SMILEY v. CITIBANK SOUTH DAKOTA (1994)

Appellant Barbara Smiley's (Smiley) class action seeks damages and injunctive relief alleging defendant Citibank (South 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.

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.)

(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 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.)   Borrowers in California have a choice.   They may elect to borrow money from a bank located in California or they may elect to borrow money from a bank located in a state other than California.   If a borrower chooses to borrow money from a national bank located in a state outside of California, that national bank may assess the lending charges permitted by the laws of the state where it is located, even if the amount of such charges exceeds the amount permitted by California law, because California law is preempted.  (See Marquette, supra, 439 U.S. at 308, 99 S.Ct. at 545.)

III

Twenty-four courts that ruled on the merits of the federal preemption defense raised by Citibank in this case have concluded that credit card late charges are “interest” governed by section 85.

In Greenwood Trust Co. v. Massachusetts, 971 F.2d 818, 830–831 (1st Cir.1992), cert. denied, 506 U.S. 1052, 113 S.Ct. 974, 122 L.Ed.2d 129 (1993), the First Circuit held that both section 85 and the parallel federal statute governing state chartered banks insured by the Federal Deposit Insurance Corporation preempt Massachusetts law prohibiting late charges.

In Tikkanen v. Citibank (South Dakota), N.A., 801 F.Supp. 270, 278–279 (D.Minn.1992), the court held that Citibank's late payment charges and over-credit-limit charges “are interest within the meaning of section 85 [¶] ․ [¶] ․ [and that] Minnesota laws regarding late and over limit fees cannot be enforced against national banks located in other states.”  (Emphasis mine.)

In Hill v. Chemical Bank, 799 F.Supp. 948 (D.Minn.1992) the district court held federal question jurisdiction existed because section 85 and federal statute governing lending by state-chartered banks apply to late and over-limit charges.   In Nelson v. Citibank (South Dakota) N.A., supra, 794 F.Supp. 312 (D.Minn.1992), the court held that federal question jurisdiction existed because Citibank's late payment charges are interest governed exclusively by section 85.  (See also Goehl v. Mellon Bank, 825 F.Supp. 1239 [E.D.Pa.1993];  Ament v. PNC National Bank, 825 F.Supp. 1243, 92–244.

IV

Smiley's contention that California law should govern the permissibility of the late fees here at issue is directly contrary to the OCC's longstanding interpretation that section 85 mandates such matter is governed by the law of the state of the card-issuing bank.   In addressing the very issue here presented, the OCC has repeatedly concluded that late fees are governed by section 85, Statement of Interest of the United States at p. 7, citing letter from Robert Serino, OCC, Deputy Chief Counsel (Policy) p. 2 (Aug. 11, 1988–1989).

 The OCC is the exclusive administrator of the National Bank Act, and its interpretations of that Act are entitled to substantial deference.   (Nelson v. Citibank (South Dakota) N.A., 794 F.Supp. 312, 319 [D.Minn.1992];  Clarke v. Securities Indus. Ass'n, 479 U.S. 388, 403–404, 107 S.Ct. 750, 759–760, 93 L.Ed.2d 757 (1987);  Independent Bankers Ass'n of Am. v. Clarke, 917 F.2d 1126, 1128–1129 [8th Cir.1990].)   This deference is particularly appropriate because national banks rely on the OCC's guidance.   (See Zenith Radio Corp. v. United States, 437 U.S. 443, 457–458, 98 S.Ct. 2441, 2448–2849, 57 L.Ed.2d 337 (1978);  Independent Bankers Ass'n v. Marine Midland Bank, N.A., 757 F.2d 453, 461 [2d Cir.1985], cert. denied, 476 U.S. 1186, 106 S.Ct. 2926, 91 L.Ed.2d 554 (1986).)

V

Smiley's reliance upon Perdue v. Crocker National Bank, 38 Cal.3d 913, 216 Cal.Rptr. 345, 702 P.2d 503, is inapposite.   The case is not in point.   It does not involve section 85, or lending charges, or the preemptive scope of section 85.

In Perdue, the plaintiff filed a class action challenging the validity of charges imposed by Crocker National Bank (Crocker), a national bank located in California, for processing checks drawn on accounts without sufficient funds.   (38 Cal.3d at p. 920, 216 Cal.Rptr. 345, 702 P.2d 503.)   Thus, the charges at issue in Perdue were not lending charges;  they were charges associated with the bank's taking and receiving of deposits.   Defendant bank was not an out-of-state bank but located in California.   Consequently, the bank did not argue section 85 preempted California law.  (See Ament v. PNC National Bank, supra, 825 F.Supp. 1243, 1250.)

