Mazaika v. Bank One, Columbus, N.A.

WIEAND, Judge,

dissenting:

The issue in this appeal is whether Pennsylvania law may invalidate fees charged to a credit card holder residing in Pennsylvania, where the credit card was issued by a national bank located in Ohio, under whose law such charges are deemed lawful interest. A majority of the Court, after care *130 fully considering this issue, concludes that it is the legislature in Pennsylvania and not the law of the state in which a national bank is located which determines the charges to be made to bank customers who reside in Pennsylvania. Unfortunately, the majority’s decision is contrary to the decisions of other courts which have considered this issue and will, in my judgment, remove Pennsylvania from the mainstream of national banking practices.

Bank One, Columbus, N.A., is a nationally chartered banking institution based in Columbus, Ohio. It extends open-ended credit card accounts to a nationwide customer base. Jennifer and Daniel Mazaika are residents of Pennsylvania who obtained a credit card from Bank One pursuant to a card-member agreement which provides for a twenty-four (24%) percent finance charge on all outstanding balances. The card-member agreement also permits Bank One to charge credit card holders an annual fee of twenty ($20) dollars, a service fee of eighteen ($18) dollars for any checks returned, a service fee of eighteen ($18) dollars for over-credit-limit charges and a service fee of eighteen ($18) dollars if a minimum monthly payment is not received within twenty-five (25) days after the same is due. Under the law in effect in Ohio, these charges are considered lawful interest. 1

In a civil action filed by the Mazaikas on behalf of themselves and other Pennsylvania residents similarly situated, it is contended that such charges violate the Pennsylvania Goods and Services Installment Sales Act of October 28, 1966, P.L. 55, 69 P.S. § 1101, et seq., the Pennsylvania Consumer Protection Law of December 17, 1968, P.L. 1224, 73 P.S. § 201-1, et seq., as well as Pennsylvania common law. Bank One filed preliminary objections in the nature of a demurrer to the complaint on grounds that Ohio law was controlling under the *131 National Bank Act, 12 U.S.C. § 85 , by which Congress preempted the field. The trial court agreed and entered judgment in favor of Bank One. The Mazaikas appealed.

Article VI of the United States Constitution provides that the laws of the United States “shall be the supreme law of the land.” Where Congress has pre-empted a field, state laws are without effect. Gibbons v. Ogden, 22 U.S. (9 Wheat) 1, 163, 6 L.Ed. 23, 62 (1824). See also: Cipollone v. Liggett Group, Inc., — U.S. -, -, 112 S.Ct. 2608, 2617 , 120 L.Ed.2d 407, 422 (1992). In any pre-emption analysis, it is necessary to consider Congress’ intent. Cipollone v. Liggett Group, Inc., supra at -, 112 S.Ct. at 2617 , 120 L.Ed.2d at 422 ; English v. General Elec. Co., 496 U.S. 72, 79 , 110 S.Ct. 2270, 2275 , 110 L.Ed.2d 65, 74 (1990). Congress’ intent may be either expressed or implied; however, absent a clear expression of an intent to pre-empt, state laws remain in force unless they conflict with the federal enactment. English v. General Elec. Co., supra.

With respect to the National Bank Act, the question of preemption is settled. Through the National Bank Act, Congress established a general system of regulations governing nationally-chartered banks and adopted state laws only as they severally fixed the amount of interest which could be charged. Evans v. Nat’l Bank of Savannah, 251 U.S. 108, 111 , 40 S.Ct. 58, 59 , 64 L.Ed. 171, 175 (1919). When a national bank is involved, the appropriate penalty for charging unlawful interest is provided exclusively by the National Bank Act, 12 U.S.C. § 86 . Haseltine v. Central Nat’l Bank of Springfield, 183 U.S. 132, 133 , 22 S.Ct. 50, 51 , 46 L.Ed. 118, 119 (1901). Although a national bank may be subject to the police powers of the states in certain instances, state laws which interfere with the purposes of the National Bank Act are void. Anderson Nat’l Bank v. Luckett, 321 U.S. 233, 248 , 64 S.Ct. 599, 607 , 88 L.Ed. 692, 705 (1944). As the Court observed in Davis v. Elmira Savings Bank, 161 U.S. 275 , 16 S.Ct. 502 , 40 L.Ed. 700 (1896),

