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Sherman v. Citibank (South Dakota)

November 28, 1995

MARC SHERMAN, ON BEHALF OF HIMSELF AND ALL OTHERS AND ALL OTHERS SIMILARLY SITUATED, PLAINTIFF-APPELLANT,
v.
CITIBANK (SOUTH DAKOTA), N.A., DEFENDANT-RESPONDENT.



On certification to the Superior Court, Appellate Division, whose opinion is reported at 272 N.J. Super. 435 (1994).

Chief Justice Wilentz and Justices Stein and Coleman join in Justice Handler's opinion. Justice Pollock has filed a separate Dissenting opinion in which Justice Garibaldi joins. Justice O'Hern has also filed a separate Dissenting opinion. The opinion of the Court was delivered by Handler, J.

The opinion of the court was delivered by: Handler

(This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for the convenience of the reader. It has been neither reviewed nor approved by the Supreme Court. Please note that, in the interests of brevity, portions of any opinion may not have been summarized).

MARC SHERMAN V. CITIBANK (SOUTH DAKOTA),N.A. (A-102-94)

(NOTE: This is a companion case to Hunter v. Greenwood Trust Co., also decided today.)

Argued February 15, 1995 -- Decided November 28, 1995

HANDLER,J., writing for a majority of the Court.

Marc Sherman, a named party in a class-action suit, challenges the legality of the late-payment fees that are charged to New Jersey holders of Citibank (South Dakota) credit cards. Sherman claims that: New Jersey's Retail Installment Sales Act of 1960 (RISA) forbids national banks that issue credit-cards to New Jersey customers from charging late-payment fees; Citibank's failure to disclose in its cardmember agreements and advertisements that late-payment fees are prohibited by New Jersey law violates the New Jersey's Consumer Fraud Act; and the imposition of the late-payment fees constitutes a common-law breach of contract and conversion.

Citibank relies on section 85 of the National Bank Act (NBA), which provides that a national bank may charge borrowers "interest" at a rate allowed by the laws of the State... where the bank is located." Citibank is a national bank chartered in South Dakota, and South Dakota includes late-payment fees in its statutory definition of "interest." Citibank contends that Sherman's RISA claim, as well as his other claims, conflict with, and are preempted by, section 85 of the NBA. Therefore, according to Citibank, it can charge late-payment fees in New Jersey

Following the institution of suit, the Law Division granted Citibank's motion to dismiss the complaint with prejudice. The Appellate Division affirmed. The Supreme Court granted Sherman's petition for certification.

HELD: Late-payment fees are not "interest" within the intent and purpose of section 85 of the National Bank Act. Rather, "interest at a rate allowed by the laws of the State... where the bank is located" refers only to the periodic percentage rate charged on outstanding balances. Therefore, Marc Sherman's state-law defenses to Citibank's charges do not conflict with federal law, are not preempted, and the late-payment fees are illegal under New Jersey law.

1. In the area of state usury-law restrictions on lending practices, compelling evidence of an intention by Congress to preempt state law is required. Because Congress failed to include an express preemption clause in section 85, the Court addresses whether the NBA conflicts with RISA's prohibition of late-payment fees. On its face, section 85 immunizes national banks that lend money beyond their home-state's borders from local usury laws that might give local banks a competitive advantage. However, neither the plain meaning of the terms "rate" and "interest" in section 85, nor the legislative history of that provision, indicates that these terms carry the expansive meaning inferred by Citibank. (pp. 5-7)

2. Since 1874, section 85 has been interpreted as entitling a national bank to charge the highest interest rate allowed to lenders by the laws of the state in which the bank is located. This borrowing of an interest rate is known as the "most-favored-lender" doctrine. In Marquette National Bank v. First of Omaha Service Corp., the national bank's authorized exportation of lending terms was limited to numerical percentage-rate interest terms. The Supreme Court made no mention of the exportation of other credit-card terms, such as late charges, nor did its reasoning or rationale imply that discrete and specialized charges affixed to credit-card loans could be imposed on customers in other states. (pp. 7-10)

3. The language of section 521 of the Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDA) essentially mirrors section 85 of the NBA. Section 521 has been interpreted as conferring on federally-insured state banks the same insulation from state usury laws that national banks have enjoyed under the NBA. The legislative history of DIDA, including the record of Congressional debate and deliberation concerning its enactment, strongly supports the understanding that preemption of credit-card regulation is confined to traditional numerical interest rates. Post-DIDA legislative history also tends to confirm the Conclusion that Congress in 1980 did not intend to bar states from prohibiting late fees by credit-card issuers. (pp. 10-15)