Similarly, not in point, are People v. Highland Federal Savings & Loan, 14 Cal.App.4th 1692, 1709, 19 Cal.Rptr.2d 555;  Garrett v. Coast and Southern Federal Savings and Loan Association, 9 Cal.3d 731, 108 Cal.Rptr. 845, 511 P.2d 1197 (1973);  and Beasley v. Wells Fargo Bank, N.A., 235 Cal.App.3d 1383, 1 Cal.Rptr.2d 446 (1991).   Like the bank in Perdue, the banks in Garrett and Beasley were located in California.   None of these cases addressed either preemption or section 85 of the National Bank Act.   Smiley cites those cases for the irrelevant proposition that Citibank's late charges violate California law.   That question is, of course, not before the court, because the sole issue before the court is whether that California law is preempted.

We conclude the late charges here are governed solely by 12 United States Code Annotated sections § 85 and § 86.   California law purporting to regulate such charges is preempted.

The judgment is affirmed.

Costs on appeal are awarded to respondent.

I respectfully dissent.

For me, this is a more difficult case than the majority opinion might suggest.   The authority holding late fees are “interest” under the National Bank Act (12 U.S.C., § 85, hereafter section 85) is thin and far from settled.   Indeed it consists primarily of a single First Circuit case decided just two years ago, which, in turn, has been followed by a few district court judges.¹  I am skeptical about the convoluted reasoning of the First Circuit opinion.   Since a California appellate court is not bound by federal circuit court or district court opinions as to interpretations of federal law,² in my view this court should consider the language of section 85 anew and in doing so, reach a sensible definition of “interest.”   Under the construction the majority opinion accepts it is “caveat emptor” and a prayer for California consumers who sign up for credit cards issued by non-California banks.

The Greenwood Trust Co. v. Com. of Mass. (1st Cir.1992) 971 F.2d 818 (Greenwood ) opinion employs a railroad metaphor, beginning with the first sentence.  “This train wreck of a case arises out of a headlong collision between a state consumer-protection law and a federal banking law.”  (971 F.2d at p. 821.)   Several pages later the train ride ends.  “We need not grease the rails.  [¶] ․ [¶] Given the imperatives of the Supremacy Clause, the whistle sounds loud and clear.   The [state consumer protection law] must yield.   It is preempted.”  (Id. at pp. 830–831.)

Taking a ride on the First Circuit's railroad I don't hear the whistle at all.   Maybe that's because there is no collision between California's consumer-protection law governing late fees and federal banking law, since the federal banking law is on another track.   It is speeding down the “interest” track, while this state's laws and judicial decisions limiting late fees are chugging up the “penalty” track.   Giving out-of-state banks a clear signal to charge whatever rate of interest their home state may allow on credit cards does not mean Congress intended state governments should be precluded from regulating other aspects of credit card transactions.

Greenwood did not involve section 85 of the banking law, directly.   Greenwood Trust Company is not a federal bank governed by the national bank laws.   Rather it is a state banking corporation chartered in Delaware.   It markets a credit card, the “Discover Card,” throughout the nation.   Delaware law allows credit card companies to impose substantial late fees.   Massachusetts, where a hundred thousand Discover Card customers reside, does not.   When the Massachusetts government threatened a lawsuit, Greenwood countered with a complaint seeking to declare federal law preempted the Massachusetts prohibition.

The federal law Greenwood Trust sought to invoke was a recent enactment seeking to place state financial institutions on an equal footing with federal financial institutions—section 521 of the Depository Institutions Deregulation Act of 1980 (DIDA).   In the provision governing allowable interest rates, this new law tracked the language of section 85.   The First Circuit initially held the identical language in the two statutes meant the same thing.   Then the court used section 85 and cases interpreting it to guide its construction of section 521 of DIDA.   So the Greenwood opinion only deals with section 85 indirectly.

The First Circuit had to concede there were no published cases construing “interest” to include “late payment fees” under section 85.   Furthermore, the court faced a further problem.  “Interest at the rate allowed”—the language within section 85 under which it sought to place “late payment fees”—has a narrower meaning in common parlance.   When someone is asked what interest rate they are paying on a loan, they respond “ten and a half percent” or “seven and three eighths percent.”   If it is a real estate loan, they might answer “ten and a half, and two points” (the up-front interest to obtain the loan).   They might even add in the closing costs and appraisal fees, etc., the lender charged as part of the “interest” paid to obtain the funds.