National Banks are instrumentalities of the federal government, created for a public purpose, and as such necessar *132 ily subject to the paramount authority of the United States. It follows that an attempt by a state to define their duties or control the conduct of their affairs is absolutely void, wherever such attempted exercise of authority expressly conflicts with the laws of the United States, and either frustrates the purpose of the national legislation or impairs the efficiency of these agencies of the federal government to discharge the duties for the performance of which they were created. These principles are - axiomatic, and are sanctioned by the repeated adjudications of this court.

Id. at 283 , 16 S.Ct. at 503 , 40 L.Ed. at 701 . It is well established, therefore, that the National Bank Act pre-empts any unauthorized attempts by the states to regulate the conduct of national banks.

Congress promulgated the National Bank Act with an intent to make national banks national favorites and to put them on a competitive plane with their state counterparts by preventing the states from passing laws favoring state-chartered banks.

It was expected [national banks] would come into competition with State banks, and it was intended to give them at least equal advantages in such competition. In order to accomplish this they were empowered to reserve interest at the same rates, whatever those rates might be, which were allowed to similar State institutions.

Tiffany v. Nat’l Bank of Missouri, 85 U.S. (18 Wall) 409, 412, 21 L.Ed. 862, 863 (1873).

Section 85 of the National Bank Act, 12 U.S.C. § 85 , specifies the amount of interest that a national bank may charge as follows:

Any association 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, - and no more....

*133 Pursuant to this section, a national bank may “export” a favorable interest rate from its home state and apply it in transactions with out-of-state borrowers. Marquette Nat’l Bank of Minneapolis v. First of Omaha Serv. Corp., 439 U.S. 299 , 99 S.Ct. 540 , 58 L.Ed.2d 534 (1978).

The defendant in Marquette Nat’l Bank of Minneapolis v. First of Omaha Serv. Corp., supra, was a national bank which, although located in Nebraska, had issued credit cards to borrowers in Minnesota. Borrowers in Minnesota who maintained accounts -with the defendant-bank were obligated to pay interest on outstanding balances at a percentage rate which, although permitted under Nebraska law, exceeded that which was allowed by the law of Minnesota. The Supreme Court held that the defendant-bank could charge the interest rates allowed by Nebraska, the state in which it was located.

In so doing, the Court examined the legislative purpose of the National Bank Act, which, it said, was to give a national bank an advantage over state competitors. Id. at 314 , 99 S.Ct. at 548 , 58 L.Ed.2d at 545 . In order to achieve this goal, the Act authorized a national bank to charge the same interest that was available to the most favored lender in the bank’s home state. Section 85 of the National Bank Act, therefore, provided that a- national bank could charge interest on any loan to the extent allowed in the state in which the bank was located. Id. at 313 , 99 S.Ct. at 548 , 58 L.Ed.2d at 545 . This principle, the court held, was not annulled when borrowers lived in another state whose laws allowed lower interest rates. Under this holding, a national bank can “export” its home state’s favorable interest laws to transactions with out-of-state borrowers; and to the extent the laws of the borrowers’ states are in opposition, they have been pre-empted. Id. at 318 , 99 S.Ct. at 550 , 58 L.Ed.2d at 548 .