4. Citibank relies on cases from other jurisdictions, specifically, Greenwood Trust v. Massachusetts and Tikkanen v. Citibank (South Dakota), N.A., to support its expansive interpretation of "interest." Those cases, however, do not support the Conclusion that Congress intended to include non-interest rate charges in its understanding of interest. Further, Smiley v. Citibank, to which Citibank and the Dissent refer, does not support the position that interest under section 85 includes late charges. The most-favored-lender doctrine serves to eliminate discrimination without distorting or extending the meaning of interest to include charges that Congress neither expressly nor implicitly incorporated in the definition of interest. (pp. 15-22)

5. The interpretative ruling of the Office of the Controller of the Currency (OCC), the agency charged with enforcement of the NBA, is not strong evidence that late fees constitute interest for purposes of the NBA. The soundness of this ruling and its value as authority are greatly undermined when placed in the context of conflicting OCC rulings. An examination of OCC interpretative letters reveals significant inconsistent administrative treatment of interest in respect of the NBA. (pp. 22-26)

6. On March 7, 1995, RISA was amended to specifically allow for late-fee charges on retail charge accounts. Because the amendment became effective on May 29, 1995, for purposes of this appeal, Citibank's late-fee charges were illegal under RISA. Nonetheless, the amendment indicates that the Legislature did not intend to include late-fee charges within its definition of interest; rather, it expressly specified when and under what conditions other non-percentage rate changes could be procured by lenders in addition to annual interest rate charges. The manner in which both the Legislature and the Department of Banking have chosen to regulate lender-authorized charges clearly supports the Conclusion that late fees are distinct from interest. The Dissent's reasoning in opposition obscures the clear language and structure of the legislative treatment of interest and late fees. (pp. 28-29)

7. The New Jersey Bank Parity Act (Parity Act) provides for parity between the rates of interest charged by banks and credit unions, but does not explicitly authorize banks to charge other types of fees. There is no indication that the Legislature implicitly intended other lender-imposed fees in the Parity Act, nor is there course of regulatory conduct that reflects a clear and consistent administrative understanding as evidence of an underlying legislative intent to include such fees. Thus, neither Congress, in passing the NBA, nor the New Jersey Legislature, through the Parity Act, intended to include late fees in its definition of interest for the purpose of preventing discrimination against out-of-state lenders. (pp. 30-34)

8. A plain reading of the NBA, as well as most cases that interpret it, indicate that a national bank is permitted to charge the interest rate of the state in which it is located, not the interest rate of the state in which the out-of-state customer is located. Here, RISA does not conflict with the most-favored-lender doctrine. Thus, New Jersey should be permitted to prohibit out-of-state lenders from charging late-fees to New Jersey residents, because, at the outset of this case, New Jersey banks were also prohibited from charging those fees. Therefore, Citibank's late-fee charges violated this State's usury laws and are impermissible. (pp. 34-39)

9. It would appear that a national bank and a federally-insured state bank may, as of May 29, 1995, charge a delinquency fee in accordance with the authorization now given by RISA. (pp. 39-42)

Judgment of the Appellate Division is REVERSED.

JUSTICE POLLOCK, Dissenting, in which JUSTICE GARIBALDI joins, notes that recent federal cases, Greenwood Trust Co. v. Massachusetts and Tikkanen v. Citibank (South Dakota), N.A., support the Conclusion that "interest" includes late fees and that an out-of-state bank can export those fees. Furthermore, Congress intended to delegate to the OCC the authority to implement the goals of the NBA. As such, federal banking regulators are in a better position than state courts to define the meaning of interest in the NBA. The evolution of the OCC's analysis does not render its opinion unworthy of judicial deference in defining "interest" to include late payment fees. The OCC has made a reasonable choice among possible definitions of interest, and has consistently determined that late-payment and certain other non-periodic fees are interest for the purposes of section 85. Because Justice Pollock believes that section 85's definition of "interest" includes late fees, he also addresses whether Congress intended that the NBA, as interpreted by the OCC, should preempt state law. Given the pervasive role that Congress has entrusted to federal banking regulators, consistent regulatory rulings on preemption should be respected. Close analysis of New Jersey law, moreover, reveals that RISA impermissibly interferes with the Congressional goal of preventing states from discriminating against national banks. Under the Parity Act, state banks, like national banks, may charge late fees as interest; therefore, the definition of interest in the Parity Act includes late fees. Because state-chartered banks may charge late fees to New Jersey customers, state laws, such as RISA, that prohibit out-of-state national banks from charging such fees would constitute impermissible discrimination in violation of the Supremacy Clause. Therefore, the NBA conflicts with, and thus preempts, RISA.

