Amicus Curiae Brief — Smiley v. Citibank (South Dakota), NA

Gq FILED

Y, yan 1 1996

No. 95-860

| cue aan

In The sal

Supreme Court of the United States

October Term, 1995

o

BARBARA SMILEY,

Petitioner,

CITIBANK (SOUTH DAKOTA), N.A.,

Respondent.

+

On Writ Of Certiorari To

The California Supreme Court

.

AMICUS CURIAE BRIEF OF THE

COMMONWEALTH OF MASSACHUSETTS AND THE

STATES OF ARKANSAS, CONNECTICUT,

FLORIDA, HAWAIL INDIANA, IOWA, KENTUCKY,

MAINE, MARYLAND, MICHIGAN, MINNESOTA,

MISSISSIPPI, NEW HAMPSHIRE, NEW JERSEY,

NEW MEXICO, NORTH CAROLINA, NORTH

DAKOTA, RHODE ISLAND, SOUTH CAROLINA,

TENNESSEE, TEXAS, VERMONT, WASHINGTON,

WEST VIRGINIA AND DISTRICT OF

COLUMBIA IN SUPPORT OF PETITIONER

°

Scott HARSHBARGER

Attorney General

of Massachusetts

Ernest L. SARASON, JR.

(Counsel of Record)

Assistant Attorney General

One Ashburton Place, 19th Floor

Boston, Massachusetts 02108 .

(617) 727-2200

(Additional Counsel On Inside Cover)

——_——— ee

a a

COCKLE LAW SRIEF PRINTING CO. (800) 225-094

OR CALL COLLECT (402) 42-2431 ’

WINsTON BryYANT

Attorney General

of Arkansas

RicHARD BLUMENTHAL

Attorney General

of Connecticut

CuHartes F.C. Rurr

Corporation Counsel

of District of Columbia

Rosert A. ButrerwortH

Attorney General

of Florida

Jo ANN Ucnipa

Executive Director

State of Hawaii

Office of Consumer

Protection

Pameca F. Carter

Attorney General

of Indiana

THomas J. MiLier

Attorney General

of lowa

A.B. CHANDLER

Attorney General

of Kentucky

ANDREW KeETTERER

Attorney General

of Maine

J. Josep: Curran, Jr.

Attorney General

of Maryland |

Frank J. Kelley

Attorney General

of Michigan

Husert H. Humpnreey III

Attorney General

of Minnesota

Mixe Moore

Attorney General

of Mississippi

Jerrrey R. Howarp

Attorney General

of New Hampshire

DesoraH T. Porrrz —

Attorney General

of New Jersey

Tom UDALL

Attorney General

of New Mexico

Micuaet F. Eastey

Attorney General

of North Carolina

Hem Herrxamp

Attorney General

of North Dakota

Jerrrey B. Pine

Attorney General

of Rhode Island

Pru S. Porrer

Administrator

State of South Carolina

Department of Consumer

Affairs

CHaRLes W. Burson

Attorney General

of Tennessee

Dan Morates

Attorney General

of Texas

Jerrrey L. Amestoy

Attorney General

of Vermont

Curistine Grecoire

Attorney General

of Washington

Darrett V. McGraw, Jr.

Attorney General

of West Virginia

TABLE OF CONTENTS

l. THE LOWER COURT'S DECISION IMPROP-

ERLY LIMITS STATES’ POLICE POWERS AND

WILL SERIOUSLY ERODE STATE CONSUMER

ee at, ee i as

A. Smiley Improperly Elevates South Dakota

Law, Not Federal Law, On Late Payment

Penalties Above The Laws Of Every Other

State, Regardless Of Each State’s Distinct

Legislative Decisions ............

B. Smiley's Holding Will Reach Beyond Laws

Limiting Late Payment Penalty Charges To

Eviscerate All State Consumer Credit Laws

C. The Decision Below Will Thwart State

Efforts To Formulate And Enforce Non-

discriminatory Consumer Credit Laws

SMILEY’S UNWARRANTED INTRUSION INTO

SUBSTANTIVE STATE CONSUMER CREDIT

POLICY OVERLOOKS THE FUNDAMENTAL

PREMISE THAT A STATE’S POLICE POWER

CAN BE NEGATED ONLY WITH A CLEAR

MANDATE FROM CONGRESS AND THE LAN.

GUAGE AND HISTORY OF THE FEDERAL

STATUTE AT ISSUE

11

TABLE OF CONTENTS - Continued

Page

A. Smiley Refers To But Does Not Apply The

Preemption Principles Developed By This

rrr er ee 11

B. Section 30 Was Enacted in 1864 As A Usury

Statute That Prescribed The Rate Of Interest

National Banks Are Permitted To Charge.

The Scope Of Preemption Must Be Inter-

preted As Narrowly As Is Consistent With

Its Plain Meaning..............-------++-- 14

C. There Is No Conflict Preemption Because

State Laws Limiting Late Payment Penalties

Do Not Make Compliance With § 85 Impos-

sible Or Unduly Obstruct The Banking Busi-

REDD. cc ccccececepctctcoadeedcessdcoeees cece 17

Ill. AGENCY INTERPRETATIONS SUPPORTING

PREEMPTION UNDER § 85 ARE NOT ENTI-

TLED TO DEFERENCE BECAUSE THEY CON-

TRADICT CONGRESSIONAL INTENT TO

PREEMPT STATE CONSUMER CREDIT LAWS

PE cc ccicedscttsdevcdvbecdbcetitescsce 22

GENES ccccvcdconsccusecscconshcstewstecans 26

sas

TABLE OF AUTHORITIES

Page

Cases

Aldens, Inc. v. LaFollette, 552 F.2d 745 (7th Cir

1977), cert. denied, 434 U.S. 880 (1977)......_. inde

Aldens, Inc. v. Miller, 610 F.2d 538 (8th Cir. 1979),

cert. denied, 446 U.S. 919 RR ae pe ees 4,19

Aldens, Inc. v. Packel, 524 F.2d 38 (3rd Cir. 1975),

cert. denied, 425 US. 943 ES ae 4,19

Beasley v. Wells Fargo Bank, 1 Cal. Rptr. 2d 446 (Ct.

