicable statutory exemptions would be practically unworkable.

Section 407(a) provides in relevant part that "none of the moneys paid or payable or rights existing under this subchapter shall be subject to execution, levy, attachment, garnishment, or other legal process . . ." (emphasis added). Courts have interpreted this provision as prohibiting states from seizing from individuals the "income or payments" they receive from Social Security. Bennett v. Arkansas, 485 U.S. 395, 396 n.1 (1988) (per curium); see also Philpott v. Essex County Welfare Bd., 409 U.S. 413, 415 (1973) (Section 407(a) barred reaching "the federal disability payments paid"). The language of the statute does not preclude states from allowing temporary legal process on bank accounts that may contain such moneys. "An 'account' is a name, a routing device like the address of a building," to be distinguished from "money" or "funds" that may be subject to legal process. United States v. $448,342.85, 969 F.2d 474, 476-77 (7th Cir. 1992).

Consistent with the focus of Section 407(a)'s prohibition on "moneys paid," courts addressing the issue have uniformly concluded that state post-judgment attachment procedures that "avoid[] any significant interruption of access to benefits" do not violate the Act. Finberg, 634 F.2d at 63; see also Dionne, 757 F.2d at 1354-55; Zeppieri v. New Haven Provision Co., 163 F. Supp. 2d 126, 136-37 (D. Conn. 2001). In Finberg and Dionne, Social Security recipients similarly challenged state post-judgment attachment procedures on both Supremacy and Due Process Clause grounds. The Third and First Circuits respectively invalidated the states' laws because they found the notice and post-attachment hearing procedures to be inadequate. The clear implication of these decisions is that state procedures that afford sufficient due process protections to debtors do not conflict with Section 407(a), even if debtors are temporarily denied access to exempt benefits. See Finberg, 634 F.2d at 63; Dionne, 757 F.2d at 1354-55 (declining to address plaintiff's argument under Section 407(a) in light of its due process holding). Here, nothing in CPLR 5222 creates a "significant interruption" of Social Security recipients' access to benefits. Spring Creek's failure to abide by New York's rules, not the rules themselves, caused the delay experienced by plaintiff. See JA 32.

Similarly, in Zeppieri, the court flatly rejected plaintiff's argument that Section 407(a)'s exemption was "self-executing" and "do[es] not need to be claimed by social security recipients É in instances É where the account at issue contains only exempt funds." 163 F. Supp. 2d at 132, 136-37. The requirement of Connecticut law that debtor recipients initiate legal proceedings to claim exemptions for frozen funds was "not deceptive or unfair" and did not "violate federal law." Id. at 136-37; see also Phillips,121 Cal. Rptr. at 62. New York's attachment procedures, like those in Zeppieri, allow judgment debtors a reasonable means to compel release of exempt funds and therefore do not "stand as an obstacle" to the accomplishment of Congress's objectives in enacting Section 407(a). Hines v. Davidowitz, 312 U.S. 52, 67 (1941).

In addition to the text of Section 407(a) and the case law, common sense renders plaintiff's Supremacy Clause challenge implausible. First, plaintiff's contention that Section 407(a) prohibits even a temporary denial of access to solitary-use bank accounts is inconsistent with his position that Section 407(a) permits freezing of commingled accounts. See Zeppieri, 163 F. Supp. 2d at 137 n.10. Second, as noted, if banks were responsible for claiming exemptions on behalf of debtor account holders, they would still have to freeze many of these accounts for some period while they determined whether any exemptions applied. See supra Part II.B. The practical necessity of this freeze belies plaintiff's interpretation of Section 407(a).

² NYBA accepts the facts of this case as set forth in the brief of Appellee HSBC.

³ In any event, plaintiff's claims for declaratory and injunctive relief are moot because he passed away in July 2002, while his appeal was pending (Appellant's Br. at 9), and therefore he presently cannot have a personal stake in these claims.

See Rhodes v. Stewart, 488 U.S. 1, 4 (1988); Swan v. Stoneman, 635 F.2d 97, 102 n.6 (2d Cir. 1980) (claims for injunctive and declaratory relief were moot as to deceased plaintiff).

⁴ Plaintiff has dropped his claim for the fee charged by HSBC for processing Spring Creek's notice.

⁵ In that context, the Court in Blum explained: "a State normally can be held responsible for a private decision only when it exercised coercive power or has provided such significant encouragement, either overt or covert, that the choice must in law be deemed to be that of the State."

Id. at 1004 (emphasis added). Although plaintiff selectively quotes from this portion of

Blum to mask the important fact that the State's liability was in issue in that case (Appellant's Br. at 29-30), the Court's full opinion makes clear that it was not addressing the liability of a private party.

⁶ Viewed in its proper historical context, the passage in Adickes cited by plaintiff (Appellant's Br. at 29) at most stands for the proposition that "a private person who discriminates on the basis of race and with the knowledge of and pursuant to a state-enforced custom requiring discrimination,

Sutton, 192 F.3d at 841 (quoting Adickes, 398 U.S. at 174 n.44). As the Ninth Circuit has observed: The conduct in Adickes occurred in 1964, 10 years after Brown v. Board of Education, 347 U.S. 483 (1954), and after the decade of publicized litigation that followed in its wake. In view of the intense national focus on issues of racial discrimination, it is virtually inconceivable that a private citizen then could have acted in the innocent belief that the state law and customs involved in Adickes still were presumptively valid. É In such a context, the private party could be characterized as hiding behind the authority of law and engaging in "joint participation" with the State in the deprivation of constitutional rights.Sutton, 192 F.3d at 841 (quoting Lugar, 457 U.S. at 955-56 (Powell, J., dissenting)); see also 1A Schwartz & Kirlin,

Section 1983 Litigation 5.10 at 522 (3d ed. 1997) (noting that Supreme Court's "expansive view of state action" during the 1960s and 1970s in "furtherance of its goal of eradicating societal racial discrimination" has since been significantly narrowed by numerous Court decisions involving private party defendants).

⁷ The same could be said for a bank providing information about persons receiving public assistance to State authorities as required by NY Banking Law 4 (2003), a lawyer responding to a subpoena or discovery request on behalf of a client, or a merchant collecting a sales tax that the customer alleges is unconstitutional.

⁸ One of the factors the Supreme Court specifically identified in Mathews was "the Government's interest, including the function involved and the fiscal and administrative burdens that the additional or substitute procedural requirement would entail." 424 U.S. at 335. In the present case this factor should be supplanted by the interest of the banks, because it is they who bear the "burden" of "increasing procedural safeguards." Doehr, 501 U.S. at 11.

⁹ The notice that a judgment creditor must serve the debtor under CPLR 5522(e) lists nine different kinds of payments that could be exempt under state or federal law: Supplemental security income; Social Security; Public assistance; Alimony or Child support; Unemployment benefits; Disability benefits; Workers' compensation benefits; Public or private pensions; and Veterans benefits.

¹⁰ The record in this case provides this Court with no basis for concluding otherwise. Because of Spring Creek's failure to provide plaintiff with a copy of the restraining notice as required under CPLR 5222 (JA 32), plaintiff was temporarily denied information about available procedures that could have assisted him in obtaining a prompt release of his funds. Moreover, even after plaintiff learned about these procedures, he did not use them.

See Appellant's Br. at 12-13. Here, as in McCahey, this Court is "not faced with a concrete example of the New York statute in action," and the Court should be "unwilling to invalidate a statute because it might, but need not, be applied in an unconstitutional manner." 774 F.2d at 553

¹¹ There are two such requirements under the ETA program: First, the financial institution must send a copy of any attachment or garnishment order that it receives and other relevant information to the benefits recipient. Second, the financial institutions must disclose to new ETA holders that certain Federal benefit payments (including Social Security) "are protected from attachment," subject to "exceptions." Notice, at 38513. Although in this case the record is silent as to whether plaintiff's account was an ETA account, some NYBA members participate in the ETA program and plaintiff seeks adoption of a rule that would apply to ETA and non-ETA accounts alike. Moreover, Treasury's determination that debtors should carry the burden of claiming exemptions in ETA accounts is equally significant for non-ETA accounts.

A. The Decision Cannot Be Reconciled with the Plain Language of SCPA 2210(10) or with New York Case Law

Daashur Assocs. v. December Artists Apartment Corp., 226 A.D.2d 114 (1st Dep't 1996) 9

In re Petition of the Union Elevated R.R. Co. of Brooklyn, 112 N.Y. 61 (1899) 12

Estate of Winston v. Northern Trust Co., 99 Ill.App.3d 278 (Ill. App. Ct. 1981) 16

The New York Bankers Association (the "Association") respectfully submits this brief as amicus curiae in support of the appeal taken by The Chase Manhattan Bank (the "Bank").¹

In its decision dated December 31, 2002 (the "Decision"), the Surrogate's Court of Westchester County (the "Surrogate's Court") held that neither SCPA 2210(10) nor the doctrines of res judicata and collateral estoppel bar an objectant's claims against a trustee, seeking to hold a trustee liable as a successor fiduciary to itself, for its acts as executor and as a trustee of a terminated trust. Those acts, essentially the retention of Eastman Kodak ("Kodak") stock, were clearly reflected in the prior judicially settled estate accounting to which Pamela Townley Creighton (the "Objectant")² was a party and in a subsequent judicially settled trust accounting in a trust for Objectant's sister under the same Will, to which Objectant was also a party.

A fiduciary may settle an accounting either judicially or by agreement. Section 2210(10) of the Surrogate's Court Procedure Act ("SCPA") requires a fiduciary accounting to itself as successor fiduciary, to cite in the accounting proceeding all persons who have an interest in the succeeding estate or trust. In a non-judicial settlement, such persons need to be party to the contract. The Decision not only undermines the finality of numerous accounting decrees where a fiduciary has acted in a dual capacity, but also undermines contracts settling fiduciary accounts of proceeding under the same circumstances.

Consequently, the Decision undermines the very purpose of SCPA 2210(10) and, if sustained, will open a floodgate of litigation. Objectant was a party to the prior accounting proceedings, had an opportunity to be heard in each of those two prior proceedings, and should not be given a third bite at the apple, based upon an erroneous reading of SCPA 2210(10). The Decision clashes with New York public policy favoring finality of decrees and interferes with contractual relationships and should not stand.

The New York Bankers Association (the "Association") is the principal trade association of the commercial banking industry in New York State. Its over 125 domestic and non-resident member banks comprise both national and state-chartered banks and trust companies, and include community, regional and money-center banks. The Association's members include virtually every commercial banking institution in New York that has fiduciary powers pursuant to New York Banking Law 100.

Banks and trust companies, many of which are Association members, commonly serve as both executor under a will and as trustee of trusts thereunder. As many Association members serve in the same dual capacities, as did the Bank in this action, the Decision has significant ramifications for the Association and its members.³ In circumstances where a bank or trust company is acting in dual capacities and accounts to itself, in accordance with the requirements of SCPA 2210(10), Association members cite through to estate or trust beneficiaries on accounting proceedings or make such beneficiaries parties to the agreement settling the accounting. It is widely believed in the industry that providing beneficiaries with the opportunity to review and question a fiduciary's acts or omissions in compliance with SCPA 2210(10) forecloses such beneficiaries from relitigating issues disclosed on the accounting in a subsequent proceeding.

The Association, whose members are fiduciaries for thousands of trusts and estates in this State, has an interest in ensuring that the law governing the obligations and liabilities of its members is fair, clear and consistent. Toward that end, the Association generally appears as amicus curiae when a question is presented of fundamental importance to the banking industry in New York State. Many of the Association's members have extensive experience with the legal issues raised in this case regarding the duties of executors and trustees, and the Association is therefore well-positioned to apprise this Court of the practical consequences for the banking industry should the Decision be upheld. The Association thus has a compelling interest in ensuring that judicial decrees and contracts that settle accounts of fiduciaries are accorded the finality to which they are due.

Blanche D. Hunter ("Decedent") died testate in December 1972. Record on Appeal ("RA") at 5. Her Will sets up identical trusts for her granddaughters, Alice Creighton (the "Alice Creighton Trust") and Objectant ("Objectant's Trust"), and named James W. Cook ("Cook") and the Bank as co-Executors and co-Trustees. Id. Between the initial funding of the trusts in 1973 and 1977, the Executors transferred over 12,000 shares of Kodak common stock into the trusts (id.), having sold the balance of Decedent's 133,000 Kodak shares. Id. at 177. In April 1976, the Executors commenced a proceeding to settle their account of proceedings. Id. at 5. This accounting fully set forth the Executors' retention of the unsold Kodak stock and its decrease in value during the accounting period and disclosed the dates and amounts of Kodak shares distributed to the trusts. See id. at 231-45. Pursuant to SCPA 2210(10), Objectant, in her capacity as beneficiary of her Trust, was served with process in that proceeding, and she appeared by counsel. Id. at 263-65. Her only objections related to the Bank's counsel fees. Id. at 5-6. Those objections were resolved and the Surrogate's Court entered a decree (the "1977 Decree") settling the account of the Executors through April 15, 1977. Id. at 6.