The majority concedes that, under Marquette Nat’l Bank of Minneapolis v. First of Omaha Serv. Corp., supra, a national bank may charge out-of-state borrowers the rate of interest permitted in its home state. The majority also agrees that, to the extent a borrowers’ home state sets a lower interest rate, its laws are pre-empted. It is argued, however, that interest, *134 as contemplated by the National Bank Act, does not include late fees, annual fees, return check charges or over-credit-limit charges, notwithstanding the definition of interest adopted by the state in which the bank is located. Rather, the majority asserts, these charges are “penalties”, to which the National Bank Act has no application and as to which the states remain free to regulate. This, in effect, would limit the “exportation” doctrine to only those charges which are based on annual percentage rates.

In the absence of a statutory definition, it is assumed that the legislative purpose of a federal enactment is expressed by the ordinary meaning of the words used. Mississippi Band of Choctaw Indians v. Holyfield, 490 U.S. 30, 47 , 109 S.Ct. 1597, 1607-1608 , 104 L.Ed.2d 29, 46 (1989). “A fundamental canon of statutory construction is that, unless otherwise defined, words will be interpreted as taking their ordinary, contemporary, common meaning.” Perrin v. United States, 444 U.S. 37, 42 , 100 S.Ct. 311, 314 , 62 L.Ed.2d 199, 204 (1979). “The plain meaning of legislation should be conclusive, except in the ‘rare cases [in which] the literal application of a statute will produce a result demonstrably at odds with the intention of its drafters.’ ” United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 242 , 109 S.Ct. 1026, 1031 , 103 L.Ed.2d 290, 299 (1989), quoting Griffin v. Oceanic Contractors, Inc., 458 U.S. 564, 571 , 102 S.Ct. 3245, 3250 , 73 L.Ed.2d 973 (1982).

In general, the courts have declined to affix to the term “interest” a narrow interpretation which would exclude any flat rate fees. Traditionally, interest has been understood to include any compensation allowed by law or fixed by the parties for the use or forbearance of money, or the price which is fixed for the use of money. See: Deputy v. DuPont 308 U.S. 488, 498 , 60 S.Ct. 363, 368 , 84 L.Ed. 416, 424 (1940); Old Colony Railroad Co. v. Commissioner of Internal Revenue, 284 U.S. 552, 560-561 , 52 S.Ct. 211, 214 , 76 L.Ed. 484, 489 (1932); National Bank of Gloversville v. Johnson, 104 U.S. (14 Otto) 271, 277, 26 L.Ed. 742, 745 (1881); Brown v. Hiatts, 82 U.S. (15 Wall) 177, 185, 21 L.Ed. 128, 131 (1873); Black’s Law Dictionary, 6th Ed. (1991). Under its ordinary definition, therefore, the term “interest” has traditionally been consid *135 ered in a broader sense than the majority has interpreted it. See: Harris v. Chase Manhattan Bank, 30 Cal.App. 4th 130 , 35 Cal.Rptr.2d 733 (1994); Tikkanen v. Citibank (South Dakota) N.A., 801 F.Supp. 270, 278 (D.Minn.1992). Thus, in Fisher v. First Nat'l Bank of Omaha, 548 F.2d 255, 258 (8th Cir.1977), a federal appellate court held that credit card cash-advance fees were interest. Similarly, in Hill v. Chemical Bank, 799 F.Supp. 948, 953 (D.Minn.1992), a federal district court found that late fees were interest. See also: Sherman v. Citibank (South Dakota) N.A., 272 N.J.Super. 435 , 640 A.2d 325 (1994). Other flat rate fees which have been considered interest include bonuses and commissions paid to the lender, 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); recording fees and mortgage taxes, Panos v. Smith, 116 F.2d 445, 446 (6th Cir.1940); closing costs, Northway Lanes v. Hockley Union Nat'l Bank & Trust Co., 464 F.2d 855, 861-862 (6th Cir.1972); and compensating balance requirements, American Timber & Trading Co. v. First Nat'l Bank of Oregon, 690 F.2d 781, 787 (9th Cir.1982).