EAE el aia 9

California v. ARC America Corp., 490 U.S. 93 (1989) ..... 4

Cipollone v. Liggett Group, Inc., 505 U.S. 504 (1992)

Pebeeesevedaseldebecocesecticccbdeséeees 11, 12, 13, 14

Citibank (South Dakota), N.A. v. Thomas ]. Miller as

Attorney General of the State of lowa, C.A. 88-258-

) i 9 aes Suis Qes isin tele aaa 6

City of Burbank v. Lockheed Air Terminal, Inc., 411

i AS i en i tla Ds a 12

CSX Transp., Inc. v. Easterwood, 113 S. Ct. 1732

ae Pébdsbdubedsseedadsdcees 17

Davis v. Elmira Savings Bank, 161 US. 275 ( 1896) .... 18

Freightliner Corp v. Myrick, 115 S.Ct. 1483 (1995)..11, 17

Garrett v. Coast & Southern Fed. Sav. & Loan Ass'n,

oe ee ee ee ee y

Gower v. Carter, 3 lowa 244 (1856) .................. 16

Greenwood Trust Co. v. Massachusetts, 971 F.2d 818

(Ist Cir. 1992), cert. denied, 506 U.S. 1052 (1993) ..8, 12

Gregory v. Ashcroft, 111 S. Ct. 2395 (1991) ........... 12

iv

TABLE OF AUTHORITIES — Continued

Griffith v. Connecticut, 218 U.S. 563 (1910) .........-.. 4

Marquette National Bank of Minneapolis v. First of

Omaha Service Corp., 439 U.S. 299 (1978) ..4, 6, 13, 17

McClellan v. Chipman, 164 US. 347 (1896) ........... 18

MCI Telecommunications v. AT&T, 114 S.Ct. 2223

CIGDED cv cccccctcccccvecchosdevebssbestbsrsceeteess 25

Mercantile Bank v. New York, 121 U.S. 138 (1887)..... 20

National Bank v. Commonwealth, 76 U.S. (9 Wall.)

SED Gc dec cccdoddacdoaecaqesscetacdanetuads es 17

National Bank v. Johnson, 104 U.S. 271 (1881)......... 15

Penn Dairies, Inc. v. Milk Control Comm'n, 318 U.S.

ee ee Pee PPro Seer 12

Perdue v. Crocker Nat'l Bank, 702 P.2d 503 (Cal.

1985), appeal dismissed, 475 U.S. 1001 (1986)....... 24

Ramsey v. Morrison, 39 N.J.L. 591 (1877)............. 16

Randall v. Home Loan & Investment Co., 12 N.W. 2d

GD Gs Tes de cdewivccudvedewetrcackevebess so’ 16

Rice v. Santa Fe Elevator Corp., 331 U.S. 218 (1947).... 11

Sherman v. Citibank (South Dakota), N.A., No.

A-102-94 slip op. (N.J. Nov. 28, 1995)............. 21

State of lowa v. Citibank (South Dakota) CE

029-16973 (lowa District Court for Polk County,

PEs voce ccccccccaseesncséscescesesbenssbénesseess 6

v

TABLE OF AUTHORITIES - Continued

Page

State of Wisconsin v. Ameritech Corporation, et al.

Dane County Circuit Court Case No. 92CV1013

(1995) (complaint dismissed), Case No. 95-3426

a UO epee 6

Tiffany v. National Bank of Missouri, 85 U.S. (18

Co 8 NE Tr ee .. 14, 15

Wiseman v. State Bank and Trust, 854 S.W. 2d 725

eS SU cele na NOUS sas doueaed eres Vadickhckec cers 7

Feperat Statutes AND Lecistative Resources

Se EE EP Ache tehdes dnadbestcctosssoultive: passim

AE TN ae AD SR ee |

PN sd oT. Yosh. fieds evn oe. 20

I 20

By I oo vn chen ceunceosercseuscce.. 20

Be IID a ne ccvctaccusicccenncceveses. 20

ep es Fb. cnn cb ev Webadecovecoscs 20

P.L. 103-328, Sept. 29, 1994, 108 Stats. 2328 § 114.... 23

H. Conf. Rept. No. 651, 103rd Cong., 2nd Sess.

PP bouSe ebb ibbusebinvencePedsdocdccWuccccccesc: 24

State STATUTES

Mass. Gen. Laws Ann. c. 140, § 114B (1991 &

SEED Radin dn utetculindeedvndsonsnataey ¥sea0s's 8

S.D. Codified Laws Ann. § 54-3-1 (1990)............. 5

vi

TABLE OF AUTHORITIES - Continued

Page

Wisconsin Senate Bill 505 (1996) ..................... 8

Wisconsin Stats. Sec. 421.201(10)(a).................. 10

RULES AND REGULATIONS

SS CR. BPMs vidcdcdne thsceebwedabecdeoke 22, 23

MISCELLANEOUS

17 Am. Jur. 2d, Consumer and Borrower Protection

Pe Goes 6 09 vercenee chides tao 8 ine hret 9

Burgess and Ciolfi, Exportation or Exploitation? A

State Regulator’s View of Interstate Credit Card

Transactions, 42 Bus. Law 929 (1987) ............... 7

Crandall, The Wisconsin Consumer Act: Wisconsin

Consumer Credit Laws Before And After, 73 Wis. L.

SO, Se GUM a ncn ceudhubatuidas cabaieunirada tc. 9

Credit Card News (Apr. 1, 1994)................0005, 5

Federal Reserve Bank of Chicago, “Small States

Teach a Big Banking Lesson,” Chicago Fed. Let-

ft, 2 , §. SS ee ae Tree 7

Ginsburg, Interstate Banking, 9 Hofstra L. Rev. 1133

GUPUEEG 0.002 cccncevneksecoeb ekki nada tbeedebas coeases 7

Uniform Consumer Credit Code [1968 Act], 7 U.L.A.

