Fenno v. Mountain West Bank

August 4 2008

DA 07-0439

IN THE SUPREME COURT OF THE STATE OF MONTANA

2008 MT 267

DANIEL FENNO,

Plaintiff and Appellant,

MOUNTAIN WEST BANK,

Defendant and Appellee.

APPEAL FROM: District Court of the First Judicial District,
In and For the County of Lewis and Clark, Cause No. ADV 2007-87
Honorable Dorothy McCarter, Presiding Judge

COUNSEL OF RECORD:

For Appellant:

Michael J. San Souci, Attorney at Law, Bozeman, Montana

For Appellee:

Frederick F. Sherwood, Reynolds, Motl & Sherwood, Helena, Montana

Submitted on Briefs: May 21, 2008

Decided: August 4, 2008

Filed:

__________________________________________
Clerk

Justice Brian Morris delivered the Opinion of the Court.
¶1 Daniel Fenno (Fenno) appeals from an order of the First Judicial District Court, Lewis

and Clark County, granting Mountain West Bank’s (Mountain West) motion for summary

judgment. We reverse and remand.

¶2 Fenno presents the following issues for review:

¶3 Whether the District Court properly concluded that federal law preempted Fenno’s

state wrongful discharge claim.

¶4 Whether the District Court properly determined that Fenno qualified as a bank officer

for purposes of the National Banking Act’s (the National Act) “at pleasure” provision.

PROCEDURAL AND FACTUAL BACKGROUND

¶5 Mountain West is a nationally chartered bank. Mountain West employed Fenno as an

internal audit officer responsible for reviewing policies and procedures. Fenno also served

as secretary of two Mountain West Bank branch’s boards of directors. Fenno discovered

what he believed to be a potential irregularity in a Mountain West loan transaction in June

2005. Fenno believed that the irregular loan transaction may have involved misconduct by a

Mountain West executive.

¶6 Fenno reported the irregularity to Mountain West management. Fenno also informed

Mountain West management that he intended to report the irregularity to the bank’s audit

committee. Fenno reported the irregularity to the audit committee and the bank’s executive

committee. Fenno alleged that his reporting of the irregularity prompted Mountain West to

begin stripping Fenno of his duties and responsibilities. Mountain West removed Fenno

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from the two boards of directors and reduced his salary. Mountain West suspended Fenno

completely in August 2006. Mountain West finally terminated Fenno in September 2006.

¶7 Fenno sued Mountain West under the Montana Wrongful Discharge from

Employment Act (WDEA). Sections 39-2-901, et seq., MCA. Fenno alleged that Mountain

West had discharged him in retaliation for Fenno’s having reported a potential violation of

public policy. Fenno sought both actual and punitive damages. Mountain West moved to

dismiss, or, in the alternative, for summary judgment, on the grounds that federal law

preempted Fenno’s claim under the WDEA. Mountain West argued that Fenno’s claim fell

under the National Act’s “at pleasure” provision. 12 U.S.C. § 24 (Fifth). This provision

permits national banks to dismiss bank officers at their pleasure. 12 U.S.C. § 24 (Fifth).

¶8 The District Court considered both the “at pleasure” clause and 12 U.S.C. §

1831j(a)(1). Section 1831j(a)(1) protects national bank employees from discrimination in

retaliation for reporting possible bank misconduct to any federal banking agency or to the

U.S. Attorney General. The District Court analyzed these two statutes in conjunction with

the WDEA. The court determined that the more specific federal statutes conflicted with the

WDEA’s more general prohibition on termination in retaliation for an employee’s reporting

of a violation of public policy. This perceived conflict led the District Court to conclude that

the federal statutes preempted the WDEA and granted summary judgment to Mountain West.

Fenno appeals.

STANDARD OF REVIEW

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¶9 We review de novo a district court’s decision to grant summary judgment. Prosser v.

Kennedy Enterprises, Inc., 2008 MT 87, ¶ 10, 342 Mont. 209, ¶ 10, 179 P.3d 1178, ¶ 10. We

use the same criteria applied by the district court under M. R. Civ. P. 56. Prosser, ¶ 10.

