Hitz v. First Interstate Bank

• Decision Date: 14 September 1995
• Docket Number: No. A063163,A063163
• Citation: 44 Cal.Rptr.2d 890,38 Cal.App.4th 274
• Court: California Court of Appeals Court of Appeals
• Parties: , 95 Cal. Daily Op. Serv. 7299, 95 Daily Journal D.A.R. 12,393 Jacque HITZ, as Personal Administrator, etc., et al., Plaintiffs and Respondents, v. FIRST INTERSTATE BANK, Defendant and Appellant.

Page 890

44 Cal.Rptr.2d 890

38 Cal.App.4th 274, 95 Cal. Daily Op. Serv. 7299,

95 Daily Journal D.A.R. 12,393

Jacque HITZ, as Personal Administrator, etc., et al., Plaintiffs and Respondents, v. FIRST INTERSTATE BANK, Defendant and Appellant.

No. A063163.

Court of Appeal, First District, Division 3, California.

Sept. 14, 1995.

Certified for Partial Publication ^*.

Rehearing Denied Oct. 10, 1995.

Review Denied Dec. 14, 1995.

Charles C. Lifland, Gregory R. Oxford, Michael M. Maddigan, O'Melveny & Myers, Los Angeles, for defendant and appellant.

William Alsup, James A. Huizinga, Morrison & Foerster, San Francisco, for amici curiae on behalf of defendant and appellant.

James C. Sturdevant, Patricia Sturdevant, Kim E. Card, Sturdevant & Sturdevant, San Francisco, for plaintiffs and respondents.

MERRILL, Associate Justice.

I. INTRODUCTION

In this case we modify a $13,971,830 judgment in a class action which challenged the assessment of fees by First Interstate Bank (FICAL) against breaching credit card customers who failed to make minimum monthly payments when due or exceeded their credit limits. We reduce the judgment by $9,076,304, which represents the amount the trial court found to be net revenue or benefit from finance charges imposed by FICAL on delinquent and overlimit balances. We hold FICAL was entitled to retain such revenue because the interest provided for in the credit card agreement remained chargeable after the breach thereof. Further, such revenue cannot be treated as gain made possible only by the breaches, and thus is not an offset against FICAL's recoverable actual damages, because FICAL could have made similar loans to other customers had the breaches never occurred. We also hold that the underlying credit card agreements invoke the provisions of Civil Code section 1671, subdivision (d), prescribing the standard of invalidity of liquidated damages in a consumer contract for services, and that substantial evidence supports the remaining $4,895,526 portion of the judgment.

II. BACKGROUND

This litigation is similar to Beasley v. Wells Fargo Bank (1991) 235 Cal.App.3d 1383, 1 Cal.Rptr.2d 446, in which Division Four of this Appellate District affirmed a $5,227,617 judgment in a class action challenging two types of fees imposed on credit card customers: a "late" fee assessed against customers who did not make monthly payments on time, and an "overlimit" fee charged to customers whose account balances in a given month exceeded their credit limits.

Beasley upheld a determination that the fees were invalid as liquidated damages under subdivision (d) of Civil Code section 1671, which applies to certain consumer contracts and provides that a provision for liquidated damages in such contracts "is void except that the parties to such a contract may agree therein upon an amount which shall be presumed to be the amount of damage sustained by a breach thereof, when, from the nature of the case, it would be impracticable or extremely difficult to fix the actual damage." Beasley held, based on Garrett v. Coast & Southern Fed. Sav. & Loan Assn. (1973) 9 Cal.3d 731, 108 Cal.Rptr. 845, 511 P.2d 1197, that "plaintiffs still remained liable for 'the actual damages resulting from' their late and overlimit activity, which would include 'administrative costs reasonably related to collecting and accounting for' late and overlimit balances." (Beasley v. Wells Fargo Bank, supra, 235 Cal.App.3d at p. 1390, 1 Cal.Rptr.2d 446, quoting Garrett v. Coast & Southern Fed.Sav. & Loan Assn., supra, 9 Cal.3d at p. 741, 108 Cal.Rptr. 845, 511 P.2d 1197.) In Garrett, which concerned the invalidity of fees charged for failure to make timely installment payments on promissory notes secured by deeds of trust, the court held that the borrower "remains liable for the actual damages resulting from his default. The lender's charges could be fairly measured by the period of time the money was wrongfully withheld plus the administrative costs reasonably related to collecting and accounting for a late payment." (Garrett v. Coast & Southern Fed.Sav. & Loan Assn., supra, 9 Cal.3d at p. 741, 108 Cal.Rptr. 845, 511 P.2d 1197.) ¹

FICAL's form credit card agreements authorize the late and overlimit fees. In 1982, the late fee was set at 5 percent of the amount past due, with a minimum charge of $3 and a maximum charge of $5 (before then, the minimum charge was $1), and the overlimit fee was set at $10 for outstanding balances exceeding credit limits (in practice, by more than 10 percent).