GOP sos steccsasnnnutpnd blpkndcciyinteeanednnetins 10

STATEMENT OF INTEREST

The amici curiae Commonwealth of Massachusetts

and the states of Arkansas, Connecticut, Florida, Indiana,

lowa, Kentucky, Maine, Maryland, Michigan, Minnesota,

Mississippi, New Hampshire, New Jersey, New Mexico,

North Carolina, North Dakota, Rhode Island, Tennessee,

Texas, Vermont, Washington, and West Virginia through

their Attorneys General, the District of Columbia through

its Corporation Counsel, South Carolina’s Department of

Consumer Affairs through its Administrator, and

Hawaii's Office of Consumer Protection through its Exec-

utive Director,’ support petitioner Smiley’s position that

federal laws do not preempt California laws limiting

excessive late payment penalties in credit card transac-

tions. Preemption of these California laws will impede

amici’s authority to enforce their laws regulating credit

card delinquency and late charges against out-of-state

national banks.

' The actual participants in this Amicus Curiae Brief are

listed on the signature page. Of the 26 States Participating, 23

are represented by the Attorney General of the state. Hawaii is

represented by the Office of Consumer Protection which, while

not part of the state Attorney General’s Office, is statutorily

authorized to undertake consumer protection functions,

including legal representation of the state and enforcement of

that state’s consumer protection laws. The District of Columbia

is represented by its Corporation Counsel. South Carolina is

represented by its Department of Consumer Affairs which

administers, enforces and interprets the South Carolina

Consumer Protection Code which regulates late charges,

overlimit charges, other default charges and debt collection

practices in South Carolina. For the sake of simplicity, amici will

hereafter be referred to as the “Attorneys General” or “States.”

The Amici states have a great interest in this case.

This Court's interpretation of the scope of the preemption

of Section 30 of the National Bank Act, codified as 12

U.S.C. §§ 85 and 86, will have a profound impact on their

protection of their citizens. This Court’s decision will

determine whether the Attorneys General may enforce

state laws that limit excessive penalty charges and other

non-interest terms in credit transactions entered into by

their residents.

As the chief law enforcement officers of their states,

the amici wish to emphasize their view, based on long-

standing principles of statutory and constitutional inter-

pretation, that acts of Congress which do not explicitly

preempt state laws must not be read more broadly than

Congress intended. This is of particular concern in a case

such as this one where the state laws are based on a

state's traditional police powers to protect consumers in

credit transactions.

Consumer protection and consumer credit are tradi-

tional and critical areas of state concern. Amici states

have established comprehensive regulatory systems to

ensure fairness in the relationship between consumer bor-

rowers and their creditors. These laws reflect each state's

own assessment of how best to balance protecting con-

sumers with providing creditors sufficient incentive to

lend profitably to their residents.

S

SUMMARY OF ARGUMENT

The lower court's majority decision destroys a state’s

ability to enforce laws regulating late charges in con-

sumer credit transactions. The decision also places in

doubt the validity of every state’s consumer credit laws

by inte: preting “interest” expansively for purposes of

preemption analysis. This unwarranted intrusion into

substantive state consumer credit policy misreads both

the language and history of the federal statute at issue

and the fundamental premise that a state’s historic police

powers can be negated only with a clear mandate from

Congress.

The lower court's decision also undermines this

country’s dual banking system which has been one of the

most significant characteristics of American banking

since the National Bank Act was passed in 1864. Histori-

cally, Congress has deferred to the interests of the states

in the regulation of national banks as to all matters except

those essential to their role as federal instrumentalities.

Application of the decision’s preemption analysis

will permit a national bank to use the law of its home

state to override the consumer protection legislation of

California and all other states under the guise of federal

preemption. Amici submit that Congress never intended

this result.

ARGUMENT

I. THE LOWER COURT’S DECISION IMPROPERLY

LIMITS STATES’ POLICE POWERS AND WILL

SERIOUSLY ERODE STATE CONSUMER CREDIT

LAWS.

A. Smiley Improperly Elevates South Dakota Law,

Not Federal Law, On Late Payment Penalties

Above The Laws Of Every Other State, Regard-

less Of Each State’s Distinct Legislative Deci-

California prohibits the assessment of excessive late

payment penalty charges on credit card accounts when

consumers are delinquent in making payments.? These

charges, however, are permitted in South Dakota. Cit-

ibank, located in South Dakota, imposes such charges on

California residents. Citibank claimed, as the basis for its

authority, 12 U.S.C. § 85 which, under certain circum-

stances, preempts state restrictions on interest rates.

Respondent also relied on Marquette National Bank of Min-

neapolis v. First of Omaha Service Corp., 439 U.S. 299 (1978),

2 Consumer protection is a traditional and important

component of the police power of the states. Griffith v.

Connecticut, 218 U.S. 563, 568-569 (1910); California v. ARC

America Corp., 490 U.S. 93, 101 (1989). Typical areas of state

consumer credit regulation include requirements of truthful

advertising, restrictions or prohibitions on automatic wage

assignments or authorizations to confess judgment, limitations

on security interests and restrictions on debt collection charges

and practices. The need for state regulation in this area has long

been judicially acknowledged. See Aldens, Inc. v. Packel, 524 F.2d

38 (3rd Cir. 1975), cert. denied, 425 U.S. 943 (1976); Aldens, Inc. v.

Miller, 610 F.2d 538 (8th Cir. 1979), cert. denied, 446 U.S. 919

(1980).

as authority to export these charges throughout the coun-

try.

In order to override California law limiting excessive

late payment penalty charges, the Smiley majority used a

flawed preemption analysis to define the term “interest”

in § 85 expansively to include late payment penalty

charges.* Proceeding on this premise, shown below to be

incorrect, the majority in Smiley incorrectly concluded

that California law is superseded because the legislature

of South Dakota permits the imposition of unlimited late

payment penalty charges in consumer credit transac-

tions.*

The result of the lower court's majority decision will

be to enshrine South Dakota’s policy of deregulation as a

nationwide policy, regardless of other states’ laws to the

contrary.

* “Late payment charges exacted by credit card issuing

banks totaled almost $2 billion in 1992, according to one

industry source. (Credit Card News (Apr. 1, 1994) at p.2).”

