McCoy v. Chase Manhattan Bank, Usa, 06-56278.

• Citation: 559 F.3d 963
• Decision Date: 16 March 2009
• Docket Number: No. 06-56278.,06-56278.
• Parties: James A. McCOY, on behalf of himself and all others similarly situated, Plaintiff-Appellant, v. CHASE MANHATTAN BANK, USA, National Association, Defendant-Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)

559 F.3d 963

James A. McCOY, on behalf of himself and all others similarly situated, Plaintiff-Appellant, v. CHASE MANHATTAN BANK, USA, National Association, Defendant-Appellee.

No. 06-56278.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted November 21, 2008.

Filed March 16, 2009.

Barry L. Kramer (authored briefs and presented argument), Law Offices of Barry

L. Kramer, Los Angeles, CA, for the plaintiff-appellant.

Robert S. Stern (authored brief) and Nancy R. Thomas (presented argument), Morrison & Foerster, LLP, Los Angeles, CA, for the defendant-appellee.

Appeal from the United States District Court for the Central District of California, James V. Selna, District Judge, Presiding. D.C. No. CV-06-00107-JVS.

Before: RICHARD D. CUDAHY,^* HARRY PREGERSON, and HAWKINS, Circuit Judges.

Opinion by Judge HAWKINS; Dissent by Judge CUDAHY.

HAWKINS, Circuit Judge:

This case presents the question of whether the notice requirements of the Truth in Lending Act ("TILA"), 15 U.S.C. §§ 1601-1615 and Regulation Z, 12 C.F.R. § 226, as interpreted by the Federal Reserve Board's Official Staff Commentary, apply to discretionary interest rate increases that occur because of consumer default. We hold that Regulation Z requires a creditor to provide contemporaneous notice of such rate increases.

FACTUAL AND PROCEDURAL BACKGROUND

James A. McCoy ("McCoy") brought this action on behalf of himself and others similarly situated against Chase Manhattan Bank, USA, N.A. ("Chase"), a national bank located in Delaware. McCoy alleges that Chase increased his interest rates retroactively to the beginning of his payment cycle after his account was closed to new transactions as a result of a late payment to Chase or another creditor. McCoy claims that the rate increase violated TILA and Delaware law because Chase gave no notice of the increase until the following periodic statement, after it had already taken effect. The district court dismissed McCoy's complaint with prejudice, holding that because Chase discloses the highest rate that could apply due to McCoy's default in its cardmember agreement with McCoy ("Cardmember Agreement"), no notice was required.

JURISDICTION AND STANDARD OF REVIEW

We have appellate jurisdiction pursuant to 28 U.S.C. § 1291 and review dismissals for failure to state a claim de novo. Knievel v. ESPN, 393 F.3d 1068, 1072 (9th Cir.2005).

DISCUSSION

Federal TILA Claim

Congress enacted TILA to "assure a meaningful disclosure of credit terms so that the consumer will be able to compare more readily the various credit terms available to him and avoid the uninformed use of credit, and to protect the consumer against inaccurate and unfair credit billing and credit card practices." 15 U.S.C. § 1601(a). Regulation Z, adopted by the Federal Reserve Board to implement TILA, addresses when and how notice of changes in terms must be given:

Written notice required. Whenever any term required to be disclosed under § 226.6 is changed or the required minimum periodic payment is increased, the creditor shall mail or deliver written notice of the change to each consumer who may be affected. The notice shall be mailed or delivered at least 15 days prior to the effective date of the change. The 15-day timing requirement does not apply if the change has been agreed to by the consumer, or if a periodic rate or other finance charge is increased because of the consumer's delinquency or default; the notice shall be given, however, before the effective date of the change.

12 C.F.R. § 226.9(c)(1). Section 226.6 requires that a creditor disclose inter alia "each periodic rate that may be used to compute the finance charge." 12 C.F.R. § 226.9(a)(2).

The parties dispute the meaning of the phrase "any term required to be disclosed under § 226.6." Chase argues that the phrase applies only to the contractual terms of Chase's Card-member Agreement. McCoy suggests the phrase also applies to the list of specific "items" § 226.6(a)(2) requires be disclosed, which includes the interest rate that may be used.

Although we find McCoy's interpretation more natural, we acknowledge that the text of Regulation Z is ambiguous.

