Madsen v. Washington Mutual Bank

2008 UT 69
This opinion is subject to revision before final
publication in the Pacific Reporter.
IN THE SUPREME COURT OF THE STATE OF UTAH
----oo0oo----
Richard Madsen and Nancy No. 20060597
Madsen, for themselves and
all others similarly situated,
Plaintiffs, Appellants,
and Cross-Appellees,
v.
Washington Mutual Bank fsb,
(successor to Prudential Federal
Savings and Loan Association), F I L E D
Defendant, Appellee,
and Cross-Appellant. September 23, 2008
---
Third District, Salt Lake
The Honorable L. A. Dever
No. 750226073
Attorneys: Robert J. Debry, Lynn P. Heward, Salt Lake City, for
plaintiffs
Joseph J. Palmer, Stephen C. Tingey, Elaina M.
Maragakis, Salt Lake City, for defendant
---
DURRANT, Associate Chief Justice:
INTRODUCTION
¶1 In 1964, Richard and Nancy Madsen financed the purchase
of their home by borrowing money from Prudential Federal Savings
and Loan Association (“Prudential”) under a real estate mortgage
contract. The contract obligated the Madsens to make monthly
payments into an account held by Prudential for the purpose of
paying taxes and insurance premiums. Prudential paid no interest
or earnings on the running account balance. The Madsens sued,
seeking interest on their account. This case requires us to
decide whether the Madsens may recover, on a common law
accounting theory, profits that Prudential and its successor,
Washington Mutual Bank (“WAMU”) may have earned from the use of
the funds, or whether federal law preempts the Madsens’ claim.
We hold that federal law preempts the Madsens’ claim.

No. 20060597 2
BACKGROUND
¶2 This is the third appeal before us in the protracted
history of this case, which was initiated more than thirty years
ago. And although we have twice ruled in this case on appeal,
our analysis of the issues requires a full explanation of the
facts and procedural history.
¶3 The facts forming the basis for the Madsens’ claim are
not in dispute. In 1964, the Madsens borrowed money from
Prudential to finance the purchase of their home. The standard
form trust deed used by Prudential required the Madsens, as
trustors, to make monthly “budget payments” into an account held
by Prudential, the trustee and beneficiary of the trust deed:
In addition to the monthly payments as
provided in said note the TRUSTOR agrees to
pay to the beneficiary, upon the same day
each month, budget payments estimated to
equal one-twelfth of the annual taxes and
insurance premiums; said budget payments to
be adjusted from time to time as required,
and said budget payments are hereby pledged
to the BENEFICIARY as additional security for
the full performance of this deed of trust
and the note secured hereby. The budget
payments so accumulated may be withdrawn by
the BENEFICIARY for the payment of taxes or
insurance premiums due on the premises. The
BENEFICIARY may at any time, without notice,
apply said budget payments to the payment of
any sums due under the terms of this deed of
trust and the note secured hereby or either
of them.
The trust deed did not contain any provision requiring Prudential
to pay interest or profits on the budget payments, and Prudential
paid none.
¶4 In 1975, the Madsens sued Prudential as the
representatives of a class of borrowers who, like the Madsens,
made budget payments to Prudential under the terms of their trust
deeds. The Madsens brought a claim for breach of contract and
sought an accounting of interest or profits under a theory of
unjust enrichment (the “accounting claim”). The Madsens argued
that Prudential was unjustly enriched because the budget payments
were held as a pledge and the common law required Prudential, as