Summary judgment is appropriate when “the pleadings, depositions, answers to

interrogatories, and admissions on file, together with the affidavits, if any, show that there is

no genuine issue as to any material fact and that the moving party is entitled to a judgment as

a matter of law.” M. R. Civ. P. 56(c). We draw all reasonable inferences in favor of the

party opposing summary judgment. Prosser, ¶ 10.

DISCUSSION

¶10 Whether the District Court properly concluded that federal law preempted Fenno’s

state wrongful discharge claim.

¶11 This Court recognizes three ways in which federal law may preempt state law. Vitullo

v. International Broth. of Elec., 2003 MT 219, ¶ 14, 317 Mont. 142, ¶ 14, 75 P.3d 1250, ¶ 14.

Congress may include a preemption clause in the federal statute that provides expressly that

state law will not apply in the area governed by the federal statute. Vitullo, ¶ 14; Favel v.

American Renovation and Const. Co., 2002 MT 266, ¶ 40, 312 Mont. 285, ¶ 40, 59 P.3d 412,

¶ 40. Federal law may supersede state law when the state law actually conflicts with the

federal law. This “conflict preemption” occurs either when one cannot comply with both

state and federal law, or when “‘the state law stands as an obstacle to the accomplishment

and execution of the full purposes and objectives of Congress.’” Favel, ¶ 40 (quoting

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Hillsborough County v. Automated Medical Labs, 471 U.S. 707, 713, 105 S. Ct. 2371, 2375

(1985)). Congress also may imply its intent to preempt state law in a particular area where

the regulation of the area is so comprehensive that it is reasonable to conclude that Congress

intended to “occupy the field” and to leave no room for supplementary state regulation.

Vitullo, ¶ 14; Favel, ¶ 40.

¶12 This Court starts with the presumption that the historic powers of the states “were not

to be superseded by the Federal Act unless that was the clear and manifest purpose of

Congress.” Vitullo, ¶ 15; Favel, ¶ 39 (both quoting Sleath v. West Mont Home Health

Services, 2000 MT 381, ¶ 23, 304 Mont. 1, ¶ 23, 16 P.3d 1042, ¶ 23). A party will overcome

the presumption against preemption only by “evidence of a clear and manifest intent of

Congress to preempt state law.” Favel, ¶ 39 (internal citations and quotation marks omitted).

National banks, such as Mountain West, remain generally subject to state laws, “unless those

laws infringe the national banking laws or impose an undue burden on the performance of

the banks’ functions.” Anderson Nat. Bank v. Luckett, 321 U.S. 233, 248, 34 S. Ct. 599, 607

(1944).

¶13 The District Court analogized from decisions of the Ninth Circuit Court of Appeals to

reach its conclusion that the federal statutes preempted Fenno’s WDEA claim. These federal

cases previously had interpreted state law in relation to the National Act’s “at pleasure”

provision and whistleblower provision. We first analyze these federal decisions to determine

their applicability to Fenno’s WDEA claim.

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¶14 The District Court relied particularly on Kroske v. U.S. Bank Corp., 432 F.3d 976 (9th

Cir. 2005, cert. denied, 127 S. Ct. 157 (2006)). The Ninth Circuit considered whether the

National Act’s “at pleasure” provision preempted the plaintiff’s state age discrimination

claim. Kroske, 432 F.3d at 980. The court determined that the National Act’s “at pleasure”

provision impliedly had been repealed to the extent necessary to effectuate the Age

Discrimination in Employment Act (ADEA). Kroske, 432 F.3d at 987. The court applied

the general conflict preemption rule to establish that the federal statutes did not conflict with

the state age discrimination statute. Kroske, 432 F.3d at 987-89. The court relied upon the

fact that the state statute “mirrors the substantive provisions of the ADEA and is interpreted

consistently with the ADEA.” Kroske, 432 F.3d at 987.

