Hunter v. Greenwood Trust Co.

Decision Date22 April 1994
Citation640 A.2d 855,272 N.J.Super. 526
PartiesJames H. HUNTER, on behalf of himself and all others similarly situated, Plaintiff-Appellant, v. GREENWOOD TRUST COMPANY, Defendant-Respondent.
CourtNew Jersey Superior Court — Appellate Division

Michael D. Donovan of Chimicles, Burt, Jacobsen & McNew, admitted pro hac vice, argued the cause for appellant; Spector Gadon & Rosen, attys. for appellant (Ann Miller, admitted pro hac vice, of counsel; Paul R. Rosen and Robert L. Grundlock, Jr., on both the brief and the reply brief).

Burt M. Rublin, of Wolf, Block, Schorr and Solis-Cohen, admitted pro hac vice, argued the cause for respondent; Archer & Greiner, attys. for respondent (Sean T. O'Mara, on the brief); Alan S. Kaplinsky of Wolf, Block, Schorr and Solis-Cohen, admitted pro hac vice, of counsel.

Before Judges SHEBELL, LONG and LANDAU.

The opinion of the court was delivered by

LONG, J.A.D.

Plaintiff, James M. Hunter, here appeals from the trial judge's dismissal of the class action he filed against defendant, Greenwood Trust Company, to invalidate the late charges imposed by defendant on his credit card account.

I

Greenwood is a federally insured bank, chartered under Delaware law, located in New Castle, Delaware. One of the banking services provided by Greenwood is the Discover Card, which cardholders use to charge items and to make purchases by borrowing money from Greenwood on an open-ended credit basis. Greenwood issues its Discover Card to credit card applicants pursuant to a Cardmember Agreement which cardholders receive when they obtain their credit cards.

Among numerous other provisions, the Cardmember Agreement specifies the annual percentage rate finance charge which Greenwood assesses against the outstanding monthly debt balance on its cardholders' accounts. The Cardmember Agreement also provides that if a cardholder fails to make a specified minimum payment on the outstanding debt balance within twenty days of the payment due date stated in a monthly bill, a late charge of ten dollars will be assessed against the cardholder's account. The late charge is added to the cardholder's outstanding balance and the annual percentage rate finance charge is applied to that outstanding balance in subsequent billings. The cardholder may incur multiple ten-dollar late payment charges on his or her account for failure to make the minimum payment during several billing cycles. Greenwood issues its Discover Card to applicants throughout the United States. More than 10,000 residents of New Jersey have received these cards.

Plaintiff is a New Jersey resident who received his Discover Card from Greenwood in 1985. On at least three occasions between 1985 and 1991, plaintiff did not pay the minimum monthly amount specified on his Discover Card bill. Consequently, he incurred at least three ten-dollar late payment charges over the years and those charges were added to his outstanding debt balance in subsequent billings.

Plaintiff filed a complaint, later amended to class action form, which alleged that the ten-dollar late charge Greenwood imposes for a cardholder's failure to pay the minimum monthly amount on an outstanding debt balance violates New Jersey statutory law, specifically provisions of the Retail Installment Sales Act, N.J.S.A. 17:16C-50 and -54 and the Consumer Fraud Act, N.J.S.A. 56:8-2 and -19. Plaintiff also alleged violations of New Jersey common law, specifically breach of contract and conversion, based upon the illegally imposed late charges.

Greenwood moved to dismiss the amended complaint for failure to state a claim upon which relief could be granted. In so moving, it asserted that plaintiff's state law based claims were preempted by section 521 of the Depository Institutions Deregulation and Monetary Control Act of 1980 ("DIDA"), Pub.L. No. 96-221, 94 Stat. 132 (codified as section 27 of the Federal Deposit Insurance Act (12 U.S.C.A. § 1831d)) (hereinafter section 521).

The trial judge, Judge Fratto, ruled that by enacting section 521 Congress intended to preempt "the entire area" covering interest rates and the assessment of late payment charges by state-chartered, federally insured banks like Greenwood. Accordingly, he entered an order dismissing plaintiff's amended complaint.

Plaintiff appeals, contending that section 521 preempts state interest laws but excludes late charges from its preemptive scope. He also urges that, even if preemption is applicable to his state statutory claims, his state common law claims should not have been dismissed. We have carefully reviewed this record in light of these contentions and have concluded that there is no warrant for our intervention.