O'HERN,J., Dissenting, would allow national banks to assess late charges against credit card holders in New Jersey, not because the late charges are interest under the NBA, (they are not) and not because Congress has authorized the Controller of Currency to preempt the State's consumer protection law, but because New Jersey permits lenders to impose such late charges and may not discriminate against national banks that seek to impose the same charges.

CHIEF JUSTICE WILENTZ and JUSTICES STEIN and COLEMAN join in JUSTICE HANDLER's opinion. JUSTICE POLLOCK filed a separate Dissenting opinion in which JUSTICE GARIBALDI joins. JUSTICE O'HERN filed a separate Dissenting opinion.

The opinion of the Court was delivered by HANDLER, J.

In this case, as in the companion case of Hunter v. Greenwood Trust Co., N.J. , rev'g 272 N.J. Super. 526 (1994), also decided today, New Jersey credit-card customers contend that New Jersey's usury laws prohibit banks that issue those cards from charging late-payment fees to New Jersey customers.

The issues before us are more specifically framed by the claims and defenses of the respective parties. Plaintiff, as a named party in a class-action suit, challenges the legality of the late-payment fees that are charged to New Jersey holders of defendant Citibank (South Dakota) credit cards. Plaintiff argues that New Jersey's Retail Installment Sales Act of 1960, N.J.S.A. 17:16C-50, -54 (RISA), forbids national banks that issue credit-cards to New Jersey consumers from charging late-payment fees. Plaintiff also argues that defendant's failure to disclose in its cardmember agreements and advertising that late-payment fees are prohibited by New Jersey law violates New Jersey's Consumer Fraud Act (CFA), N.J.S.A. 56:8-2, -19. Finally, plaintiff contends that the imposition of late-payment fees constitutes a common-law breach of contract and conversion.

Defendant relies on section 85 of the National Bank Act (NBA), which provides that a national bank may charge borrowers "interest at a rate allowed by the laws of the State . . . where the bank is located." 12 U.S.C.A. § 85. Citibank is a national bank chartered in South Dakota, and South Dakota includes late-payment fees in its statutory definition of interest. 272 N.J. Super. at 438. Citibank, therefore, contends that plaintiff's RISA claim, as well as plaintiff's other claims, conflict with, and are preempted by, section 85. See id. at 439. Thus, Citibank argues it is free to charge late-payment fees in New Jersey.

Following the commencement of this action, the Law Division granted the bank's motion to dismiss the complaint with prejudice. The Appellate Division affirmed. 272 N.J. Super. 435 (1994). We granted plaintiff's petition for certification, 138 N.J. 270 (1994), and now reverse the dismissal of plaintiff's claims.

We determine that the understanding of "interest" as expressed and authorized in the NBA does not include distinctive and contingent loan terms or charges, such as late fees, that are unrelated to interest rates. We hold that late-payment fees are not "interest" within the intendment and purposes of the applicable federal statute. Rather, "interest at a rate allowed by the laws of the State . . . where the bank is located" refers only to the periodic percentage rate charged on outstanding balances. Therefore, plaintiff's state-law defenses to the bank's charges do not conflict with federal law, are not preempted, and the late-payment fees are illegal under New Jersey law.

I

Since the early years of the Republic, the states have generally resisted the development of national banks and favored their own state-chartered banks through regulatory legislation. William Oscar Scroggs, A Century of Banking Progress 50-51 (1924); John J. Knox, A History of Banking in the U.S. 12 (2d ed. 1969). The Supreme Court has, since M'Culloch v. Maryland, 17 U.S. (4 Wheat) 316, 4 L. Ed. 579 (1819), generally limited federal statutory involvement by construing preemption narrowly and giving relatively free rein to state usury law regulations. See Anderson Nat'l Bank v. Luckett, 321 U.S. 233, 64 S. Ct. 599, 88 L. Ed. 692 (1944); McClellan v. Chipman, 164 U.S. 347, 17 S. Ct. 85, 41 L. Ed. 461 (1896).