¶15 The District Court also relied upon the Ninth Circuit’s decision in Mackey v. Pioneer

Nat. Bank, 867 F.2d 520 (9th Cir. 1989). There a state bank officer alleged wrongful

discharge pursuant both to his employment contract and to state tort law. The bank fired

the officer after he had been accused of sexual harassment. Mackey, 867 F.2d at 522. The

court determined that the National Act’s “at pleasure” provision preempted the contract

claim as a matter of law. Mackey, 867 F.2d at 525. The court considered whether the

National Act also preempted the officer’s state law tort claim. Mackey, 867 F. 2d at 525-26.

The court cited its general disapproval of substituting tort for contract claims. Mackey, 861

F.2d at 526. The court further reasoned that “[t]he purpose of the provision in the [National

Act] was to give those institutions the greatest latitude possible to hire and fire their chief

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operating officers, in order to maintain the public trust.” Mackey, 867 F.2d at 526.

¶16 The District Court distinguished Kroske on the basis that the WDEA’s retaliatory

discharge provision did not mirror the substantive provisions of the federal whistleblower

statute. The District Court further noted that the federal statute identifies specific employee

actions for which a bank may not carry out a retaliatory discharge – reporting information

regarding a possible violation of federal law or regulation, or bank mismanagement. 12

U.S.C. § 1831j(a)(1). The District Court pointed out that the WDEA, by contrast, prohibits

termination generally if “it was in retaliation for the employee’s refusal to violate public

policy or for reporting a violation of public policy.” Section 39-2-904(1)(a), MCA. Thus,

the District Court interpreted the federal statutes as affording Mountain West great latitude to

fire its officers similar to the latitude afforded by the court in Mackey.

¶17 The District Court concluded that federal law protects employees who report

violations to a federal agency or the U.S. Attorney General specifically, where the WDEA

does not identify to whom the employee must report violations in order to qualify for

protection. Section 39-2-904(1)(a), MCA. The District Court did not provide, however, any

further analysis of the existence of conflict preemption in the operation of the state and

federal statutes at issue. The District Court did not demonstrate explicitly that “‘the state law

stands as an obstacle to the accomplishment and execution of the full purposes and

objectives of Congress.’” Favel, ¶ 40 (quoting Hillsborough County, 471 U.S. at 713, 105 S.

Ct. at 2375).

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¶18 Fenno distinguishes Kroske and Mackey on the basis that the decisions discuss age

discrimination and general wrongful discharge, respectively. Fenno contends that Booth v.

Old Nat. Bank, 900 F.Supp. 836 (N.D. W. Va. 1995), and Sargent v. Central Nat. Bank &

Trust Co., 809 P.2d 1298, (Okla. 1991), represent more closely analogous and better

reasoned federal decisions that consider more directly whether the National Act preempts

state wrongful discharge laws. Booth and Sargent analyzed whether the National Act

preempts state law in the context of a bank officer’s allegation that he had been discharged in

retaliation for his refusal to violate a federal law or regulation. Booth, 900 F.Supp. at 840;

Sargent, 809 P.2d at 1300-01.

¶19 Sargent explained the “at pleasure” provision’s policy goals as being rooted in the

ability to “hire and fire at will . . . for the sake of the institution’s financial integrity.”

Sargent, 809 P.2d at 1302 (citing Armano v. Federal Reserve Bank of Boston, 468 F.Supp.

674, 676 (D.Mass. 1979)) (emphasis omitted). Sargent reasoned that this right is “not

without a limit,” however, when “the public policy whose violation gives rise to [the

retaliatory discharge] claim parallels that of the federal law which is sought to be invoked as

a shield from liability. . . .” Sargent, 809 P.2d at 1302 (emphasis omitted). The court

determined that “pre-emption does not shield the defendant-bank from tort liability for

dismissing an employee in violation of a state public policy which is consistent with the

federal statute’s purpose.” Sargent, 809 P.2d at 1300 (emphasis omitted).