Following the death of Alice Creighton in 1980, the Bank and Cook, as co-Trustees of the Alice Creighton Trust, distributed the remainder of her trust, consisting mostly of Kodak stock, to Objectant's Trust. Id. In 1981, the co-Trustees commenced a proceeding to settle their account of proceedings as co-Trustees of the Alice Creighton Trust, and Objectant, in her capacity as beneficiary of her Trust, the remainderman of Alice's Trust, was duly served with process in that proceeding. Id. As in the earlier Executors' accounting, this accounting fully set forth the Trustees' retention of Kodak stock and disclosed the dates and amounts of Kodak stock received from the Decedent's estate and the distribution of Kodak shares to Objectant's Trust. Id. at 269-76. Objectant executed a waiver of citation and consented to the entry of a decree settling the co-Trustees' accounting, and the Surrogate's Court entered a decree (the "1981 Decree") settling the co-Trustees' account of proceedings through May 2, 1980. Id. at 315. Cook and the Bank continued to act as co-Trustees of the Objectant's Trust until Cook's death in 1996; thereafter the Bank has continued to act as sole Trustee. Id. at 6.

In November 1997, the Bank commenced an intermediate accounting proceeding, covering the period from the funding of the Objectant's Trust in 1973 through Cook's death. Id. On May 6, 2002, Objectant filed her verified objections to the accounting (the "Objections"), based primarily on the Bank's retention of the Kodak shares from 1973 through the early 1980s in its capacities as Executor and Trustee of both trusts. Id. at 6-7. On July 17, 2002, the Bank moved to dismiss certain Objections because Objectant was a party to both previous accountings and had failed to object to the retention of Kodak stock in either of those proceedings. Id. at 146-47.

The Surrogate's Court dismissed certain Objections but denied the Bank's motion to dismiss other objections which sought to impose successor fiduciary liability on the Bank as Trustee of Objectant's Trust on account of its actions as Executor and as Trustee of the Alice Creighton Trust. The Surrogate's Court, finding no New York precedent on the question of whether the doctrine of res judicata barred the prosecution "of a claim that a successor trustee breached a fiduciary duty, as successor trustee, in failing to redress misdeeds it committed as a predecessor executor or trustee," Id. at 10, relied on a Utah case, Pepper v. Zions First Nat'l Bank, 801 P.2d 144 (Utah 1990), and held that the doctrine of res judicata did not bar Objectant from claiming that the Bank had breached its fiduciary duty to her "in failing to redress any improprieties it may have committed" as co-Executor of Decedent's estate and/or co-Trustee of the Alice Creighton Trust. Id. at 11.

The Surrogate's Court further concluded that there was no requisite "identity of parties" to warrant the application of the doctrine of res judicata. Id. at 12. Noting that Objectant did not seek to reopen accountings settled in 1977 and 1981, the Surrogate's Court found that the Bank's actions as Trustee of Objectant's Trust were not subject to judicial scrutiny in either of those prior proceedings. Id. The Surrogate's Court also rejected the Bank's argument that making the Objectant a party in both prior accounting proceedings pursuant to SCPA 2210(10) protected it from failing to scrutinize its own actions in those proceedings. Id. at 12-13. Finally, the Surrogate's Court noted the courts' reluctance to invoke the doctrine of res judicata where a colorable claim for breach of a trust duty has been raised. Id. at 13.

On January 15, 2003, the Bank noticed its appeal. Id. at 1. The Association's motion to appear as amicus curiae was granted on or about June 12, 2003. For the reasons stated herein, this Court should reverse the Decision except to the extent that the Surrogate's Court dismissed the Objections.

This State's public policy favors the recognition of the finality of judicial determinations. New York law incorporates a number of equitable principles to prevent a party from seeking to raise issues that either were heard previously and decided in a judicial proceeding or could have been raised but were not. As the New York Court of Appeals has stated:

[A]s to the parties in a litigation and those in privity with them, a judgment on the merits by a court of competent jurisdiction is conclusive of the issues of fact and questions of law necessarily decided therein in any subsequent action . . . . This principle, so necessary to conserve judicial resources by discouraging redundant litigation, is grounded on the premise that once a person has been afforded a full and fair opportunity to litigate a particular issue, that person may not be permitted to do so again.

The purpose of an accounting proceeding is to offer an opportunity to necessary parties to review and, if they choose, object to the conduct of the accounting fiduciary. Basic principles of finality mandate that, after an accounting proceeding has been completed and a judicial decree has been entered (or, in the case of a non-judicial settlement of an account, a contract has been signed), no issue (i) clearly presented in an accounting actually objected to and resolved in the proceeding; or (ii) that could have been objected to in the proceeding, but was not, may be objected to subsequently by a party to the original proceeding. As stated in In re Lawyers Trust Co., 182 Misc. 845, 847 (Surr. Ct. Kings Co. 1943):

Every issue actually or potentially tendered by the account, to which no objection is asserted, is rendered res judicata by the entry of a decree judicially settling such account. The benefit of the finality and conclusiveness granted to such decrees Éwould be destroyed if the courts did not thus rigidly seek to maintain their sanctity on this basis.

See also In re Matter of Rudin, 292 A.D.2d 283, 283 (1st Dep't 2002) (finding that objectant was estopped by her participation in and consent to prior judicial proceedings from objecting to matters covered in a prior accounting); In re Zilkha, 174 A.D.2d 331, 334 (2d Dep't 1991) (stating that a prior judicial decree settling the executor's account "precludes relitigation by the parties to an action and their privies of any matters that were necessarily decided in the prior action"); In re Estate of Zaharis, 148 A.D.2d 868, 869 (3d Dep't 1989); Krimsky v. Lombardi, 78 Misc.2d 685, 687 (Sup. Ct. Albany Co. 1974). The conclusiveness extends to every material matter within the issues that were expressly litigated and determined and also to those matters which, although not expressly determined, are comprehended and involved in the matter expressly stated and decided, whether they were or were not actually litigated or considered. Id. While the aim of the accounting is to inform the beneficiary of a fiduciary's actions, the Decree on an accounting (or the signed contract) finally discharges the accounting fiduciary from liability for the actions revealed in the accounting. Thus, no party to an accounting can challenge the accounting decree (or contract) in a later proceeding absent allegations of fraud or misrepresentation as to facts material to the accounting.

In this case, Objectant was made a party to the prior accounting proceedings, as required under SCPA 2210(10). She appeared by counsel in the estate proceeding, waived her right to do so in the trust proceeding, and raised no substantive objections in either. She has not alleged any fraud or misrepresentation with respect to those prior accountings, nor has she contended that she was unaware that the trusts for her sister and herself consisted primarily of Kodak stock that had substantially declined in value by 1977 and still further by 1981. Objectant could have raised her objections to the Executors' retention of Kodak at the time of the 1977 accounting, and she could have raised her objections to the Trustees' retention of Kodak at the time of the 1981 trust accounting. Her failure to do so bars her from seeking to raise such objections as to such actions under the guise that the Bank, as successor fiduciary to itself, as Executor and as Trustee of the Alice Creighton Trust, should have raised objections.

If upheld, the Decision could lead to a deluge of litigation brought by beneficiaries seeking to raise objections that they could have raised but did not raise in prior accounting proceedings. Such a result will impose huge costs on the fiduciary industry. The passage of time will make it very difficult for fiduciaries to defend themselves against claims that relate to accounts, such as the ones at issue in this case, that have been closed for decades. In this case, many of the parties, including the co-Executor and co-Trustee and many of the Bank's employees who handled the Estate, are no longer living. Even if all the parties were still alive, there is no reason to think that either memories or records will be reliable with respect to accounts closed 20 years earlier.

Moreover, rather than face such litigation in the future, fiduciaries will either refuse to serve as successor fiduciary to themselves, or they will provide executor's and successive trustee's accountings, thus imposing needless expenses on the trust. In short, the Decision will force the fiduciary industry to either limit its services to its clients or to impose new and unnecessary costs on those clients, a result clearly at odds with the intent of SCPA 2210(10), which provides a mechanism for protecting the interests of beneficiaries while permitting fiduciaries to account to themselves.

Where a successor fiduciary is a different entity from its predecessor, the successor may be liable as a successor fiduciary for its predecessor's actions, because it is charged with a duty to protect the beneficiaries' rights in the predecessor's accounting. Where a fiduciary accounts to itself, by operation of SCPA 2210(10), it is charged with no such duty. Rather in such circumstances, New York law recognizes that a fiduciary will not object to its own accounting because it has already reviewed the account and found its own actions reasonable. By imposing a duty on fiduciaries to object to their own deeds as predecessor fiduciaries in addition to their fiduciary duties as predecessors, the Decision exposes fiduciaries to double liability for the same acts and gives beneficiaries two bites at the apple, while undermining the finality of judicial decrees settling accounts.

Furthermore, a fiduciary's accounting can be settled in either of these two ways: judicially by court decree or non-judicially by contractual Receipt and Release Agreement. If the Decision stands, it is likely that beneficiaries, who are dissatisfied in hindsight, will attempt to extend the Decision to re-open a Receipt and Release Agreement that they knowingly signed. It is thus possible and, in fact, likely, that the Decision will not only wreak havoc on the finality of judicial decrees, but will also undermine the sanctity of agreements entered into freely between parties, violating the policy against interfering with clear contracts between parties, in the absence of fraud or duress. Daashur Assocs. v. December Artists Apartment Corp., 226 A.D.2d 114 (1st Dep't 1996); Columbus Trust Co. v. Campolo, 110 A.D.2d 616, 617 (2d Dep't 1985).

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In cases such as this one where a predecessor fiduciary accounts to itself as a successor fiduciary, because there is no expectation that the successor fiduciary will object to its own accounting, the legislature enacted SCPA 2210(10), which provides in pertinent part:
Where an accounting fiduciary accounts to himself in a separate capacity É it shall not be sufficient to issue process or obtain the appearance of the accounting party in such separate capacity only, but in addition process shall issue to all persons interested in É the trust of which the accounting party is trustee.

The statute addresses the fact that a fiduciary accounting to itself cannot be expected to challenge its own actions, a fact that was clearly recognized by New York case law predating the statute. Fisher v. Banta, 66 N.Y. 468, 482 (1876) (holding that beneficiaries could not be bound by an accounting to which they were not parties where the executor accounted to himself); In re Haigh, 125 Misc. 365, 366-67 (Surr. Ct. N.Y. Co. 1925) ("In such cases it has been the rule since the rendition of [Fisher v. Banta] that the persons interested in the deceased beneficiary's estate must be cited, otherwise the decree is not conclusive upon them."). These cases set forth a rule of law later codified by SCPA 2210(10) that a decree settling a predecessor fiduciary's account is conclusive on all beneficiaries of the succeeding trust made party to the accounting proceeding where the identity of the predecessor and successor fiduciary is the same.

In the 75 years since New York adopted SCPA 2210(10), New York courts have uniformly interpreted it as barring actions to challenge the conduct of a fiduciary that accounted to itself in a prior proceeding to which the objectant was a party. See In re Hoyt's Estate, 47 N.Y.S.2d 929, 931 (Surr. Ct. Westchester Co. 1943), modified on other grounds, 294 N.Y. 373 (1945) (barring the prosecution of a claim against a trustee based on its alleged misdeeds as a predecessor executor); In re Campbell's Will, 38 N.Y.S.2d 827, 830-31 (Surr. Ct. Westchester Co. 1942) (barring negligence claims against fiduciary serving as both executor and trustee and relating to conduct that preceded the executor's accounting); In re Estate of Massimino, 143 Misc. 119, 121 (Surr. Ct. Bronx Co. 1932) (noting that a decree settling an account approves the trust as set up and is conclusive as against all parties to the accounting proceeding). Where as here, a person beneficially interested in an estate or trust is made a party to an accounting proceeding and thereby has an opportunity to be heard, that person is bound by a decree settling the account. See In re Schaaf's Estate, 12 A.D.2d 811, 812 (2d Dep't 1961) (finding parties bound by an accounting decree where they were parties to the accounting proceeding and made no motion to change or modify the provisions of the decree). The reasons for this doctrine have been clearly articulated:

By reason of their inclusion in the former account, issues were inevitably tendered to the respondents in the proceeding respecting the propriety É of the accountant in respect of [the securities in question]. . . . So long as the decree stands, it is conclusive upon the parties in respect of all issues that might have been litigated in the former proceeding. It is not subject to attack either collaterally or by indirection . . . .

In re Estate of Emmerich, 175 Misc. 228, 229 (Surr. Ct. Kings Co. 1940); accord In re Edward's Will, 102 N.Y.S.2d 715, 720 (Surr. Ct. Onondaga Co. 1950); In re Cornwell's Will, 78 N.Y.S.2d 622, 626 (Surr. Ct. Queens Co. 1948); Lawyers Trust, 182 Misc. at 847.