But common citizens are unlikely to think of the “rate of interest” as including “late payment fees” they will not incur, unless and until they fail to make timely payments, as a part of the “interest” they are paying to obtain the loan.   Instead late payment fees are costs, such as those which might accompany an attachment or foreclosure, which are contingent on a failure of performance on the part of the borrower.   They are not what the ordinary citizen thinks of as part of the “rate of interest.”

If the term “interest rate” (or “rate of interest”) is given this common sense meaning within the context of section 85, that section clearly does not apply to “late payment fees.”   As a consequence, section 85 which preempts state consumer protection laws only as to the “interest rate” out-of-state federal banks can charge would not preempt those state laws as to the “late payment fees” those banks can impose on delinquent borrowers.

In an effort to avoid the result dictated by the common meaning of “interest” and “rate of interest,” the Greenwood opinion attempts to suggest Congress meant those terms to have a different, more technical, and broader meaning in section 85.   The court does not delve into legislative history to prove this intent, however.³  Instead it turns to a couple of dictionary definitions, both of which define “interest” as “ ‘․ a charge for borrowed money[,] generally a percentage of the amount borrowed.’ ”  (971 F.2d at p. 824, quoting Webster's Ninth New Collegiate Dictionary (1989) 630 (emphasis supplied by Greenwood court.)) ⁴  The Greenwood court emphasizes that according to these dictionary definitions the common notion interest is a percentage of the amount loaned is only “generally” true.   The court then assumes Congress intended the dictionary definition rather than what the term “rate of interest” might mean in common parlance—without even mentioning what definition of “interest” or “rate of interest” might have appeared in dictionaries more than a century ago when Congress first enacted section 85.   From its finding Congress intended the dictionary definition of “interest,” the Greenwood court then leaps to the conclusion the term “interest” in that statute can embrace “late payment fees.”

I will turn momentarily to the question of how the court justifies its conclusion the term “interest” in section 85 does include “late payment fees.”   But for now I question the reasoning employed to argue the dictionary definitions on which the Greenwood court relies even allows such a construction.   Forgetting about whether “interest” inevitably must be expressed as a percentage of the amount borrowed, under these dictionary definitions the essential nature of “interest” remains.   It is the “price paid” or “compensation received” for the use of money obtained for a period of time from the lender.   Just because this price can be expressed as a flat fee instead of a percentage of the amount borrowed, or can be expressed as a mix of percentage and flat fee charges, or perhaps in some other imaginative way, does not alter its fundamental character as an amount of money the borrower pays the lender in return for the use of a sum of money the borrower receives.

A “late payment fee,” on the other hand, is not a part of the compensation borrowers pay for the use of money.   Black's Law Dictionary (incidentally one of the sources of the Greenwood court's definition of “interest”) contrasts the two.  “Interest” is “compensation ․ for the use ․ of money.”  (Black's Law Dict. 5th ed. (1979) p. 729, col. 2.)   A “late payment fee,” on the other hand, is “compensation for delay in payment.”  (Id. at p. 730, col. 1.)   Black's also points out a late payment fee “in essence is in the nature of a penalty.”  (Ibid.)  “Late payment fees” likewise have been considered a “penalty” by the California Supreme Court.  (Garrett v. Coast & Southern Fed. Sav. & Loan Assn. (1973) 9 Cal.3d 731, 739–740, 108 Cal.Rptr. 845, 511 P.2d 1197.)

A “late payment fee” is a contingent obligation most borrowers will never have to pay.   It is one of several consequences borrowers may face for various breaches of their contract to repay the loan and the interest on the loan (which, in turn, is the compensation owed for use of the money).   Depending on the nature of the loan and the contract, those consequences may include attachment of property, foreclosure of real estate, etc.   Those consequences also may include payment of various additional fees and costs—not just “late payment fees,” but the lender's legal fees and collection costs, the costs of the attachment or foreclosure, etc.

Are these additional contingent costs and consequences also to be considered part of “interest” within the meaning of section 85?   Does this federal law preempt state regulation of those contingent costs and consequences, too?   The logic of the Greenwood opinion would say yes.   But I think not, for the reason they, like “late payment fees,” are not part of the “compensation for the use of that money.”   These charges, like the “late payment fee,” are in the nature of “damages” or “penalties” for breaching the loan contract rather than “compensation” due as part of the performance of that contract.