We defer to an agency interpretation of its own ambiguous regulation provided it is not "plainly erroneous or inconsistent with the regulation." Auer v. Robbins, 519 U.S. 452, 461, 117 S.Ct. 905, 137 L.Ed.2d 79 (1997) (citing Robertson v. Methow Valley Citizens Council, 490 U.S. 332, 359, 109 S.Ct. 1835, 104 L.Ed.2d 351 (1989)). We do not "permit the agency, under the guise of interpreting a regulation, to create de facto a new regulation." Christensen v. Harris County, 529 U.S. 576, 588, 120 S.Ct. 1655, 146 L.Ed.2d 621 (2000).

Chase argues that the Federal Reserve Board ("FRB")'s Official Staff Commentary interprets Regulation Z to require no notice in this case. We disagree.

Comment 3 is the most salient Official Staff Commentary to § 226.9(c)(1) and, when describing the amount of notice required for different kinds of changes, provides that "a notice of change in terms is required, but may be mailed or delivered as late as the effective date of the change ... [i]f there is an increased periodic rate or any other finance charge attributable to the consumer's delinquency or default." § 226.9(c)(1), cmt. 3. The plain-meaning of Comment 3 is to require notice when a cardholder's interest rates increase because of a default, but to specify that the notice may be contemporaneous, rather than fifteen days in advance of the change. Under Comment 3, McCoy has stated a claim.

Chase argues that because Comment 3 repeats language from Regulation Z, a different portion of the Official Staff Commentary, Comment 1, should govern instead. Comment 3's specific reference to interest rate increases attributable to the consumer's delinquency or default is directly on point and therefore governs. Even if we decided that Comment 1, despite preceding Comment 3, could somehow be interpreted as an exception to it, we would still hold that Comment 1 does not dispel Chase's obligation to notify its account holders of discretionary rate increases.

Comment 1 to § 226.9(c)(1) describes the circumstances in which Regulation Z requires no notice of a change in terms:

"Changes" initially disclosed. No notice of a change in terms need be given if the specific change is set forth initially, such as: Rate increases under a properly disclosed variable-rate plan, a rate increase that occurs when an employee has been under a preferential rate agreement and terminates employment, or an increase that occurs when the consumer has been under an agreement to maintain a certain balance in a savings account in order to keep a particular rate and the account balance falls below the specified minimum. In contrast, notice must be given if the contract allows the creditor to increase the rate at its discretion but does not include specific terms for an increase (for example, when an increase may occur under the creditor's contract reservation right to increase the periodic rate).

12 C.F.R. § 226.9(c), cmt. 1 (emphasis added).

The effect of Comment 1, assuming arguendo it applies, depends on how the phrase "specific" is defined. McCoy argues that the "specific change is set forth initially" and the "specific terms for an increase" are included in a contract when the contract gives consumers the information they need in order to know what interest rate they will be charged and under what conditions. Chase argues that any agreement that specifies the possibility of an interest rate increase if the cardholder defaults and establishes any boundaries on the potential amount of the increase adequately "sets forth" a "specific change."

McCoy's reading of Comment 1's use of the word "specific" is reinforced by the three examples Comment 1 includes of rate increases for which notice is not required. The first example is "rate increases under a properly disclosed variable-rate plan." Id. Variable rate plans specify that the interest rate will fluctuate in direct correspondence with an externally determined variable rate such as, for example, the Federal Prime rate. Providing additional notice of the interest rate charged under a variable rate plan would be redundant because variations in the interest rate are not discretionary, and the method for computing the interest rate based on the Federal Prime rate is fully specified in advance. Creditors in that circumstance need not provide additional notice because consumers can predict their precise interest rate according to a formula.

The second example in Comment 1 is "a rate increase that occurs when an employee has been under a preferential rate agreement and terminates employment." Id. Again, the notice of such a rate increase would be redundant because it "occurs" whenever the employee terminates employment. Nothing suggests the creditor possesses any discretion over whether to increase the rates or by how much to do so once the event triggering a higher rate occurs.

The third example is "an increase that occurs when the consumer has been under an agreement to maintain a certain balance in a savings account in order to keep a particular rate and the account balance falls below the specified minimum." Id. Again, the use of the word "occurs" rather than the phrase "may occur" suggests that additional notice would be redundant because the increase is non-discretionary.¹ All three examples pertain to rate increases that are spelled out in cardmember agreements and ascertainable by the consumer without additional notice.

In contrast to these examples, the increase here occurs at Chase's discretion and the most pertinent "specific terms for an increase" — the actual amount of the increase and whether it will occur — are not disclosed in advance. The Cardmember Agreement states that Chase "may" change McCoy's interest rate and impose a non-preferred rate "up to" the maximum rate described in the...