This Court, in considering preemption claims, must be cautioned by the longstanding presumption that "Congress did not intend to displace state law." Maryland v. Louisiana, 451 U.S. 725, 746, 101 S. Ct. 2114, 2129, 68 L. Ed. 2d 576, 595 (1981), and that it should not unnecessarily disturb "the federal-state balance." United States v. Bass, 404 U.S. 336, 349, 92 S. Ct. 515, 523, 30 L. Ed. 2d 488, 497 (1971). Indeed, greater restraint ought apply to preemption of spheres traditionally occupied by the states. Where the field that Congress is said to have preempted has been traditionally occupied by the states, "we start with the assumption that the historic police powers of the States were not to be superseded by the Federal Act unless there was the clear and manifest purpose of Congress." Rice v. Santa Fe Elevator Corp., 331 U.S. 218, 230, 67 S. Ct. 1146, 1152, 91 L. Ed. 1447 (1947).

"It is well settled that state usury law restrictions on lending practices are so extensive and historically rooted as to form part of the consumer protection terrain 'traditionally occupied' by the states." Greenwood Trust Co. v. Massachusetts, 776 F. Supp. 21, 27-28 (D. Mass. 1991), rev'd, 971 F.2d 818 (1st Cir. 1992), cert. denied, U.S. , 113 S. Ct. 974, 122 L. Ed. 2d 129 (1993) (citing Lewis v. BT Inv. Managers, Inc., 447 U.S. 27, 38, 100 S. Ct. 2009, 2016, 64 L. Ed. 2d 702, 713 (1980) ("We readily accept the submission that, both as a matter of history and as a matter of present commercial reality, banking and related financial activities are of profound local concern")); Smiley v. Citibank (South Dakota), N.A., 44 Cal. Rptr. 2d 441, 465-66 (1995) (Arabian, J., Dissenting) (same); id. at 467-68 (George, J., Dissenting) (same). Accordingly, " because consumer protection law is a field traditionally regulated by the states, compelling evidence of an intention to preempt is required in this area." General Motors Corp. v. Abrams, 897 F.2d 34, 41-42 (2d Cir. 1990) (upholding New York's "Lemon Law" against a claim that a Federal Trade Commission consent decree preempted major elements of the local law). Congress' failure to include an express preemption clause in section 85 necessitates a careful examination of whether the NBA conflicts with RISA's prohibition of late-payment fees.

Section 85 provides in pertinent part:

Any [national bank] association 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 a 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 (emphasis added) .]

On its face, section 85 immunizes national banks that lend money beyond their home-state's borders from local usury laws that might give local banks a competitive advantage. It also protects national banks during periods of inflation by overriding even the home-state's usury laws and permitting national banks to charge interest at a rate tied to the federal discount rate. E.g. Tiffany v. National Bank, 85 U.S. (18 Wall) 409, 412-13, 21 L. Ed. 862, 863-64 (1874) (holding that Congress, by enacting NBA, intended to protect national banks from hostile state usury laws); Roper v. Consurve, Inc., 578 F. 2d 1106 (5th Cir. 1978), aff'd sub nom., Deposit Guaranty Nat'l Bank v. Roper, 445 U.S. 326, 100 S. Ct. 1166, 63 L. Bd. 2d 427 (1980) (holding section 85 was designed by Congress to mandate parity between national banks and local lenders). However, neither the plain meaning of the terms "rate" and "interest", in section 85, nor the legislative history of that provision indicates that these terms carry the expansive meaning inferred by defendant. See Smiley, supra, 44 Cal. Rptr. 2d at 469 (George, J., Dissenting).