1 558 P.2d 1337 (Utah 1977).
2 Id. at 1339.
3 Id. at 1340.
3 No. 20060597
pledgee, to account for any profits earned through the use of the
pledge.
¶5 After the district court certified the class,
Prudential sought judgment as a matter of law. In separate
motions, Prudential moved the court to dismiss or grant summary
judgment in its favor. In both motions, Prudential argued that
federal law, which specifically authorized Prudential to hold
budget payments without paying interest, preempted the Madsens’
accounting claim. Furthermore, in one of its motions, Prudential
argued that the contract, which was complete and unambiguous,
contained no provision obligating Prudential to pay interest.
¶6 The district court granted summary judgment to
Prudential on its contract claim without addressing its
preemption claim. The court reasoned that “neither the contract
provisions, express or implied, the principles of ‘unjust
enrichment,’ nor those of ‘pledges’ give to plaintiffs a claim
upon which relief can be granted on the contract in question.”
The Madsens appealed, and we took up the case in Madsen v.
Prudential Federal Savings & Loan Ass’n (“Madsen I”).1 We
reversed, holding that the funds deposited under the loan
agreement satisfied the essential elements of a common law
pledge: “The essential elements of a pledge are contained in the
agreement, viz., the existence of a debt or obligation, a
transfer of property to the pledgee, to be held as security and,
if necessary, to be used to assure performance of the
obligation.”2 We held that the common law of pledge required
that “if from the use of [the pledge] profits are derived,
pledgee must, in the absence of a special agreement, account for
them to the pledgor.”3 Thus we remanded the case to the district
court to consider the Madsens’ accounting claim.
¶7 Although Prudential referred to federal banking
regulations as part of its policy argument in its appellate brief
to us, Prudential did not argue federal preemption. Accordingly,
our decision did not address federal banking regulations or
federal preemption. Nor did our decision address the Madsens’
claim for breach of contract. Instead, we confined our decision

4 Id. at 1339-40.
5 Id.
6 635 F.2d 797 (10th Cir. 1980).
7 Id. at 802.
8 Id. at 804.
No. 20060597 4
to whether the budget payments constituted a common law pledge.4
We reversed the district court’s grant of summary judgment,
holding that the budget payments were such a pledge and that the
Madsens could pursue their accounting claim.5
¶8 Following the remand, Prudential removed the case to
federal district court, asserting, as a basis for federal
jurisdiction, that the case involved an important question of
federal law. The Madsens moved for dismissal, arguing that the
federal court lacked jurisdiction. When the federal district
court denied the Madsens’ motion to dismiss, the Madsens appealed
to the United States Court of Appeals for the Tenth Circuit in
Madsen v. Prudential Federal Savings & Loan Ass’n (“Madsen II”).6
The Tenth Circuit reversed, holding that “Prudential’s claim of
federal preemption is in the nature of a defense to the Madsens’
cause of action and cannot be the basis of federal question
jurisdiction on removal.”7 The case was remanded to the state
district court.8
¶9 On remand in the state district court, Prudential
revived the federal preemption argument in a new motion for
summary judgment. In reply, the Madsens alleged that although we
did not mention the federal preemption issue in our ruling, we
had already decided the issue in the Madsens’ favor in Madsen I.
The Madsens further argued that the issue was decided in their
favor by the Tenth Circuit in its ruling that the federal court
had no jurisdiction. After a hearing, the district court ruled
simply, “Prudential’s Motion for Summary Judgment based upon
federal preemption is hereby denied,” offering no further
explanation.
¶10 The parties proceeded to try the “test case” of
Prudential’s liability. Judge Kenneth Rigtrup limited the trial
to the issue of whether Prudential earned profit from the use of
the Madsens’ pledged funds and, if so, how much. Because he
narrowed the scope of the trial to this one issue, he did not
allow Prudential to present evidence or argue in support of
several defenses that it had urged. He did not allow Prudential
to argue federal preemption or introduce evidence of a “special