The principle animating SCPA 2210(10) is the recognition that a fiduciary accounting to itself cannot represent the interests of the beneficiary. See In re Parkinson, 134 Misc.2d 565, 566 (Surr. Ct. Nassau Co. 1987) ("SCPA 2210(10) states in no uncertain terms that an accounting fiduciary may not account to himself[,] recognizing that an individual may not discharge himself from liability"); see also In re Estate of Ziegler, 157 Misc.2d 423, 427 (Surr. Ct. N.Y. Co. 1993) (recognizing that SCPA 2210(10) carves out an exception to the general rule that beneficiaries can be represented by their trustee, thus recognizing that where a fiduciary accounts to itself it cannot represent the beneficiary). The statute recognizes the conflict that the accounting fiduciary has when accounting to itself and, by requiring all persons interested in the estate accounting to be made parties to the proceeding, ensures the finality of the decree or agreement settling the accounting. Indeed, one court has stated that "an executor may always choose to cite all of the trust beneficiaries rather than postpone their potential objections to the trustee's accounting." Ziegler, 157 Misc.2d at 431. It is the beneficiaries cited under SCPA 2210(10), and not the successor fiduciary, who are charged with the representation of their interests. See In re Accounting of Cambeis, 27 Misc.2d 668, 669 (Surr. Ct. Bronx Co. 1960) ("In order to preserve his rights, [SCPA 2210(10)] makes this petitioner a necessary party to any voluntary proceeding to judicially settle the account of these executrices."); In re Gibson's Will, 40 N.Y.S.2d 727, 732 (Surr. Ct. Westchester Co. 1943) (noting that trust beneficiaries are necessary parties to a proceeding to settle the accounts of the executor and that a decree settling such an account "is conclusive as to all persons of whom jurisdiction was obtained as to all matters embraced in the account and decree").

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It is a well-accepted principle of statutory construction that a court must avoid an interpretation that renders a provision meaningless. See, e.g., Hernandez v. Barrios Paoli, 93 N.Y.2d 781, 787 n.2 (1999) ("[T]he Appellate Division's reading of the statute would render this provision meaningless, in direct contravention of settled principles of statutory construction"); Stevens v. Wing, 293 A.D.2d 49, 54 (1st Dep't 2002) (reversing the trial court and noting that "contrary to principles of statutory construction, [the trial court's] interpretation would render some of the statutory and regulatory language meaningless"). The Decision states that the Bank interprets SCPA 2210(10) as providing protection for a successor fiduciary by exonerating the fiduciary for failing to scrutinize its actions as predecessor. RA at 12-13. To the contrary, SCPA 2210(10) exists to provide protection to the beneficiaries by allowing them to scrutinize the predecessor fiduciary's actions. The Decision's interpretation of SCPA 2210(10) deprives that statutory provision of any purpose. If process to the beneficiary does not result in finality and a discharge of the fiduciary, the requirement that the beneficiary be cited serves no purpose.

A fundamental requirement of due process in any proceeding that is to be accorded finality is notice and an opportunity to be heard. See Alvarado v. Dep't of State, 110 A.D.2d, 583 (1st Dep't 1985); Brown v. Giesecke, 40 A.D.2d 1009 (2d Dep't 1972). It is well established under New York law that, where a party has notice and opportunity to be heard on certain questions, it is "estopped . . . from ever afterward raising the question" as the "judgment is no longer open to collateral attack." In re Petition of the Union Elevated R.R. Co. of Brooklyn, 112 N.Y. 61, 78 (1899); see also In re Estate of Fales, 294 A.D.2d 165, 165-66 (1st Dep't 2002) (affirming denial of motion to modify decree settling trustee's accounting where objectant "had notice reasonably calculated to apprise him of the pendence of the proceeding and afford him an opportunity to present his objections."); In re Matter of Harley, 746 N.Y.S.2d 137, 139 (1st Dep't 2001) (finding that the requirements of collateral estoppel were met where a party has notice and opportunity to be heard on the issue in a prior proceeding). There is no reason why Section 2210(10) should be treated any differently from any other provision of law that provides an opportunity to be heard.

C. The Analogous Doctrine of Virtual Representation Demonstrates that the Objectant Represented Her Own Interests in the Prior Proceedings

Ensuring the finality of court decrees is also an issue in application of virtual representation. Pursuant to SCPA 315 one party may represent the interests of another person or class of persons having a future interest in an estate or trust. However, courts have refused to allow the party, who is both an accounting fiduciary and a beneficiary, to virtually represent the interests of another trust beneficiary, requiring the appointment of a guardian ad litem to do so. In re Estate of Bingham, 97 Misc. 2d 370 (Surr. Ct. N.Y. Co. 1978); In re Estate of Sage, 54 Misc.2d 779 (Surr. Ct. N.Y. Co. 1967). Courts have refused to permit virtual representation in such cases because of the damage such representation would do to the finality of court decrees:

In the instant case, the proposed representors are co-trustees of the trust in question as well as part of the class of potential remaindermen. In addition, the proposed representors are also the accounting parties. As accounting parties and representors, questions may be raised as to their adequately reviewing their own petition and final accounting in terms of separating their interests as petitioners from their interests as representors É The court is in no way suggesting that the petitioners would act in any way other than in the best interest of the representees and in accordance with the highest fiduciary standards. The court, however, must be concerned with conflicts inherent with persons serving in multiple capacities. Indeed, the court's concern for the finality in the ensuing decree is a concern that touches upon all the parties, not just the representees.

In re Estate of Prianti, N.Y.L.J., Aug. 15, 1997, at p. 16-17 (Surr. Ct. Suffolk Co., Aug. 15, 1997).

Representation of a beneficiary's interest by an accounting fiduciary in the context at hand gives rise to concerns identical to those in the virtual representation context. The trust beneficiaries are made parties to the proceeding in order to represent themselves because the law recognizes that there are conflicts inherent with persons serving in multiple capacities. Both SCPA 315 and SCPA 2210(10) make clear the underlying expectation that once beneficiaries are made parties to a fiduciary's accounting, they must assert any objections they have to such accounting then, or lose them forever.

THE SAME LEGAL ENTITY
The Decision rests in large part on the theory that, notwithstanding the fact that Objectant was a party to two accounting proceedings, Objectant is not foreclosed from asserting that the Bank may be liable as a successor fiduciary to her on two grounds: One, as Trustee of Objectant's Trust for failing to object to its accounting as Executor, and two, as Trustee of Objectant's Trust for failing to object to its accounting as Trustee of the Alice Creighton Trust. See RA at 10. There simply is no New York authority that can provide the basis for imposing successor fiduciary liability in this context, and SCPA 2210(10) provides authority for not imposing liability in such cases. Indeed it would be preposterous for the law to require a fiduciary to object to its own actions.
A. The Doctrine of Successor Liability Has No Application Here

There is no statutory basis for the imposition of successor fiduciary liability on an entity that is acting as successor fiduciary to itself. Indeed, the statute which the Surrogate's Court cites as evidence of successor fiduciary liability, SCPA 1506, expressly applies only where the predecessor and successor fiduciary are not the same entity. SCPA 1506 does not impose successor fiduciary liability but instead sets forth exceptions to such liability of "[a] trustee who was not an executor of the estate of the same decedent." Therefore, SCPA 1506 only evidences that there is successor fiduciary liability when the predecessor fiduciary has a different identity from the successor. In such case, the successor fiduciary is a necessary party to an accounting proceeding of the predecessor under SCPA 2210 and is charged with the duty of reviewing the account of the predecessor to protect the interests of the beneficiaries of the succeeding trust who are not necessary parties. If the successor fiduciary fails to carry out its duty, it will be liable for the actions of its predecessor unless it falls within an exception set forth in SCPA 1506.

However, that is not the case where the predecessor fiduciary has the same identity as the successor fiduciary. There SCPA 2210(10) requires the beneficiaries of the succeeding trust to be necessary parties to protect their own interests. The Surrogate's Court fails to citetha any case or statute that supports the imposition of liability on the Bank as successor fiduciary in these circumstances. That is because there is no statute imposing successor fiduciary liability on the Bank and New York courts have rejected the notion that a fiduciary can be liable as a successor fiduciary, in the absence of fraud, where all relevant facts had been disclosed to the objectants in a prior accounting and the prior accounting as such had been approved. See Lawyers Trust, 182 Misc. at 849 ("Here the prior account correctly described the investments, disclosed the source of purchase, and apprised the parties . . . sufficiently to bind them . . . ."). In addition, New York courts have repeatedly rejected the notion that a fiduciary whose actions as executor have been approved in an executor's accounting can later be held liable for those same actions in its capacity as trustee. See Rudin, 292 A.D.2d at 283 (holding that res judicata barred objectant from arguing that "certain assets that should have been used to fund the trust were omitted" from an accounting settled by an earlier decree); Krimsky, 78 Misc.2d at 686-87 ("[A] judicial decree of settlement is conclusive evidence against all the parties of whom jurisdiction was obtained as to all matters covered in the account and decree.") (emphasis added).

Failing to find any basis for its ruling in New York law, the Surrogate's Court relied on case law from other jurisdictions and on the Restatement (Second) of Trusts for its position that the Bank could be liable in these circumstances as a successor fiduciary to itself. RA at 11. The central authority relied on by the Surrogate's Court in finding that the Bank can be liable as successor to itself is a decision of the Utah Supreme Court. See RA at 10-11. (citing Pepper, 801 P.2d at 153-54). In Pepper, Zions First National Bank ("Zions") was named the executor of the Jerome B. Pepper estate and the trustee of the Jerome B. Pepper inter vivos trust (the sole beneficiary of the estate). Id. at 145. As executor Zions filed a final accounting seeking approval of, among other things, the sale of the estate's interest in a joint venture. Id. at 146. Zions made no mention of the fact that it would use this sale to pay off the security interest that Zions, as a commercial bank, had securing a line of credit it had extended to one of the estate's other businesses. Id. In fact, the Pepper beneficiaries alleged that Zions, as trustee, represented to them that the sale of the interest in the joint venture was to benefit the beneficiaries. Id. at 147.

The Pepper beneficiaries were given notice of Zions' petition for closure of the estate but they did not appear at the hearing. Id. at 146. Utah apparently has no analogue to SCPA 2210(10) and does not require that beneficiaries be made parties to proceedings at which a fiduciary accounts to itself. The court entered a decree approving the estate's first and final accounting and closed the estate. Id. In determining that the executor's accounting was not res judicata as to a claim against Zions as trustee for failing to object to its own actions as executor, the court noted that "[t]he grounds alleged in the complaint here were not actually litigated in the probate proceeding and therefore cannot collaterally estop the beneficiaries against the trustee." Id. at 154.

Given that there were allegations of misrepresentation and self-dealing in the prior accounting in Pepper, to which the objectant was not a party, the result in Pepper is not surprising. However, there is simply no basis for concluding that the Pepper rule, which applies where the fiduciary engaged in unlawful self-dealing, should also apply in actions such as this one where the only question is whether or not the fiduciary acted "prudently." Clearly, if a fiduciary came to the conclusion that its actions were prudent as executor, it would come to the same conclusion as trustee.⁴⁴ In addition, all of the cases cited in support of the decision in Pepper are distinguishable for various reasons, the most significant of which is that none seem to be constrained by a statute such as SCPA 2210.

, 205 N.W.2d 755 (Minn. 1981) (holding that trust beneficiaries had a cause of action against trustee for failure to object to his own acts as executor where beneficiaries were not parties to the executor

, 99 Ill.App.3d 278 (Ill. App. Ct. 1981) (holding that where deceased fiduciary was alleged to have treated property of the trust as her own individual property, petitioner

, 310 N.W.2d 531 (Iowa Ct. App. 1981) (holding that acts of fraud by fiduciary not disclosed in executor

, 72 Ill.App.3d 927 (Ill. App. Ct. 1979) (refusing to insulate a trustee from liability where it consented to or acquiesced in its own acts as executor or where it performed negligently as trustee, but not indicating that the beneficiaries who were challenging the actions of the trustee had been made parties to the executor

, 1 N.J. 459 (N.J. 1949) (holding that although non-legal investments whose market value had declined were accounted for and approved at their inventory value in executor

's accounting, such investments were required to be accounted for at their decreased market value in Trustee

's accounting because trustees were under a duty to accept for the trust estate only cash or legal securities at the then market value).

Moreover, the Decision's reliance on Pepper is remarkable, in that Pepper itself acknowledges that New York is among the jurisdictions that have rejected the doctrine of successor fiduciary liability in this context. See Pepper, 801 P.2d at 152 ("There is some authority to support Zions' contention that a probate decree is res judicata as to both the executor and a successor trustee") (citing cases, including In re Estate of Chaves, 143 Misc. 868 (Surr. Ct. N.Y. Co. 1932), and In re Estate of Menzie, 54 Misc. 188 (Surr. Ct. Madison Co. 1907)).

In Menzie, George L. Menzie, as executor of the estate of George W. Menzie, accounted to himself in 1884 as trustee of a trust created for the benefit of Esther Menzie, life beneficiary under the will. Esther was a party to and consented to the 1884 accounting. 54 Misc. at 191-92. In 1906, Esther sought an accounting from George L. Menzie as trustee and sought to raise objections relating to the first accounting at the second accounting proceeding. Id. at 189. The Surrogate's Court rejected any such objections out of hand: "[S]he is bound by said decree and by all its provisions.

