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Court of Appeal, First District, Division 2, California.

Leslie U. HARRIS et al., Plaintiffs and Appellants, v. CHASE MANHATTAN BANK, N.A. et al., Defendants and Respondents.

No. A060791.

Decided: November 17, 1994

William S. Lerach, Alan M. Mansfield, Darren J. Quinn, Kaitlin M. McCarty, Robin R. Williams, Hynes & Lerach, San Diego, Alan M. Caplan, Philip Neumark, April Strauss, Bushnell, Caplan & Fielding, San Francisco, for plaintiffs and appellants. Nicholas E. Chimicles, Michael D. Donovan, Chimicles, Burt, Jacobson & McNew, Haverford, PA, Michael P. Malakoff, Malakoff, Doyle & Finberg, Pittsburgh, PA, Eugene Mikolajczyk, Patrick J. Grannan, Greenfield, Burt, Jacobsen & McNew, Los Angeles, Kennedy P. Richardson, Albert Lee, Oakland, for amici curiae on behalf of plaintiffs and appellants. McCutchen, Doyle, Brown & Enersen, Palmer Brown Madden, Daniel E. Birkhaeuser, Walnut Creek, Wolf, Block, Schorr & Solis–Cohen, Alan S. Kaplinsky, Jeffrey S. Saltz, Burt M. Rublin, Philadelphia, PA, for defendants and respondents. Morrison & Foerster, Robert S. Stern, James A. Huizinga, Lauren T. Nguyen, Los Angeles, Ronald J. Greene, Christopher R. Lipsett, Charles A. Mendels, Kenneth L. Chernof, Wilmer, Cutler & Pickering, Washington, DC, Sheppard, Mullin, Richter & Hampton, John D. Berchild, Charles H. MacNab, Jr., Los Angeles, for amici curiae on behalf of defendants and respondents.

Plaintiff and appellant Leslie U. Harris appeals from a summary judgment dismissing his class action on behalf of himself and all others similarly situated against defendant-respondent Chase Manhattan Bank, N.A. (Chase) for damages and injunctive relief as the result of allegedly unlawful late fees charged to Chase's credit card holders.

The trial court granted judgment for Chase on the ground that plaintiff's state law-based action was preempted by section 521 of the Depository Institutions Deregulation and Monetary Control Act (DIDA).   Supported by the near unanimous weight of authority, we will affirm.


The facts are simple and undisputed.   Until 1990, Chase was a national banking association located in Delaware.   Since June 21, 1990, Chase has been a federally insured state chartered bank located in Delaware.

Chase issues Visa and MasterCard credit cards to customers in California.   Plaintiff was the holder of a Chase MasterCard residing in the City and County of San Francisco.   Under the cardholder agreement, each cardholder must make a minimum payment by the due date shown on the periodic statement.   If the cardholder fails to make such payment by the due date, Chase is authorized to charge a $10 late fee as a result of the cardholder's breach of his obligation to make timely payments.   On February 20, 1992, Chase assessed a $10 late charge to plaintiff's account under the provisions of the foregoing agreement.

In an amended complaint brought on behalf of himself and other similarly situated cardholders, plaintiff alleges that the late charge constitutes a liquidated damages penalty in violation of Civil Code section 1671 (section 1671) and California law.   He seeks both damages and injunctive relief pursuant to Business and Professions Code sections 17200 and 17204.

Chase demurred to the complaint on federal preemption grounds.   Relying on Greenwood Trust Co. v. Com. of Mass. (1st Cir.1992) 971 F.2d 818, certiorari denied (1993) 506 U.S. 1052, 113 S.Ct. 974, 122 L.Ed.2d 129 (Greenwood Trust ) the trial court found that plaintiff's action against Chase was preempted by the National Banking Act (NBA), section 85 (12 U.S.C. § 85) and DIDA, section 521 (12 U.S.C. § 1831d).   The demurrer was sustained without leave to amend and plaintiff appeals from the judgment of dismissal.


This case is one of many recent class actions brought throughout the country in which credit cardholders have challenged loan fees assessed by either national banks or those chartered in foreign states as violative of their own states' consumer protection laws.