9 Madsen v. Prudential Fed. Sav. & Loan Ass’n, 767 P.2d 538,
541 (Utah 1988).
10 Id. at 539-40.
11 Id. at 541.
12 767 P.2d 538 (Utah 1988).
13 Id. at 543.
14 Id. at 543-44.
15 Id.
16 Id. at 544.
5 No. 20060597
agreement” whereby the parties agreed that no interest would be
paid. He then ruled in favor of the Madsens, awarding them
$134.70 plus interest from the date of judgment on their
individual claim.9
¶11 Prior to the trial and again prior to issuing his
ruling, Judge Rigtrup disclosed to the parties that he was a
potential class member, having financed the purchase of his own
home by borrowing from Prudential.10 Thirty-nine days after this
ruling, Prudential moved to disqualify Judge Rigtrup. The
presiding judge granted Prudential’s motion, and the Madsens
sought permission to file an interlocutory appeal.11
¶12 We granted such permission and addressed Judge
Rigtrup’s disqualification in Madsen v. Prudential Federal
Savings & Loan Ass’n (“Madsen III”).12 We held that Prudential’s
motion to disqualify was not timely.13 We also ruled that
Prudential apparently acquiesced in Judge Rigtrup’s rendering a
decision by failing to move for his disqualification until
thirty-nine days after his ruling.14 We concluded that
Prudential’s acquiescence was evidence that it did not believe
that Judge Rigtrup should recuse himself.15 Further, we noted
that although Judge Rigtrup had personal knowledge of some of the
disputed facts and had a financial interest in the outcome of the
case, the presiding judge expressly found no actual bias.16
¶13 Following the remand, Judge Rigtrup made a number of
rulings, some of which the parties challenge in this appeal.
First, he defined the class consistent with the Madsens’
complaint as borrowers who had purchased a “single[-]family,
owner-occupied, primary residence.” This ruling excluded from
the class borrowers who financed second homes, commercial

17 Utah Code section 78B-2-307 (Supp. 2008), which the court
applied, provides that “[a]n action may be brought within four
years . . . for relief not otherwise provided for by law.” The
Madsens argue that the court should have applied the former
section 78-12-34 (now repealed), which provided that “actions
[may be] brought, to recover money or other property deposited
with any bank, trust company or savings and loan corporation,
association or society, [without] limitation,” or, in the
alternative, section 78-12-25(2) (now amended), which provided a
six-year statute of limitations for actions founded “upon any
contract, obligation, or [for] liability founded upon an
instrument in writing.”
No. 20060597 6
properties, and multiplexes. Second, he ruled that the four-year
statute of limitations in Utah Code section 78-12-25(3), “for
relief not otherwise provided for by law,” applied to the case.
Third, he ruled that the 1979 Interest on Mortgage Loan Accounts
Act cut off damages as of 1979. Thus, he limited the Madsens to
recovering for the period from 1971 to 1979. Fourth, he ruled
that the Madsens were not entitled to prejudgment interest but
that interest during the eight-year period would be compounded.
Fifth, he appointed a special master to locate and define the
class members and ascertain damages. The special master filed a
final report on March 1, 2002, concluding that there were 9,547
class members, who were owed an average of $105.18, resulting in
a total judgment of $1,004,153. The trial court, now presided
over by Judge L. A. Dever, entered a judgment for that amount.
¶14 The Madsens appeal, and WAMU cross-appeals. Each
asserts multiple errors. The Madsens assert that the district
court erred by
(1) applying a four-year statute of limitations rather
than applying a six-year statute of limitations or
holding that no limitations period applied;17
(2) ruling that the 1979 Interest on Mortgage Loan
Accounts Act cut off damages after 1979;
(3) failing to award prejudgment interest covering the
period from 1979 to the judgment;
(4) narrowing the class to include only borrowers who
financed owner-occupied single-family homes, which
excluded borrowers who financed duplexes, second homes,
and commercial properties; and

18 WAMU preserved its federal preemption argument by making
the argument to the district court both before and after Madsen I
and to the federal district court. However, WAMU’s brief in this
appeal did not include a citation to the record showing that it
had preserved this issue as required by our rule 24(a)(5) of the
Utah Rules of Appellate Procedure. While we decline to sanction
WAMU under rule 24(k), we warn future litigants that compliance
with our briefing requirements is not discretionary, and
litigants who fail to comply take the risk that we may disregard
or strike briefs or arguments. See, e.g., Peters v. Pine Meadow
Ranch Home Ass’n, 2007 UT 2, ¶ 23, 151 P.3d 962. We decline to
disregard WAMU’s preemption argument because, despite WAMU’s
oversight in this regard, it is clear that WAMU preserved the
federal preemption argument and otherwise fully complied with the
briefing requirements found in rule 24.
7 No. 20060597
(5) failing to disqualify the special master because he
held ex parte meetings with WAMU and relied heavily on
the work of WAMU employees.
¶15 The Madsens further argue that we should simplify the
accounting of the profits earned and end the case by ordering the
district court to use the pass-book savings rate instead of
continuing the case with a newly appointed special master.
¶16 WAMU cross-appeals, asserting that the district court
(1) erred as a matter of law by not granting summary
judgment on the basis that federal law as codified in 12
C.F.R. § 545.6-11(c) preempts the Madsens’ state law
claims;18
(2) erred by excluding evidence of a “special agreement”
between the parties that no interest be paid on the pledged
funds;
(3) erred in certifying the class under rule 23(b)(1)(A) of
the Utah Rules of Civil Procedure; and
(4) erred in awarding compound interest during the 1971 to
1979 accounting period.
¶17 We have jurisdiction pursuant to Utah Code section 78A-
3-102(3)(j) (Supp. 2008).

