Appendix — Crocker National Bank v. Perdue

: %?

ae a7.) if Supreme Court, U.S,

85-1038 | FILED

: DEC 16 188s

No. ——————

JOSEPH F SPAN, Im.

IN THE 5 .

Supreme Court of the United States

OCTOBER TERM, 1985

CROCKER NATIONAL BANK,

Appellant,

V.

PAUL PERDUE,

Appellee.

On Appeal from the Supreme Court

of the State of California

APPENDIX TO

JURISDICTIONAL STATEMENT

WILLIAM ALSUP *

PAUL FLUM

MORRISON & FOERSTER

One Market Plaza

Spear Street Tower

San Francisco, CA 94105

Telephone: (415) 777-6000

Attorneys for Appellant

Crocker National Bank

* Denotes Counsel of Record

WILSON - EPES PRINTING Co., INC. - 789-O096 - WASHINGTON, D.C. 20001

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TABLE OF CONTENTS

A—Opinion of the Supreme Court of Cali-

| RR Rey RISEN. Oilint <te A a

B—Judgment of Dismissal

C—Opinion of the California Court of Ap-

peal

[= eee

E—Order Denying Rehearing in the Su-

preme Court of California

F—Notice of Appeal

G-$S USC. 06: MO nicer

H—12 U.S.C. §§ 3501-3505, 1832 _

I—Interpretive Rulings of the Comptroller

of the Currency, codified at 12 C.F.R.

§ 7.8000

J—Excerpts from the Comptroller’s Hand-

book For National Bank Examiners

K—Cal. Civ. Code § 1670.5

L—Briefs of Amicus Curiae Comptroller of

the Currency in the Supreme Court of

California

Page

la

APPENDIX A

IN THE SUPREME COURT

OF THE STATE OF CALIFORNIA

S.F. 24591

(Super. Ct. No. 740351)

PAUL PERDUE,

Plaintiff and Appellant,

.

CROCKER NATIONAL BANK,

Defendant and Respondent.

[Filed July 18, 1985]

Plaintiff filed this class action to challenge the validity

of charges imposed by defendant Crocker National Bank

for the processing of checks drawn on accounts without

sufficient funds. (The parties refer to such checks as

NSF checks and to the handling charge as an NSF

charge.) He appeals from a judgment of the trial court

entered after that court sustained defendant’s general

demurrer without leave to amend.

On July 3, 1978, plaintiff filed suit on behalf of all

persons with checking accounts at defendant bank and a

subclass of customers who have paid NSF charges to the

bank.’ The complaint first alleges a contract under which

1 The complaint refers to both “plaintiffs” and “defendants” in

the plural. Perdue, however, is the only named plaintiff; the

2a

the bank furnishes checking service in return for a

maintenance charge.” It then asserts that “It is the prac-

tice of defendants to impose and collect a unilateral set

charge for processing checks presented against plaintiffs’

accounts when such accounts do not contain sufficient

funds to cover the amount of the check.” “Defendants

have at various times unilaterally increased the NSF

charge to an amount the defendants deemed appropriate,

without reference to any criteria, and defendants im-

posed and collected the said increased amount without

any explanation or justification by defendants to plain-

tiffs.’ At the time of filing of the suit, the charge was

$6 for each NSF check, whether the check was honored

or returned unpaid, even though “the actual cost incurred

by the defendants in processing an NSF check is approxi-

mately $0.30.”

The bank requires each depositor to sign a signature

card which it uses “to determine and verify the authen-

ticity of endorsements on checks”. A copy of the signa-

ture card is attached as an exhibit to the complaint and

reproduced in an appendix to this opinion. In extremely

small (6 point) type, it states that the undersigned de-

positors “agree with Crocker National Bank and with

each other that... this account and all deposits therein

shall be . . . subject to all applicable laws, to the Bank’s

present and future rules, regulations, practices and

others are unidentified members of the ciass. The complaint names

Crocker National Bank and Does 1-100 as defendants, but the

“Doe” defendants have not been served or identified. We refer

to both parties in the singular.

2 Paragraph 7 states: “Defendants offer said checking services

in exchange for a promise by plaintiffs to pay a predetermined

charge set by defendants [hereafter called the maintenance charge. |

Plaintiffs, at the commencement of the checking account agreed to

pay said maintenance charge, or to maintain a minimum balance

in their checking account or some similar arrangement, unless such

charge was waived... .”