 The gravamen of plaintiff's action is that the credit card late fee charged by Chase violates California law because it is in the nature of a penalty or liquidated damages for breach of the credit card agreement, having no relation to the actual damages incurred by Chase as a proximate result of such breach.  (See § 1671;  Beasley v. Wells Fargo Bank (1991) 235 Cal.App.3d 1383, 1398–1401, 1 Cal.Rptr.2d 446.)   Under the law of Chase's home state of Delaware, the subject late fee fits within the definition of “interest” and is perfectly legal.  (See Del.Code Ann. tit. 5, §§ 945, 950.)   The question presented here is whether, by virtue of DIDA section 521, Chase may “export” Delaware's law applicable to late fees, even though it may conflict with California law governing liquidated damage penalties.

Section 85 of the NBA, enacted by Congress in 1864, provides that a national bank “may take, receive, reserve and charge on any loan ․ interest at the rate allowed by the laws of the State ․ 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․”  (Emphasis added.)

The intent of section 85 was to protect national banks from discriminatory state banking laws and insure “ ‘competitive equality’ ” between state and national banks.  (See Greenwood Trust, supra, 971 F.2d 818, 826, fn. 6;  Marquette National Bank of Minneapolis v. First of Omaha Service Corp. (1978) 439 U.S. 299, 314, 99 S.Ct. 540, 548, 58 L.Ed.2d 534 (Marquette ).)

Ten years after the NBA was enacted, the United States Supreme Court announced the “most favored lender” doctrine pursuant to which national banks could not be placed at a competitive disadvantage with respect to any state-regulated lender.  (Tiffany v. National Bank of Missouri (1873) 85 U.S. (18 Wall.) 409, 21 L.Ed. 862.)   The doctrine has been interpreted to mean that national banks must be given the same interest rate privileges as any person or entity in the state lending money under like conditions.  (See Fisher v. First Nat. Bank of Chicago (7th Cir.1976) 538 F.2d 1284, 1289–1290.)   In Marquette, supra, the court went one step further and held that section 85 permitted a national bank to “export” a favorable credit card interest rate from the state in which it was located to customers in another state.  (439 U.S. at pp. 317–319, 99 S.Ct. at pp. 549–551.)

DIDA was enacted in 1980 following an enormous credit crunch in which interest rates rose to record levels.   National banks, which could lend money at one percent above the Federal Reserve discount rate, enjoyed a distinct competitive advantage over their state-chartered counterparts, which were bound by often restrictive state usury laws.   In order to equalize this advantage, Congress enacted legislation permitting state-chartered banks to export the interest rates of their home states abroad, as national lending institutions had been doing through the NBA.  (Greenwood Trust, supra, 971 F.2d 818, 826;  Stoorman v. Greenwood Trust Company (Colo.Ct.App.1994) 888 P.2d 289 (Stoorman).)   Consequently, section 521 of DIDA borrowed language extensively from section 85, but also added a preemption clause.   It provides that “[i]n order to prevent discrimination against State-chartered insured depository institutions ․ with respect to interest rates,” a state bank “may, notwithstanding any State constitution or statute which is hereby preempted for the purposes of this section,” charge interest at the “rate allowed” by the laws of its home state, or one percent over the federal reserve discount rate, whichever is greater.  (12 U.S.C. § 1831d(a), emphasis added.)

It was against this background that Greenwood Trust was decided.   The issue there was whether a federally insured bank chartered in Delaware could impose late fee charges on its credit cardholders residing in Massachusetts, which fees were prohibited by a Massachusetts consumer protection statute.

The First Circuit held that the Massachusetts statute was substantively preempted under section 521, employing the following reasoning:  (1) due to the unequivocal preemption language of the statute, if section 521 preempts state law, it does so expressly and not by implication;  (2) in order to “level the playing field” in interest rate competition between national and state banks, Congress enacted DIDA, copying section 85's language with regard to interest rates;  included within that language was the “exportation” principle as defined in Marquette;  (3) federal case law interpreting section 85 has consistently defined the term “interest” broadly to include not only numerical percentage rates but late fees and kindred charges in connection with the lending of money;  (4) DIDA therefore permits a state bank to export its home state's entire usury law, including that state's expansive definition of interest;  (5) under either federal common law or the law of Delaware late fees constitute “interest”;  and thus (6) Massachusetts law prohibiting late fees must yield to the preemptive force of section 521.   (Greenwood Trust, supra, 971 F.2d at pp. 823–829.)