She is also estopped from raising any question that might have been raised at that time. The decree is conclusive on matters then within the jurisdiction of the Surrogate's Court." Id. at 192.

In Chaves, a case acknowledged but not discussed in the Decision (RA at 11), pursuant to a 1931 accounting, the decedent's widow had accounted as administrator and turned over the assets of the estate to herself as executor. 143 Misc. at 870. The objectant appeared at that proceeding through her attorney and consented to the decree settling the account of the administrator. Id. One year later, after the value of the stocks held in the estate had significantly deteriorated in value, objectant brought objections seeking to hold the widow liable as executor of the estate. Id. The court's ruling simply could not be clearer and is dispositive of the current action: "I hold . . . that the objectant is precluded from asserting any liability during this period against the widow as executrix, because of the objectant's failure to protest in the prior accounting proceeding and by her consent to the entry of the decree." Id.

Although the Decision treats this case as presenting an issue of first impression, it is settled law in New York that a trustee cannot be liable as a successor to itself with respect to its own accounting as executor. All claims relating to the executor's accounting are decided in the accounting, which has preclusive effect with respect to all parties to the accounting, including the trustee. See Massimino, 143 Misc. at 121 ("The make-up of these trusts is one of the matters embraced in the account. It follows, therefore, that objection must be made at this time as a decree settling the account as filed would approve the trusts as set up and be conclusive as against all parties to this proceeding.").

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While SCPA 2210(10) provides sufficient basis to reverse the Decision, other more general principles of New York law provide additional, independent rationale for reversal. Generally, a beneficiary is permitted to challenge a successor fiduciary's failure to object to his predecessor's accounting when the beneficiary was not a party to the predecessor's accounting and thus had no prior opportunity to object. The beneficiary's collateral attack on the successor fiduciary is the functional equivalent of the beneficiary objecting to the actions of the predecessor fiduciary directly; it is just a different way for the beneficiary to voice such objection. Where the beneficiary was a party to the predecessor's accounting and had a direct opportunity to object to the predecessor's actions, she is not entitled to raise claims which she has already had a full and fair opportunity to litigate in a collateral proceeding. In this case, the Objections relate to the failure of the Bank to object, in its role as Trustee of Objectant's Trust, to its actions as Executor and as Trustee of the Alice Creighton Trust, as disclosed in prior accountings. But Objectant was herself a party to those prior proceedings and failed to object to these issues at that time. Objectant has already had a full and fair opportunity to litigate the substantive issues underlying her Objections relating to prior accountings. To the extent that the Objections relate to transactions disclosed in the prior accountings, they are barred by the doctrines of res judicata and collateral estoppel.

A. As the Objections Could Have Been Raised in an Earlier Proceeding in Which Objectant Was a Party, the Objections Are Barred by the Doctrine of Res Judicata Citing the Restatement (Second) of Judgments 36(2), the Surrogate's Court found that there was no identity of parties in the prior proceeding such as to warrant the application of the doctrine of res judicata. RA at 12. Section 36(2) provides:
A party appearing in an action in one capacity, individual or representative, is not thereby bound by or entitled to the benefits of the rules of res judicata in a subsequent action in which he appears in another capacity.

Clearly this section of the Restatement cannot apply here, since the issue is not whether or not the prior accounting binds the Bank as Trustee of Objectant's Trust but whether Objectant, who clearly was a party to the prior proceeding in her current capacity as beneficiary of the Trust, can be bound by the prior proceedings. There is no question that the requirement of identity of parties is met with respect to the Objectant and that she is bound by the prior proceedings in which she appeared as a party.

Under New York law, the doctrine of res judicata bars a party to a proceeding from raising claims in a subsequent proceeding that either were actually litigated and determined at the prior proceeding or that could have been raised at that prior proceeding but were not. See, e.g., O'Brien v. City of Syracuse, 54 N.Y.2d 353, 357 (1981) ("[O]nce a claim is brought to a final conclusion, all other claims arising out of the same transaction or series of transactions are barred, even if based upon different theories or if seeking a different remedy."); Windsor Metal Fabrications, Ltd. v. General Accident Ins. Co. of Am., 295 A.D.2d 502, 503 (2d Dep't 2002) (noting that the doctrine of res judicata bars a plaintiff from raising an argument that could have been raised in the prior proceeding between the parties).

This principle applies with equal force to accounting proceedings in the Surrogate's Court. An accounting decree binds all parties to the proceeding and "is conclusive not only as to issues which were actively presented and determined but as to those which could have been raised" at the accounting but were not. See, e.g., Fales, 294 A.D.2d at 165 (affirming decision of the Surrogate's Court denying motion to modify earlier decree settling trustee's intermediate accounting where movant had notice and opportunity to present his objections but failed to do so); Rudin, 292 A.D.2d at 283 (finding objectant's claims barred as a matter of res judicata where there was no suggestion that the challenged decree was a product of fraud or misrepresentation and objectant had expressly consented to the settlement of the account); Zilkha, 174 A.D.2d at 334 (finding that judicial decree on executors' accounting was res judicata and barred petitioners' claims and that they were also estopped from challenging the funding of the trust where their predecessor-in-interest had been a proponent of the executors' account and a consenting beneficiary to the decree settling the account); In re Estate of Ziegler, 161 Misc. 2d 203, 204-05 (Surr. Ct. N.Y. Co. 1994) ("Under the general precepts of res judicata, an accounting decree is conclusive not only as to issues which were actively presented and determined, but as to those which could have been raised regarding all matters set forth in the accounting.").

The Surrogate's Court stated that it could not "find explicit authority in New York where the doctrine of res judicata has been applied summarily to bar the prosecution of a claim that a successor trustee breached a fiduciary duty, as successor trustee, in failing to redress alleged misdeeds it committed as a predecessor executor or trustee." RA at 10. It is certainly true that there is no precedent under New York law for the Surrogate's Court's application of the doctrine of res judicata to bar claims against a successor fiduciary for actions it took as a predecessor. The reason why there are no such cases is simple: there is no precedent under New York law for the application of the doctrine of successor fiduciary liability where, as here, the successor and predecessor fiduciary have the same identity. However, the Surrogate's Court overlooks several cases that clearly do apply the doctrine of res judicata to bar claims in procedural postures that are similar to those presented here. While these cases do not expressly address the doctrine of successor fiduciary liability, as argued in Section III above, they do so by implication, because the facts of such cases are similar to those of the case at bar and no New York court has ever imposed successor fiduciary liability in a case where the fiduciary was acting as successor to itself.⁵

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In Hoyt, the executor of the estate delivered to itself as trustee a mortgage participation in 1930 for the purpose of partially setting up a trust. 47 N.Y.S.2d at 931. One year later, the executor filed its account, duly citing all the beneficiaries of the estate, who did not object to the delivery of the mortgage participation. Id. A decree was entered approving the delivery of the mortgage participation for the purpose of partially funding a trust, which the court held "was conclusive as to all matters embraced" in the accounting. Id. The court then dismissed objections to the delivery of the mortgage participation brought in 1943, noting that the parties to the 1943 proceeding remained bound by the earlier decree. Id. The court thus quite properly gave preclusive, i.e., res judicata, effect to the 1931 accounting and barred the prosecution of a claim against a trustee based on its alleged misdeeds as a predecessor executor.

Campbell's Will, 38 N.Y.S.2d 827, is similar. In a proceeding for judicial settlement of the intermediate account of the trustee, the beneficiary brought objections relating to the delivery of certain mortgage certificates for the purpose of setting up the trust. Id. at 830. The delivery of these mortgage certificates had been set forth in a prior accounting involving the same trust company acting as both executor and trustee. Id.

Since objections to the executor's account might have been filed by any cestui que trust and the Court could have then determined the issues raised by the objections, the trust company being both sole executor and trustee, the decree in effect approved the delivery of such mortgage certificates . . . for the purpose of setting up the trust . . . and the decree was conclusive as to all matters embraced in the account. . . . The respondents in the executor's accounting proceeding were thereby barred from charging the executor with negligence that occurred at any time before the filing of the account.

Id. at 830-31 (internal citations omitted). The current case is indistinguishable. The challenged conduct of the Bank was fully disclosed in accounting proceedings in 1977 and 1981, at which Objectant was a party and raised no substantive objections. The conduct to which she now seeks to object, under the guise of successor fiduciary liability, is res judicata, as are all Objections relating to the conduct reported on the accountings for the Estate and the Alice Creighton Trust.

The Surrogate's Court correctly noted that New York courts have at times been reluctant to apply the doctrine of res judicata in favor of a fiduciary against which a beneficiary has alleged breach of trust. RA at 13. Such reluctance arises only where the questions raised in a later proceeding involve allegations that the fiduciary had failed to disclose that the predecessor's actions were tainted by self-dealing. See In re Estate of Alker, 20 A.D.2d 894, 895 (2d Dep't 1964) (refusing to bar claims as embraced by prior decrees where trustee may have "violated the rule that a fiduciary has an undivided duty to his beneficiary and may not place himself in a position whereby his personal interest will come in conflict with the interest of his cestui que trust") (internal quotations omitted); In re Long Island Loan & Trust Co., 92 A.D. 1, 3 (2d Dep't 1904) ("[A]ssuming this to have been a sale to the trust by the trustee, it is in violation of the public policy of this State, which forbids a trustee dealing with the trust estate both as buyer and seller"); In re Estate of Schmidt, 163 Misc. 610, 611 (Surr. Ct. N.Y. Co. 1937) (finding no estoppel where objectants alleged that the nature of an investment had been misrepresented and was made in breach of trust and self-dealing). Because there are no allegations of self-dealing in this case, there is no reason why the doctrine of res judicata should not apply.

The Decision ignores cases which specifically distinguish cases involving self-dealing and bar objections where there are no allegations of self-dealing or misrepresentation. See Ziegler, 161 Misc.2d at 206 (finding executor's failure to highlight the "obvious possibility" that "not unlikely events" might take place did not constitute a deficiency in disclosure sufficient to re-open a 20-year old accounting decree.); In re Chapin, 171 Misc. 783, 784 (Surr. Ct. N.Y. Co. 1939) (finding objectants estopped from "questioning the legality or regularity" of investments that were fully disclosed in a prior accounting).

Further, in a case involving a trustee and a successor trustee (in this case referred to as a substituted trustee), a case properly under the ambit of successor liability, the court discusses the application of principles of res judicata and determines that so long as a decree settling the account of a predecessor trustee gave proper disclosure as to investments made therein, such decree will preclude any objections to those same actions in a successor trustee's accounting by anyone who was a party to the predecessor trustee's accounting. The court notes that:

If parties who are duly cited upon an accounting do not avail themselves of the rights accorded to them by statute, do not inquire or question acts of the fiduciary which are sufficiently disclosed to them by the account to put them on notice or inquiry, and yet at a later date may assert objections to such previously disclosed acts and proceedings, the benefits of judicial settlement are obliterated. Upon the entry of a decree judicially settling an account, rights of both the fiduciary and the parties in interest vest.

Contrary to the Surrogate's Court's conclusion (RA at 12), in raising objections to the conduct of the Bank disclosed in the 1977 and 1981 accountings through the guise of successor fiduciary liability, Objectant is seeking to reopen the accountings settled by court Decrees. The substance of the Objections, the retention of Kodak stock, was clearly disclosed on those earlier accounting proceedings. Although Objectant would claim that she is not objecting to the substantive conduct of the Bank as predecessor fiduciary but to the Bank's failure as successor fiduciary to object to its own conduct as predecessor, she may only do so if she had no means of objecting to the acts of the Bank as predecessor directly. Here, Objectant had the opportunity to object to the Bank's acts that were disclosed in the prior accountings. She did not do so, and because there is no substantive difference between objecting directly to the acts of a predecessor fiduciary and objecting to a successor fiduciary's failure to object to such acts, Objectant's claims are now foreclosed by the doctrine of res judicata.

Barred Under the Doctrine of Collateral Estoppel
Collateral estoppel is an equitable doctrine based on "the general notion that it is not fair to permit a party to relitigate an issue that has already been decided against it." Juan C. v. Cortines, 89 N.Y.2d 659, 667 (1997) (quoting Kaufman v. Lilly & Co., 65 N.Y.2d 449, 455 (1985)). For the doctrine to apply, the identical issue necessarily must have been decided in the prior action and be decisive of the present action, and the estopped party must have had a full and fair opportunity to contest the prior determination. Juan C., 89 N.Y.2d at 667; see also Schwartz v. Public Adm'r, 24 N.Y.2d 65, 70 (1969) ("[W]here it can be fairly said that a party has had a full opportunity to litigate a particular issue, he cannot reasonably demand a second one.").
In this case, the actions of the Bank as Executor and as Trustee of the Alice Creighton Trust to which the Objectant now tries to object indirectly through the doctrine of successor fiduciary liability, were clearly disclosed in the two previous accountings to which she was a party. As a result, she had in those prior proceedings a full and fair opportunity to be heard on issues raised in this proceeding. Because identity of parties is not a requirement of the collateral estoppel doctrine, the fact that she did not have an opportunity to raise her objections against the Bank as Trustee of her own Trust in the prior accountings is of no importance. Instead, Objectant had an opportunity to raise such objections directly against the Bank as Executor and as Trustee of the Alice Creighton Trust. Consequently, Objectant is now collaterally estopped from raising a claim against the Bank.