¶20 The Booth court agreed. Booth, 900 F.Supp. at 843 (adopting Sargent’s language

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regarding state public polices that are “consistent with the federal statute’s purpose”

(Sargent, 809 P.2d at 1300)). The court in Booth noted that the National Act’s “at pleasure”

provision has been construed generally to preempt state law governing employment

relations, particularly with regard to contract claims. Booth, 900 F.Supp. at 841. The court

cautioned, however, that “this preemption does not amount to complete preemption” as the

U.S. Supreme Court has applied complete preemption only in specific, limited areas. Booth,

900 F.Supp. at 841 (citing Watson v. First Union Nat. Bank of South Carolina, 837 F.Supp.

146 (D. S.C. 1993)). The court distinguished Mackey on the grounds that cases finding

preemption in the tort context had not addressed generally the issue of retaliatory discharge.

Booth, 900 F.Supp. at 842.

¶21 The court then analyzed whether the National Act preempted state retaliatory

discharge protection in the context of the competing policy interests at stake between the

federal and state laws. Booth, 900 F.Supp. at 841. Booth looked to whether a conflict

existed between the policy underlying the National Act and the policy underlying the state

retaliatory discharge law. Booth, 900 F.Supp. at 842-43. The court found no policy conflict,

and, thus, concluded that 12 U.S.C. § 24 (Fifth), does not preempt a state retaliatory

discharge claim. Booth, 900 F.Supp. at 843.

¶22 The South Dakota Supreme Court recently adopted Sargent’s and Booth’s conflict

preemption analysis. Tiede v. CorTrust Bank, N.A., 748 N.W.2d 748 (S.D. 2008). The court

considered whether an employee could bring a state retaliatory discharge suit against a

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national bank covered by 12 U.S.C. § 24 (Fifth). Tiede, 748 N.W.2d at 750. The bank had

fired the employee after she had filed several federally required reports over the bank’s

objections. The statutes that require banks to file these reports provide criminal penalties for

failure to accomplish the filing. Tiede, 748 N.W.2d at 750. South Dakota common law, like

Montana’s WDEA, allows employees to bring a wrongful termination claim for retaliatory

discharge where the employee’s discharge violated a public policy. Tiede, 748 N.W.2d at

751. South Dakota specifically recognizes a violation of public policy when the employer

has committed a criminal or unlawful act. Tiede, 748 N.W.2d at 751.

¶23 The court applied the policy-based preemption test from Sargent and Booth in

conjunction with its own state conflict preemption test. This test mirrors Montana’s –

whether the law “‘stands as an obstacle to the accomplishment and execution of the full

purposes and objectives of Congress.’” Tiede, 748 N.W.2d at 752 (quoting Barnett Bank of

Marion County, N.A. v. Nelson, 517 U.S. 25, 32, 116 S. Ct. 1103, 1108 (1996)); see also

Favel, ¶ 40. The court determined that Congress had intended the federal statutes that

required the employee to file the reports at issue to aid federal criminal investigations.

Tiede, 748 N.W.2d at 753 (citing The Bank Secrecy Act, 31 U.S.C. § 5313(a) and 31 U.S.C.

§ 5322(a)). The court noted that the state retaliatory discharge law likewise prevented

employers from violating public policy, particularly with regard to criminal or unlawful acts.

Tiede, 748 N.W.2d at 751, 754.

¶24 The court balanced the body of federal law against state law and concluded that the

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“at pleasure” provision of 12 U.S.C § 24 (Fifth) did not preempt the state retaliatory

discharge claim. The court agreed that the federal banking laws’ purpose of addressing

potential criminal interference in banking conformed with the state retaliatory discharge

law’s purpose of preventing employers from violating public policy. Tiede, 748 N.W.2d at

754-55. As a result, the state law did not “stand[] as an obstacle to the accomplishment and

execution of the full purposes and objectives of Congress.” Tiede, 748 N.W.2d at 753, 754-

55; Barnett Bank, 517 U.S. at 32, 116 S. Ct. at 1108; see also Favel, ¶ 40.

¶25 We agree with South Dakota’s preemption analysis. South Dakota applied conflict

preemption instead of field preemption. The U.S. Supreme Court has applied complete

preemption only in specific areas. Booth, 900 F.Supp. at 841 (citing Watson, 837 F.Supp.

146). The National Act has not preempted completely state law governing employment

relations. Montana’s preemption analysis dictates that conflict preemption occurs either

when one cannot comply with both state and federal law, or when the “‘state law stands as an

obstacle to the accomplishment and execution of the full purposes and objectives of

Congress.’” Favel, ¶ 40 (quoting Hillsborough County, 471 U.S. at 713, 105 S. Ct. at 2375).

