In July 2003, Mitchell Weiss and others borrowed approximately $5.2 million at 5.33 percent interest on a 10-year promissory note from Washington Mutual Bank. The loan was secured by Los Angeles and Beverly Hills buildings.

Before signing the loan documents, Weiss read the prepayment penalty and concluded it was about 2 percent of the amount borrowed. He decided that was acceptable and went ahead with signing the paperwork.

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However, when Weiss paid off the loans in October and November 2004, Washington Mutual charged prepayment penalties and fees of approximately 10 percent of the loan balances. In January 2005, Weiss sued Washington Mutual and its loan officer in state court for fraud, unlawful restraint on alienation of real property, unfair and deceptive business practices, and unjust enrichment.

Washington Mutual and the loan officer answered the complaint, explaining Weiss read the loan documents and agreed to them. Furthermore, the Washington Mutual lawyer emphasized, Weiss’ allegations are preempted by federal law, specifically the Home Owners’ Loan Act (HOLA), which is administered by the federal Office of Thrift Supervision (OTS).

If you were the judge would you rule Weiss’ allegations are preempted by federal rather than state law?

The judge said yes!

Loans made by federally chartered institutions, such as Washington Mutual, are governed by federal law, the judge began. Congress has delegated supervision of these institutions and the loans they originate to the Office of Thrift Supervision, he continued.

Although Weiss’ lawsuit was partially based on allegations of fraud, the judge explained, federal law preempts the entire case. Therefore, the complaint is preempted by federal law and the lawsuit in state court is dismissed, the judge ruled.

Based on the 2007 California Court of Appeal decision in Weiss v. Washington Mutual Bank, 53 Cal.Rptr.3d 782.

(For more information on Bob Bruss publications, visit his
Real Estate Center

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