Smiley v. Citibank, B078913

• Citation: 26 Cal.App.4th 1767,32 Cal.Rptr.2d 562
• Decision Date: 11 July 1994
• Docket Number: No. B078913,B078913
• Court: California Court of Appeals Court of Appeals
• Parties: Previously published at 26 Cal.App.4th 1767, 31 Cal.App.4th 1730, 36 Cal.App.4th 196 26 Cal.App.4th 1767, 31 Cal.App.4th 1730, 36 Cal.App.4th 196 Barbara SMILEY, Plaintiff and Appellant, v. CITIBANK (SOUTH DAKOTA) N.A., Defendant and Respondent.

Page 562

32 Cal.Rptr.2d 562

Previously published at 26 Cal.App.4th 1767, 31 Cal.App.4th 1730, 36 Cal.App.4th 196

26 Cal.App.4th 1767, 31 Cal.App.4th 1730, 36 Cal.App.4th 196

Barbara SMILEY, Plaintiff and Appellant, v. CITIBANK (SOUTH DAKOTA) N.A., Defendant and Respondent.

No. B078913.

Court of Appeal, Second District, Division 7, California.

July 11, 1994.

As Modified Aug. 5, 1994.

Review Granted Oct. 27, 1994.

[31 Cal.App.4th 1731] [26 Cal.App.4th 197] Chimicles, Jacobsen & Tikellis, Haverford, PA, and Nichaolas E. Chimicles and Michael D. Donovan. Chimicles, Jacobsen & Tikellis, Los Angeles, and Eugene Mikolajczyk and Patrick J. Grannan, for plaintiff and appellant.

Shearman & Sterling and William M. Burke, Richard B. Kendall and Michael H. Strub, Jr., Los Angeles, for defendant and respondent.

STANIFORTH, Associate Justice. ^*

Appellant Barbara Smiley's (Smiley) class action seeks damages and injunctive relief alleging defendant Citibank (South [31 Cal.App.4th 1732] [26 Cal.App.4th 198] Dakota) N.A. (Citibank) ¹ charged excessive late charges on her (and others) Mastercard and Preferred Visa credit card accounts. Smiley alleges the fees charged are impermissible under California law. Citibank contends Smiley's claims are "completely preempted under federal law."

The trial court first denied Citibank's motion to dismiss, and Citibank then sought a writ of mandate in this court (Division Seven). This court issued its order and alternative writ of mandate directing the trial court to vacate its prior minute order denying Citibank's motion or to show cause why it did not do so. The trial court responded by entering judgment on the pleading and dismissing Smiley's action. Smiley appeals the judgment.

FACTUAL AND PROCEDURAL BACKGROUND

Citibank is a national banking association chartered by the United States Office of the Controller of Currency (OCC). Citibank issues credit cards to customers nationwide from its sole location in Sioux Falls, South Dakota. In addition to the "finance charge" on certain outstanding balances, Citibank's credit card agreements provide for "late charges" for customers who do not make minimum payments by certain specified dates.

Citibank charges are consistent with the express terms of Smiley's card agreements with Citibank. These charges are authorized under South Dakota law, where Citibank is located and where Smiley's account is maintained.

In August 1992, Citibank removed Smiley's action to the United States District Court for the Central District of California, upon the sole ground of diversity of citizenship. Citibank later sought to amend its removal petition to include the ground that Smiley's claims were preempted under federal law. Citibank filed its answer and affirmative defenses in federal court, denying every allegation of wrongdoing asserted by Smiley.

The federal court granted Citibank's motion to remand on the ground of lack of diversity. The federal court denied Citibank's motion to amend the removal petition as untimely. It therefore did not reach the merits of Citibank's preemption argument.

After remand, Citibank moved the trial court for a judgment on the pleadings dismissing with prejudice and without leave to amend all claims set forth in the complaint. The trial court denied Citibank's motion.

[31 Cal.App.4th 1733] [26 Cal.App.4th 199] Thereafter, Citibank filed a petition for writ of mandate and other appropriate relief in this court (Division Seven) seeking an order commanding the trial court (1) to vacate its order denying Citibank's motion, and (2) to enter a new order granting the motion. This court (Citibank v. Smiley (Sept. 23, 1993) B077960 [nonpub. opn.] ) issued an order and alternative writ of mandate commanding the trial court to vacate its prior minute order denying Citibank's motion or, in the alternative, to show cause why it had not done so. The trial court vacated its previous order and issued its judgment of dismissal from which Smiley filed this appeal.

The trial court held that section 85 of the National Bank Act of 1864 governs Citibank's late payment fees on credit card accounts and that Smiley's claims, all of which were

based entirely on challenges to Citibank's late charges under California law, were preempted

ISSUE

Does section 85 of the National Bank Act, 12 U.S.C.A. section 85 (West 1989), govern late payment fees that are charged by a national bank on credit card accounts, preempting any claim alleging that such charges violate the law of the state where the borrower resides?

I DISCUSSION

Section 85 of the National Bank Act provides in part:

"Any association may take, receive, and charge on any loan ... 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; hereafter section 85.)

