People ex rel. Spitzer v. Applied Card Sys.

• Decision Date: 26 June 2008
• Docket Number: No. 96.,96.
• Citation: 11 N.Y.3d 105,894 N.E.2d 1
• Parties: In the Matter of the PEOPLE of the State of New York, by Eliot SPITZER, as Attorney General, Respondent-Appellant, v. APPLIED CARD SYSTEMS, INC., et al., Appellants-Respondents.
• Court: New York Court of Appeals Court of Appeals

894 N.E.2d 1

11 N.Y.3d 105

In the Matter of the PEOPLE of the State of New York, by Eliot SPITZER, as Attorney General, Respondent-Appellant, v. APPLIED CARD SYSTEMS, INC., et al., Appellants-Respondents.

No. 96.

Court of Appeals of New York.

June 26, 2008.

Arnold & Porter LLP, New York City (H. Peter Haveles, Jr., of counsel) and Howard N. Cayne, Washington, D.C., for appellants-respondents.

Andrew M. Cuomo, Attorney General, New York City (Michelle Aronowitz, Barbara D. Underwood and Diana R.H. Winters of counsel), for respondent-appellant.

William H. Sorrell, Attorney General, Montpelier, Vermont (Elliot Burg of counsel), for Attorneys General of the States of Alaska and others, amici curiae.

OPINION OF THE COURT

CIPARICK, J.

This appeal arises out of a special proceeding initiated by the Attorney General, seeking restitution, civil penalties, and injunctive relief for violations of New York's Executive Law and Consumer Protection Act (see Executive Law § 63[12]; General Business Law §§ 349, 350). We are asked to determine whether the federal Truth-in-Lending Act (TILA) preempts these claims of a fraudulent and deceptive credit card solicitation scheme. We conclude that it does not. We hold, however, that res judicata effect should be granted to a prior nationwide class action settlement agreement, thereby precluding the Attorney General from recovering certain restitution.

I.

Respondent Cross Country Bank (CCB) is a Delaware bank that, since 1997, has actively solicited consumers in the "subprime" credit market to apply for its credit cards. These consumers "generally would not qualify for credit under traditional underwriting guidelines and principles."¹ Certain of CCB's marketing materials claim that the company's "purpose is to help people establish good credit." Respondent Applied Card Systems (ACS) provided, as relevant here, debt collection services for CCB's credit card accounts.

On March 28, 2003, the Attorney General filed a verified petition asserting that CCB's credit card solicitations and collections practices violated New York's Executive Law and Consumer Protection Act (see Executive Law § 63[12] [fraud]; General Business Law §§ 349 [deceptive business practices], 350 [false advertising]). The gravamen of the petitioner's complaint was that CCB had misrepresented the credit limits that subprime consumers could obtain and that it failed to disclose the effect that its origination and annual fees would have on the amount of initially available credit.

For example, in its mail solicitations CCB told consumers that they were "pre-approved" for a credit limit "up to" $2,500 or $1,000. These communications further clarified that the actually-approved credit limit could be substantially less, perhaps as low as $350.² CCB's solicitations also explained that upon approval consumers would incur a $100 "Account Origination Fee" and a $50 "Annual Fee." But CCB's explanation of the fact that those fees would be treated as charges that could greatly reduce the amount of credit initially available to consumers was oblique.³ In some cases, the initial fees depleted consumers' credit limits by approximately 40% or more.

As relevant here, the verified petition also contained allegations of fraud and deception pertaining to CCB's marketing of "secured cards," the Credit Account Protector (CAP) insurance program, the Applied Advantage (AA) cardholder benefit program, and a debt collection device known as "re-aging." With respect to secured cards,⁴ petitioner asserted that CCB's advertisement was deceptive because its banner touted "no late fees*" and "no collections calls*," but further clarified that such fees would be imposed and such calls made in certain instances. The marketing of CAP was fraudulent and deceptive, petitioner claimed, because the program was advertised as providing coverage in the event of "death, disability, unemployment, or family leave," but—as CCB clarified in an insert and subsequently-mailed certificate of coverage—only life and dismemberment benefits were available to New York consumers.⁵ As for AA, petitioner asserted that CCB's practice of automatically enrolling consumers in the benefit program—at a cost of $34.95 per year—unless they expressly opted out of it was deceptive because the opt-out mechanism was confusing and misleading. Finally, petitioner alleged that ACS marketed re-aging as a means for severely delinquent cardholders to bring their accounts current through a series of payments, while failing to explain that over-the-limit fees would continue to accrue throughout the re-aging process and that both these fees and the previously imposed late fees would be due at the conclusion of the re-aging process.⁶

In addition to the alleged fraudulent and deceptive practices described above, the verified petition also set forth certain facts regarding respondents' late fees, finance charges, balance calculation method, and the lack of any "grace period" for consumer payments. Pursuant to TILA, these terms must be disclosed in all credit card solicitations. But petitioner claimed that many consumers were "unaware" of the manner in which charges and penalties based upon the terms were assessed to their accounts.⁷ According to petitioner, these charges and penalties contributed to "trapp[ing] . . . unwary consumers" in a "vicious cycle of pyramiding debt."