Since Objectant was a party to the prior accountings, and had an opportunity to object to the Bank's actions as predecessor fiduciary, she had the opportunity to voice the very objections for which she now faults the Bank as Trustee of her Trust for failing to make. The fact that the 1981 accounting related to Objectant's sister's Trust is no bar to the applicability of the doctrine of collateral estoppel. Accordingly, this Court should reverse the Decision of the Surrogate's Court except to the extent the Decision dismissed the Objections.

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For the foregoing reasons, this Court should reverse the decision of the Surrogate's Court of the County of Westchester.

(Footnotes)
¹ The original Trustee was Lincoln First Bank of Rochester. Through a series of mergers and consolidations, The Chase Manhattan Bank is the successor of Lincoln First Bank of Rochester and now acts as Trustee. For purposes of simplicity, references in this brief to the Bank, shall mean The Chase Manhattan Bank or its predecessors and successors in interest in connection with this litigation.

² The Association is informed that after the Decision was rendered, the Objectant died, and her estate has been substituted for the Objectant.

" as used in this brief, refers to Pamela Townley Creighton or her estate, collectively as Objectant, unless the context otherwise requires.

³ The Decision has the same ramifications for an individual serving in dual capacities.

The Surrogate 's Court improperly imposed the burden on the Bank to prove a negative

that it could not be held liable under the doctrine of successor fiduciary liability. In fact, the burden is on the Objectant to show some basis in New York law for holding the Bank liable. Objectant failed to meet her burden under New York law.

TABLE OF CONTENTS

Page

INTEREST OF AMICUS CURIAE...................................................................................... 1

Preliminary Statement................................................................................................................... 3

ARGUMENT................................................................................................................. 5

I.          THE PREEMPTION DOCTRINE APPLIES TO ORDINANCES LIKE
             LOCAL LAW 36 THAT REGULATE BY DEBARRING ENTITIES FROM
            CONTRACTING WITH THE GOVERNMENT ..........................................................   5

II. NEW YORK STATE LAW PREEMPTS LOCAL LAW 36................................................7

A. New York State Has “Occupied the Field” of Home Mortgage Lending....................... 8

B. New York State Has “Occupied the Field” of Banking............................................ 11

C. Local Law 36 Is Inconsistent With the New York Banking Law................................ 12

III. FEDERAL LAW PREEMPTS LOCAL LAW 36........................................................... 14

A. 12 U.S.C. § 371 Preempts Local Law 36 as It Applies to National Banks................. 15

1. Local Law 36 Impermissibly Limits National Banks’ Mortgage Lending Authority.............15

2. OCC Regulations Expressly Preempt Parts of Local Law 36................................... 19

B. National Banks’ Authority To Charge Home-State Interest Rates Preempts Local
Law 36.........................................................................................................21

C. The Home Owners Loan Act Preempts Local Law 36 as It Applies To Federal Savings
& Loans Associations..................................................................................... 22

D. DIDMCA Preempts Local Law 36’s Provisions Limiting Interest Rates on Home
Mortgage Loans............................................................................................. 24

E. Federal Law Preempts the Examination Powers That Local Law 36 Grants to City
Officials........................................................................................................ 25

CONCLUSION............................................................................................................ 26

TABLE OF AUTHORITIES

CASES

Page(s)

Air Transp. Ass’n v. City and County of San Francisco,
992 F. Supp. 1149 (N. D. Cal. 1998)................................................................................................................. 6

Albany Area Builders Ass’n v. Town of Guilderland,
74 N.Y.2d 372, 547 N.Y.S.2d 627, 546 N.E.2d 920 (1998)....................... 7, 8, 9, 10, 12

Am. Bankers Ass’n v. Lockyer,

..... 239 F. Supp. 2d 1000 (E.D. Cal. 2002)................................................................... 23

Bank of Am. v. City & County of San Francisco, 309 F.3d 551 (9th Cir. 2002).................... 21

Barnett Bank of Marion County v. Nelson, 517 U.S. 25 (1996)................................... 15, 16

Bleecker Assocs. v. Astoria Fed. Sav. & Loan Ass’n,
544 F. Supp. 794 (S.D.N.Y. 1982).......................................................................... 23

Bracker v. Cohen, 612 N.Y.S.2d 113, 204 A.D.2d 115 (1st Dep’t 1994)............................. 10

Bldg.& Constr. Trades Council of the Metro. Dist. v. Associated

..... Builders & Contractors of Mass./R.I., Inc., 507 U.S. 218 (1993).................................. 7

Chamber of Commerce v. Reich, 74 F.3d 1322 (D.C. Cir. 1996)........................................ 6

Con Edison v. Town of Red Hook, 60 N.Y.2d 99,
468 N.Y.S.2d 596, 456 N.E.2d 487 (1983)........................................................... 8, 10

Conference of Fed. Sav. & Loan Ass’ns v. Stein, 604 F.2d 1256 (9th Cir. 1979),

..... aff’d, 445 U.S. 924 (1980)............................................................................... 23, 25

Conference of State Bank Supervisors v. Conover, 710 F.2d 878 (1983)......................... 20

Crosby v. National Foreign Trade Council, 530 U.S. 363 (2000)...................................... 14

Dillingham Constr. N.A. Inc. v. County of Sonoma, 190 F.3d 1034 (9th Cir. 1999).............. 6

Dime Sav. Bank of New York, FSB v. New York,
579 N.Y.S.2d 679, 174 A.D.2d 173 (2d Dep’t 1992).................................................. 24

Fidelity Federal Savings & Loan Association v. De la Cuesta,
458 U.S. 141 (1982).................................................................................... 5, 19, 23

First National Bank v. California, 262 U.S. 366 (1923)..................................................... 17

Franklin National Bank v. New York, 347 U.S. 373 (1954)................................................ 17

Free v. Bland, 369 U.S. 663 (1962)............................................................................... 5

F.T.B. Realty Corp. v. Goodman, 300 N.Y. 140 (1949).................................................... 10

Hines v. Davidowitz, 312 U.S. 52 (1941)................................................................. 14, 15

Idaho v. Sec. Pac. Bank, 800 F. Supp. 922 (D. Idaho 1992)............................................ 18

In re State Bank of Canastota, 263 N.Y.S. 388, 238 A.D. 39 (1933)................................. 11

Jones v. Rath Packing Co., 430 U.S. 419 (1977)............................................................ 14

Marquette Nat’l Bank v. Omaha Serv. Corp., 439 U.S. 299 (1978).............................. 15, 21

Nat’l Foreign Trade Council v. Natsios, 181 F.3d 38, aff’d sub nom

..... Crosby v. Nat’l Foreign Trade Council, 530 U.S. 363 (2000)....................................... 6

New Rochelle Trust Co. v. White, 283 N.Y. 223, 28 N.E.2d 387 (1940)............................. 11

New York City Health & Hosps. Corp. v. Council of City of New York,
752 N.Y.S.2d 665 (1st Dep’t 2003).......................................................................... 5

New York State Club Ass’n v. City of New York, 69 N.Y.2d 211,
513 N.Y.S.2d 349, 505 N.E.2d 915 (1987), aff’d, 487 U.S. 1 (1988)................ 10, 12, 13

Rice v. Norman Williams Co., 458 U.S. 654 (1982)....................................................... 14

Rice v. Santa Fe Elevator Corp., 331 U.S. 218 (1947)................................................... 14

Robins v. Brooklyn Trust Co., 6 N.Y.S.2d 626 (Sup. Ct. 1938)......................................... 11

Smiley v. Citibank (S.D.), N.A., 517 U.S. 735 (1996)...................................................... 21

Sprint Spectrum, L.P. v. Mills, 283 F.3d 404 (2d Cir. 2002).............................................. 7

United States v. Shimer, 367 U.S. 374 (1961).............................................................. 19

Wells Fargo, Bank, N.A. v. Boutris, 2003 WL 1220131 (E.D. Cal. Mar. 10, 2003).............. 25

Wisconsin Department of Industry, Labor and Human Relations v. Gould,
475 U.S. 282 (1986)........................................................................................ 6, 26

TOP

STATUTES AND REGULATIONS

12 U.S.C. § 85..................................................................................................... 21, 22

12 U.S.C. § 92................................................................................................................... 16

12 U.S.C. § 371............................................................................. 4, 15, 16, 17, 18, 19

12 U.S.C. § 484.................................................................................................................. 25

12 U.S.C. § 1464(a)............................................................................................. 22, 23

12 U.S.C. § 1735f-5................................................................................................. 24

12 U.S.C. § 1735f-7a.......................................................................................... 24, 25

12 U.S.C. § 1831(d)............................................................................................. 21, 22

12 C.F.R. § 34..................................................................................................................... 19

12 C.F.R. § 34.4............................................................................................ 18, 19, 20

12 C.F.R. § 34.21................................................................................................................ 20

12 C.F.R. § 560.2(a)............................................................................................................ 23

12 C.F.R. § 7.4000.............................................................................................................. 25

12 C.F.R. § 7.4002............................................................................................................... 21

Local Law 36...................................................................................................... passim

N.Y. Banking Law § 589............................................................................................ 8-9

N.Y. Banking Law, Article 12-D, §§ 589-99................................................................... 9

N.Y. Banking Law § 6-c.......................................................................................... 9, 10

N.Y. Banking Law § 6-d............................................................................................. 10

N.Y. Banking Law § 6-e............................................................................................. 10

N.Y. Banking Law § 6-f.............................................................................................. 10

N.Y. Banking Law § 6-g............................................................................................. 10

N.Y. Banking Law § 6-h............................................................................................. 10

N.Y. Banking Law § 6-i.............................................................................................. 10

N.Y. Banking Law § 6-j.............................................................................................. 10

N.Y. Banking Law § 6-k............................................................................................ 10

N.Y. Banking Law § 6‑l.................................................................................... 10, 12, 13

N.Y. Banking Law § 9‑f.............................................................................................. 10

N.Y. Banking Law § 10............................................................................................... 11

N.Y. Comp. Codes R. & Regs. tit. 3, Part 41.................................................................. 9

N.Y. Comp. Codes R. & Regs. tit. 3, Part 79................................................................. 10

N.Y. Comp. Codes R. & Regs. tit. 3, Part 80................................................................. 10

N.Y. Comp. Codes R. & Regs. tit. 3, Part 84................................................................ 10

Real Estate Lending by National Banks, 48 Fed. Reg. 40,698 (September 9, 1983)........... 18

MISCELLANEOUS

Governor’s Bill Jacket, L.2002, C.626........................................................................... 13

S. Rep. No. 97-536, at 27 (1982), reprinted in 1982 U.S.C.C.A.N. 3054, 3081............... 16

MEMORANDUM OF LAW OF THE NEW YORK BANKERS ASSOCIATION
AS AMICUS CURIAE IN SUPPORT OF PLAINTIFFS’
MOTION FOR A PRELIMINARY INJUNCTION

The New York Bankers Association (the “NYBA”) respectfully submits this brief as amicus curiae in support of plaintiffs’ motion for a preliminary injunction staying the enforcement date and barring enforcement of Local Law number 36 of the year 2002 (“Local Law 36”).

Interest of Amicus Curiae

The NYBA is comprised of community, regional and money center commercial banks in the State of New York. Many of those members, including some of the largest, are located in and do a significant portion of their business in New York City. In the aggregate, NYBA’s members have over 220,000 employees and assets in excess of $1 trillion. The NYBA regularly appears as amicus curiae before courts in cases that raise significant legal issues relating to banking.

The NYBA opposes predatory lending practices and is committed to working with state and federal officials to help eradicate the problem by engaging in, among other things, (i) consumer education and community outreach, (ii) support for current federal and state laws and regulations, (iii) self-regulation and industry discipline through adoption of “best practices” adopted by NYBA and other bankers’ associations, (iv) supporting expansion of credit to low and moderate income borrowers, and (v) new laws and regulations which strengthen criminal and civil penalties for clearly defined predatory practices.

The NYBA frequently takes positions on legislation and regulation concerning predatory lending practices and advises government officials on proposed new laws and regulation. In fact, the President of the NYBA testified before the New York State Senate and the City Council on proposed predatory lending legislation last year, including on Local Law 36. (For the Court’s convenience, a copy of the NYBA President’s testimony on Local Law 36 is attached as Tab A hereto.)

This case stems from the City Council’s adoption of Local Law 36, which prohibits the City of New York (the “City”) from doing business with any financial institution that is, or is affiliated with, a so-called “Predatory Lender.” While the NYBA fully supports the goal of eliminating predatory lending — generally understood to mean loans provided to vulnerable consumers by misleading or deceiving them about the terms or conditions of their loans and committing them to loans they will probably not be able to repay — NYBA does not believe that Local Law 36 is well-designed to accomplish that aim. Rather, that ordinance will apply to, in addition to some (but perhaps not all) predatory lenders, legitimate high cost (called subprime) home lenders — loans to borrowers who do not meet the creditworthiness standards for conventional prime loans, and thus who need subprime loans in order to have access to credit.