We agree with Greenwood Trust's reasoning, as have a plethora of state and federal cases nationwide holding that either section 85 or section 521 preempt contrary state laws regulating late charges and other flat fees in connection with credit card lending.  (Stoorman, supra, 888 P.2d at p. 291 [62 U.S.L. Week 2586];  Ament v. PNC Nat. Bank (W.D.Pa.1992) 825 F.Supp. 1243;  Watson v. First Union Nat. Bank of South Carolina (D.S.C.1993) 837 F.Supp. 146 [overlimit fees];  Goehl v. Mellon Bank (DE) (E.D.Pa.1993) 825 F.Supp. 1239;  Tikkanen v. Citibank (South Dakota) N.A. (D.Minn.1992) 801 F.Supp. 270 (Tikkanen );  Hill v. Chemical Bank (D.Minn.1992) 799 F.Supp. 948 (Hill );  Nelson v. Citibank (South Dakota) N.A. (D.Minn.1992) 794 F.Supp. 312 (Nelson ).

 Two federal banking agencies, the Office of the Comptroller of the Currency (OCC) (OCC Interp.Ltr., 452 Fed.Banking L.Rep. (CCH) ¶ 85,676 (Aug. 11, 1988)) and the Federal Deposit Insurance Corporation (FDIC) (Hill, supra, 799 F.Supp. at p. 953) have also taken the view that state laws regulating late charges by banks are preempted by federal banking statutes.   The opinions of these agencies are entitled to deference by the courts.   (Clarke v. Securities Industry Assn. (1987) 479 U.S. 388, 403–404, 107 S.Ct. 750, 759–760, 93 L.Ed.2d 757 [OCC];  FDIC v. Philadelphia Gear Corp. (1986) 476 U.S. 426, 439, 106 S.Ct. 1931, 1938, 90 L.Ed.2d 428 [FDIC];  see also Conservatorship of Lambert (1983) 143 Cal.App.3d 239, 244, 191 Cal.Rptr. 725 [“Interpretations of a federal statute by a federal agency, although not binding on the courts, are entitled to great weight.  [Citations.]”].)

 Plaintiff claims that the Greenwood Trust court wrongly applied a presumption in favor of preemption instead of the proper standard of presuming lack of preemption unless congressional intent appears unmistakeable.  (See Cipollone v. Liggett Group, Inc. (1992) 505 U.S. 504, ––––, 112 S.Ct. 2608, 2617, 120 L.Ed.2d 407;  Mangini v. R.J. Reynolds Tobacco Co. (1994) 7 Cal.4th 1057, 1072, 31 Cal.Rptr.2d 358, 875 P.2d 73 (Mangini ).)

This argument overlooks the fact even before the enactment of section 521, federal courts had consistently construed the term “interest” in section 85 to embrace not only periodic percentage rates but a host of other fees incidental to the loaning or forbearance of money.  (Citizens' National Bank v. Donnell (1904) 195 U.S. 369, 373–374, 25 S.Ct. 49, 49–50, 49 L.Ed. 238 [overdraft charges];  Northway Lanes v. Hackley Union Nat. Bank & Trust Co. (6th Cir.1972) 464 F.2d 855, 863 [closing costs];  Fisher v. First National Bank of Omaha (8th Cir.1977) 548 F.2d 255, 258–261 [credit card cash advance fees];  Panos v. Smith (6th Cir.1940) 116 F.2d 445, 446–447 [taxes and recording fees];  Cronkleton v. Hall (8th Cir.1933) 66 F.2d 384, cert. den., 290 U.S. 685, 54 S.Ct. 121, 78 L.Ed. 590 [bonus or commission paid to lender].)

In lifting section 85's language and engrafting it onto section 521, Congress is presumed to have been aware of prior judicial decisions interpreting the older statute (Holmes v. Securities Investor Protection Corp. (1992) 503 U.S. 258, –––– – ––––, 112 S.Ct. 1311, 1317–1318, 117 L.Ed.2d 532), including the courts' sweeping construction of the term “interest.”   (Greenwood Trust, supra, 971 F.2d 818, 827.) 1  Viewed from this historical perspective Congress's intent to define “interest” in the broadest sense for preemption purposes could not be more clear.

