Brown v. First Nat. City Bank

• Citation: 503 F.2d 114
• Decision Date: 14 August 1974
• Docket Number: No. 1093,D,1093
• Parties: Jordan BROWN, and all others similarly situated, Plaintiff-Appellee, v. FIRST NATIONAL CITY BANK, Defendant-Appellant. ocket 74-1279.
• Court: United States Courts of Appeals. United States Court of Appeals (2nd Circuit)

Page 114

503 F.2d 114

Jordan BROWN, and all others similarly situated, Plaintiff-Appellee, v. FIRST NATIONAL CITY BANK, Defendant-Appellant.

No. 1093, Docket 74-1279.

United States Court of Appeals, Second Circuit.

Argued June 5, 1974.

Decided Aug. 14, 1974.

Sheldon v. Burman, New York City, on the brief, for appellee.

Shearman & Sterling, New York City, on the brief, for appellant.

John Leferovich, Jr., New York City, for amicus curiae New York State Bankers Ass'n.

Before KAUFMAN, Chief Judge, MANSFIELD and MULLIGAN, Circuit Judges.

MANSFIELD, Circuit Judge:

During the last decade some banks in New York have offered to their customers, as an additional banking service, various types of revolving credit or check-credit loan plans, which permit the automatic or immediate payment of a customer's overdraft on his regular checking account. At issue on this appeal is the legality of certain aspects of a plan of this type offered by defendant-appellant First National City Bank ('Citibank') to its depositors, known as the 'Checking Plus Credit Agreement.'

Specifically, on this appeal by both parties from a summary judgment and order of Judge Kevin T. Duffy of the Southern District (opinion reported at 365 F.Supp. 1286), we are asked to decide whether federal and state usury statutes, 12 U.S.C. 85 and N.Y. Banking Law, McKinney's Consol.Laws, c. 2, 108(5), permit Citibank, pursuant to its 'Checking Plus' program, to charge plaintiff-appellee Jordan Brown interest on certain portions of funds transferred by Citibank to Brown's Regular checking account pursuant to its Checking Plus Credit Agreement with him and to refuse to credit deposits made by Brown to his checking account as a repayment of loans advanced to Brown from his 'Checking Plus' account. We hold that these terms and conditions are valid and enforceable, and we reverse so much of the district court's order as enjoined Citibank from charging Brown interest on the entire amount of funds made available to him pursuant to the 'Checking Plus' agreement. We further direct the district court to dismiss Brown's complaint in its entirety.

Under the 'Checking Plus Credit Agreement', which was introduced in 1966, Citibank agrees with a regular checking account depositor that, if the depositor's checking account should be overdrawn, (1) the bank will automatically debit his Checking Plus account, which is opened by him at the time when he enters into the agreement, and credit to his regular checking account, an amount equal to the first multiple of $100.00 above the amount of the overdraft, ¹ or (2) the depositor may give the bank a written authorization to debit his Checking Plus account and credit to his Regular checking account a specific sum, which may be limited by him to the amount of the overdraft. The amount thuse debited to the customer's account becomes a loan repayable with interest at the rate of .03333% Per day-- the maximum rate permitted by state law ² -- in minimum monthly installments. These repayments must be made directly to the Checking Plus account and must be accompanied 'by a properly completed payment ticket (enclosed with the monthly Checking Plus statement) or by any other properly completed form of notice . . . authorized by the bank.' The agreement further provides that as collateral security for the payment of any indebtedness under the program the bank is given a 'security interest and/or right to set-off in and to all monies, securities and other property of the (depositor) now or hereafter on deposit with or otherwise held by or coming into the possession or under the control of the bank . . ..' The bank further retains the right to terminate the agreement when the depositor reaches '70 years of age, or at any other time, upon written notice by the bank . . ..'

After entering into a 'Checking Plus Credit Agreement' with Citibank early in July of 1972, appellee Brown on five separate occasions in August and September, 1972, overdrew his checking account and elected to receive credits in multiples of $100,00 rather than authorize credits limited to the specific amounts of the overdrafts. ³ Additionally, on one occasion in September, he made a deposit to his Regular checking account which, pursuant to the agreement, Citibank did not apply to the outstanding debit balance in appellee's Checking Plus account.

In a complaint filed on October 24, 1972, on behalf of himself and all other Citibank Checking Plus customers (asserted to number in the thousands), Brown claimed that Citibank violated 85 of the National Bank Act, 12 U.S.C. 85 and 108(5) of the New York Banking Law by charging him daily interest at the maximum legal rate on the full amounts credited to his checking account in multiples of $100.00, rather than on the lesser amounts of the overdrafts, and on previously imposed interest charges and on service and maintenance charges.