Smiley at Pet.App. 62 (Arabian, J., dissenting).

* South Dakota has legislatively expanded the definition of

“interest” to be “compensation allowed by law for the use, or

forbearance, or detention of money or its equivalent, including

without limitation, points, loan origination fees, credit service

or carrying charges, charges for unanticipated late payments,

and any other charges, direct or indirect, as an incident to or as a

condition of the extension of credit.” $.D. Codified Laws Ann.

§ 54-3-1 (1990).

ee eT en ee

6

B. Smiley's Holding Will Reach Beyond Laws

Limiting Late Payment Penalty Charges To

Eviscerate All State Consumer Credit Laws.

Although this case is limited to consideration of late

payment penalty charges, national banks elsewhere,

using Marquette as a lever, have attempted to push the

preemptive force of § 85 to virtually all terms of credit

transactions with consumers. For example, at least one

national bank has argued that state laws limiting collec-

tion costs and attorney fees following default are pre-

empted.5 To support this position this bank has

incorporated the following term in its credit card agree-

ment:

All terms and conditions of this Agreement

(including the change of terms provision, the

applicable law provision, and the finance

charge, late charge, returned check charge, and

research charge provisions) are deemed to be

interest under this Agreement and material to

the determination of the finance charge.®

° State of Wisconsin v. Ameritech Corporation, et al., Dane

County Circuit Court Case No. 92CV1013 (1995) (complaint

dismissed), Dst. IV, WI Ct. of Appeals, Case No. 95-3426 (appeal

stayed pending decision in this matter). See also Citibank (South

Dakota), N.A. v. Thomas J. Miller as Attorney General of the State of

lowa, C.A. 88-258-E (S.D. lowa 1988); State of lowa v. Citibank

(South Dakota), CE 029-16973 (lowa District Court for Polk

County, 1988). These cases were settled in November, 1989; no

judicial decision on the merits was reached.

® This credit card agreement is part of the record in State of

Wisconsin v. Ameritech Corporation, et al., Wis. Ct. Appeals, Dst.

IV, Case No. 95-3426, (R. 60, p. 4).

If this Court upholds Smiley and confirms the expor-

tation theory promoted by some national banks, the

states’ legislative ability to balance consumers’ interests

with lenders’ interests will be severely curtailed.

Lenders doing business in states with strong con-

sumer protection measures will be at a competitive disad-

vantage against financing sources based in states which

have forsaken consumer protection in order to attract

banking interests.”? Nationa’ banks, located in states

responsive to banking interests, eventually will dominate

not only the credit card industry, but all credit markets.*

The states that provide a greater measure of consumer

protection will be confronted with the unenviable choice

of eliminating these public protection provisions so that

” Although the statutory basis for interest rate exportation

is more than one hundred years old, this court first considered

the issue in Marquette. Following that decision, several states

chose to eliminate consumer safeguards in credit transactions to

attract national banks. Ginsburg, Interstate Banking, 9 Hofstra L.

Rev. 1133, 1370 (1981); Burgess and Ciolfi, Exportation or

Exploitation? A State Regulator’s View of Interstate Credit Card

Transactions, 42 Bus. Law 929, 933-34, 939 (1987). A few states’

efforts to attract credit card issuers from other states have been

successful. “Small States Teach a Big Banking Lesson,” Chicago

Fed. Letter, No. 10 (June 1986). Today, of the top ten credit card

issuers, six are located in Delaware, while the respondent, the

single largest issuer of Visa cards and Mastercards, is in South

Dakota.

* In states with consumer credit laws in place, local

merchants, such as appliance stores and car dealers, already

offer financing from institutions located in states where

consumer credit has been deregulated. See Wiseman v. State Bank

and Trust, 854 S.W. 2d 725 (Ark. 1993) (interest rate for motor

vehicle loan determined by law where bank is located).

local creditors may compete with out-of-state creditors or

watching the local financing sources move elsewhere.’

C. The Decision Below Will Thwart State Efforts

To Formulate And Enforce Nondiscriminatory

Consumer Credit Laws.

It is appropriate for each state to define as a matter of

policy and law consumer credit terms for transactions

within its borders. States such as Delaware and South

Dakota have the undisputed right to deregulate rates for

their own citizens." However, every state’s right to set

standards for fair practices in the consumer credit area

within its respective borders will be curtailed if the deci-

sion below is upheld.

“Because credit has become a way of life for con-

sumers, and their need for protection in that area is great,

the most important protective efforts in the field of con-

sumer protection in recent years relate to consumer credit

* See, e.g., the Massachusetts Legislature’s 1993 amendment

allowing credit card late charges of up to $10.00 in place of its

previous prohibition of such late charges, after the First Circuit

allowed the preemption of that prohibition in Greenwood Trust

Co. v. Commonwealth, 971 F.2d 818 (1st Cir. 1992), cert. denied, 506

U.S. 1052 (1993). Mass. Gen. Laws Ann. c. 140, § 114B as

amended by 1993 Mass. Acts Chapter 151, § 43. The Wisconsin

Legislature is considering a proposal to eliminate limits on late

payment penalties, over-the-limit fees and other non-interest

rate charges in the event this Court determines that late

are “interest” under § 85. Wisconsin Senate Bill 505 (1996).

° Indeed, the Smiley court seems to have substituted its

policy judgments for those of the California lesislature. See

discussion at Pet. App. 35 (e.g. “As a general matter at least, late

payment has no social utility”).

9

protection.” 17 Am. Jur. 2d, Consumer and Borrower Protec-

tion § 1 (1990). State consumer credit laws reflect the now

familiar differences between commercial transactions and

consumer transactions.'' Commercial transactions pre-

sumably involve two knowledgeable parties. One party

does not rely on the other party for fairness or know!l-

edge. Terms of a commercial agreement are usually

understood, even if not expressly bargained for by the

parties. The parties to a commercial transaction custom-

arily have comparable economic positions or interests at

stake, or can select their respective bargaining position in

the marketplace.

On the other hand, consumer transactions are for

personal, not business, use. Consumers frequently lack

experience from repeated transactions and have a more

limited knowledge of the marketplace than the seller.