Congress may look to the laws of the several states to define the term “interest.” Tikkanen v. Citibank (South Dakota) N.A., supra at 280. Even though federal laws are frequently intended to have uniform nationwide application, Congress may provide that federal enactments be interpreted by reference to state law. Mississippi Band of Choctaw Indians v. Holyfield, supra 490 U.S. at 43 , 109 S.Ct. at 1605 , 104 L.Ed.2d at 43 . In Section 85 of the National Bank Law, Congress expressly and unambiguously stated that a national bank was to be subject to the interest provisions of the laws of the state in which the bank was located. Accord: Franklin Nat'l Bank of Franklin Square v. New York, 347 U.S. 373 , 378 n. 7, 74 S.Ct. 550 , 554 n. 7, 98 L.Ed. 767 , 774 n. 7 (1954). This requires that we look to the laws of the state in which a national bank is located to determine the manner in which that state defines and allows interest. Thus, the fact that one.state considers late fees or service charges to be penalties does not invalidate another state’s decision to include the same fees as interest. See: Harris v. Chase Manhattan Bank, supra 30 *136 Cal.App.4th at 140, 35 Cal.Rptr.2d 733 ; Tikkanen v. Citibank (South Dakota) N.A., supra at 278. Because each state may define interest differently, the National Bank Act requires that courts rely on the definitional laws adopted by the state in which the bank is located. See, e.g.: Fisher v. First Nat’l Bank of Omaha, supra at 261.

In Greenwood Trust Co. v. Massachusetts, 971 F.2d 818 (1st Cir.1992), cert. denied, — U.S. -, 113 S.Ct. 974 , 122 L.Ed.2d 129 (1993), the plaintiff-bank was a state-chartered bank, located in Delaware, which regularly issued credit cards to Massachusetts’ residents. In addition to monthly finance charges, the bank assessed late fees and delinquency charges against accounts in default. . Although such charges were permitted as interest in Delaware, they were illegal under the consumer protection laws of Massachusetts. When the Attorney General for the Commonwealth of Massachusetts advised the bank that it had violated state law, the bank filed a declaratory judgment action in federal district court. The district court ruled in favor of the Commonwealth, but the Court of Appeals for the First Circuit reversed.

Because the plaintiff-bank was a state-chartered insured depository institution, the Depository Institutions Deregulation and Monetary Control Act, 12 U.S.C. § 1831 (DIDA), was applicable. DIDA, the Court said, had been derived from and was analogous to the National Bank Act and, like section 85,

provide[d] the mechanism whereby a bank [could] continue to use the favorable interest laws of its home state in certain transactions with out-of-state borrowers. See Marquette Nat’l Bank v. First of Omaha Serv. Corp., 439 U.S. 299, 313-19 , 99 S.Ct. 540, 548-51 , 58 L.Ed.2d 534 (1978); Gavey [Properties/762 v. First Fin. Sav. & Loan, 845 F.2d 519, 521 (5th Cir.1988) ]. To the extent that a law or regulation in the borrower’s home state purposes to inhibit the bank’s choice of an interest term under section 521, DIDA expressly preempts the state law’s operation.

Id. at 827 (footnote'omitted).

In reaching this result, the court rejected the borrowers’ contention that flat rate fees could not be considered interest.

*137 . In the first place, we do not believe that the plain meaning of “interest” necessarily restricts the definition of the word to numerical percentage rates. Reference works typically define interest as “a charge for borrowed money[,] generally, a percentage of the amount borrowed.” Webster’s Ninth New Collegiate Dictionary 630 (1989) (emphasis supplied); see also Black’s Law Dictionary 812 (6th ed. 1990). Such definitions do not limit interest to numerical percentage rates, for they simply note that interest is often, but not always, expressed as a percentage.

Id. at 824. Interest, the court said, was broad enough to include non-percentage based charges.

Although the court acknowledged that words contained in federal statutes are generally defined by federal common law, it determined that reference to state law was often appropriate.

