Henry Meier, The Law Office of Henry C. Meier, Esq.
Judge Virginia M. Kendall of the federal district court in Illinois heard arguments on Oct. 22 on a motion for summary judgment in a case that could establish important precedent about the scope of federal preemption afforded to federally chartered credit unions. See Ill. Bankers Ass’n v. Raoul.
Last year, Illinois passed the Illinois Interchange Fee Prohibition Act (IFPA). The law mandated that banks and credit unions reimburse merchants for the portion of interchange fees made up of state and local taxes and tips. The law was originally slated to take effect in July of 2025; however, the Illinois legislature pushed the compliance date back a year.
In Ill. Bankers Ass’n v. Raoul, banks and credit unions filed a joint motion seeking to block Illinois from enforcing the law against federally chartered institutions. Earlier this year, the trial court granted the motion for banks but held that federally chartered credit unions were not exempt from the law. This ruling established a potentially important precedent limiting the ability of credit unions to argue that they are exempt from state laws that interfere with the federal credit union charter.
The Oct. 22 hearing involved a motion for summary judgment giving credit unions the opportunity to effectively ask the judge to reverse her earlier ruling. Although most of the two hours of argument did not address credit union preemption, the attorney for the banks and credit unions underscored the importance of the case by noting that the industry was advancing an untested argument. Specifically, credit unions are arguing that as federal instrumentalities they have the same preemption protections as afforded to national banks.
The plaintiff’s filing concluded, “As the more developed—and undisputed—record shows, absent this relief, the IFPA would continue to indirectly (and improperly) restrict federally protected institutions in ways the Court has already determined the State cannot do directly.”
This argument has never been addressed in any other decision, and the judge’s analysis would be instructive for other courts examining preemption issues going forward. This argument is being made precisely as bank preemption more generally is getting much attention.
As a practical matter, expert witness, Anthony (Tony) Hayes concluded in his written statement, “If one financial institution associated with a transaction has injunctive relief from the IFPA, then, by extension, all entities involved in the processing of the same transaction also need relief from the requirements of the IFPA, at least for purposes of that transaction. Interchange flows from one side of a network (the acquiring side) to the other side of a network (the issuing side) on a dollar-for-dollar basis.”
The Dodd-Frank Act instructed the courts that determinations related to bank preemption should be made in accordance with the Court’s holding in Barnett Bank of Marion County N.A. v. Nelson. In last year’s term, the Supreme Court interpreted this provision as requiring courts to take a nuanced view of bank preemption issues based on the cases relied upon by the Court in Barnett Bank (Contero v. Bank of America).
This means that courts should not assume that certain laws are categorically preempted because they affect bank powers. For example, recently, the Court of Appeals for the First Circuit held that federally chartered banks were subject to state laws mandating that they pay borrowers a minimum amount of interest on mortgage escrow accounts (Conti v. Citizens Bank).
Ben Jackson, EVP, Illinois Bankers Association and Ashley Sharp, SVP, Illinois Credit Union League, wrote in a joint statement prior to the hearing, “Our legal arguments underscore the urgent need to protect all participants in Illinois’s payment ecosystem—including community banks and credit unions and the customers they serve—from the unintended consequences of the Illinois Fee Prohibition Act. We’re confident in the strength of our case and appreciate the court’s thoughtful consideration of both the facts and the law.”