¶26 Preemption cannot “shield [a] defendant bank from tort liability for dismissing an

employee in violation of a state public policy which is consistent with the federal statute’s

purpose.” Tiede, 748 N.W.2d at 754; Booth, 900 F.Supp. at 842; Sargent, 809 P.2d at 1302.

A bank cannot avail itself of the National Act’s “at pleasure” provision unless one cannot

comply with both state and federal law, or if the state law “stands as an obstacle to the

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accomplishment and execution of the full purposes and objectives of Congress.” Favel, ¶ 40

(quoting Hillsborough County, 471 U.S. at 713, 105 S. Ct. at 2375).

¶27 We too analyze first the policies underlying the federal statutes at issue. The federal

courts have determined that Congress intended the “at pleasure” provision to “ensure the

financial stability of the banking institutions by affording them the means to discharge

employees who were felt to compromise an institution’s integrity.” Kroske, 432 F.3d at 984

(internal citations and quotation marks omitted); see also Westervelt v. Mohrenstecher, 76 F.

118, 122 (8th Cir. 1896). The National Act’s “at pleasure” provision has been repealed

impliedly, however, to the extent necessary to effectuate 12 U.S.C. § 1831j(a)(1). See

Kroske, 432 F.3d at 987.

¶28 The federal whistleblower protection provision, 12 U.S.C. § 1831j(a)(1), shields

national bank employees from discrimination in retaliation for reporting possible bank

misconduct to any federal banking agency or to the U.S. Attorney General. Congress

enacted this provision as an amendment to the Federal Deposit Insurance Act, 12 U.S.C. §

1811 et seq., in 1989. Pub. L. No. 101-73, 103 Stat. 183, 494 (1989). Congress sought to

“enhance the regulatory and enforcement powers of Federal financial institutions regulatory

agencies . . . .” Pub. L. No. 101-73, 103 Stat. 183, 183 (1989). The WDEA’s retaliatory

discharge provision, § 39-2-904(1)(a), MCA, similarly exists to protect the State’s interest in

enforcing State policies “concerning the public health, safety, or welfare established by

constitutional provision, statute, or administrative rule.” Section 39-2-903(7), MCA. The

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federal statutes and the WDEA protect employees who take steps in their employment to

promote the enforcement of laws and regulations.

¶29 The WDEA’s retaliatory discharge provision comports with the federal whistleblower

statute’s purpose. Tiede, 748 N.W.2d at 754-55; Booth, 900 F.Supp. at 843; Sargent, 809

P.2d at 1302. The WDEA does not “stand[] as an obstacle to the accomplishment and

execution of the full purposes and objectives of Congress.” Barnett Bank, 517 U.S. at 32,

116 S. Ct. at 1108; see also Favel, ¶ 40. No conflict exists between the policies underlying

the Montana law and the federal statutes. The District Court’s determination that the federal

statutes and Montana’s WDEA conflicted in light of the fact that the federal statute included

more specific criteria is not determinative in the context of conflict preemption. The District

Court improperly concluded that 12 U.S.C. § 24 (Fifth) and 12 U.S.C. § 1831j(1)(a),

preempted Fenno’s retaliatory discharge claim pursuant to § 39-2-904(1)(a), MCA, of the

WDEA.

¶30 Whether the District Court properly determined that Fenno qualified as a bank officer

for purposes of the National Act’s “at pleasure” provision.

¶31 The National Act’s “at pleasure” provision permits national banks to dismiss bank

officers at their pleasure. 12 U.S.C. § 24 (Fifth). Fenno argues on appeal that Mountain

West had stripped him of his officer status before it had terminated him. We need not reach

Fenno’s claim regarding his officer status in light of the fact that we have determined above

that the District Court improperly applied 12 U.S.C. § 24 (Fifth) in this case. ¶ 29.

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¶32 We reverse and remand.

