Foreclosure: Is A National Bank Authorized to Foreclose Non-Judicially In Arkansas?

JPMorgan Chase Bank, N.A. v. Johnson, 719 F.3d 1010 (8th Cir. 2013) –

The 8th Circuit considered the issue of whether a national bank is “authorized to do business” in Arkansas, as required by a state statute in order to proceed with a non-judicial foreclosure, in connection with a consolidation of three bankruptcy cases that were appealed to the district court, another case that was removed from state court to the district court, and a fifth class action case.

As background, the Arkansas legislature amended its non-judicial foreclosure statute to provide that no one can “avail themselves of the procedures under this chapter unless authorized to do business in this state.”  This legislation was adopted in response to what was perceived as an emergency as explained in the findings that:

foreign entities not authorized to do business in the state of Arkansas are availing themselves to [sic] the provisions of the Statutory Foreclosure Act of 1987; that often times is to the detriment of Arkansas citizens; and that this act is immediately necessary because the entities should be authorized to do business in the state of Arkansas before being able to use the Statutory Foreclosure Act of 1987.

The parties had stipulated that the national bank in question (JPMorgan) was neither registered with the Arkansas Secretary of State as an entity authorized to conduct business in Arkansas, nor registered with the Arkansas Bank Department as an out-of-state bank doing business in Arkansas.

In the three bankruptcy cases, debtors contended that the fees and costs of JP Morgan incurred in connection with non-judicial foreclosures were not authorized and should not be allowed as part of its claims.  The bankruptcy court agreed with the debtors, and JPMorgan appealed to the district court.

In a fourth case, after the borrowers obtained a temporary restraining order in state court enjoining foreclosure by JPMorgan, JPMorgan removed the case to federal court.  The fifth case involved a plaintiff seeking damages and restitution on behalf of a class of persons subject to non-judicial foreclosure by JPMorgan, arguing among other things that unauthorized use of the foreclosure procedures violated the Arkansas Deceptive Trade Practices Act.

The district court reversed the bankruptcy court decisions, granted JPMorgan a judgment in the removed case, and dismissed the class action case.

On appeal, the 8th Circuit analyzed the issue as (1) whether an entity seeking to use the foreclosure procedures must be “authorized to do business” using state registration procedures, or whether federal law would suffice, and (2) if authorization under federal law was permitted, whether the National Bank Act provided the necessary authorization.  The court viewed this as a question of Arkansas law that had not yet been decided, so that it was required to predict what the Arkansas Supreme Court would do.

The court began its analysis with the question of whether the statute was ambiguous – meaning either that there are two or more constructions or that reasonable minds could disagree or be uncertain as to the meaning.  “[W]e initially observe the statute means exactly what it says – an entity must be ‘authorized to do business’ in Arkansas to avail itself of the SFA.”  However, the statute neither required that a bank register with a state entity nor acknowledged that federal law could be a basis for authorization – thus leaving reasonable minds to speculate.

As its next step, the court considered state statutes relating to the same subject, using the rule of construction that these statutes should be read in a harmonious way if possible.  Its consideration included a provision on who may serve as a trustee in a non-judicial proceeding (which allowed banks authorized to do business under both Arkansas and federal law), the Wingo Act (which allowed a foreign corporation to become authorized to do business by obtaining a certificate of authority from the secretary of state), and the Branching Act (which required an out-of-state bank to file an application with the Arkansas Bank Commissioner to open a branch in Arkansas).

Based on this review the court concluded that (1) it did not make sense to allow a national bank to be a trustee in a non-judicial foreclosure, but not allow it to conduct a foreclosure itself, and (2) when the state legislature wanted to require state registration, it said so.  Consequently, state registration was not required in order to be “authorized to do business.”

The 8th Circuit next considered whether the National Bank Act (NBA) was sufficient to constitute an authorization to do business in Arkansas.  First, the NBA authorized JPMorgan to conduct the business of banking in Arkansas.

Next, in response to the argument that this only allows a bank to judicially foreclose, the court reviewed the powers granted under the NBA.  Given that mortgage lending is one of the enumerated powers under the NBA, and the act also authorizes “incidental powers,” the court concluded that it was clear that the NBA grants a national bank the power to foreclose under state law.  The power to make real estate loans would be a “nullity” if national banks could not foreclose when a borrower defaulted.

Consequently, the 8th Circuit affirmed the district court decision that JPMorgan was authorized to do business in Arkansas, and thus could use non-judicial foreclosure procedures.

It is interesting to see that it was not a foregone conclusion that a national bank could use the state’s non-judicial foreclosure procedures.  It is worth keeping in mind that there may be differences in the powers and restrictions applicable to state as opposed to federally chartered financial institutions.

Vicki R. Harding, Esq.

About BankruptcyRealEstateInsights

Vicki R. Harding was a partner in the Detroit office of Pepper Hamilton LLP who moved to Arizona seeking warmer weather. Ms. Harding continues to handle commercial transactions with an emphasis on real estate and bankruptcy issues (but no longer owns a snow shovel).
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