Most often, contractual documents are not read, much

less bargained for, by consumers.

Under the lower court's ruling, consumers subjected

to unfair or illegal credit and collection practices by an

out-of-state national bank will have no recourse to their

state consumer protection authorities.'2 These officials

will be precluded from enforcing consumer credit laws

** For example, see Crandall, The Wisconsin Consumer Act:

Wisconsin Consumer Credit Laws Before and After, 73 Wis. L. Rev.

334, 357 (1974).

Courts have ruled that national banks have engaged in

improper practices and have taken advantage of customers. See

Beasley v. Wells Fargo Bank, 1 Cal. Rptr. 2d 446 (Ct. App. Ist Dist.

1991); Garrett v. Coast & Southern Fed. Sav. & Loan Assn, 108 Cal.

Rptr. 845, 511 P.2d 1197 (1973).

10

against out-of-state national banks. Further, consumers

will not be able to pursue private statutory or common

law remedies. Moreover, consumer protection authorities

in the state where the bank is located may be less moti-

vated to take action against a local national bank based

on complaints from consumers in another state.

States have expressly extended the territorial applica-

tion of their consumer credit laws to ensure evenhanded

coverage of all credit offers made to consumers within

their borders. These efforts have included statutory

invalidation of choice of law contract terms that provide

that the law of a foreign state controls a consumer credit

transaction.'* As the drafters of the Uniform Consumer

Credit Act recognized in the mid 1960's:

The danger that creditors may be able to

induce consumers to agree that the applicable

law will be that of a creditors’ haven that has no

effective consumer credit protection has led to

invalidating choice of law agreements except

where the law chosen is that of the state of the

consumer's residence.” Uniform Consumer

Credit Code [1968 Act], Comment § 1.201, 7

U.L.A. 595, 619.

State residents are entitled to and reasonably expect

the protection of their own state’s laws. Consumers

should not be subject to the non-interest laws of other

states. While the market arguably regulates the “interest

rates” offered across state lines, it does not regulate back-

'S For example, see Sec. 421.201(10)(a), Wis. Stats.; Aldens,

Inc. v. LaFollette, 552 F.2d 745 (7th Cir. 1977), cert. denied, 434 U.S.

880 (1977).

11

end late fees or other penalties after a loan default. Banks

usually do not compete on the basis of penalties for the

contractual breach, nor are consumers particularly sensi-

tive to those penalties when choosing credit cards.

Because such penalties, like late fees, can be more oppres-

sive than market-based “interest,” the resident states

have a superior interest in limiting such charges when

compared to the interest of a bank’s home state.

Il. SMILEY’S UNWARRANTED INTRUSION INTO

SUBSTANTIVE STATE CONSUMER CREDIT POL-

ICY OVERLOOKS THE FUNDAMENTAL PREM-

ISE THAT A STATE’S POLICE POWER CAN BE

NEGATED ONLY WITH A CLEAR MANDATE

FROM CONGRESS AND THE LANGUAGE AND

HISTORY OF THE FEDERAL STATUTE AT ISSUE.

A. Smiley Refers To But Does Not Apply The Pre-

emption Principles Developed By This Court.

“Consideration of issues arising under the Suprem-

acy Clause ‘start[s] with the assumption that the historic

police powers of the States [are] not to be superseded

by . . . Federal Act unless that [is] the clear and manifest

purposes of Congress.’ ” Cipollone v. Liggett Group, Inc.,

505 U.S. 504, 516 (1992), citing Rice v. Santa Fe Elevator

Corp., 331 U.S. 218, 230 (1947). The requirement that

preemption be found only when there is clear evidence of

Congressional intent applies to consideration of both

express statutory preemption and implied conflict pre-

emption. Freightliner Corp. v. Myrick, 115 S.Ct. 1483, 1488

(1995).

This axiom is essential to the states. Appropriate

deference to state laws helps ensure that Congress does

12

not supersede state legislative enactments except through

deliberate action. Principles of federalism demand no

less.'* By finding that state laws may be preempted by

stretching the definition of a federal law, the majority

opinion below is incompatible with this Court's preemp-

tion decisions.'5

The majority in Smiley did not recognize the clear

meaning and import of this Court’s preemption decisions.

The California Supreme Court initially reviewed the lan-

guage of § 85 and concluded that the term “interest” was

not defined.'© Having done so, it should then have

applied the standard set out in Cipollone: where there is

'* As Chief Justice Rehnquist has emphasized: “Unless the

requisite pre-emptive intent is abundantly clear, we should

hesitate to invalidate state and local legislation for the added

reason that ‘the state is powerless to remove the ill effects of our

decision, while the national government, which has the ultimate

power, remains free to remove the burden.’ ” City of Burbank v.

Lockheed Air Terminal, Inc., 411 U.S. 624, 643 (1973) (Rehnquist, J.,

dissenting) (quoting Penn Dairies, Inc. v. Milk Control Comm'n,

318 U.S. 261, 275 (1943)).

'® As Justice O’Connor has explained, the right to preempt

state law under the Supremacy Clause is an extraordinary

power in a federalist system. The use of this power will not be

implied unless Congress has made its intention clear. To depart

from this standard would place in jeopardy the federalist

system of joint sovereigns. Gregory v. Ashcroft, 111 S. Ct. 2395,

2399 (1991).

‘© The First Circuit Court of Appeals made the same error

in Greenwood Trust Co. v. Massachusetts, 971 F.2d 818 (Ist Cir.

1992), cert. denied, 506 U.S. 1052 (1993), by continuing its

preemption analysis despite finding that“... DIDA’s text and

legislative history are, at bottom, inconclusive.” Id. at 828.

13

no clear evidence of preemptive intent, a finding of fed-

eral preemption is foreclosed. This approach would have

properly limited § 85 to its plain meaning - numerical

interest rates. Instead, without conducting any preemp-

tion analysis whatsoever, the majority relied on Marquette

for the proposition that § 85 preempts state laws relating

to “interest,” and framed the issue as one centering on

the scope of preemption.'” At this point the Smiley major-

ity abandoned preemption principles and looked to sec-

ondary sources to define interest broadly to encompass

any payments obtained from a borrower. Ultimately, the

majority concluded that the power of South Dakota to

dictate non-interest rate terms for California was

“implicit” in the word “interest” as meant by the framers

of the National Bank Act.'* Both the plain meaning of the

statute and its legislative history were ignored.