For this reason, Local Law 36 may adversely affect NYBA member banks and their ability to engage actively in the lending market because of the potential risk of being precluded from bidding on or maintaining City contracts. Even if Local Law 36 is ultimately rejected by this Court at the conclusion of this case, NYBA’s members may never be able to recapture the missed opportunities and significant economic relationships that would have been prevented in the interim. Moreover, even NYBA members that do not offer any subprime loans will be affected by the certification process required by Local Law 36.

Although there are a number of policy reasons on which the NYBA opposes Local Law 36, this memorandum addresses only whether Local Law 36 is preempted by state and federal banking laws and regulations. The NYBA and its members are acutely aware of the extensive federal and state legislation and regulation in this area. The NYBA respectfully submits that, as a result of this extensive scheme, much of which conflicts with Local Law 36, that ordinance is preempted, and that the Court should therefore enjoin enforcement of its provisions.

Preliminary Statement

It is well settled that ordinances such as Local Law 36 that regulate by “debarring” people or entities from entering into contracts with the government are preempted in the same fashion as any regulatory statute. Preemption of a local law results where the local law is expressly preempted by state or federal law or regulation, attempts to regulate a field that is occupied by the state or federal government, or is inconsistent with state or federal law or regulation. On all three counts, Local Law 36 is preempted by state and federal laws and regulation concerning predatory lending, high cost (subprime) home mortgage lending and banking.

Local Law 36 is preempted by the comprehensive and detailed regulatory scheme enacted by the State of New York to address both mortgage lending and banking more generally. Indeed, the State’s statutory declaration calling for uniform mortgage lending makes this legislative intent abundantly clear. Further, Local Law 36 is inconsistent with a provision of the New York Banking Law that sets different standards for high cost lending and thus, under a long line of authority, is preempted by state law.

Although this Court need not reach the question, Congress also has manifested its intent to preempt laws like Local Law 36. First, Local Law 36 “stands as an obstacle to” the authority granted to national banks under the plain text of 12 U.S.C. § 371, pursuant to which Congress has provided that only the Office of the Comptroller of the Currency (“OCC”) shall regulate national bank mortgage lending, and by the regulations promulgated by the OCC thereunder. Further, Local Law 36 impermissibly limits the ability of out-of-state banks to charge interest at the highest rates permitted by their home state. Local Law 36 also is preempted insofar as it applies to federal savings and loan associations, limits interest rates on home mortagages and permits City officials to exercise examination powers with respect to national banks or federal savings associations.

There is already in place an extensive body of state and federal law and regulation that addresses predatory and high cost lending as well as many other banking practices. This scheme both “occupies the field” and conflicts with Local Law 36. Under well-settled principles of federalism, supremacy and state power, Local Law 36 is preempted.

argument

As stated above, the NYBA opposes predatory lending practices. Whether or not Local Law 36 is well-intended, however, it is settled law that the merits or objectives of the challenged statute are irrelevant to a determination as to whether it is preempted by state or federal law. As the United States Supreme Court has held in the context of federal preemption, when a law conflicts with a valid federal law, “the federal law must prevail.” Fid. Fed. Sav. & Loan Ass’n v. De la Cuesta, 458 U.S. 141, 153-54 (1982) (quoting Free v. Bland, 369 U.S. 663, 666 (1962)). Similarly, in the context of State law preemption, the First Department has explained that “the City Council cannot achieve even laudable goals by making illegal what is specifically allowed by State law.” New York City Health & Hosps. Corp. v. Council of City of New York, 752 N.Y.S.2d 665, 672 (1st Dep’t 2003).

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I. The preemption doctrine applies to ordinances like local law 36 that regulate by debarring entities from contracting with the government.

The doctrine of preemption does not distinguish between laws that outlaw persons from engaging in specified conduct, and laws like Local Law 36 that punish persons that engage in such conduct by debarring them from doing business with government entities. It is well-settled that where a government entity uses its spending power to further public policy goals or punish perceived wrongdoers, it acts in its capacity as a market regulator and its actions are subject to preemption.

In Wisconsin Department of Industry, Labor and Human Relations v. Gould, 475 U.S. 282 (1986), the Supreme Court considered a Wisconsin statute that debarred companies from participating in state procurement contracts if they violated the National Labor Relations Act three times within a five‑year period. Wisconsin contended that it was acting as a market participant and that the statute was not subject to preemption. The Supreme Court rejected this argument, finding that the state’s use of its spending power was the equivalent of regulation:

That Wisconsin has chosen to use its spending power rather than its police power does not significantly lessen the inherent potential for conflict when two separate remedies are brought to bear on the same activity. . . . To uphold the Wisconsin penalty simply because it operates through state purchasing decisions therefore would make little sense. It is the conduct being regulated, not the formal description of governing legal standards, that is the proper focus of concern. . . . By flatly prohibiting state purchases from repeat labor law violators Wisconsin simply is not functioning as a private purchaser of services; for all practical purposes, Wisconsin’s debarment scheme is tantamount to regulation.

Id. at 289 (emphasis added) (internal quotations and citations omitted). The Supreme Court’s analysis has been reaffirmed in many recent decisions considering statutes like Local Law 36.[1] The only debarring laws immune from preemption are those that impose conditions that are narrowly focused on one event or project and directly related to the immediate purpose for which the governmental moneys are spent (e.g., the purpose of the contract at issue).[2] Here, the City Council seeks through Local Law 36 to use the City’s weight in the marketplace to accomplish regulatory objectives unrelated to the nature of its contracts with private entities.

The City Council’s regulatory objectives are affirmed by Local Law 36’s “declaration of legislative findings and intent.” This declaration lists the purported evils of predatory lenders and states that the ordinance seeks to deny such lenders the opportunity for business relationships with City agencies. As such, it is clear that Local Law 36 is intended to punish wrongdoing and ensure fidelity to the law — both of which are hallmarks of action taken by the City as a regulator, rather than a market participant.

Local Law 36 is therefore subject to preemption to the same extent as any regulatory statute.

II. New York State Law Preempts Local Law 36.

New York recognizes two independent grounds on which a State law will be found to preempt a municipal law: (1) the municipal law attempts to regulate a field that is occupied solely by the State; and (2) the municipal law is inconsistent with the State law. See Albany Area Builders Ass’n v. Town of Guilderland, 74 N.Y.2d 372, 377, 547 N.Y.S.2d 627, 629, 546 N.E.2d 920, 922 (1989). As the Court of Appeals held in Albany Area Builders, this rule “represents a fundamental limitation” on the power of local governance:

While localities have been invested with substantial powers both by affirmative grant and by restriction on State powers in matters of local concern, the overriding limitation of the preemption doctrine embodies “the untrammeled primacy of the Legislature to act . . . with respect to matters of State concern.” Preemption applies both in cases of express conflict between local and State law and in cases where the State has evidenced its intent to occupy the field.

Id. (internal citations omitted).

A. New York State Has “Occupied the Field” of Home Mortgage Lending.

Where the State occupies or regulates a particular field, the state law’s “intent to preempt need not be express. It is enough that the Legislature has impliedly evinced its desire to do so.” Con Edison v. Town of Red Hook, 60 N.Y.2d 99, 105, 468 N.Y.S.2d 596, 599, 456 N.E.2d 487, 490 (1983). The State can imply its intent to preempt “from a declaration of State policy by the Legislature or from the fact that the Legislature has enacted a comprehensive and detailed regulatory scheme in the area.” Id. (internal citations omitted). In the case of home mortgage lending, both conditions apply.

In Article 12-D of the New York Banking Law, the New York State legislature declared a specific State policy that regulation of residential mortgage lending must be “uniform” across the State:

The legislature finds that it is essential for the protection of the citizens of this state and the stability of the state’s economy that reasonable standards governing the business practices of mortgage lenders and their agents be imposed. The legislature further finds that the obligations of lenders and their agents to consumers in connection with making, soliciting, processing, placing or negotiating of mortgage loans are such as to warrant the uniform regulation of the residential mortgage lending process, including the application, solicitation, making and servicing of mortgage loans.

N.Y. Banking Law § 589 (emphasis added).

Declaring the need for uniform policy is itself sufficient to evidence a desire to occupy the field. See Albany Area Builders, 74 N.Y.2d at 377, 547 N.Y.S.2d at 629, 546 N.E.2d at 922 (finding that intent to preempt may be implied from “the need for State-wide uniformity in a given area”).

The State’s intent to occupy the field is also demonstrated by the comprehensive scheme for the regulation of home mortgage lending practices established by the New York Banking Law. Article 12‑D of the New York Banking Law, which encompasses sections 589 through 599 of the New York Banking Law, applies to banking organizations, savings associations and insurance companies as well as mortgage bankers and mortgage brokers. The provisions of the Article thoroughly regulate mortgage lending in the State (including licensing and registration of lenders, prohibiting certain practices and requiring certain disclosures) and provide the New York Banking Board with the authority to impose and enforce rules and regulations appropriate for the protection of consumers with regard to mortgage lending. Pursuant to that authority, the New York Banking Board has adopted a comprehensive regulatory scheme for subprime mortgage loans and predatory lending. See N.Y. Comp. Codes R. & Regs. tit. 3, Part 41.

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Sections 6-c through 6-l of the New York Banking Law impose additional requirements on mortgage lending in the State. One of these requirements is that lending institutions can only provide mortgage loans “in conformity with the [applicable provisions of the New York Banking Law] and in compliance with such rules and regulations as may be promulgated by the [New York State] banking board or prescribed by the [New York State] superintendent.” N.Y. Banking Law § 6-i.[3] Such a “comprehensive, detailed statutory scheme” is independent evidence of the State’s intent to preempt Local Law 36. Albany Area Builders, 74 N.Y.2d at 377, 547 N.Y.S.2d at 629, 546 N.E.2d at 922.

The Court of Appeals held in Albany Area Builders that local laws like Local Law 36 cannot regulate the same subject as state law:

Where the State has preempted the field, a local law regulating the same subject matter is deemed inconsistent with the State’s transcendent interest, whether or not the terms of the local law actually conflict with a State-wide statute. Such local laws, were they permitted to operate in a field preempted by State law, would tend to inhibit the operation of the State’s general law and thereby thwart the operation of the State’s overriding policy concerns.

Id. (internal quotations and citations omitted).[4] Thus, whether or not Local Law 36 “actually conflict[s]” with State law, it is preempted.

B. New York State Has “Occupied the Field” of Banking.

The New York State legislature has also occupied the field of banking. “[A] bank is a mere creature of the State, and is allowed to conduct business only on the terms and in the circumstances prescribed by the State.” In re State Bank of Canastota, 263 N.Y.S. 388, 390, 238 A.D. 39, 41 (3d Dep’t 1933). Accordingly, “the State Legislature has the right to prescribe rules for the management and operation thereof.” Robins v. Brooklyn Trust Co., 6 N.Y.S.2d 626, 627 (Sup. Ct. 1938).

For this reason, the Court of Appeals has held that the State-chartered banking industry cannot be regulated by local law:

The State incorporates banks and regulates and supervises the transaction of the business of banking in the interest of all the people of the State. Banks may be incorporated only by general laws, and they derive their powers from the State alone. If powers granted by the State to a bank might be curtailed by the city in which the bank does business or if powers withheld by the State might be conferred upon banks by the city, the control of banking by the State would no longer be plenary.

New Rochelle Trust Co. v. White, 283 N.Y. 223, 230, 28 N.E.2d 387, 389 (1940) (emphasis added). Local Law 36 is preempted because, in imposing penalties on banks for lawful conduct, it curtails powers of banks that are granted by State law.

Finally, the New York Banking Law’s policy of uniform regulation of banks by the Banking Department is further evidence of the State’s intent to preempt regulation of the banking field by municipalities. Section 10 of the Banking Law states:

It is hereby declared to be the policy of the State of New York that the business of all banking organizations shall be supervised and regulated through the banking department in such manner as to insure the safe and sound conduct of such business, to conserve their assets, to prevent hoarding of money, to eliminate unsound and destructive competition among such banking organizations and thus to maintain public confidence in such business and protect the public interest and the interests of depositors, creditors, shareholders and stockholders.

Under the rule in Albany Area Builders, the Legislature’s declaration of its policies and the comprehensive regulatory scheme adopted for banking associations is sufficient to preempt municipal regulation of banks. Because New York State has occupied the field of banking, Local Law 36 is preempted as it applies to banks and savings associations.

C. Local Law 36 Is Inconsistent With the New York Banking Law.

Even if this Court were to find that the Legislature did not preempt the fields of home mortgage lending and banking, Local Law 36 would be preempted because it is inconsistent with Chapter 626 of the Laws of 2002, codified as Section 6-l of the New York Banking Law. Inconsistency has been found where local laws prohibit acts that are otherwise permissible under State law or “where the local law imposes prerequisite additional restrictions on rights under State law, so as to inhibit the operation of the State’s general laws.” New York State Club Ass’n, 69 N.Y.2d at 217, 513 N.Y.S.2d at 351, 505 N.E.2d at 917 (emphasis added). In these cases, courts recognize that, by drawing a line, the legislature evidences a policy judgment both as to what should be impermissible and, implicitly, as to what should continue to be permitted.

