Sherman v. Citibank (South Dakota), N.A.

Citation272 N.J.Super. 435,640 A.2d 325
PartiesMarc SHERMAN, on behalf of himself and all others similarly situated, Plaintiff-Appellant, v. CITIBANK (SOUTH DAKOTA), N.A., Defendant-Respondent.
Decision Date22 April 1994
CourtNew Jersey Superior Court – Appellate Division

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

Christopher R. Lipsett of Wilmer, Cutler & Pickering, Washington, DC, admitted pro hac vice, argued the cause for respondent; Dechert Price & Rhoads, Lawrenceville, attorneys for respondent (George G. O'Brien, Matthew V. DelDuca, Robert D. Rhoad, Lawrenceville, of counsel and on the brief).

Smith, Stratton, Wise, Heher & Brennan, Princeton, filed a brief amicus curiae for New Jersey Bankers Ass'n (William J. Brennan, III, of counsel and on the brief).

Jeffrey M. Keiser, Cherry Hill, filed a brief amicus curiae for Bank Card Holders of America.

Before Judges SHEBELL, LONG and LANDAU.

The opinion of the court was delivered by

LONG, J.A.D.

Plaintiff, Marc Sherman, here appeals from the trial judge's dismissal of the class action he filed against defendant, Citibank (South Dakota), N.A. to invalidate the late charges defendant imposed upon him in connection with a credit card it had issued to him.

I

Defendant is a nationally chartered bank association located in Sioux Falls, South Dakota. It actively solicits New Jersey consumers to apply for and accept its Visa and Mastercard credit cards through direct mailings and multi-media advertisements.

Sometime in 1989, plaintiff received a Visa credit card which defendant had mailed to him at his New Jersey residence. At the same time, he received a Cardmember Agreement. This agreement was not included in the record. However, defendant does not dispute that it provided for a late fee to be imposed if a cardholder fails to pay the designated minimum monthly payment by the late payment due date. This fee is in addition to the interest which accrues on the unpaid balance and is listed separately on a cardholder's statement. Plaintiff and defendant dispute the amount of the late charge. Plaintiff says it is a $15 flat fee; defendant says it is a $6 flat fee for accounts unpaid over fifteen days plus one-half percent per month.

Between the date plaintiff received his credit card and December 1991, he did not always pay the minimum monthly installment due on his account as stated on his monthly billing statements. As a result, his succeeding monthly billing statements reflected the imposition of at least two separate late charges. These fees are prohibited by New Jersey law.

Plaintiff filed a consumer class action against defendant on behalf of himself and all residents of New Jersey who hold credit cards issued by defendant or have done so in the past and have been charged a delinquency charge or late fee in connection with those credit cards. In it he asserted four claims: (1) violation of N.J.S.A. 56:8-2 and -19, for defendant's failure to disclose in its advertising and in its agreements with credit cardholders that New Jersey law prohibits late fee charges; (2) violation of N.J.S.A. 17:16C-50 and -54, which prohibit delinquency charges on revolving credit accounts, for defendant's collection of late fees; (3) breach of contract for assessing late fees that are not reasonably related to defendant's costs; and (4) conversion.

Defendant moved to dismiss the amended complaint. At the close of oral argument, the motion judge, Judge Fratto, dismissed plaintiff's complaint on the ground that the National Bank Act preempted New Jersey law relative to the subject of interest. An order to this effect was entered from which plaintiff filed a timely notice of appeal. On appeal, plaintiff argues that his state law claims are not preempted by section 85 of the National Bank Act because the late charges at issue are not interest. We have carefully reviewed this record in light of this contention 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:

[a]ny 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. Marquette Nat'l Bank, 439 U.S. 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.

The question presented here is whether the late charge imposed by Citibank is exportable interest within the meaning of Marquette and the most favored lender doctrine. A number of recent federal decisions persuasively reason that late charges are interest within the meaning of federal law. Greenwood actually presented the question of whether a state bank which was chartered in Delaware and insured by the Federal Deposit Insurance Corporation could assess its Massachusetts credit card customers the late penalties permitted by Delaware law but proscribed by Massachusetts. 971 F.2d at 821-22. The First Circuit Court of Appeals was presented with a problem similar to that at issue here because the Delaware bank was governed by section 521 of the Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDA), Pub.L. No. 96-221, 94 Stat. 132 (1980) (codified in scattered sections of the U.S. Code). Greenwood, supra, 971 F.2d at 822. Section 521, codified at 12 U.S.C.A. § 1831d(a), allows insured state...

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    • United States
    • California Supreme Court
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