Resort to uniquely federal definitions is not, however, automatic. “Congress sometimes intends that a statutory term be given content by the application of state law.” Mississippi Band, 490 U.S. at 43 , 109 S.Ct. at 1605 . In such instances, a federal court may properly use state law to fill the interstices within a federal legislative scheme. See, e.g., Kamen [v. Kemper Fin. Servs., Inc., 500 U.S. 90, 107-09 , 111 S.Ct. 1711, 1722-23 , 114 L.Ed.2d 152 (1991) ] (holding it proper to borrow a definition from state corporate law); Mississippi Band, 490 U.S. at 47-53 , 109 S.Ct. at 1607-11 (allowing state-law definition of “domicile” to inform a federal definition); Federal Election Comm’n v. National Right to Work Comm, 459 U.S. 197, 204-05 , 103 S.Ct. 552, 557-58 , 74 L.Ed.2d 364 (1982) (similar in corporate law context); DeSylva v. Ballentine, 351 U.S. 570, 580-81 , 76 S.Ct. 974, 979-80 , 100 L.Ed. 1415 (1956) (borrowing definition from state domestic relations law); Reconstruction Fin. Corp. v. Beaver County, 328 U.S. 204, 208-10 , 66 S.Ct. 992, 994-96 , 90 L.Ed. 1172 (1946) (borrowing definition from state property law). This “does not mean that a State would be entitled to use [a statutory term] in a way entirely strange to those familiar with its ordinary usage, but at *138 least to the extent there are permissible variations in the ordinary concept [of that term] we [may] deem state law controlling.” DeSylva, 351 U.S. at 581 , 76 S.Ct. at 980 .

Id. at 828-829. Because the Act of Congress specifically stated that interest should be determined by reference to the laws of the state in which the bank was located, the court reasoned, Delaware’s liberal definition of interest was applicable. The court added, however, that an analysis under federal common law did not yield a converse result.

Several courts in analyzing the language of section 85 of the Bank Act, have- had little trouble in construing the term “interest” to encompass a variety of lender-imposed fees and financial requirements which are independent of a numerical percentage rate. See, e.g., American Timber & Trading Co. v. First Nat’l Bank, 690 F.2d 781 , 787-88 (9th Cir.1982) (compensating balance requirement); Fisher v. First Nat’l Bank, 548 F.2d 255, 258-61 (8th Cir.1977) (fee for cash advance); Panos v. Smith, 116 F.2d 445, 446-47 (6th Cir.1940) (taxes and recording fees); Cronkleton v. Hill, 66 F.2d 384, 387 (8th Cir.) (bonus or commission paid to lender), 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) (late fees). Fairly read, these opinions expand the scope of section 85 preemption— and, by implication, the scope of section 521 preemption— well beyond periodic percentage rates.

Id. at 829-830 (footnote omitted).

Other courts which have considered this issue have uniformly reached the same result. See: Harris v. Chase Manhattan Bank, supra; Smiley v. Citibank (South Dakota) N.A., 26 Cal.App.4th 1767 , 32 Cal.Rptr.2d 562 (1994), appeal granted, 35 Cal.Rptr.2d 269 , 883 P.2d 387 (1994); Tikkanen v. Citibank (South Dakota) N.A, supra; Hill v. Chemical Bank, supra; Nelson v. Citibank (South Dakota) N.A., 794 F.Supp. 312 (D.Minn.1992); Roper v. Consurve, Inc., 777 F.Supp. 508 (S.D.Miss.1990), aff'd, 932 F.2d 965 (5th Cir.), cert. denied, 502 U.S. 861 , 112 S.Ct. 181 , 116 L.Ed.2d 142 (1991); Sherman v. Citibank (South Dakota) N.A., supra; Ament v. PNC Nat’l *139 Bank, 849 F.Supp. 1015 (W.D.Pa.1994); Goehl v. Mellon Bank (DE), 825 F.Supp. 1239 (E.D.Pa.1993); Ament v. PNC Nat’l Bank, 825 F.Supp. 1243 (W.D.Pa.1992); Watson v. First Union Nat’l Bank of South Carolina, 837 F.Supp. 146 (D.S.C.1993).