19 See Dep’t of Human Servs. v. Hughes, 2007 UT 30, ¶ 15,
156 P.3d 820; see also Retherford v. AT&T Commc’ns, 844 P.2d 949,
958-59 (Utah 1992).
20 R.A. McKell Excavating, Inc. v. Wells Fargo Bank, N.A.,
2004 UT 48, ¶ 7, 100 P.3d 1159.
21 U.S. Const. art. VI, cl. 2.
22 English v. General Elec. Co., 496 U.S. 72, 79 (1990).
23 See Free v. Bland, 369 U.S. 663, 667-68 (1962).
No. 20060597 8
ANALYSIS
¶18 In this opinion, we will first discuss the law of
preemption generally. Then, we will discuss WAMU’s argument that
federal law preempts the Madsens’ claim. We will also address
the Madsens’ contention that both this court and the Tenth
Circuit have already decided the preemption question in the
Madsens’ favor in Madsen I and Madsen II, respectively. Because
we hold that federal regulations preempt the Madsens’ claim, it
is unnecessary to reach the other issues on appeal and cross-
appeal.
I. FEDERAL LAW PREEMPTS CONFLICTING STATE LAW
¶19 Whether federal law preempts a state law cause of
action is a question of law.19 We review questions of law for
correctness, giving no deference to the ruling of the court
below.20 Under the Supremacy Clause of the United States
Constitution,21 federal law preempts state law “where it
regulates conduct in a field that Congress intended the Federal
Government to occupy exclusively” or “to the extent that it
actually conflicts with federal law.”22 In either case, it does
not matter whether the state law is statutory or common law or
whether the federal law is a federal regulation or statute of
Congress.23
¶20 In this case, WAMU has argued that the Madsens’ state
law accounting claim, which requires WAMU to pay profits earned
on the Madsens’ pledged funds, conflicts with federal law as
codified in 12 C.F.R. § 545.6-11(c). WAMU contends that under
this regulation and other federal laws, it has no obligation to
pay interest or earnings on such accounts. If, under federal
law, WAMU has no obligation to pay interest or earnings on the
Madsens’ pledged funds, federal law conflicts with, and therefore
preempts, the Madsens’ state law accounting claim.

24 12 C.F.R. § 545.6-11(c) (1976).
9 No. 20060597
II. UNDER FEDERAL REGULATIONS IN EFFECT AT THE TIME OF THE
CONTRACT, PRUDENTIAL HAD NO OBLIGATION TO PAY INTEREST ON RESERVE
ACCOUNTS
¶21 WAMU argues that 12 C.F.R. § 545.6-11(c), which exempts
federal savings and loan associations from paying interest under
certain circumstances, preempts any state law under which the
Madsens might recover. That section reads as follows:
A Federal association which makes a loan on
or after June 16, 1975, on the security of a
single-family dwelling occupied or to be
occupied by the borrower (except such a loan
for which a bona fide commitment was made
before that date) shall pay interest on any
escrow account maintained in connection with
such a loan (1) if there is in effect a
specific statutory provision or provisions of
the State in which such dwelling is located
by or under which the State-chartered savings
and loan associations, mutual savings banks
and similar institutions are generally
required to pay interest on such escrow
accounts, and (2) at not less than the rate
required to be paid by such State-chartered
institutions but not to exceed the rate being
paid by the Federal association on its
regular accounts (as defined by Section 526.1
of this chapter). Except as provided by
contract, a Federal association shall have no
obligation to pay interest on escrow accounts
apart from the duties imposed by this
paragraph.24
¶22 Under this regulation, Prudential had no obligation to
pay interest to the Madsens absent a state statute or contractual
obligation to the contrary. The Madsens’ accounting claim is not
founded on a contract or statute. By its express terms, however,
the regulation applies only prospectively to loans made after
June 16, 1975. It does not apply to the Madsens’ loan, which
Prudential made in 1964. But WAMU argues that § 545.6-11(c) did
not alter the federal law applicable to the loans made before
1975. Rather, WAMU contends, the 1975 change merely reaffirmed