Since I do not consider the term “interest” within section 85 even encompasses “late payment fees,” in my view this section would not authorize federal preemption of state laws regulating late payment fees.   Thus, ordinarily I would not reach the rest of the Greenwood rationale.   Or, to put it another way, if my view represents a proper construction of the term “interest” the remaining arguments in the Greenwood opinion are irrelevant.   Those arguments cannot rescue the day for preemption if Congress indeed intended to define “interest” either in its everyday meaning on the street or as its dictionary definitions are interpreted in this dissent.

But I do have some problems with the rest of the Greenwood rationale as well.   Once having posited Congress intended some sort of open-ended definition of “interest” the court urges two alternative reasons for determining “late payment fees” are included in that definition.   First, according to this opinion, under section 85 the home state of the bank not only determines the rate of interest its federal banks may charge in other states, it also defines the meaning of the term “interest.”   If that home state decides “interest” includes “late payment fees,” then “late payment fees” are interest under section 85.   Consequently, the home state's law broadly interpreting interest to include late payment fees preempts other states from regulating the late fees the federal banks based in that home state charge citizens of these other states on any loans, including credit cards, those federal banks arrange with their out-of-state customers.  (971 F.2d at pp. 828–829.)

The Greenwood court points to no authority supporting this novel interpretation of section 85.   I find it unnecessary to discuss the grave issues of unconstitutional delegation of Congressional power to state legislatures this construction raises.   That is because, in my view, it appears highly unlikely Congress intended to leave the scope of federal preemption to the whim of a host of state legislatures.   It is one thing for Congress to be seen as delegating to state legislatures the power to effectively determine certain rates within a precisely defined area which Congress has defined and permitted preemption.   It is quite another for Congress to delegate to state legislatures the power to define the length and width of the area in which they will be allowed to set rates which preempt other states' regulations.⁵  Without a clear and unequivocal statement of congressional intent to make the latter, rather extraordinary form of delegation, it seems difficult to argue Congress did so.   If Congress has not unequivocally expressed such an intent, certainly courts should be reluctant to do the delegating for them.

This interpretation of section 85 appears dangerous as well as improbable.   If states are allowed to define “interest” as broadly as they like, “late payment fees” may only be the beginning.   Anything which bears on the conditions of a loan conceivably can be brought within the elastic concept of “interest” the Greenwood court implicitly endorses.   So long as a state legislature is willing to define a specific loan condition as an element of “interest” for purposes of its own lending institutions, it becomes “interest” for purposes of all federal banks based in that state.   Consequently, when federal banks home-based in that state distribute credit cards—or otherwise lend money—to citizens in other states, the state legislatures of those states are preempted from regulating that loan condition.   In that way, the legislature of a small state, like South Dakota or Delaware, which is home base to a major credit card institution could use federal preemption to impose not just its interest rates but the bulk of its credit card laws across the length and breadth of the land.⁶

The Greenwood opinion, however, does not rely entirely on the argument Congress left the question of preemption's scope to 50 state legislatures.   As an independent and sufficient ground, the court argues prior federal court decisions interpret the term “interest” within section 85 so broadly it can be deemed to encompass “late payment fees.”   The Greenwood opinion bases this conclusion on cases construing “interest” to include flat interest rates as well as percentage rates (Fisher v. First Nat. Bank of Omaha (8th Cir.1977) 548 F.2d 255 [fee for cash advance] );  certain up-front loan fees (Panos v. Smith (6th Cir.1940) 116 F.2d 445, 446–47 [taxes and recording fees] );  and bonuses or commissions paid to the lender (Cronkleton v. Hall (8th Cir.) 66 F.2d 384, 387 cert. den. (1933) 290 U.S. 685, 54 S.Ct. 121, 78 L.Ed. 590).

In my view, this argument fails because it neglects a vital distinction between the payments and fees defined as “interest” in these cases and the family of costs and consequences of which “late payment fees” are a member.   The former are merely different forms of “compensation for the use of money.”   In contrast, the latter are different forms of “damages (or penalties) for failure to timely pay.”   The only thing the cases the Greenwood opinion cites teach us is that “interest” can embrace “compensation for the use of money” even when the compensation comes in the form of “points” or fixed payments or commissions or expenses or in the form of flat fees of various sorts tacked on to more typical percentage interest rates.   These cases do not stand for the proposition “late payment fees” and like consequences of breaching the loan contract represent “interest” within the meaning of section 85.   Thus, these cases supply no support as precedent or in logic for the leap the Greenwood court, and those courts which have followed in its wake, have taken over the vast gulf which separates interest for the use of money from damages for breach of a loan contract.