/S/ BRIAN MORRIS

We Concur:

/S/ JAMES C. NELSON
/S/ PATRICIA COTTER
/S/ JIM RICE

Justice John Warner dissents.

¶33 I dissent. I would affirm the District Court’s conclusion that federal law preempts

Fenno’s claim under the Montana WDEA.

¶34 The Court correctly states the law on preemption. As the decision accurately notes,

state law is preempted when either of the following is true: (1) one cannot comply with both

the state and federal law or (2) “state law stands as an obstacle to the accomplishment and

execution of the full purposes and objectives of Congress.” ¶ 11 (quoting Favel, ¶ 40).

¶35 The Court incorrectly applies the law at ¶¶ 28-29 when it concludes that there is not

an irreconcilable conflict between the state and federal laws because they both serve the

same purposes. In this case, the WDEA is preempted by federal law under both criteria

stated above.

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¶36 The Court erroneously concludes that the purposes underlying the state and federal

laws are the same and that the WDEA does not impede the accomplishment of Congress’

objectives. The purpose of the “at pleasure” provision of 12 U.S.C. § 24 (Fifth) is to give

banks “the greatest latitude possible to hire and fire their chief operating officers, in order to

maintain the public trust.” Mackey, 867 F.2d at 526. See also Sargent, 809 P.2d at 1302;

Kroske, 432 F.3d at 984. Section 1831j is the one and only exception under federal law to

the “at pleasure” provision. When enacting the bill that includes 12 U.S.C. § 1831j,

Congress stated that its purpose was, among other things, “[t]o strengthen the enforcement

powers of Federal regulators of depository institutions” and “[t]o strengthen the civil

sanctions and criminal penalties for defrauding or otherwise damaging depository institutions

and their depositors.” Pub. L. No. 101-73, 103 Stat. 187 (1989). Both of these federal

statutes are intended by Congress to protect the integrity of banking institutions and to

provide enforcement mechanisms when necessary.

¶37 The purpose of the WDEA is focused not on protecting the integrity of the banking

system, but on protecting employees, as the Court states at ¶ 28. The purpose of 12 U.S.C. §

24 (Fifth) and 12 U.S.C. § 1831j, as stated above, is not to protect employees, but banks.

¶38 12 U.S.C. § 1831j does offer some whistleblower protection to bank employees, but it

is not a blanket protection. The protection exists only if the employee reports the potential

violation to the appropriate agency, because the congressional objective of greater

enforcement is achieved only when a violation is reported outside the banking institution

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involved, rather than reporting internally, as Fenno did in this case.

¶39 Today’s decision, by limiting the power of banks under § 24 (Fifth) to fire employees

at will unless the requirements of § 1831j are met, undermines the congressional purpose of

the statute and “stands as an obstacle to the accomplishment and execution of the full

purposes and objectives of Congress.” Barnett Bank, 517 U.S. at 32, 116 S. Ct. at 1108;

Favel, ¶ 40.

¶40 Further, in this instance, federal law preempts the WDEA because there is an

irreconcilable conflict between it and 12 U.S.C. § 24 (Fifth). See Favel, ¶ 40. Nowhere does

Fenno assert that he reported the alleged violation to either a federal banking agency or the

Attorney General, as required to secure protection from an at will termination under 12

U.S.C. § 1831j(a)(1). Therefore, 12 U.S.C. § 24 (Fifth) gave Mountain West the right to

dismiss Fenno at its pleasure, and the Bank was fully in compliance with the federal statutes

when it fired him. The Court’s decision today puts Mountain West in the position of being

in compliance with federal law while at the same time potentially violating Montana’s

WDEA. Thus, Mountain West may be found liable in a Montana court for exercising its

statutory right under federal law to terminate Fenno’s employment. In this situation, federal

law preempts the WDEA.

¶41 Today’s decision undermines federal law governing banks and interferes with the

congressional purposes underlying 12 U.S.C. § 24 (Fifth) and 12 U.S.C. § 1831j. I would

conclude that in this case the WDEA is preempted by federal law. I respectfully dissent.

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/S/ JOHN WARNER

Chief Justice Karla M. Gray joins in the foregoing dissent.

/S/ KARLA M. GRAY