Since 1874, the Supreme Court has interpreted section 85 as entitling a national bank to charge the highest interest rate allowed to lenders by the laws of the state in which the bank is located. Tiffany, supra, 85 U.S. at 411-13, 21 L. Ed. at 863-64 ("The only mode of guarding against [state discrimination] was . . . to allow to national associations the rate allowed by the state to natural persons generally, and a higher rate"). Courts have recognized that Tiffany construed section 85 to place national banks in a position of limited advantage over state banks by allowing them to charge interest at the highest rate applicable under state law to lenders generally and not necessarily at a rate applicable to state banks, which might be lower. This ability to "borrow" an interest rate has come to be known as the "most-favored-lender" doctrine. See, e.g., Fisher v. First Nat'l Bank, 548 F.2d 255 (8th Cir. 1977) (recognizing that notwithstanding limitations on interest imposed on state banks by Nebraska law, national bank located in Nebraska could legally charge, with respect to credit-card transactions, rates allowed by Nebraska law to small loan companies).

In Marquette National Bank v. First of Omaha Service Corp., 439 U.S. 299, 99 S. Ct. 540, 58 L. Ed. 2d 534 (1978), the Supreme Court relied on the NBA and its most-favored-lender doctrine to allow a national bank chartered in Nebraska to charge its credit-card customers in Minnesota a rate of interest authorized in Nebraska, but prohibited by usury law restrictions in Minnesota. Id. at 313-15, 99 S. Ct. at 548-49, 58 L. Ed. 2d at 545-46. The Marquette Court recognized that the "exportation" of interest rates from a national bank's "home state" into a foreign state would "significantly impair the ability of the States to enact effective usury laws," but it found that such impairment "has always been implicit in the structure of the National Bank Act since citizens of one State were free to visit a neighboring State to receive credit at foreign interest rates." Id. at 318, 99 S. Ct. at 550, 58 L. Ed. 2d at 548 (citation omitted) (footnote omitted).

The Court, nonetheless, suggested Congressional action would be necessary to check the preemptive effect of the NBA in a time of national bank deregulation, tightened credit availability, and an increasingly nationalized credit-card lending system:

This impairment may in fact be accentuated by the ease with which interstate credit is available by mail through the use of modern credit cards. But the protection of state usury laws is an issue of legislative policy, and any plea to alter § 85 to further that end is better addressed to the wisdom of Congress than to the judgment of this Court.

[ Id. at 318-19, 99 S. Ct. at 550, 58 L. Ed. 2d at 548.]

Marquette does not mandate or encourage an extension of the "most-favored-lender" status to expand the definition of "rates" to include other non-interest rate charges. The national bank's authorized exportation of lending terms in Marquette was limited to numerical percentage-rate interest terms. The Court made no mention of the exportation of other credit-card terms, such as late charges, nor did its reasoning or rationale imply that discrete and specialized charges affixed to credit-card loans could be imposed on customers in other states. See Smiley, supra, 44 Cal. Rptr. 2d at 465 (Arabian, J., Dissenting).

In the years following Marquette, Congress embarked on a mission to deregulate the banking industry. Interest rates soared, and while national banks could charge interest at a rate tied to the federal discount rate, state banks were constrained by local usury laws. See Greenwood Trust, supra, 971 F.2d at 826. Congress sought to rectify that obvious inequity by enacting the Depository Institutions Deregulation and Monetary Control Act of 1980, 12 U.S.C.A. § 1831d (DIDA). Ibid. The language of section 521 of DIDA essentially mirrors that of section 85 of the NBA. Courts and federal agencies have interpreted section 521 as conferring on federally-insured state banks the same insulation from state usury laws that national banks have enjoyed under the NBA. Id. at 826-27 (concluding that Section 521 permits federally-insured state banks to "export" interest rates); Vanderweyst v. First State Bank, 425 N.W.2d 803, 806 (Minn.) (concluding that section 521 gives federally-insured state banks "most favored lender" status), cert. denied, 488 U.S. 943, 109 S. Ct. 369, 102 L. Ed. 2d 359 (1988).

The legislative history of DIDA is instructive to our understanding of Congress' general understanding of interest and its intent with respect to the notion of interest contained in the NBA. E.g. Copeland v. MBNA America Bank, N.A., Colo. (1995) (slip op. at 14). Although the NBA was enacted 100 years earlier, the same tensions, namely parity between federal and state lenders and preservation of local usury laws, were present and these conflicting considerations generated substantial concerns surrounding the passage of the earlier banking statute.

The record of Congressional debate and deliberation concerning the enactment of DIDA strongly supports the understanding that preemption of credit-card regulation under DIDA is confined to traditional numerical interest rates. The central unifying purpose of DIDA was to provide for increased access to home mortgage loans. Section 501 of DIDA provided for preemption of state usury limits on mortgage loans in a manner virtually identical to the treatment of other loans (including credit-card agreements) in Title V of the Act, which contains section 521.