In my judgment, these decisions represent a logical application of the “exportation” principal announced by the Supreme Court in Marquette National Bank v. First of Omaha Service Corp., supra, and a correct interpretation of the plain language of the National Bank Act. The interest which may be charged by a national bank is determined according to the laws of the state in which the national bank is located. Where, as here, the home state of the national bank has defined interest broadly to include service fees and charges which are measured other than by a numerical percentage rate, the bank may rely on those laws in making charges for borrowed money. Thus, if a borrower chooses to borrow money from a national bank located in another state, the national bank should be permitted to rely upon the lending charges permitted in its home state, even if those charges are not permitted in the borrower’s state. Smiley v. Citibank (South Dakota) N.A., supra 26 Cal.App.4th at 1772, 32 Cal.Rptr.2d at 565.

It is significant that this interpretation is consistent with the opinion given by the Office of the Comptroller of Currency, which is the agency charged with the regulation of national banks. See: Clark v. Securities Industry Ass’n, 479 U.S. 388, 403 , 107 S.Ct. 750, 759 , 93 L.Ed.2d 757, 771 (1987) (in interpreting a statute, consideration may be given to the interpretation adopted by the agency charged with enforcement). According thereto, a national bank may look to the laws of the state in which it is located to determine whether it may include service charges and other fees as lawful interest. See, e.g.: Richard Fitzgerald, Director, OCC Legal Advisory Services Div. 3, Letter of Nov. 24, 1980; William Bowden, Jr., OCC Chief Counsel, Letter of Feb. 4, 1992; Robert Serino, OCC deputy Chief Counsel, Letter of August 11, 1988. This *140 general consensus is the basis on which modern interstate banking is conducted.

The majority’s contrary holding deprives national banks of the favored status which Congress intended, for Pennsylvania will now be able to enact laws allowing local banks and savings institutions to assess late fees and service charges while denying the same rights to national banks. See: Tiffany v. Nat’l Bank of Missouri, supra 85 U.S. at 412 , 21 L.Ed. at 863. It will also undermine. Congress’ attempt to create uniformity within the banking industry, for a bank located in one state will become subject to the disparate interest laws enacted in all of the fifty states in which it does business. See: Marquette Nat’l Bank v. First of Omaha Service Corp., supra 439 U.S. at 312 , 99 S.Ct. at 547 , 58 L.Ed.2d at 544 (requiring national bank to adhere to restrictions of each state would “throw into confusion the complete system of modern interstate banking.”).

I would hold, therefore, that Pennsylvania laws which attempt to regulate the amount and type of interest charged to Pennsylvania residents by national banks located in other states are ineffective. The matter of interest to be charged by a national bank has been pre-empted by the National Bank Act and is determined according to the laws of the state in which the bank is located. 2 Because the majority holds otherwise, I respectfully dissent.

POPOVICH and SAYLOR, JJ., join.

. At Ohio Revised Code Annotated § 1107.262(A) it is provided as follows:

''[A] bank may charge, collect, and receive, as interest, other fees and charges that are agreed upon by the bank and the borrower, including, but not limited to, periodic membership fees, cash advance fees, charges for exceeding a designated credit limit, charges for late payments, and charges for the return of a dishonored check....”

. Whether application of the “exportation” doctrine announced by the Supreme Court in Marquette Nat’l Bank of Minneapolis v. First of Omaha Serv. Corp., supra, to this case would result in an unconstitutional delegation of Congressional power to the State of Ohio was not considered by the trial court and is not now properly before this Court. If necessary, this issue can better be decided at a later date, after it has been briefed and argued fully by all interested parties.