Section 86 of the National Bank Act provides in part:

"The taking, receiving, reserving, or charging a rate of interest greater than is allowed by section 86 of the title, when knowingly done, shall be deemed a forfeiture of the entire interest which the note, bill or other evidence of debt carries with it, or which has been agreed to be paid thereon. In case the greater rate of interest has been paid, the person by whom it has been paid ... may recover back, in an action in the nature of an action of debt, twice the amount of the interest thus paid...." (12 U.S.C.A. § 86; hereafter section 86.)

[31 Cal.App.4th 1734] [26 Cal.App.4th 200] (1) Neither section 85 nor 86 defines the terms "interest" and "rate of interest". Smiley claims that late fees are not governed by sections 85 and 86. She argues that sections 85 and 86 govern the amount of interest national banks may charge and that because late fees are not interest, they are not governed by sections 85 and 86.

Multiple courts in interpreting sections 85 and 86 have treated a wide variety of charges as interest within the meaning of the statute. (See Fisher v. First National Bank, 548 F.2d 255 [8th Cir.1977] [cash advance fee]; McAdoo v. Union Nat'l Bank, 535 F.2d 1050, 1056 [8th Cir.1976] [compensating balance requirements]; Cronkleton v. Hall, 66 F.2d 384, 387 [8th Cir.], cert. denied, 290 U.S. 685, 54 S.Ct. 121, 78 L.Ed. 590 (1933) [bonus or commission paid to lender]; Northway Lanes v. Hackley Union Nat'l Bank & Trust Co., 464 F.2d 855, 863 [6th Cir.1972] [closing costs]; Schumacher v. Lawrence, 108 F.2d 576, 577 [6th Cir.1940] [taxes and recording fees]; Panos v. Smith, 116 F.2d 445 [6th Cir.1940] [same]; American Timber & Trading Co. v. First Nat'l Bank, 690 F.2d 781 [9th Cir.1982] [compensating balance requirements]; Nelson v. Citibank (S.D.) 794 F.Supp. 312, 318; Ament v. PNC National Bank, 849 F.Supp. 1015.)

In Fisher, supra, 548 F.2d 255, the court concluded that because section 85 allowed national banks located in Nebraska to charge interest at the rate allowed by state law, and because Nebraska law allowed some classes of state lenders to charge flat fees for loans, national banks located in Nebraska could also charge flat fees for loans. In its May 28, 1992 order, this Court held that under Fisher, interest under section 85 could not be defined narrowly to include only periodic interest charges, but included flat fees as well.

The United States Supreme Court upheld the Fisher court's holding in Marquette National Bank of Minneapolis v. First Omaha Service Corp., 439 U.S. 299, 99 S.Ct. 540, 58 L.Ed.2d 534 (1978). The issue in Marquette was whether a national bank chartered in Nebraska could charge its Minneapolis credit card customers an interest rate that was allowed under Nebraska law, but was higher than the rate allowed by Minnesota's usury law. The Court held that under the plain language of section 85, a national bank could charge the rate of interest allowed by the state named in its organization certificate. The fact that the bank extended credit to

residents of another state, the Court reasoned, did not alter the bank's location. Marquette, 439 U.S. at 310, 99 S.Ct. at 546. Because section 85 allowed the bank to charge the interest allowed by Nebraska law, it overrode Minnesota's interest rate ceilings

In Marquette National Bank v. First of Omaha Corporation, supra, 439 U.S. 299, 308, 99 S.Ct. at 545, the United States Supreme Court stated: "Omaha [31 Cal.App.4th 1735] [26 Cal.App.4th 201] Bank is a national bank; it is an 'instrumentalit[y] of the Federal government, created for a public purpose, and as such necessarily subject to the paramount authority of the United States.' Davis v. Elmira Savings Bank, 161 U.S. 275, 283 [16 S.Ct. 502, 503-04, 40 L.Ed. 700] (1896). The interest rate that Omaha Bank may charge in its BankAmericard program is thus governed by federal law. See Farmers' & Mechanics' Nat. Bank v. Dearing, 91 U.S. 29, 34 [23 L.Ed. 196] (1875)."

II

Citibank's authority to engage in the banking business and, specifically, to establish credit card accounts, is based on the National Bank Act. (12 U.S.C.A. § 24 [Seventh] 12 C.F.R., § 7.7378.) The Act establishes a federal limit on lending charges by national banks (§ 85). If the section 85 limit is exceeded, section 86 provides the borrower's exclusive remedy: forfeiture of all interest due on the debt or, if the lender has already received the excessive interest, twice the amount of interest paid by the borrower. Thus sections 85 and 86 "cover the entire subject" of national bank lending. (Farmers' & Mechanics' Nat. Bank v. Dearing, 91 U.S. 29, 32, 35, 23 L.Ed. 196 (1875).) As noted above, section 85 of the Act further provides that national banks may charge "interest at the rate allowed by the laws of the State Territory, or District where the bank is located." (12 U.S.C.A., § 85.) (Emphasis mine.)...