The Senate Report of deliberations over section 501 of DIDA restricts preemption and expressly reserves the regulation of "late charges" to the states.

In exempting mortgage loans from state usury limitations, the Committee intends to exempt only those limitations that are included in the annual percentage rate. The Committee does not intend to exempt limitations on prepayment charges, attorney fees, late charges or similar limitations designed to protect borrowers.

[S. Rep. No. 96-368, 96th Cong., 2d Sess. 19, reprinted in 1980 U.S. Code Cong. and Ad. News, Vol. 2, 236, 255.]

Subsequent legislative history links preemption concerns in section 501 both to the consideration of section 521, and to DIDA in its entirety as passed on March 27-28, 1980. Notably, Congress passed section 501 at the same time, and the same title (Title V) of the same act, as section 521.

During the Discussion on the Senate floor of the various bills that figured in the development of DIDA, Senators Pryor and Bumpers proposed an amendment, S. 1988, to give state-chartered institutions "competitive equality" with national banks by allowing them to charge interest at one percent above the federal discount rate. 125 Cong. Rec. 30655 (1979). Senator Proxmire, floor manager of the Senate bills under Discussion, and chairman of the Senate Banking Committee, understood the proposed amendment to override state usury laws and emphasized that there was "a sharp division and difference of opinion in the Senate." Id.

Separate hearings on the Pryor-Bumpers initiative, S. 1988, 96th Cong. 1st Sess, (1979) were held December 17, 1979, and though it was not reported out of committee, the bill's language was substantially incorporated into House Bill 4986, H.R. 4986, 96th Cong., 1st Sess. (1979), which was, in turn, enacted as DIDA. William M. Burke & Alan S. Kaplinsky, Unraveling the New Federal Usury Law, 37 Bus. Law. 1079, 1096-97 and n.102 (1982).

A fair reading of the legislative history indicates that Congressional concern was focused with particularity on numerical or percentage interest rates. In introducing S. 1988, Senator Pryor noted, "A national bank may charge one percent above the Federal discount rate, notwithstanding any State laws setting an interest-rate ceiling . . . [which] obviously discriminates in the strongest possible way against State banks. 125 Cong. Rec. 30655 (1979). The great bulk of the subsequent committee testimony and Discussion indicates that the proposed preemption amendment was limited because, in Senator Pryor's words, it "would merely allow State chartered, federally insured banks . . . to charge the same interest rate as national banks." Id. In fact, there were only two references to wider displacement of state law though expansion of the "most-favored-lender doctrine." Senator Bumpers, co-sponsor of the preemption amendment, confined his remarks to numerical interest rate disparities and remarked pointedly, "I do not think it is particularly healthy to be overriding state law." Id.

Post-DIDA legislative history tends to confirm the Conclusion that Congress in 1980 did not intend to bar states from prohibiting late fees by credit-card issuers. In 1981 and in 1983-84 the Senate (but not the House) passed amendments to DIDA which would have expanded preemption of state usury laws, but would have expressly exempted late charges from preemption. Greenwood Trust, supra, 776 F. Supp. at 31 (citing Hearings on S. 730 Before the Senate Committee on Banking, Housing and Urban Affairs, 98th Cong., 1st Sess. (April 12, 1983); Hearings on S. 1720, 1981. *fn1 The failed S. 730 bill also expressly granted states the right to override preemption.

Thus, the fact that Congress was specifically concerned about effecting a preemption limited to numerical interest rates is significant. If we cannot attribute to legislative initiative of 15 years ago the intent to include discrete, specialized charges within a definition of interest, we cannot ascribe that expansive definition to a legislative initiative that occurred over 100 years earlier. That is especially so when the later statute substantially paralleled the language of the former, and it was passed in an effort to give federally-insured state banks status equal to national banks that had enjoyed a superior status since the enactment of the earlier act. Thus, it would be contrary to common sense to conclude that in enacting the NBA, Congress contemplated an open-ended and expansive concept of interest that was light years from the traditional understanding of a fixed, basic percentage rate applied to an unpaid loan balance. Or that, correlatively, it intended to prohibit states from regulating specific terms and conditions of loans and preventing lenders from charging late-payment fees.