25 The Home Owners’ Loan Act of 1933 created the Federal
Home Loan Bank Board, which promulgated regulations governing the
savings and loan industry beginning in 1933.
26 23 C.F.R. § 9893 (1958).
27 12 C.F.R. § 544.1 (1975).
28 12 C.F.R. § 541.5 (1975).
No. 20060597 10
the impact of two existing regulations, which also provide that
Prudential had no obligation to pay interest to the Madsens.25
¶23 WAMU is correct. Two regulations predating the
Madsens’ loan, 12 C.F.R. §§ 544.1 and 541.5, directly conflict
with the Madsens’ state law cause of action. Both regulations
became part of the federal register in 1958 and thus apply to the
Madsens’ 1964 loans.26 Section 544.1 provides that a federal
home loan association such as Prudential “is not required to
distribute earnings on short-term savings accounts.”27 Section
541.5 defines short-term savings accounts to include “a savings
account in a Federal association established for the purpose of
accumulating funds to pay taxes or insurance premiums, or both,
in connection with a loan on the security of a lien on real
estate.”28 The Madsens’ account held by Prudential fits this
definition precisely. Therefore, the account is subject to
section 544.1, which explicitly provides that lenders who hold
such accounts have no obligation to pay interest or earnings
absent an agreement or state statute. The regulations directly
conflict with the Madsens’ state law claim. Federal law,
therefore, preempts the Madsens’ state law claim for interest on
their account.
III. NEITHER THIS COURT NOR THE TENTH CIRCUIT HAS YET RULED ON
THE MERITS OF THE FEDERAL PREEMPTION ISSUE
¶24 The Madsens do not make any attempt to counter WAMU’s
federal preemption argument on the merits. Instead, their
argument on appeal consists entirely of an assertion that the
federal preemption issue has already been decided by this court
in Madsen I and by the Tenth Circuit in Madsen II. But our
opinion in Madsen I did not address, much less decide, the issue
of federal preemption. And in Madsen II, the Tenth Circuit
dismissed the case purely for lack of federal jurisdiction. As
we did not rule on the merits of WAMU’s federal preemption
argument in Madsen I, and as the Tenth Circuit dismissed the case
for lack of jurisdiction without reaching the merits in

29 558 P.2d 1337 (Utah 1977).
30 Id.
31 Id. at 1339.
32 Dipoma v. McPhie, 2001 UT 61, ¶ 18, 29 P.3d 1225
(emphasis added) (quoting Limb v. Federated Milk Producers Ass’n,
461 P.2d 290, 293 n.2 (Utah 1969)).
11 No. 20060597
Madsen II, we now address for the first time the merits of WAMU’s
federal preemption argument.
A. We Did Not Rule on the Merits of Federal Preemption
in Madsen I
¶25 The issue of preemption was not before us in Madsen
I.29 The district court had ruled that neither the contract nor
the principles of pledge gave rise to a claim upon which relief
could be granted. The district court did not rule on the issue
of preemption. Accordingly, neither party appealed the issue of
federal preemption. Our decision in Madsen I focused exclusively
on whether the Madsens’ budget payments satisfied the elements of
a common law pledge.30 We reversed the district court’s ruling,
holding that the budget payments met the elements of a common law
pledge because there was “a debt or obligation, a transfer of
property to the pledgee, to be held as security and, if
necessary, to be used to assure performance of the obligation.”31
The decision did not include a single reference to any federal
law, much less a resolution of whether federal law preempts the
Madsens’ accounting claim.
¶26 The Madsens’ argue that, although they did not appeal
the issue of preemption and neither our opinion nor the district
court’s grant of summary judgment addressed preemption,
“Prudential’s federal theory has already been presented to the
Utah Supreme Court” and that “[i]f 12 C.F.R. § 545.6-11(c)
destroyed Madsen’s [sic] cause of action, the Utah Supreme Court
would have been forced to affirm the trial court’s dismissal over
thirty years ago.” This assertion is contrary to our well-
established precedent that “an appellate court may affirm the
judgment appealed from ‘if it is sustainable on any legal ground
or theory apparent on the record.’”32 When reviewing a decision
made on one ground, we have the discretion to affirm the judgment
on an alternative ground if it is apparent in the record. But
that cannot mean, as the Madsens’ contend here, that our
declining to rule on an alternative ground can be construed as a
ruling on the merits of the alternative ground, particularly when