 Nor are we impressed by plaintiff's attempt to distinguish Greenwood Trust on the basis that the Massachusetts statute prohibited late fees whereas California only places certain limits on them.  Greenwood Trust 's analysis is unaffected by whether the bank customer's state restricts late charges or totally bans them.   In both cases, the issue turns on whether a bank chartered in another state can “export” its home state's definition of late charges as interest under the preemptive umbrella of section 521.

 Plaintiff also faults Greenwood Trust for not grasping the difference between “up-front” loan charges which are required by the lender and late fees, which are contingent and the imposition of which is within the control of the borrower.   He suggests that the former charges are more akin to “interest” whereas the latter are in fact penalties for breach of contract.   Ancient federal cases holding that late penalties for loan delinquency are not usurious (Spain v. Hamilton's Administrator (1863) 68 U.S. (1 Wall.) 604, 626, 17 L.Ed. 619;  In re Tastyeast, Inc., supra, 126 F.2d 879, 882) lend only superficial support to his position, for none of them interpreted sections 85 or 521.

 The cases interpreting section 85 do not recognize plaintiff's contingent/noncontingent distinction.   Indeed, many of the types of lender-imposed fees which federal courts have deemed embraced within that statute's broad definition of interest were also “contingent” in the sense that they were in the control of the borrower (see cases cited p. 737, ante ).   Furthermore, under section 85 (and by implication section 521) a bank may export not only its home state's periodic interest rate, but its entire body of usury law, even though it may conflict with the law of the customer's state of residence.  (First National Bank in Mena v. Nowlin (8th Cir.1975) 509 F.2d 872, 876;  Fisher v. First Nat. Bank of Omaha, supra, 548 F.2d 255, 257–258.)   Thus, “[t]he fact that one state considers late fees to be penalties that do not implicate the usury laws does not by itself invalidate another state's determination that late fees are a component of the interest rate.”   (Tikkanen, supra, 801 F.Supp. 270, 278–279.)   And under Marquette, Delaware's definition of interest may be exported to Chase's California customers, notwithstanding its conflict with California law.2

Citing Perdue v. Crocker National Bank (1985) 38 Cal.3d 913, 216 Cal.Rptr. 345, 702 P.2d 503 (Perdue ), plaintiffs claim that our state Supreme Court has already determined that DIDA preempts only state usury law, not traditional contract law governing liquidated damages.

The issue in Perdue was whether a national bank located in California could collect nonsufficient funds charges on deposit accounts under California law.   The bank contended that plaintiff's claims were preempted by a “comprehensive federal statutory scheme” intended to displace state law in the field.   Perdue dealt with section 501 of DIDA, which was conspicuously silent with respect to deposit services.   It did not discuss section 521, which has a specific preemption clause pertaining to loans and interest rates.   The court never addressed the crucial subject matter presented here, i.e., the interplay between the preemption clause and the meaning of the term “interest” as it is used in section 521.   As the Greenwood Trust court observed, cases construing section 501 of DIDA are of little help of in interpreting section 521.  “In light of the irrefutable evidence that section 521 was conceived as an offspring of section 85 of the [NBA], we believe ․ [t]he proper analogy in this case is to compare lineal descendants who share common language and purpose, not distant cousins who share little more than a name.”   (971 F.2d 818, 830, fn. 10.)

 Taking a different tack, amici supporting plaintiff focus on that portion of the section 521 which states “notwithstanding any State constitution or statute which is hereby preempted for the purposes of this section ․” (emphasis added) to argue that Congress intended to preempt only state statutes and constitutions which affect the meaning of the term “interest,” not state common law.

This argument is hardly persuasive.   First, given the unmistakable intent of Congress to “level the playing field” and create lending parity between state and national banks by preempting inconsistent statutes and state constitutions, an enormous loophole in the statute would be created if states were allowed to eviscerate this policy through the back door of the common law.   As the FDIC recognizes, it is highly unlikely that Congress could have intended such a result.  (Advisory Op. No. FDIC 93–27, 7/12/93, Fed.Banking L.Rep. (CCH) ¶ 81,635.)   Second, section 521 contains no savings clause which would evince an intent to preserve state common law claims, which Congress has done in other contexts.  (E.g., 15 U.S.C. § 4406(c) [“Nothing in this chapter shall relieve any person from liability at common law․”];  49 U.S.C. § 1506 [“Nothing contained in this chapter shall in any way abridge or alter the remedies now existing at common law․”];  see Stoorman, supra, 888 P.2d 292.)   Third, plaintiff's claims are statutory in nature.   They are grounded on the prohibition against liquidated damage penalties set forth in section 1671.   The fact that section 1671 was a codification of preexisting case law does not, as plaintiff seems to imply, convert his action into one at common law.