Although most federal courts have followed Greenwood, at least one published District Court opinion was highly critical of its reasoning.   (Copeland v. MBNA America, N.A. (D.Colo.1993) 820 F.Supp. 537.)   In Copeland plaintiffs filed a class action in state court, nearly identical to the instant case, challenging late fees a Delaware bank imposes on its credit card holders.   The bank removed the case to federal court and the plaintiffs moved to remand to state court.   The bank resisted remand on grounds there was complete federal preemption of the lawsuit under Greenwood.   The Copeland court announced it “respectfully disagrees” and granted remand to the state court.

The Copeland court was careful to point out it was ruling on the narrow issue of remand and not the possible viability of a preemption defense after remand.   Nonetheless, in order to decide the remand issue, the court found it necessary to dispute much of the reasoning in Greenwood.

“Courts are to assume that the legislative purpose is expressed by the ordinary meaning of the words used․  Because late fees are not charged on a percentage basis, the ordinary meaning of the word interest does not include late fees.

“In Greenwood Trust, ․ the court noted that the word “generally” in Webster 's qualified the definition so as not to exclude other possible meanings.  (Citation omitted.)   Therefore it concluded that the plain meaning rule did not control.  (Id.)  The plain meaning of a word, however, is not determined by reference to variations on its ordinary meaning, but by the ordinary meaning itself, i.e., the way it is generally used.

“Legislative history offers little assistance․

“This court concludes that a proposition that is not obvious from the plain meaning of a statute's language, nor from the legislative history, simply cannot be regarded as a clear manifestation of congressional intent.”  (Copeland v. MBNA America, N.A., supra, 820 F.Supp. 537, 540–541.)

The Copeland court had no occasion to do so, but could just as well have added, that preemption itself does not occur unless there is a clear manifestation of congressional intent to preempt state laws.  (Cipollone v. Liggett Group, Inc. (1992) 505 U.S. 504, 112 S.Ct. 2608, 120 L.Ed.2d 407.)

I recognize this dissent has been devoted almost exclusively to discussion of a single circuit court opinion.   However, this Greenwood opinion presented the full case for the interpretation the majority of this court has adopted.   It is the rationale which has been followed or adopted by other courts in the past two years.⁷  My reasons for rejecting that case and for supporting a contrary view having been set forth in full, I urge our Supreme Court to examine this issue anew.   The State of California and its citizens have much to lose by allowing the legislature of a far away state to dictate the penalties a powerful lending institution can impose on our state's consumers when they are late with a payment or otherwise violate some term of the credit card contract.

FOOTNOTES

FOOTNOTE.  

1.   The complaint seeks both injunctive relief and damages and asserts causes of action under section 17200 of the California Business and Professions Code, section 1671 of the California Civil Code (which relates to liquidated-damages provisions), and California common law.

1.   See, e.g., Tikkanen v. Citibank (South Dakota) N.A. (1992) 801 F.Supp. 270, 278.  Ament v. PNC Nat. Bank (W.D.Pa.1994) 849 F.Supp. 1015 [removal to federal court ordered of lawsuit seeking recovery of excess interest and various fees and charges, including late fees];  Grunbeck v. Dime Sav. Bank of New York (D.N.H.1994) 848 F.Supp. 294.

2.   California Courts of Appeal are bound by decisions of the United States Supreme Court and of the California Supreme Court interpreting federal law.   But they are not bound by circuit or district court decisions, although obviously those decisions are persuasive authority on federal questions.  (9 Witkin, Cal.Procedure (3d ed. 1985) Appeal, §§ 779–780 pp. 750–751.)