II

Defendant relies on case law from other jurisdictions to support its expansive interpretation of "interest", specifically, Greenwood Trust, supra, 971 F.2d 818 and Tikkanen v. Citibank (South Dakota), N.A., 801 F. Supp. 270 (D. Minn. 1992). We find, however, that the reasoning expressed in the Greenwood Trust line of cases and the authorities cited by the Greenwood Trust court are unpersuasive and do not support the Conclusion that Congress intended to include non-interest rate charges in its understanding of interest.

Greenwood Trust held that prior case law supported the notion that federal common law construes interest to encompass a variety of lender-imposed fees and financial requirements that are independent of a numerical percentage rate. 971 F.2d at 829 (citing American Timber & Trading Co. v. First Nat'l Bank, 690 F.2d 781, 787-88 (9th Cir. 1982); Fisher v. First Nat'l Bank, 548 F.2d 255, 258-61 (8th Cir. 1977); Panos v. Smith, 116 F.2d 445, 446-46 (6th Cir. 1940); 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); Nelson v. Citibank (South Dakota) N.A., 794 F. Supp. 312, 318 (D. Minn. 1992)). Inimical to the holding in Greenwood Trust, a careful examination of the cases cited does not establish that Congress intended to include late-payment fees within a federal definition of interest under either section 85 or section 521.

Contrary to the Greenwood Trust court's interpretation, American Timber & Trading Co., supra, did not hold that a compensating-balance requirement was interest under section 85. Rather, the court held that a compensating-balance requirement reduces the principal amount of a loan for purposes of calculating effective interest. 690 F.2d at 787-88. In addition, Fisher, supra, did not expressly hold that cash-advance fees were interest under section 85. In that case, the plaintiff challenged the periodic interest and cash-advance fees charged by an out-of-state national bank. 548 F.2d at 256. The court applied the most favorable laws covering any class of lenders in the bank's home state, which permitted certain lenders to charge 30% interest on a balance under $300, and held that the charges were not usurious. Id. at 258-61. The court did not even discuss the distinction between periodic interest rates and the flat fees charged.

In Panos, supra, the court did not hold that mortgage taxes and recording fees were interest under section 85. Rather, the court held that such charges, which were deducted from the principal received by the borrower, reduced the principal amount of a loan for purposes of calculating effective interest. 116 F.2d at 446-47.

In Cronkleton, supra, the court did not conclude that a bonus or commission was interest under section 85. The Eighth Circuit's holding (in relevant part) was limited to a modification of the district court's award of damages for usury under the NBA. The court's opinion does not provide a detailed account of the facts. However, it appears that in February 1926, the defendant, a national bank, loaned $55,000 to the plaintiffs. 66 F.2d at 385. The contractual periodic rate of interest was not usurious. Ibid. But, in November 1930, plaintiffs paid to the bank an additional $1,000. Ibid. Although the district court "made no findings as to bonuses paid," the court characterized the additional payment as a bonus or commission. Id. at 386. The court then noted that "in determining the rate 'reserved' or 'charged' . . . the taking of a 'bonus' or 'commission' . . . may enter in to render an otherwise lawful rate unlawful and usurious." Id. at 387.

The Greenwood Trust court suggested that Nelson, supra, decided three months earlier, held that late-payment fees were interest under section 85. 971 F.2d at 829. However, Nelson expressly disclaimed that Conclusion. 794 F. Supp. at 320 ("the question of whether national banks may export terms other than periodic interest charges goes to the merits of the case; deciding that question on a motion to remand is inappropriate"). The court held only that the defendant's claim that section 85 preempted plaintiffs' state law claims raised a substantial federal question. Id. at 315-16.