In the face of the overwhelming number of state and federal cases which are in opposition to his position, plaintiff cites two cases which purportedly support it, Donald v. Golden 1 Credit Union (E.D.Cal.1993) 839 F.Supp. 1394 (Donald ) and Irwin v. Citibank (South Dakota) N.A. (Pa.Ct.C.P. Dec. 9, 1993), No. 9112–2557.

 We will not discuss Irwin, a non-published decision of an out-of-state trial court.3  The issue in Donald was not substantive preemption but jurisdictional preemption.   That case turned on whether the preemptive force of sections 85 and 86 of the NBA was so extraordinary as to convert complaints asserting state law claims for unlawful contract penalties into federal claims for usury.  Donald did not adjudicate the question of substantive preemption which we face here.

Finally, amicus Bankcard Holders of America suggests that interpreting section 521 in the manner suggested by Greenwood Trust in effect allows Delaware to define what constitutes “interest” for California's consumers.   This construction, the argument runs, constitutes an impermissible delegation by Congress of this state's legislative powers to another state.

 Congress, however, may properly choose to adopt definitional terms from the law of another state in pursuit of its overall objective of regulating banking.  (Greenwood Trust, supra, 971 F.2d 818, 829.)   As the Supreme Court recognized in Marquette, incorporation of the “ ‘exportation’ ” principle into federal banking law inevitably impairs the ability of some states to protect its citizens against what they perceive to be unfair lending practices.   The court, however, did not view that impairment as a constitutional hurdle but simply “an issue of legislative policy” better left to the wisdom of Congress.  (439 U.S. 299, 318–319, 99 S.Ct. 540, 550–551.)

We conclude that because Chase is chartered in Delaware, section 521 and the Supremacy Clause mandate that Delaware rather than California law controls its imposition of late charges on plaintiff's credit card account.   The trial court thus correctly determined that plaintiff's complaint based on Chase's alleged violation of California restrictions on such charges, is preempted.




1.   Cases cited by plaintiff and amicus Bankcard Holders of America which purportedly exclude late charges from the “federal common law” meaning of the term “interest” (e.g., U.S. v. Texas (1993) 507 U.S. 529, ––––, 113 S.Ct. 1631, 1635, 123 L.Ed.2d 245;  Johnson v. McCrackin–Sturman Ford, Inc. (3d Cir.1975) 527 F.2d 257, 265–266;  In re Tastyeast, Inc. (3d Cir.1942) 126 F.2d 879, 881–882;  Lloyd v. Scott (1830) 29 U.S. (4 Pet.) 205, 224, 7 L.Ed. 833) are not apposite, since none of them construed either section 85 or section 521.

2.   Classifying late charges as “interest” does no violence to the dictionary definition of the latter term, i.e., “[C]ompensation allowed by law or fixed by the parties for the use or forbearance or detention of money.”  (Black's Law Dict. (5th ed 1979) p. 729.)   The cardholder who is late in tendering the minimum monthly payment enjoys use of that money in the meantime and the late charge compensates the lender for such forbearance.  (See Greenwood Trust, supra, 971 F.2d 818, 825.)Accordingly, we do not share the fear expressed by plaintiff and his amici at oral argument that our holding will allow individual states to enact laws which define “interest” to include any kind of fees it pleases and that state's banks to export such excessive or outlandish charges to its out-of-state customers under the guise of “interest.”

3.   Each side requests judicial notice of certain cases and has filed certain objections to the other side's request for judicial notice.   We will not arbitrate this debate.   Where appropriate, we will take note of state, federal and agency decisions which we find illuminating, guided only by the restrictions set forth in California Rules of Court, rule 977 and our own common sense.  (See Mangini, supra, 7 Cal.4th 1057, 1064–1065, 31 Cal.Rptr.2d 358, 875 P.2d 73.)

SMITH, Associate Justice.

KLINE, P.J., and PHELAN, J., concur.

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