3.   The legislative history of the National Bank Act appears to lean in the opposite direction from the Greenwood definition of “interest.”   Congress did not write section 85 on a clean slate.   The lawmakers chose to use the term “rate of interest” in section 85 at a time when the settled federal common law definition of “interest” specifically excluded contingent payments such as late fees.  (Lloyd v. Scott (1830) 29 U.S. (9 Pet.) 205, 7 L.Ed. 833 [agreement to pay fixed additional payment if late in repaying loan is not considered “interest” but a “penalty”], Spain v. Hamilton's Administrator (1863) 68 U.S. (1 Wall.) 604, 626, 17 L.Ed. 619 [any payment which is contingent upon happening of an uncertain event is not part of “interest” and thus does not make a loan usurious].)Not surprisingly, given the common understanding of the term “rate of interest”, appellant's brief reports without contradiction from respondent, that the congressional debates are sprinkled with references to the “rate of interest” as solely a charge for money over time, with no mention of late charges or other contingent payments.   Typically, a California congressman explained during the debate, “In California, the interest is by law, where no rate is expressed in the contract, ten percent per annum.”   (Cong.Globe, 38th Cong., 1st Sess. 1353 (1864).)   Respondents refer us to nothing in the entire debate intimating the national lawmakers were seeking to affect state regulation of late charges or other contingent fees.   Nor do they point to anything in the debate suggesting Congress intended to adopt a definition of “rate of interest” which deviated from the common law definition the Supreme Court had reiterated only two years before congressional consideration of the National Bank Act.  (38 Cong.Globe, 38th Cong. 1st Sess. 2122–2124.)

4.   The Greenwood opinion also cited but did not quote from the definition found in Black's Law Dictionary (6th ed. 1990).   Black's defines interest as “the compensation ․ fixed by the parties for the use ․ of money.”  (Black's Law Dict. (5th ed. 1979) p. 729.)   Interest is defined in Webster's Third New International Dictionary, Unabridged (1981) page 1178 as “the price paid for borrowing money generally expressed as a percentage of the amount borrowed paid in one year.”

5.   This very concern was expressed when it was suggested Congress had delegated to state legislatures the power to define another term in the National Banking Act.   The term in question was what constituted a “branch” of a bank.   The U.S. Supreme Court rejected the notion Congress had left this definition affecting state jurisdiction to individual state legislatures.   In doing so the high court observed that to do so would “make [state legislatures] the sole judges of their own powers.”   Our high court concluded Congress “did not intend such an improbable result.”   (First National Bank v. Dickinson (1969) 396 U.S. 122, 133–134, 90 S.Ct. 337, 343, 24 L.Ed.2d 312.)

6.   I reemphasize a point made earlier.   If the term “interest” means what this dissent urges it means in the context of section 85, then this prong of the Greenwood rationale falls of its own weight.   State legislatures would lack the power to define “interest” so broadly it embraced “late payment fees.”   Even assuming state lawmakers were empowered to define the scope of preemption by defining what they included in interest, this power obviously is limited to the boundaries of the congressional definition of that term.   For reasons discussed earlier, they could not extend preemption to “late payment fees” or other contingent consequences representing damages or penalties for breaching the loan contract rather than compensation for its performance.   To put it another way, they could not by fiat declare “non-interest” to be “interest” and thereby impose their version of the law throughout the country.

7.   The majority opinion also relies heavily on an administrative agency's interpretation that “rate of interest” in section 85 includes “late fees.”  (Maj. opn. at pp. 565–566.)   The office of the Controller of Currency indeed has come to that view in recent years (letter of Robert Serino, OCC, Deputy Chief Counsel (Policy).   Not that many years ago, however, the head of that same administrative office took the contrary position, ruling that under section 85 “Charges for late payments ․ are illustrations of charges which are made by some banks that would not properly be characterized as interest.”  (Letter of J. Saxon, Controller of the Currency (June 25, 1964).)The current O.C.C. interpretation does not warrant the degree of deference the majority opinion accords it for several reasons.   This particular agency interpretation deals with “a pure question of statutory construction”, which is a judicial prerogative and not one where administrative bodies offer special competence.  (INS v. Cardoza–Fonseca (1987) 480 U.S. 421, 446, 107 S.Ct. 1207, 1221, 94 L.Ed.2d 434.)   Furthermore, this agency has not been consistent in its interpretation of what is embraced in the term “rate of interest.”  “An agency interpretation which conflicts with the agency's earlier interpretation is ‘entitled to considerably less deference’ than a consistently held agency view.”   (Id. at p. 446, fn. 30, 107 S.Ct. at 1221, fn. 30.)   Finally, I note our Supreme Court found it quite possible—indeed most reasonable—to interpret the National Banking Act contrary to a firm O.C.C. interpretation of disputed language.  (Perdue v. Crocker Nat. Bank (1985) 38 Cal.3d 913, 933–937, 216 Cal.Rptr. 345, 702 P.2d 503, app. dism. (1986) 475 U.S. 1001, 106 S.Ct. 1170, 89 L.Ed.2d 290.)

STANIFORTH, Associate Justice.* FN* Assigned by the Chairperson of the Judicial Council.

LILLIE, P.J., concurs.