By forging ahead with an analysis of secondary

sources while overlooking the purpose of § 85 and its

7 In a separate opinion in Cipollone joined by Justices

Kennedy and Souter, Justice Blackmun concurred with the

majority and noted: “The principles of federalism and respect

for state sovereignty that underlie the Court's reluctance to find

pre-emption where Congress has not spoken directly to the

issue apply with equal force where Congress has spoken,

though ambiguously. In such cases, the question is not whether

Congress intended to pre-empt state regulation, but to what

extent. We do not, absent unambiguous evidence, infer a scope

of pre-emption beyond that which clearly is mandated by

Congress’ language.” Cipollone, 505 U.S. at 533. (Emphasis in the

original.)

* “Had Congress intended to limit protection, it would

doubtless have made itself plain. It did not. Its silence is

especially deafening. . . . ” Smiley at Pet. App. 24.

14

legislative history, the decision misapplied important pre-

emption principles. The Smiley majority turned the Cip-

ollone standard on its head by reasoning that because

Congress did not speak plainly to preemption, it must

have intended or implied limitless preemption.

B. Section 30 Was Enacted In 1864 As A Usury

Statute That Prescribed The Rate Of Interest

National Banks Are Permitted To Charge. The

Scope Of Preemption Must Be Interpreted As

Narrowly As Is Consistent With Its Plain Mean-

ing.

The primary objective of Section 30 of the National

Bank Act was to enact a federal usury law for national

banks. This measure, today codified as 12 U.S.C. §§ 85

and 86, prescribed an interest rate ceiling and federal

remedy for usury. It also protected national banks from

discriminatory state usury laws under the “most favored

lender” doctrine articulated by this Court in Tiffany v.

National Bank of Missouri, 85 U.S. (18 Wall.) 409 (1874).

Discriminatory state usury laws are not at issue in

this case. The explicit language of this statute does not

speak to late payment penalty charges or credit terms

other than the rate of interest. The majority in Smiley

conceded correctly that language addressing late pay-

ment penalties or delinquency charges was not present in

the statutory scheme. Further, the legislative history

reveals no evidence of Congressional intent to displace

15

state law regarding penalty charges or payments other

than for interest.!9

The term “interest” in § 85 must be given federal

definition, independent of unique state definitions. This

principle was recognized by this Court in Tiffany which

held that “interest” must “receive a strict, that is literal

construction” to avoid subjecting banks to double interest

penalties under the Act. Id. at 410. While maximum rates

of interest would vary among the states because of differ-

ent state interest rate ceiling laws, the meaning of interest

rate for national banks would be uniform across all the

states. See National Bank v. Johnson, 104 U.S. 271, 277

(1881) (§ 85 of the National Bank Act federalizes the

“rate” of interest, not the character of bank contracts).

In setting limits on rates of interest charged by

national banks under the National Bank Act, Congress

showed great deference to the states: the usury ceiling for

a national bank would be the usury ceiling of that bank’s

home state. Respondent's attempt to use this provision of

the Act, more than one hundred years after its passage, to

engage in wholesale exportation of South Dakota’s caveat

emptor regime, thereby eviscerating the non-usury con-

sumer protection laws of all the other states, turns upside

down Congressional intent and violates Congressional

deference.

19 Justice Arabian's dissent details the historical record

regarding the enactment of the National Bank Act by the 38th

Congress in 1864. The majority does not dispute this analysis,

but takes the term “interest” out of its statutory context and

looks to secondary sources as a basis for its expansive meaning.

16

The Smiley majority failed to point to evidence that

by enacting a federal usury statute, Congress intended to

preempt charges that were not customarily considered in

determining compliance with these laws. The majority

avoided historical authority and reasoning advanced in

the dissenting opinions by suggesting that such authori-

ties concern “lawful interest” in contrast to the more

general concept of “interest” (Smiley, Pet.App. 20, n.8).

However, this distinction would have made no sense to

members of Congress in 1864. Today, this has no greater

persuasive significance.

Section 85 preempts state usury laws but nothing

more. In the 1860’s, late payment penalties were not

included in determining the rate of interest.2° Therefore,

late payment penalties were irrelevant to usury analyses,

imposition of those penalties did not violate state usury

laws, and the regulation of those penalties did not con-

flict with federal usury laws. Today, state laws limiting

late payment penalty charges remain beyond the scope of

federal preemption. The federal usury provisions of the

National Bank Act look to the laws of a national bank’s

home state only to determine the maximum interest rate,

not the laws that regulate (or more precisely, fail to

regulate) late payment penalty charges.

20 See Gower v. Carter, 3 lowa 244 (1856); Ramsey v. Morrison,

39 N.J.L. 591 (1877); Randall v. Home Loan & Investment Co., 12

N.W. 2d 915 (Wis. 1944).

17

C. There Is No Conflict Preemption Because State

Laws Limiting Late Payment Penalties Do Not

Make Compliance With § 85 Impossible Or

Unduly Obstruct The Banking Business.

In the absence of express statutory preemption, con-

flict preemption may be implied where it is impossible to

comply with both state and federal requirements, or

where state law stands as an obstacle to achieving the

intent of Congress. Freightliner Corp. v. Myrick, 115 S. Ct.

1483 (1995). As with express preemption, conflict pre-

emption will not be found unless it is the clear intent and

purpose of Congress. CSX Transp., Inc. v. Easterwood, 113

S. Ct. 1732, 1737 (1993).

When considering preemption under the National

Bank Act, this Court has consistently and repeatedly rec-

ognized that state laws are not to be set aside simply to

accommodate the commercial convenience of national

banks.?! In National Bank v. Commonwealth, 76 U.S. (9

Wall.) 353, 362 (1869), this Court stated:

[National banks] are subject to the laws of the

State, and are governed in their daily course of

business far more by the laws of the State than

21 The Smiley majority suggests that these cases are

inapposite because Marquette determined that state laws related

to “interest” were preempted due to “conflict” with federal law.