The class was certified to consist of all FICAL credit cardholders who were assessed late or overlimit fees after February 10, 1983. After a nonjury trial, the court issued a lengthy and thorough statement of decision, concluding that the challenged fees were void under Civil Code section 1671, subdivision (d), and their imposition was an unlawful business practice under Business and Professions Code section 17200 et seq. The court rendered judgment for plaintiffs in the total sum of $13,971,830 for fees paid through October 21, 1991, consisting of "$9,569,560 for late fees collected in excess of defendant's actual costs resulting directly from late payments, and $4,402,260 for overlimit fees collected in excess of defendant's actual costs resulting directly from overlimit charges."

III. DISCUSSION

A. Finance Charges as a Basis For Reducing FICAL's Damages

In calculating FICAL's actual damages resulting from the late payment and overlimit breaches, which damages are to be deducted from plaintiffs' recovery, the trial court reduced damages by what the statement of decision called "the monetary benefit earned by the bank resulting from the very same breaches, i.e., interest earned by the bank on late and overlimit balances." In other words, the court determined that FICAL mitigated its damages by imposing finance charges, at contract rates of up to 21 percent, on the portions of account balances that were delinquent or overlimit.

The court determined that during the class period, FICAL collected finance charges of $15,134,864 on delinquent balances and $1,145,544 on overlimit balances, for a total of $16,280,408. According to the court, the bank's cost of borrowing these sums (for lending to plaintiffs), based on the average federal funds interest rate ² during the class period, was $6,745,554 for delinquent balances and $458,550 for overlimit balances, for a total of $7,204,104. By this reckoning, the net "benefit" to FICAL from these finance charges (the charges collected minus the bank's cost of borrowing) was $9,076,304. This sum is, in effect, the major component of plaintiffs' $13,971,830 judgment because as an offset against FICAL's actual damages that reduce plaintiffs' recovery, it becomes a part of plaintiffs' recovery. ³

FICAL contends this was error because the result is to deny the bank its full contract rate of interest on delinquent and overlimit balances, to which it is entitled by statute and case authority, improperly replacing the contract rate with the federal funds interest rate.

We agree with FICAL's contention. It is wrong to compel FICAL, in effect, to finance delinquent and overlimit balances at rates that are lower than are charged on nondelinquent and within-limit portions of accounts and to nondefaulting cardholders. This would be inconsistent with FICAL's entitlement to actual damages "fairly measured by the period of time the money was wrongfully withheld...." (Garrett v. Coast & Southern Fed. Sav. & Loan Assn., supra, 9 Cal.3d at p. 741, 108 Cal.Rptr. 845, 511 P.2d 1197.)

In its statement of decision the trial court acknowledged FICAL's entitlement to the full contract rate of interest on late and overlimit balances, but treated what it considered to be net revenue or benefit as an offset against FICAL's damages: "The court holds that a determination of FICAL's damages resulting from 'money wrongfully withheld' in the form of late payments and overlimit transactions must take into account the revenue earned by FICAL on the amounts in breach, as well as the costs incurred in borrowing those sums, i.e., the bank's cost of funds." Thus the $9,076,304 figure at issue in this case was arrived at by the trial court by taking the difference between its determination of the amount of interest to which the bank is entitled at the contract interest rate ($16,280,408) and the bank's cost of federal funds ($7,204,104).

The court's holding is in error for several reasons. FIRST, the parties and the trial court all agree that the contract rate of interest agreed upon continues to be chargeable on the delinquent and overlimit balances after the breach. Civil Code section 3289, subdivision (a), expressly provides that "[a]ny legal rate of interest stipulated by a contract remains chargeable after a breach thereof, as before, until the contract is superseded by a verdict or other new obligation." This proposition is so well established that both parties cite authorities in support thereof which were decided over a century ago. (Casey v. Gibbons (1902) 136 Cal. 368, 371, 68 P. 1032 ["The rate of interest was stipulated in the contract and 'remains chargeable after a breach thereof, as before, until the contract is superseded by a verdict or other new obligation' "]; Kohler v. Smith (1852) 2 Cal. 597, 597-598 ["This language [in the act] is very explicit, and shows that the intention of the act was two-fold; first, that money demands after maturity should draw interest; and second, that they should draw interest at whatever rate was expressed in the written contract"].)

In the case before us, however, the trial court, in effect, reduced the contract rate of interest recoverable by FICAL. Plaintiffs say this is untrue and they point to the decision of the trial court. The court ruled as follows: "In determining the amount of excessive late fees that must be returned to class members ... the Court has used the same methodology...