33 See, e.g., Pearson v. Pearson, 2008 UT 24, ¶ 10 n.8, 182
P.3d 353 (declining to apply the Utah Uniform Parentage Act to a
child custody dispute because the parties did not argue or brief
the issue under that law).
No. 20060597 12
the alternative ground has not been argued by either party to the
appeal. In fact, we frequently decline to rule on an issue when
it has not been fully briefed by the parties because full
briefing allows this court to carefully consider fully developed
and supported arguments.33 The decision not to reach an
alternative ground is certainly not binding on the court below,
particularly when the parties did not argue the issue and this
court’s decision does not include so much as a single reference
to the issue now supposedly foreclosed.
¶27 In support of their argument that we have already ruled
on the issue of preemption, the Madsens assert that Prudential
made the federal preemption argument in its briefs. In fact,
Prudential’s appellate brief in Madsen I cited federal banking
regulations, including 12 C.F.R. § 545.6-11(c) in support of its
policy argument against applying the law of pledge. But
Prudential did not mention the law of federal preemption. The
Madsens’ briefs in that appeal likewise did not argue preemption.
Thus the Madsens are incorrect in arguing that we have already
decided the preemption issue. Having determined that we did not
decide the issue in Madsen I, we now address the Madsens’
contention that the Tenth Circuit decided the preemption issue in
Madsen II.
B. The Tenth Circuit Did Not Rule on the Merits of Federal
Preemption In Madsen II
¶28 In Madsen II, the Tenth Circuit ruled on the Madsens’
appeal from the federal district court, which had granted summary
judgment in favor of Prudential on the basis of preemption:
Under the federal preemption doctrine,
Madsens have no claim against Prudential for
interest on their escrow account.
12 C.F.R. § 545.6-11(c) clearly precludes the
relief the Madsens are seeking. . . . More
importantly, the regulation cited above does
not appear to alter the federal law
applicable to loans made before June 16,
1975, but instead appears to reaffirm the
impact of 12 C.F.R. §§ 544.1 (“association is
not required to distribute earnings on short-
term savings accounts”) and 541.5 (defining

34 635 F.2d 797, 800 (10th Cir. 1980).
35 Id.
36 Id.
37 Id. (quoting Gully v. First Nat’l Bank, 299 U.S. 109, 113
(1936)).
38 Id. at 801.
13 No. 20060597
short-term savings account as including
mortgage loan escrow accounts for taxes and
insurance).34
The Madsens argued that the federal court lacked jurisdiction and
appealed to the Tenth Circuit.35 The issue on appeal was whether
the federal court had federal question jurisdiction, specifically
whether the suit arose under the Constitution or laws of the
United States.36 The Tenth Circuit held that federal
jurisdiction existed only if the “federal right or immunity [is]
an essential element of the plaintiff’s cause of action, and that
the federal controversy must be ‘disclosed on the face of the
complaint, unaided by the answer or by the petition for
removal.’”37 It went on to hold that “[b]ecause the Madsens have
predicated their suit upon rights created under state law, the
fact that federal regulations may create a defense to recovery on
such a claim is immaterial to a finding of federal question
jurisdiction.”38
¶29 Although the Tenth Circuit explicitly ruled on
jurisdictional grounds, the Madsens argue that the following
language in the Tenth Circuit’s opinion constitutes a decision on
the merits of the preemption argument:
Here, it is vigorously argued that
application of state law would create a
significant conflict because federal policy
requires uniform nationwide standards for the
handling of escrow accounts by federal
savings and loan associations. This argument
founders on the very language of the
regulation cited to support it. Section
545.6-11(c) provides that a federal savings
and loan association shall pay interest on
escrow accounts if a state statute requires
such payments to be made by state-chartered
institutions, or if payments are required by
contract. The regulation expressly

