# Amicus Curiae Brief — Smiley v. Citibank (South Dakota), NA > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385013_0672%3A13 ## Record - **Collection:** Supreme Court brief - **Document type:** Amicus Curiae Brief - **Published:** January 1, 1996 - **Citation:** 517 U.S. 735 ## Text 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 --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385013_0672%3A13. Public record. Not legal advice.