(Smiley, Pet.App. 12, n.4) However, Justice Brennan looked to

the plain meaning of the statutory text to determine that the rate

of interest was determined by the law of the state where the bank

was located. Marquette did not hold that the preemption

analysis of prior decisions under the National Bank Act was

inapplicable when express terms of the Act do not conflict with

state law.

18

of the nation. All their contracts are governed

and construed by state laws. Their acquisition

and transfer of property, their right to collect

their debts, and their liability to be sued for

debts, are all based on state law. It is only when

the state law incapacitates the banks from dis-

charging their duties to the government that it

becomes unconstitutional.

This principle has been balanced with national banks’

role as federal instrumentalities. State action which con-

flicts with or frustrates the purpose of the federal act is

void. Davis v. Elmira Savings Bank, 161 U.S. 275, 283

(1896). Almost one hundred years ago this Court recon-

ciled these principles in McClellan v. Chipman, 164 U.S.

347, 357 (1896):

These two propositions, which are distinct,

yet harmonious, practically contain a rule and

an exception, the rule being the operation of

general state laws upon the dealings and con-

tracts of national banks, the exception being the

cessation of the operation of such laws when-

ever they expressly conflict with the laws of the

United States or frustrate the purpose for which

the national banks were created, or impair their

efficiency to discharge the duties imposed upon

them by the law of the United States.

The application of these principles to this case does

not evidence a clear intent to preempt state laws as held

by the majority below. First, it is not impossible for

national banks to comply with both § 85 and non-

discriminatory state laws limiting late payment penalty

charges and other non-interest terms so as to infer con-

gressional intent to preempt contrary state law. National

banks may comply with home state interest rate limits,

19

while conforming to laws governing non-interest charges

and other terms of the states where their customers res-

ide.?2

Second, the Smiley majority did not demonstrate that

the state laws limiting late payment penalty charges frus-

trated the purposes of the National Bank Act or somehow

prevented banks from discharging their duties under fed-

eral law. The federal duties or purposes of national

banks were laid out in the National Bank Act and its

legislative history and include: “to establish a system of

22 The majority’s concern that limiting national banks to the

“varying laws of the several states .. . might ‘throw into

confusion the complex system of modern interstate banking.’ ”

(Smiley, Pet.App. 29), quoting Marquette, 439 U.S. at p. 312) is ill-

founded. Justice Brennan was concerned about using the place

of the transaction, not the customer’s state of residence, as the

basis for selection of the law to be applied. Moreover,

sophisticated computer technology enables other interstate

sellers to conform to consumer protection laws of states where

customers reside. Today, creditors, other than financial entities

under federal interest rate laws, operate on a national scale and

extend consumer credit terms which comply with the laws of

the states where the customer resides. See Aldens, Inc. v. Packel,

524 F.2d 38 (3d Cir. 1975), cert. denied, 425 U.S. 943 (1976); Aldens,

Inc. v. Miller, 610 F.2d 538 (8th Cir. 1979), cert. denied, 446 U.S.

919 (1980).

23 The Smiley majority suggests that an obstacle to federal

policies would exist if a state were to set interest rates to

unprofitably low rates, yet permit lenders other than national

banks to impose high penalty charges so as to drive national

banks out of business. (Pet.App. 22) However, this scenario is

not realistic. It assumes, inter alia, that favored banks would

seek out chronic delinquents (and jeopardize repayment of

principal and interest) so as to maximize late payment penalties.

20

national banking institutions, in order to provide a uni-

form and secure currency for the people and facilitate the

operations of the Treasury of the United States.” Mercan-

tile Bank v. New York, 121 U.S. 138, 154 (1887).

State laws regarding credit terms other than the rate

of interest do not impede, frustrate, or incapacitate

national banks from achieving these federal purposes.

The Smiley majority does not point to a real impediment

created by requiring national banks to be subject to state

laws in an area traditionally reserved to the states.

Furthermore, federal intervention in the consumer

credit area does not occupy the field and foreclose state

involvement apart from interest rate limits under usury

laws. Far from evidencing a desire to occupy the entire

field of consumer credit, the federal government's inter-

vention in this area has been cautious, limited and delib-

erately deferential to state laws.24 Generally, federal

provisions only preempt state law when state law either

offers less protection than, or is inconsistent with, the

federal law.?5

24 For example, the federal Truth-in-Lending Act, 15 U.S.C.

1601 et seq., regulates consumer lending disclosures but

explicitly leaves intact substantive state consumer protection

laws. See, 15 U.S.C. sec. 1610. Similar deference to state law is

demonstrated in the Equal Credit Opportunity Act, 15 U.S.C.

secs. 1691-1691f (see, 15 U.S.C. sec. 1691d(f)), the Fair Debt

Collection Practices Act, 15 U.S.C. secs. 1692-16920 (see, 15

U.S.C. sec. 1692n) and the Electronic Fund Transfers Act, 15

U.S.C. sec. 1693-1693r (see, 15 U.S.C. sec. 1693q).

25 For example, the legislative history of the Depository

Institutions Deregulation and Monetary Control Act of 1980

(DIDA), 12 U.S.C.A. § 1831, is instructive to an understanding of

21

The test for preemption is not inconvenience, nor

even a claim of financial detriment to a private institu-

tion, but whether the state laws frustrate the purpose of

the federal legislation. State laws are not preempted

because they may modify defendants’ options in a partic-

ular state; they are preempted only if they interfere with

the federal purpose behind the National Bank Act.

Absent federal preemption, states, not banks, and not

even national banks, determine the laws, benefits and

protection afforded to their consumers.

Congress’ intent with respect to the notion of interest contained

in the National Bank Act. “Although the NBA [National Bank

Act] 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 .. . . 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 of a legislative initiative that occurred over 100 years

earlier.” Sherman v. Citibank (South Dakota), N.A., No. A-102-94

slip op., Pet.App. 151, 160-64 (N.J. Nov. 28, 1995).