The court in Greenwood Trust also cited several cases to support the proposition that section 85 "adopts the entire case law of [a state bank's home] state interpreting the state's limitations on usury; it does not merely incorporate the numerical rate adopted by the state." 971 F.2d at 829 (citing First Nat'l Bank v. Nowlin, 509 F.2d 872, 876 (8th Cir. 1975); accord Roper v. Consurve, Inc., 777 F. Supp. 508, 510-11 (S.D. Miss. 1990), aff'd, 932 F.2d 965 (5th Cir.) (table), cert. denied, U.S. , 112 S. Ct. 181, 116 L. Ed. 2d 142 (1991); Daggs v. Phoenix Nat'l Bank, 177 U.S. 549, 555, 20 S. Ct. 732, 735, 44 L. Ed. 882 (1900); Union Nat'l Bank v. Louisville, N.A. & C. Ry., 163 U.S. 325, 331, 16 S. Ct. 1039, 1042, 41 L. Ed. 177 (1896); Bartholomew v. Northampton Nat'l Bank, 584 F.2d 1288, 1295 (3d Cir. 1978); McAdoo v. Union Nat'l Bank, 535 F.2d 1050, 1055-58 (8th Cir. 1976); Northway Lanes v. Hackley Union Nat'l Bank & Trust Co., 464 F.2d 855, 861-64 (6th Cir. 1972)). Those cases, however, do not demonstrate that Congress intended to incorporate a state definition of interest that would authorize states unilaterally to incorporate non-percentage rate charges into an exportable definition under section 85. Moreover, none of those cases involve a definition of interest for exportation purposes where the definition varied between states.

Nowlin, supra, exemplifies the Greenwood Trust court's misplaced reliance on previous cases construing the NBA. In Nowlin, a national bank in Arkansas loaned money to the plaintiff, who agreed to repay the loan in installments. 509 F.2d at 874. Instead of amortizing the loan over the agreed term, the bank "discounted" the notes by 8%; that is, the bank gave the plaintiff the requested sum, but an additional 8% for every year of the notes' term was immediately added to the outstanding principal amount. Ibid. The plaintiff then had to repay the adjusted principal amount in equal payments over the term. Ibid. Because all interest was calculated up-front based on the initial loan amount, instead of being calculated periodically on a declining principal balance, the national bank achieved an effective yield of nearly 16%. Ibid.

The bank did not dispute that Arkansas considered usurious interest rates over 10%. Id. at 876. Furthermore, the bank did not dispute that a state bank could not "discount" notes in a like manner because Arkansas case law defined interest for purposes of its usury laws as "effective yield." Ibid. However, the bank argued that because it was a national bank, it was subject only to section 85, which defined interest narrowly to include only percentage rates charged, not effective yields. Ibid. Because its 8% discount rate was less than the 10% Arkansas-usury rate, the bank argued that it did not violate the NBA. Ibid.

The court rejected the bank's arguments. After discussing the objectives of section 85, the court held that such a narrow interpretation would be inconsistent with Congress' desire to foster competitive equality between state and national banks. Id. at 880. Thus, the court held, Arkansas' definition of interest was incorporated into section 85. Ibid.

Contrary to the Greenwood Trust Court's Conclusion, Nowlin does not offer an expanded definition of the term "rate," but rather shows only that calculation of chargeable interest rates must take "the case law of the state" into account. The state law regarding discounting was given substantial weight because discounting, unlike late-fee charges, directly affects the numerical interest rate by altering the percentage rate over time. It is noteworthy that the Nowlin decision involved the intra-state, not inter-state, application of Arkansas' definition of interest. Thus, it said nothing about exporting that definition to a foreign state where state-usury laws are more restrictive. Moreover, the case should be read as a judicial attempt to protect state usury laws at the expense of the federal most-favored-lender doctrine.

Defendant also refers, as does the Dissent, to Smiley v. Citibank, supra, 44 Cal. Rptr.2d 441 (1995), to support its position that "interest" under section 85 includes late charges. Post at (slip op. at 4). Similar use is made of Copeland v. MBNA America Bank, N.A., supra, Colo. (1995). The majority in Smiley bases that Conclusion in large measure on its understanding of historical legal usage. Smiley, supra at 449-51. See also Copeland, supra, at (slip op. at 11-13) (same). In our view, however, interest in its historical setting is limited to a periodic charge expressed as a percentage of a principal balance due. See Discussion, (supra) , at 25-28. The majority in Smiley also concluded that if interest does not include late charges then a state could discriminate against a national bank to make it unprofitable for it to lend money in that state. Smiley, supra, at 451. However, a state cannot discriminate against a national bank by permitting state banks to charge late fees or higher late fees while prohibiting a national bank from charging those fees. See Discussion, (infra) at 38-41. See Smiley, supra, at 470 (George, J., Dissenting) (noting that it has been established since the early 1800's that even in the absence of a specific federal statutory prohibition a state may not ...


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