II

In 1864, Congress enacted the National Bank Act (NBA) ch. 106, 13 Stat. 99 (codified, as amended, in scattered sections of the United States Code). Section 85 of the NBA, states in relevant part that:

Any association [national bank] may take, receive, reserve, and charge on any loan or discount made, or upon any notes, bills of exchange, or other evidence of debt, interest at the rate allowed by the laws of the State, Territory, or District where the bank is located, or at a rate of 1 per centum in excess of the discount rate on ninety-day commercial paper in effect at the Federal reserve bank in the Federal reserve district where the bank is located, whichever may be the greater....

[12 U.S.C.A. § 85.]

The intent of section 85 was to protect national banks from discriminatory state banking laws. See Greenwood Trust Co. v. Massachusetts, 971 F.2d 818, 826 n. 6 (1st Cir.1992), cert. denied, --- U.S. ----, 113 S.Ct. 974, 122 L.Ed.2d 129 (1993). By permitting national banks to charge interest at the rate allowed by a state's law or at a rate tied to the local federal discount rate, Congress prevented states from favoring state-chartered banks to the detriment of national banks as to the amount of interest that could be charged on bank loans. Ibid.

Ten years after the NBA was enacted, the United States Supreme Court construed section 85 in Tiffany v. National Bank 85 U.S. (18 Wall.) 409, 21 L.Ed. 862 (1873). There, the Court announced what became known as the "most favored lender" doctrine, under which national banks could not be placed at a competitive disadvantage with respect to any state-regulated lender. Specifically, Tiffany allowed a national bank to charge interest rates chargeable by natural persons under Missouri law. 85 U.S. at 413, 21 L.Ed. at 863-64. The "most favored lender" doctrine has subsequently been interpreted to give national banks the same interest rate privileges as any competing state institutions, including small loan companies and retail installment sellers. See, e.g., Fisher v. First Nat'l Bank, 538 F.2d 1284, 1289-90 (7th Cir.1976), cert. denied, 429 U.S. 1062, 97 S.Ct. 786, 50 L.Ed.2d 778 (1977).

In 1936, the Comptroller of the Currency issued an interpretation of section 85 which administratively recognized the "most favored lender" doctrine as part of federal banking law. See Barkley Clark, The Law of Bank Deposits, Collections and Credit Cards, p 11.09, at 43 (3d ed. 1990). The "most favored lender" doctrine was later formally incorporated into the Comptroller's regulations covering national banks. 12 C.F.R. § 7.7310(a) (1993).

The margins of the most favored lender doctrine were later tested in Marquette National Bank v. First of Omaha Service Corp., 439 U.S. 299, 99 S.Ct. 540, 58 L.Ed.2d 534 (1978). There, First National Bank of Omaha, a national bank chartered in Nebraska, where the allowable interest rate ranged up to eighteen percent on outstanding credit card balances, attempted to "export" that rate to Minnesota, where it had solicited BankAmericard customers and where the allowable interest rate was only twelve percent. Id. at 302-304, 99 S.Ct. at 542-43, 58 L.Ed.2d at 538-39. Minnesota law permitted credit card issuers within its borders to charge an annual usage fee to cardholders to compensate for the relatively low rate of allowable interest. Id. at 303, 99 S.Ct. at 542, 58 L.Ed.2d at 538-39. A national bank located in Minnesota, Marquette National Bank, brought an action to enjoin First of Omaha from soliciting business in and from "exporting" interest rates to Minnesota, asserting that it was losing BankAmericard customers to First of Omaha because Minnesota's low twelve percent interest rate compelled it to charge its cardholder customers a ten-dollar annual fee for use of the card. Id. at 304, 99 S.Ct. at 543, 58 L.Ed.2d at 539. The Minnesota-based national bank was rebuffed by the Minnesota Supreme Court and appealed.

The United States Supreme Court determined that the case was governed by section 85, and ruled that a national bank may charge interest on any loan at the rate allowed by the state where the bank is located. Id. at 313-19, 99 S.Ct. at 547-50, 58 L.Ed.2d at 544-48. The Court unanimously held that First of Omaha could charge its Minnesota customers the interest rate allowed under Nebraska law, even though that rate was greater than the rate allowed in Minnesota for a Minnesota-based national bank. Id. at 318-19, 99 S.Ct. at 550-51, 58 L.Ed.2d at 547-48. Marquette effectively permitted a national bank to "export" its home state's interest rates on credit card accounts to other states.

Within two years of Marquette, the United States experienced a credit upheaval which included soaring interest rates. See Greenwood Trust Co., supra, 971 F.2d at 826. National banks fared well on credit card transactions because they could either "export" favorable home state interest rates or charge interest tied to very high local federal discount rates, pursuant to section 85 of the NBA. Ibid. State-chartered banks, however, could not do so because their interest rates were constrained by the ceilings imposed by the various states' usury laws, some of which were unrealistically low. Ibid. Congress sought to ...

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