Here, Local Law 36 is more stringent than the New York Banking Law in that it imposes penalties based on loans that are permitted by the State. Three examples serve to demonstrate the point:

· High-Cost Loan Thresholds. The New York Banking Law and Local Law 36 create two alternative thresholds that, if met or exceeded, classify a home loan as a “high-cost home loan.” However, Local Law 36 sets lower thresholds. Therefore, more loans will be subject to Local Law 36 than the New York Banking Law.

· Purchasers of Home Loans. The New York Banking Law only applies to mortgage bankers and other banking institutions operating in New York. Local Law 36 applies to a variety of additional entities, including any entity that “purchases or invests, directly or indirectly, including through collective investment or securitization entities, one or more home loans.” Local Law 36 will therefore apply to more entities than the New York Banking Law.

· Counseling. The New York Banking Law requires that lenders making high-cost loans recommend that borrowers receive counseling and provide a list of approved counselors. Local Law 36 goes further and requires a written certification from an independent housing or credit counselor that a borrower has been counseled or has waived that right.

The New York State Legislature considered a version of its predatory lending law that would have been more stringent, but ultimately decided that a broader prohibition would have a harmful effect on residential mortgage lending in the State.[5] Now the City Council seeks to undermine the Legislature’s intent through an ordinance that exacts a penalty for loans that the State expressly determined should be available to borrowers. The City Council’s actions “inhibit the operation of the State’s general laws” by “prohibit[ing] what would have been permissible.” New York State Club Ass’n, 69 N.Y.2d at 217, 513 N.Y.S.2d at 351, 505 N.E.2d at 917.[6] Accordingly, Local Law 36 is inconsistent with the New York Banking Law and is preempted.

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Defendants may argue that the New York Legislature’s consideration of an express preemption provision that was never adopted could somehow save Local Law 36. The law is clear, however, that such a negative inference is inappropriate. The United States Supreme Court addressed exactly this argument in Crosby v. National Foreign Trade Council, 530 U.S. 363 (2000). In that case, the state argued “that the failure of Congress to preempt the

state Act demonstrates implicit permission,” and “that Congress was aware of the state Act in 1996, but did not preempt it explicitly when it adopted its own” statute. Id. at 386-87. This argument was rejected in language equally applicable here:

The argument is unconvincing on more than one level. A failure to provide for preemption expressly may reflect nothing more than the settled character of implied preemption doctrine that courts will dependably apply, and in any event, the existence of conflict cognizable under the Supremacy Clause does not depend on express congressional recognition that federal and state law may conflict, Hines [v. Davidowitz, 312 U.S. 52, 67 (1941)]. The State’s inference of congressional intent is unwarranted here, therefore, simply because the silence of Congress is ambiguous.

530 U.S. at 387-88. Likewise here, the longstanding preemption of local banking regulation by State law obviated any need for express preemption language.

III. FEDERAL LAW PREEMPTS LOCAL LAW 36.

The supremacy of federal law over state and local law is a cornerstone of our Constitutional system. The United States Supreme Court has identified three ways in which Congress can express its intent to displace laws of subordinate jurisdictions. Congress can preempt a state or local law by (1) express language in a statute, (2) regulating the field, leaving no room for states or localities to adopt supplemental laws, or (3) adopting a statute that is in “irreconcilable conflict” with state or local law. Rice v. Norman Williams Co., 458 U.S. 654, 659 (1982); Jones v. Rath Packing Co., 430 U.S. 419, 525, 530-31 (1977); Rice v. Santa Fe Elevator Corp., 331 U.S. 218, 230 (1947). Irreconcilable conflict will be found when the state or local law stands “as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.” Hines, 312 U.S. at 67; see also Barnett Bank of Marion County v. Nelson, 517 U.S. 25, 31 (1996).

A. 12 U.S.C. § 371 Preempts Local Law 36 as It Applies to National Banks.

In 1864, Congress enacted the National Bank Act in the midst of the Civil War in order to provide for a strong national banking system that would be immune from state regulation that had previously restricted national banking. See Marquette Nat’l Bank v. Omaha Service Corp., 439 U.S. 299, 313-15 (1978). To do so, the National Bank Act created national banks that were empowered to engage in various banking activities without state interference. Since 1864, Congress has continued to provide that national banks may engage in such activity subject only to certain home-state and regulatory limits.

Section 371 of Title 12 of the U.S. Code (which originated as Section 24 of the Federal Reserve Act) is one such statute. Section 371 provides that any national bank wherever located may “make, arrange, purchase or sell loans or extensions of credit secured by liens on interests in real estate, subject to section 1828(o) of this title and such restrictions and requirements as the Comptroller of the Currency may prescribe by regulation or order.” Local Law 36 is in irreconcilable conflict with Section 371 and the related OCC regulations and is therefore preempted.

1. Local Law 36 Impermissibly Limits National Banks’
Mortgage Lending Authority.

When Congress gave national banks plenary authority to engage in home mortgage lending under Section 371, subject only to OCC regulation, it did not intend for state or local law to impair this authority.

In a virtually identical situation, the U.S. Supreme Court held that a federal statute governing national banks left no room for state or local regulation. In Barnett Bank of Marion County, the Court was faced with the question of whether the authority provided in 12 U.S.C. § 92 — that certain national banks may, subject to OCC regulations, act as the agent for insurance companies — precluded a state statute requiring national banks to receive state permission before acting as an insurance company’s agent. The Court concluded that Section 92 preempted the state law because Section 92 expressly granted a national bank “authorization, permission, or power,” and did not indicate “that Congress intended to subject that power to local restriction.” 517 U.S. at 32-35. The Court noted that:

In defining the pre-emptive scope of statutes and regulations granting a power to national banks, [our decisions] take the view that normally Congress would not want States to forbid, or to impair significantly, the exercise of a power that Congress explicitly granted.

Id. at 33. As a result, the state licensing law stood in irreconcilable conflict with Section 92.

The same analysis is applicable here. Section 371 authorizes and empowers national banks to provide mortgage loans in the same fashion as Section 92 empowers national banks to act as the agent for insurance companies. Local Law 36, which prohibits whole categories of mortgage loans, “impair[s] significantly” the power of national banks to extend mortgage loans and is thus preempted just as the law in Barnett Bank.

Indeed, a fundamental purpose of Section 371 is “to provide national banks with the ability to engage in more creative and flexible financing, and to become stronger participants in the home financing market.” S. Rep. No. 97-536, at 27 (1982), reprinted in 1982 U.S.C.C.A.N. 3054, 3081. As a result, the statute provides national banks with the authority to operate their mortgage lending business free from “rigid statutory limitations.” Id. Local Law 36 presents the type of “rigid statutory limitations” that Section 371 sought to prevent.

In similar contexts, the Supreme Court has found far less significant impairments of national bank authority than Local Law 36 to be preempted. For example, in Franklin National Bank v. New York, 347 U.S. 373 (1954), the Court considered a New York law prohibiting banks from using the word “savings” in their advertising materials. The Court determined that the state law stood as an obstacle to the national bank’s authority to receive deposits because it would preclude the national bank from advertising their authorized business. 347 U.S. at 377-78. Here, Local Law 36 does not merely limit the ability of national banks to advertise a business that Congress has permitted — instead, it purports to limit the business itself.

Similarly, in First National Bank v. California, 262 U.S. 366 (1923), the Supreme Court considered the application of a California escheat law to national banks. The law at issue provided for the escheat to the State of deposits after they remained intact and unclaimed for more than twenty years. In considering whether the law was preempted, the Court found that the escheat statute conflicted with the Congressional objective by impairing the efficiency of national banks accepting deposits and exposing national banks to varying limitations:

If California may thus interfere, other States may do likewise; and, instead of twenty years, varying limitations may be prescribed – three years perhaps, or five, or ten, or fifteen. We cannot conclude that Congress intended to permit such results. They seem incompatible with the purpose to establish a system of governmental agencies specifically empowered and expected freely to accept deposits from customers irrespective of domicile with the commonly consequent duties and liabilities.

Id. at 369-70.

Local Law 36 suffers from the same faults as California’s escheat law. It “qualifies” the ability of national banks to conduct mortgage-lending business, by penalizing certain types of mortgage loans that national banks have been given the authority to provide pursuant to Section 371. “A limitation on these powers clearly impedes its ability to function and stands as an obstacle to the objective of the National Banking Act.” Idaho v. Sec. Pac. Bank, 800 F. Supp. 922, 926 (D. Idaho 1992).[7]

The OCC has specifically addressed by regulation the extent to which Section 371 will preempt state and local law. First, the OCC has designated a list of five areas in which preemption is absolute. See Section I.A.2, infra. Second, the OCC has affirmed that it “will apply recognized principles of Federal preemption in considering whether State laws apply to other aspects of real estate lending by national banks.” 12 C.F.R. § 34.4(b). Applying these principles, the OCC has held that Section 371 preempts state laws limiting mortgage lending outside a national bank’s home office,[8] and state licensing requirements for lender’s making secondary mortgages.[9] There is no reason to treat Local Law 36 differently.

2. OCC Regulations Expressly Preempt Parts of Local Law 36.

It is well established that federal regulation promulgated by administrative agencies pursuant to statutory authority can preempt a state or local law. “Federal regulations have no less pre‑emptive effect than federal statutes.” Fid. Fed. Sav. & Loan Ass’n, 458 U.S. at 153-54 (citing United States v. Shimer, 367 U.S. 374, 381‑82 (1961)). Even if this Court were to conclude that Section 371 does not generally preempt Local Law 36, Part 34 of the OCC’s regulations enacted pursuant to Section 371 and governing real estate lending by national banks, specifically preempts Local Law 36 in several important respects.

First, 12 C.F.R. § 34.4(a) designates five areas of state mortgage regulation that are unconditionally preempted:

A national bank may make real estate loans under 12 U.S.C. § 371 . . . without regard to State law limitations concerning: (1) the amount of a loan in relation to the appraised value of the real estate; (2) the schedule for the repayment of principal and interest; (3) the term to maturity of the loan; (4) the aggregate amount of funds that may be loaned upon the security of real estate; and (5) the covenants and restrictions that must be contained in a lease to qualify the leasehold as acceptable security for a real estate loan.

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By threatening to debar national banks for making mortgage loans with various provisions relating to “the schedule for the repayment of principal or interest,” the provisions of Local Law 36 directly interfere with Section 34.4(a). There are at least four such provisions. Local Law 36 applies to (1) loans where “more than two periodic payments are consolidated and paid in advance,” (2) loans where “[t]he payment schedule . . . requires regular periodic payments that cause the principal balance to increase,” (3) loans where “default by the borrower triggers an interest rate increase,” and (4) loans that have balloon payments. Section 34.4(a) clearly preempts these provisions.[10]

Local Law 36 also contains at least one provision that purports to apply to “the term to maturity” of high-cost home loans. This provision applies to a loan provision that would enable the lender to “accelerate the indebtedness and demand repayment of the entire outstanding balance of the loan.” Again, Section 34.4(a) of the OCC’s regulations preempts this restriction.

Second, 12 C.F.R. § 34.21 states that a “national bank and its subsidiaries may . . . deal in [adjustable rate mortgage] loans and interest therein without regard to any State law limitations on those activities.” (Emphasis added.) This language expressly preempts any state law that limits the ability of national banks to make adjustable rate mortgage loans. The preemptive effect of this provision has been upheld in both federal court, see Conference of State Bank Supervisors v. Conover, 710 F.2d 878 (D.C. Cir. 1983), and several OCC Interpretive Letters,[11] and it clearly preempts application of Local Law 36 to any adjustable rate mortgage loans made by national banks.

Third, 12 C.F.R. § 7.4002 permits every national bank to impose “non-interest charges and fees” determined in the bank’s “discretion, according to sound banking judgment and safe and sound banking principles.” To the extent that Local Law 36 purports to regulate non-interest charges in connection with home mortgage loans, such as appraisal fees, premiums attributable to insurances, finders’ fees, fees for document preparation or fees for credit reports, it is preempted by Section 7.4002. See Bank of Am. v. City & County of San Francisco, 309 F.3d 551, 563 (9th Cir. 2002).

B. Out-of-State Banks’ Authority To Charge Home-State Interest Rates
Preempts Local Law 36.

Section 30 of the National Bank Act, 12 U.S.C. § 85, authorizes national banks to charge interest at a rate up to the rate allowed by the laws of the bank’s home state. Similarly, 12 U.S.C. § 1831(d) empowers out-of-state state-chartered banks. It is well established that state and local laws that conflict with this authority, such as Local Law 36, are preempted.