39 Id. at 802-03 (emphasis added).
40 Wallis v. Pan Am. Petroleum Corp., 384 U.S. 63, 68
(1966).
No. 20060597 14
anticipates that the obligation of a federal
institution to pay interest on escrow
accounts not only will vary from state to
state, but from contract to contract.
. . .
Given the absence of a significant conflict
between the federal policy expressed in
section 545.6-11(c) and the use of state law,
we hold that state law is applicable in
determining whether Prudential contracted to
pay interest on the Madsens’ escrow
account.39
¶30 This, the Madsens argue, is the Tenth Circuit’s
pronouncement that the federal regulation does not conflict with
their claim for interest, and thus federal law does not preempt
their state law claim.
¶31 The Madsens are incorrect. The discussion cited above
is presented in response to Prudential’s argument that the
controversy required the court to apply federal common law in
determining whether the parties had entered into a contract for
the payment of interest. A controversy that requires the
application of federal common law necessarily arises under the
laws of the United States. But federal courts only apply federal
common law to cases in which there is “a significant conflict
between some federal policy or interest and the use of state
law.”40 The passage cited by the Madsens is the Tenth Circuit’s
acknowledgment that under the explicit terms of 21 C.F.R.
§ 545.6-11(c), lenders’ interest obligations could be varied by
contract between private parties. The question of whether such a
private contract had been created is, as the Tenth Circuit
concluded, governed by state law. Interest obligations that
varied from state to state or from contract to contract would not
disrupt a federal scheme requiring uniformity.
¶32 In this case, however, the Madsens have not claimed
that a provision in the contract obligated Prudential to pay
interest. Indeed, there is no such provision. Moreover, they
concede that there is no applicable state statute. So while the
federal regulation explicitly permits the interest obligation to
vary by private contract or by state statute, in this case we
have neither. And in the absence of a contract or statute, the

15 No. 20060597
regulation is clear that Prudential had no obligation to pay
interest. The mere fact that the Tenth Circuit acknowledged that
under the explicit terms of the regulation, the interest
obligation may be established by private contract or statute in
no way changes the fact that absent either, Prudential had no
obligation to pay interest on the budget payment accounts.
¶33 Thus the Madsens are incorrect in arguing that this
court or the Tenth Circuit has already decided the preemption
issue, and it is appropriate that we resolve the issue in this
appeal. For the reasons discussed in section II, we reverse the
district court’s ruling, hold that federal law preempts the
Madsens’ accounting claim, and remand with instructions to enter
summary judgment in favor of WAMU. Because we decide that
federal law preempts the Madsens’ claim, it is unnecessary to
reach the other issues in this appeal.
CONCLUSION
¶34 We conclude that federal law preempts the Madsens’
claim for profits earned on pledged funds in reserve accounts
maintained by Prudential in connection with their real estate
mortgage. Because federal law preempts the Madsens’ cause of
action, it is unnecessary to reach the other issues presented by
the parties in this appeal. We reverse and remand with
instructions to enter summary judgment in favor of WAMU.
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¶35 Chief Justice Durham, Justice Parrish, Judge Greenwood,
and Judge Westfall concur in Associate Chief Justice Durrant’s
opinion.
¶36 Having disqualified himself, Justice Wilkins does not
participate herein; District Court Judge G. Michael Westfall sat.
¶37 Justice Nehring does not participate herein; Court of
Appeals Judge Pamela T. Greenwood sat.