On February 11, 2004, Supreme Court issued a decision and order that, in relevant part, held that petitioner was barred by res judicata from seeking restitution for pre-January 1, 2002 "front-end claims," or those concerning illegal conduct "at or near the inception of the cardholder relationship," on behalf of New York consumers who had opted to accept the benefits of a nationwide class action settlement with CCB.⁸ The California Superior Court approved the settlement and dismissal of the action with prejudice on September 30, 2002 (see Allec v. Cross Country Bank, No. 802894, final judgment and order of dismissal with prejudice [Sept. 30, 2002]).

In their motion to reargue the February 11 order, respondents asserted that the credit card application and solicitation disclosure requirements set forth in TILA (see 15 USC § 1632[c]; § 1637[c], [e], [f]) and its accompanying regulation, Regulation Z (12 CFR part 226), preempted petitioner's claims. Following oral argument, Supreme Court held that the claims were not preempted.

After issuing its preemption decision, the court proceeded to find "as a matter of law and fact" that CCB had "repeatedly and persistently" engaged in fraud, deception and false advertising in connection with its credit card solicitations, and that ACS's marketing of the re-aging process was similarly illegal. These rulings were based on the court's review of "volumes of evidentiary proof," including more than 100 pages of application and solicitation materials, more than 200 consumer complaints and affidavits, and the affidavits of former ACS collection employees.

On June 24, 2004, Supreme Court issued an order that, as relevant here, "permanently enjoined" respondents from engaging in future fraud, deception, and false advertising with respect to: credit limits, initially available credit, late fees and collection calls concerning secured credit card accounts, benefits available under CAP and the benefits of account repayment plans, such as re-aging. Supreme Court also prohibited respondents from automatically enrolling consumers in AA without express authorization. The Appellate Division affirmed, rejecting respondents' preemption argument (see 27 A.D.3d 104, 109, 805 N.Y.S.2d 175 [2005]). On January 27, 2006, Supreme Court entered an order awarding the Attorney General approximately $1.3 million in restitution and damages, $7.9 million in penalties and $2,000 in costs. In part, restitution was based upon costs incurred by virtue of the origination and annual fees as well as certain late and over-the-limit fees.

The Appellate Division modified. Upholding Supreme Court's res judicata ruling, the court held that the "public interest does not justify giving the New York consumers bound by the Allec settlement two chances to receive make-whole relief" (41 A.D.3d 4, 8, 834 N.Y.S.2d 558 [2007] [internal quotation marks and brackets omitted]). As to respondents' appeal, the court held that Supreme Court's award of restitution for petitioner's CAP and re-aging claims was improper. Finally, the court affirmed each of the penalties assessed.

This Court granted petitioner and respondents leave to appeal and we now affirm.

II.

Under the U.S. Constitution's Supremacy Clause (U.S. Const., art. VI, cl. 2), the purpose of our preemption analysis is singular and straightforward. "[O]ur sole task is to ascertain the intent of Congress" (California Fed. Sav. & Loan Assn. v. Guerra, 479 U.S. 272, 280, 107 S.Ct. 683, 93 L.Ed.2d 613 [1987]; Rosario v. Diagonal Realty, LLC, 8 N.Y.3d 755, 763, 840 N.Y.S.2d 748, 872 N.E.2d 860 [2007]; see also Medtronic, Inc. v. Lohr, 518 U.S. 470, 485, 116 S.Ct. 2240, 135 L.Ed.2d 700 [1996] ["(T)he purpose of Congress is the ultimate touchstone in every pre-emption case" (internal quotation marks omitted)]). Preemption can arise by: (i) express statutory provision, (ii) implication, or (iii) an irreconcilable conflict between federal and state law (see Balbuena v. IDR Realty LLC, 6 N.Y.3d 338, 356, 812 N.Y.S.2d 416, 845 N.E.2d 1246 [2006]).

When dealing with an express preemption provision, as we do here, it is unnecessary to consider the applicability of the doctrines of implied or conflict preemption (see Cipollone v. Liggett Group, Inc., 505 U.S. 504, 517, 112 S.Ct. 2608, 120 L.Ed.2d 407 [1992, plurality op.] [statute's preemptive scope is "governed entirely" by its "express language"]). Instead, the resolution in this case turns solely upon proper statutory construction of TILA's credit card application and solicitation preemption provision (see Matter of Frew Run...