Section 85 provides that a national bank “may take, receive, reserve, and charge on any loan or [other lending device], interest at the rate allowed by the laws of the State, Territory, or District where the bank is located . . . .” In Marquette National Bank, the Supreme Court held that the “plain language” of Section 85 empowers an out-of-state national bank to charge interest “on any loan” at the rate “allowed” by its home state without regard to local law limits on interest rates. In reaching its conclusion, the Court dismissed the argument that the “exportation” of interest rates by national banks would “significantly impair the ability of States to enact effective usury laws.” 439 U.S. at 313; see also Smiley v. Citibank (S.D.), N.A., 517 U.S. 735, 737 (1996) (“a national bank [may] charge out-of-state credit-card customers an interest rate allowed by the bank’s home State, even when that rate is higher than what is permitted by the States in which the cardholders reside”). Section 1831(d) was enacted to “prevent discrimination against State-chartered insured depository institutions” and similarly also them to charge interest “at the rate allowed by the laws of the State . . . where the bank is located.”

Local Law 36 directly conflicts with Section 85 and Section 1831(d) insofar as it applies to out-of-state banks. Such a bank could be debarred unless it limited its rates on mortgage loans to those decreed by Local Law 36 — irrespective of the level of interest rates permitted by its home state. Thus, the effect of Local Law 36 is equivalent to a specific usury limit on the categories of loans covered, and Local Law 36 is accordingly preempted as it applies to out-of-state banks.

C. The Home Owners Loan Act Preempts Local Law 36 as It Applies To
Federal Savings & Loans Associations.

Section 5(a) of the Home Owners Loan Act (“HOLA”), 12 U.S.C. § 1464(a), gives the Office of Thrift Supervision (“OTS”) plenary authority to regulate the lending of federally chartered savings associations, authorizing the OTS to “provide for the organization, incorporation, examination, operation, and regulation of . . . Federal savings associations, . . . giving primary consideration to the best practices of thrift institutions in the United States” and to “issue such regulations as [it] determines to be appropriate to carry out [its] responsibilities.” The OTS has expressly occupied the entire field of lending regulation for federal savings associations, and thus preempted Local Law 36.

The OTS has expressly occupied the field of regulating lending by federal savings associations:

To enhance safety and soundness and to enable federal savings associations to conduct their operations in accordance with best practices (by efficiently delivering low‑cost credit to the public free from undue regulatory duplication and burden), OTS hereby occupies the entire field of lending regulation for federal savings associations. OTS intends to give federal savings associations maximum flexibility to exercise their lending powers in accordance with a uniform federal scheme of regulation. Accordingly, federal savings associations may extend credit as authorized under federal law, including this part, without regard to state laws purporting to regulate or otherwise affect their credit activities.

12 C.F.R. § 560.2(a) (emphasis added). This regulation renders the OTS’s intent to preempt laws such as Local 36 wholly unambiguous, and thus preempts Local Law 36 as applied to federal savings associations. See Fid. Fed. Sav. & Loan Ass’n, 458 U.S. at 153-54.

In any event, the breadth of Section 5(a) and regulations enacted thereunder leave no doubt that federal law has occupied this field. As the Supreme Court held in Fidelity Federal Savings & Loan Association, “[t]he broad language of § 5(a) expresses no limits on the [OTS’s] authority to regulate the lending practices of federal savings and loans.” 458 U.S. at 166. Other federal courts have similarly concluded that the OTS occupies the field because it “is authorized to prescribe rules and regulations governing virtually every aspect of a federal savings and loan association.” Bleecker Assocs. v. Astoria Federal Savings & Loan Ass’n, 544 F. Supp. 794, 795, n.2 (S.D.N.Y. 1982); accord, e.g., Conference of Fed. Sav. & Loan Ass’ns v. Stein, 604 F.2d 1256, 1260 (9th Cir. 1979) (“[T]he regulatory control of the [OTS] over the federal savings and loans associations is so pervasive as to leave no room for state regulatory control.”), aff’d, 445 U.S. 924 (1980); Am. Bankers Ass’n v. Lockyer, 239 F. Supp. 2d 1000 (E.D. Cal. 2002) (holding that the HOLA and its concurrent OTS regulations “occupy the field of lending-related practices of federal savings associations.”); Dime Savings Bank of New York, FSB v. New York, 174 A.D.2d 173, 175, 579 N.Y.S.2d 679, 681 (2d Dept. 1992).

In two recent opinions, the OTS affirmed that predatory lending laws adopted by the State of New York and the State of Georgia were preempted to the extent they applied to federal thrifts. See OTS Op. Chief Counsel (January 30, 2003) (attached as Tab H hereto) (finding the New York Predatory Lending law to be preempted); OTS Op. Chief Counsel (January 21, 2003) (attached as Tab I hereto) (finding the Georgia Fair Lending Act to be preempted). In each opinion, the OTS determined that the state laws “would thwart the . . . general congressional objective that OTS have exclusive responsibility for regulating the operations of federal savings associations.” OTS Op. Chief Counsel (January 30, 2003) (Tab H) at 4; OTS Op. Chief Counsel (January 21, 2003) (Tab I) at 3. The same is true of Local Law 36.

D. DIDMCA Preempts Local Law 36’s Provisions Limiting Interest Rates on Home Mortgage Loans.

The Depository Institutions Deregulation and Monetary Control Act of 1980 (“DIDMCA”) expressly provides that state laws limiting the amount of interest or other charges for any loan or mortgage secured by a lien on residential real property are preempted. 12 U.S.C. § 1735f-7a(a)(1).[12] DIDMCA permitted states to opt out of its preemption provisions during a three-year period ending on April 1, 1983. States could opt out only by adopting a law “which states explicitly and by its terms that such State does not want the provisions of subsection (a)(1) of this section to apply with respect to loans, mortgages, credit sales, and advances made in such State.” 12 U.S.C. § 1735f-7a(b)(2). New York, however, did not choose to adopt such a law and opt out.

Local Law 36 expressly limits the “rate or amount of interest, discount points [and] finance charges” that can be charged in connection with loans subject to DIDMCA. Accordingly, DIDMCA preempts Local Law 36 as it applies to these loans.

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E. Federal Law Preempts the Examination Powers That
Local Law 36 Grants to City Officials.

The Federal Reserve Act, 12 U.S.C. § 484, provides that no national bank may be subject to examination except as authorized under federal law. Pursuant to Section 484, the OCC has promulgated rules prohibiting state officials from reviewing or requiring the production of books and records of national banks, “or prosecuting enforcement actions, except in limited circumstances authorized by federal law.” 12 C.F.R. § 7.4000(a). Similarly, it is well established that HOLA’s broad grant of authority provides the OTS with exclusive authority to monitor and examine federal savings associations. See, e.g., OTS Op. Chief Counsel (January 18, 1996) (attached as Tab J hereto); Conference of Fed. Sav. & Loan Ass’ns, 604 F.2d at 1260.

The enforcement provision of Local Law 36, which authorizes New York City officials to “conduct an investigation . . . to determine whether a [national bank] or any of its affiliates is a predatory lender,” are clearly within these visitation powers. As such, they are preempted by Section 484. See Wells Fargo, Bank, N.A. v. Boutris, 2003 WL 1220131, at *8 (E.D. Cal. Mar. 10, 2003) (attached as Tab K hereto) (enjoining California Residential Mortgage Lending Act because the OCC has exclusive visitorial powers pursuant to the National Bank Act).

conclusion

Local Law 36 is preempted by multiple state and federal laws and regulations. Plaintiffs’ motion for a preliminary injunction should be granted, and Local Law 36 stayed.

Respectfully submitted,

____________________________

SULLIVAN & CROMWELL LLP

Marc De Leeuw

Marc R. Trevino

Dara A. Govan

125 Broad Street

New York, NY 10004-2498

(212) 558-4000

Attorneys for The New York

Bankers Association

[1] See, e.g., Nat’l Foreign Trade Council v. Natsios, 181 F.3d 38 (1st Cir. 1999) (Massachusetts statute debarring companies doing business with Burma from participating in any state contracts subject to preemption), aff’d sub nom. Crosby v. Nat’l Foreign Trade Council, 530 U.S. 363 (2000); Dillingham Constr. N.A. Inc. v. County of Sonoma, 190 F.3d 1034 (9th Cir. 1999) (apprentice prevailing wage law in all public works contracts with California agencies constituted regulation subject to preemption); Chamber of Commerce v. Reich, 74 F.3d 1322 (D.C. Cir. 1996) (executive order forbidding federal contractors from procuring goods and services from companies that hired permanent replacements for workers on strike subject to preemption); Air Transp. Ass’n v. City and County of San Francisco, 992 F. Supp. 1149 (N.D. Cal. 1998) (municipal ordinance debarring companies from participating in city contracts unless they provided employee benefits to domestic partners constituted regulation subject to preemption).

[2] See Bldg.& Constr. Trades Council of the Metro. Dist. v. Associated Builders & Contractors of Mass./R.I., Inc., 507 U.S. 218 (1993) (state water authority did not act as a regulator by requiring unions involved in one project — the court-ordered clean-up of the Boston Harbor — to use certain labor dispute resolution procedures designed to ensure that the clean-up was completed within deadlines set by the court); Sprint Spectrum, L.P. v. Mills, 283 F.3d 404 (2d Cir. 2002) (school district did not act as a regulator by seeking to enforce terms in a lease for a cellular transmission tower to be placed on the roof of one school building).

[3] See also N.Y. Banking Law §§ 6‑c & 6‑d (loan application requirements), § 6‑e (graduated payment mortgages), § 6‑f (alternative mortgage instruments), § 6‑g (override of certain provisions of United States Public Law 97-320), § 6‑h (reverse mortgage loans), § 6‑j (proof of insurance), § 6‑k (real property insurance escrow accounts), § 9‑f (geographic discrimination prohibition in the making of mortgage loans); N.Y. Comp. Codes R. & Regs. tit. 3, Part 79 (reverse mortgage loans), Part 80 (junior lien mortgage loans), Part 82 (alternative mortgage instruments), Part 84 (certain mortgage loan requirements). Particularly relevant to this motion, New York State recently has enacted legislation to regulate predatory lending practices (Section 6-l of the Banking Law), and the New York Banking Board also has adopted regulations addressing predatory lending. See Section I.C, infra.

[4] See also New York State Club Ass’n v. City of New York, 69 N.Y.2d 211, 217, 513 N.Y.S.2d 349, 351, 505 N.E.2d 915, 917 (1987) (citing Con Edison, 60 N.Y.2d 99, 108, 468 N.Y.S.2d 596, 600 (1983) and quoting F.T.B. Realty Corp. v. Goodman, 300 N.Y. 140, 147-48 (1949)), aff’d on other grounds, 487 U.S. 1 (1988); Bracker v. Cohen, N.Y.S.2d 113, 115, 204 A.D.2d 115, 116, 612 (1st Dep’t 1994).

[5] Before adopting bill A.11856, which became Section 6-l of the New York Banking Law, the New York State Legislature contemplated adopting bill A.7828-A, a more stringent predatory lending regulation. A.7828-A was similar to Local Law 36 in a number of ways, including that it too set lower high-cost home loan thresholds and required a written certification from an approved counselor that a borrower had been counseled. Bill A.11856, however, was ultimately adopted.

[6] The history also indicates that New York Legislature considered whether predatory lending was a “New York City problem” and concluded that it was not. Governor’s Bill Jacket, L.2002, C.626.

[7] Local Law 36 also undermines the determination of the OCC that decisions concerning the forms and terms of national bank real estate lending are “properly the responsibility of each bank’s directorate and management.” See Real Estate Lending by National Banks, 48 Fed. Reg. 40,698, 40,699 (September 9, 1983).

[8] OCC Unpublished Interpretive Letter from Wallace S. Nathan, District Counsel (January 13, 1987) (attached as Tab B hereto) (“This Office has taken the position that any state statute which attempts to proscribe the real estate lending activities of national banks is preempted by [Section 371].”)

[9] OCC Unpublished Interpretive Letter from Jonathan L. Levin, Senior Attorney, Legal Advisory Services Division (July 19, 1985) (attached as Tab C hereto).

[10] The OCC has specifically determined that balloon payment restrictions “embody the type of limitations intended to be preempted by [Section 371] and need not be followed by national banks.” OCC Unpublished Interpretive Letter from Charles F. Byrd, Assistant Director, Legal Advisory Services Division (August 24, 1987) (attached as Tab D hereto).

[11] OCC Unpublished Interpretive Letter from Peter Liebesman, Assistant Director, Legal Advisory Services Division (October 7, 1986) (attached as Tab E hereto); OCC Unpublished Interpretive Letter from William B. Glidden, Assistant Director, Legal Advisory Services Division (June 6, 1985) (attached as Tab F hereto); OCC Unpublished Interpretive Letter from Peter Liebesman, Assistant Director, Legal Advisory Services Division (December 8, 1983) (attached as Tab G hereto).

[12] DIDCMA’s restrictions apply to loans that are “federally related.” Because the definition of that phrase is so broad — including any loan by a federally insured or regulated lender and any lender that makes more than $1,000,000 in residential mortgage loans per year, see 12 U.S.C. § 1735f-5(b)(1)-(2)(D) — DIDMCA applies to the vast majority of home mortgage loans.