22

Ill. AGENCY INTERPRETATIONS SUPPORTING

PREEMPTION UNDER § 85 ARE NOT ENTITLED

TO DEFERENCE BECAUSE THEY CONTRADICT

CONGRESSIONAL INTENT TO PREEMPT

STATE CONSUMER CREDIT LAWS NARROWLY.

The decision below bolsters its expansive construc-

tion by reference to interpretations of the Office of Comp-

troller of the Currency (OCC) and its rulemaking

proposal to define “interest” broadly to include almost

any charge a national bank may impose upon a borrower.

60 Fed. Reg. at 11940 (March 3, 1995). Recently the OCC

issued the final rule which includes such a sweeping

definition of interest.26 However, the lower court did not

base its decision on these administrative actions which

are entitled to neither weight nor deference.

Although the OCC rule purports to define “interest,”

the obvious consequence will be the wholesale preemp-

tion of state laws limiting charges not included in calcu-

lating a rate of interest imposed by out-of-state national

26 The final text is as follows: “The term ‘interest’ as used in

12 U.S.C. 85 includes any payment compensating a creditor or

prospective creditor for an extension of credit, making available

of a line of credit, or any default or breach by a borrower of a

condition upon which credit was extended. It includes, among

other things, the following fees connected with credit extension

or availability: numerical periodic rates, late fees, not sufficient

funds (NSF) fees, overlimit fees, annual fees, cash advance fees,

and membership fees. It does not ordinarily include appraisal

fees, premiums and commissions attributable to insurance

guaranteeing repayment of any extension of credit, finders’

fees, fees for document preparation or notarization, or fees

incurred to obtain credit reports.” 60 Fed. Reg. at 4869 (February

9, 1996). 12 C.F.R. § 7.4001(a).

23

banks.?” However, Congress has never explicitly pre-

empted state limitations on non-interest charges such as

late charges, default charges or state limitations on

charges related to collection costs, such as attorney fees.

The OCC’s rulemaking attempt to preempt state laws

conflicts with the spirit if not the letter of § 114 of the

Riegle-Neal Interstate Banking and Branching Efficiency

Act of 1994, P.L. 103-328, Sept. 29, 1994, 108 Stats. 2338.

That Act requires agencies to specify particular state

banking laws which are to be administratively pre-

empted. The OCC did not attempt in the preamble or in

the text of the rule to identify those state laws, thereby

depriving states of adequate notice of the potential pre-

emptive impact of the proposed rule. Without such

notice, many states may not realize that substantial por-

tions of their versions of the Uniform Commercial Code,

the Uniform Consumer Credit Code, the Retail Install-

ment Sales Act and the common law of contracts, collec-

tions, attorney fees and penalties have been displaced by

administrative fiat.

The legislative history of Riegle-Neal makes clear

Congressional intent to narrowly preempt state consumer

protection laws:

27 The OCC’s definition of “interest” does not apply to all

transactions. In order to enable national banks located in states

with fixed interest rate limits to avoid violating these usury

laws ~ a likely result if late payment penalty fees and other

charges were included as part of the interest rate - OCC’s rule

states that the definition is not to be used for credit extended

within the state where the bank is located. 12 C.F.R. § 7.4001(c).

The OCC offers no reasoned explanation for this approach.

24

States have a strong interest in the activities and

operations of depository institutions doing busi-

ness within their jurisdictions. States have a

legitimate interest in protecting the rights of

their consumers, businesses, and commu-

nities . . . Congress does not intend that the

Interstate Banking and Branching Efficiency Act

of 1994 alter this balance and thereby weaken

States’ authority to protect the interests of their

consumers, businesses, or communities. . . .

It is of utmost concern to the Conferees that

the agencies issue opinion letters and in

tive rules concluding that Federal law preempts

state law regarding community reinvestment,

consumer protection, fair lending, or establish-

ment of intrastate branches only when the agency

has determined that the Federal policy interest in

preemption is clear.

H. Conf. Rep. No. 651, 103rd Cong., 2nd Sess. 53

reprinted in 1994 U.S.C.C.A.N. 2068, 2074 (emphasis

added)

Long-standing principles of administrative law pro-

hibit giving any weight to the OCC’s actions. First, there

is no explicit congressional mandate to the OCC regard-

ing § 85 or relating to the definition of the preemptive

reach of the Act. The interpretations and rule definition

do not advance traditional administrative objectives or

fill in the gaps of statutory coverage or explain how the

comptroller will exercise discretion in the future. Cf. Per-

due v. Crocker Nat'l Bank, 38 Cal. 3d 913, 702 P.2d 503, 523,

n. 38 (Cal. 1985), appeal dismissed, 475 U.S. 1001 (1986).

Second, the interpretations themselves are of ques-

tionable authority as they are not based on the banking

25

expertise of the agency. Instead they are quasi-judicial

determinations of whether state consumer protection

laws are preempted by federal banking laws.

Finally, as has been shown above, the conclusion

advanced by the OCC - that interest rate includes other

charges - cannot be reconciled with the plain language

and Congressional intent of § 85. “|A]n agency’s inter-

pretation of a statute is not entitled to deference when it

goes beyond the meaning that the statute can bear... ”

MCI Telecommunications v. AT&T, 114 S.Ct. 2223, 2231

(1994). These recent interpretations and rulemaking are

nothing more than an attempt to shore up the position of

national banks in pending litigation. The courts, not an

administrative agency without authorization from Con-

gress, are the final authority on these issues of statutory

construction. Administrative constructions which are

contrary to clear congressional intent must be rejected.

The OCC should not have attempted to accomplish indi-

rectly what Congress only recently has refused to pre-

empt directly.

26

CONCLUSION

For the above reasons, the judgment of the California

Supreme Court should be reversed.

Respectfully submitted,

Scott HARSHBARGER

Attorney General

of Massachusetts

Ernest L. SARASON, JR.

(Counsel of Record)

Assistant Attorney General

One Ashburton Place, 19th Floor

Boston, Massachusetts 02108

(617) 727-2200

Date: March 1, 1996