After both parties moved for summary judgment the district court, in an opinion filed on November 7, 1973, (1) upheld Brown's claim to the extent that it challenged the bank's practice of charging interest on the amounts by which the credits exceeded the overdrafts (2) dismissed his claim that Citibank was charging interest on interest, since records submitted by the bank, which were undisputed by Brown, clearly contradicted the claim and (3) denied summary judgment to either party on Brown's claim that Citibank was charging him interest on service and maintenance charges, since the question could not be resolved 'until the defendant discontinues its practice of charging interest on multiples of a hundred-dollars rather than the amount of the overdraft.' Finally, the court refused to order the bank to credit deposits made by Brown to his checking account as repayment of the transfers from his Checking Plus account. The court held that the bank could lawfully require the repayments to be credited to the Checking Plus loan account since such repayments did not 'entail additional expense or sacrifice' of the kind referred to in (section 108(5)(f) of the New York Banking Law).' Both parties have appealed from the district court's judgment.

DISCUSSION

Before reaching the merits, we must consider a threshold issue which neither of the parties raised here or in the district court. The district court's jurisdiction was properly invoked pursuant to 28 U.S.C. 1337, 1355, since Brown was technically asserting a claim under the National Bank Act,12 U.S.C. 85 and seeking to recover the penalties provided for in 12 U.S.C. 86. However, in regulating the interest-charging practices of national banks such as Citibank those sections contain no independent provisions but merely incorporate the laws of the various states. Thus 85 provides that 'any association may take, receive, reserve and charge on any loan . . . interest at the rate allowed by the laws of the State, Territory, or District where the bank is located.' The provision is clearly enabling rather than restraining and was intended solely to place national banks in a position to compete with all other banks in the country. See Tiffany v. National Bank, 18 Wall. 409, 85 U.S. 409, 21 L.Ed. 862 (1873).

Since the federal statute had no independent operation and only state law questions were presented, the district court could, and probably should, have posponed its decision until Brown's claim was presented to and adjudicated by the courts of New York. Cf. Railroad Commission v. Pullman Co.,312 U.S. 496, 61 S.Ct. 643, 85 L.Ed. 971 (1941); Louisiana Power & Light Co. v. Thibodaux City, 360 U.S. 25, 79 S.Ct. 1070, 3 L.Ed.2d 1058 (1959). While we recognize that abstention should be reserved for exceptional circumstances, Zwickler v. Koota, 389 U.S. 241, 248, 88 S.Ct. 391, 19 L.Ed.2d 444 (1967), in view of its substantial costs for litigants, see Baggett v. Bullit, 377 U.S. 360, 375-379, 84 S.Ct. 1316, 12 L.Ed.2d 377 (1969), it would have been appropriate in this case, since the district court was dealing with part of a complicated and comprehensive regulatory statute intended to strike a balance between differing local interests. See Burford v. Sun Oil Co., 319 U.S. 315, 63 S.Ct. 1098, 87 L.Ed. 1424 (1943): Alabama Public Service Commission v. Southern R. Co., 341 U.S. 341, 71 S.Ct. 775, 95 L.Ed. 1016 (1951). In enjoining Citibank from continuing a practice which its competitors in neighboring states clearly have power to do, see N.J.S.A., Article 12-A, 17.9A-59.1, there was the danger that the district court was frustrating a significant state policy in favor of permitting commercial banks located within the state to be 'free to compete'. See New York State Banking Department, Report of the Superintendent's Committee on Financial Reform 4 (1974).

With these considerations in mind and in deference to New York's overriding interest in this litigation, we would reverse the district court on abstention grounds alone if Citibank had raised the issue or if we ourselves were in any doubt as to the proper meaning of the state statute. However, while the abstention doctrine is designed primarily to serve such public policies as comity in federal-state-relations, see Comment, Federal-Question Abstention: Justice Frankfurter's Doctrine in an Activist Era, 80 Harv.L.Rev. 605 (1967), the failure of a defendant even to raise the abstention issue is entitled to some consideration when an appellate court is deciding whether the plaintiff should be required to start all over again. See AFA Distributing Co. Inc. v. Pearl Brewing Co., 470 F.2d 1210, 1213 (4th Cir. 1973). Furthermore, abstention is inappropriate when a federal court believes the state law is clear, see Chicago v. Atchison Topeka & Santa Fe Railway Co., 357 U.S. 77, 78 S.Ct. 1063, 2 L.Ed.2d 1174 (1957); Toomer v. Witsell, 334 U.S. 385, 392 n. 15, 68 S.Ct. 1156, 92 L.Ed. 1460 (1948), and a state statute may be clear even where, as here, it has not been ruled upon by a state court. See Executive...