3a

charges, and to its right of setoff for the obligations of

any of us.” The card does not identify the amount of

the charge for NSF checks, and the bank does not furnish

the depositor with a copy of the applicable bank rules

and regulations.*

On the basis of these allegations, plaintiff asserts five

causes of action: (1) for a judicial declaration that the

bank’s signature card is not a contract authorizing NSF

charges; (2) for a judicial declaration that such charges

are oppressive and unconscionable; (3) to recover dam-

ages for unjust enrichment derived from the _ bank’s

collection of illegal NSF charges; (4} to enjoin alleged

unfair and deceptive practices—the bank’s failure to in-

form customers of the contractual nature of the signature

card, and its practice of waiving NSF charges as to cer-

tain preferred customers; and (5) to recover the dif-

ference between the NSF charges and defendant’s actual

expenses in processing NSF checks on the theory that

the charges represent an unreasonable attempt to fix

liquidated damages.

Defendant filed general and special demurrers to each

of the asserted causes of action. The superior court sus-

tained the general demurrers and, taking notice of the

fact that plaintiff had filed three previous complaints in

another action raising similar issues,‘ denied leave to

amend. Plaintiff appeals from judgment for defendant.

% Financial Code section 865.2, effective July 1, 1977, requires

banks to make information about bank charges available to the

public in an area of the bank open to the public. The complaint

does not state whether defendant complied with this section.

* Plaintiff Perdue and co-plaintiff Ralph Abascal filed a complaint

against Crocker National Bank on March 15, 1977, raising issues

similar to those of the present complaint. (S.F. Super. Ct. No.

720-309.) After the court sustained demurrers with leave to amend,

Perdue and Abascal filed a first, and then a second amended com-

plaint. On June 15, 1978, counsel for Perdue and counsel for

Abascal severed their association, and counsel for Perdue filed the

4a

Plaintiff’s third alleged cause of action is derivative;

its charge of unjust enrichment depends upon a finding

pursuant to some other cause of action that the NSF

charges were invalid or excessive. This cause of action

raises no issues for decision in the present appeal. The

other four alleged causes of action, however, present in-

dependent and substantial issues. We review each in

turn, applying the established principle that a demurrer

“admits the truth of all material factual allegations in

the complaint . . .; the question of plaintiff’s ability to

prove those allegations, or the possible difficulty in mak-

ing such proof does not concern the reviewing court.”

(Aleorn v. Anbro Engineering Inc. (1970) 2 Cal.3d 493,

496; Committee on Children’s TV, Inc. v. General Foods

Corp. (1983) 35 Cal.3d 197, 213-214.)

I. Plaintiff's first cause of action: whether the sig-

nature card is a contract authorizing NSF charges.

The complaint alleges that “The signature card pre-

pared by the defendants does not identify the amount of

any charge to be paid by the plaintiffs for processing

NSF checks and is not an agreement for such payment.

The card does not constitute mutual assent to NSF

charges in any particular sum or at all and accordingly

is not a contract conferring authority to do the acts

complained of herein.” “Based upon the language of the

signature card, the plaintiffs believed and expected that

the signature card was intended as a handwriting ex-

ample for purposes of identification and _ verificatien

only.” Plaintiff therefore seeks a judicial declaration ‘as

to whether the signature card is a valid or enforceable

contract and . . . a lawful basis for the imposition of

the NSF charge.”

The cases unanimously agree that a signature card

such as the Crocker Bank card at issue here is a con-

present action. The superior court subsequently denied a petition

to coordinate the various actions attacking NSF check charges,

and dismissed Perdue as a coplaintiff in action No. 720-309.

5a

tract. “The bank is authorized to honor withdrawals

from an account on the signatures authorized by the

signature card, which serves as a contract between the

depositor and the bank for the handling of the account.”

(Blackmon v. Hale (1970) 1 Cal.8d 548, 556; Bullis v.

Security Pac. Nat. Bank (1978) 21 Cal.3d 801, 811-

812.) Other California decisions (see Hoffman v. Se-

curity Pacific Nat. Bank (1981) 121 Cal.App.3d 964,

969; Larrus v. First National Bank (1954) 122 Cal.App.

2d 884, 889-890) and decisions of other states (see, e.g.,

In re Estate of Cilvik (Pa. 1970) 267 A.2d 836, 838,

fn. 2) also view the signature card as a contract.

Plaintiff does not seriously dispute this proposition.

His complaint alleges that the depositors “agreed to

pay [the bank’s] maintenance charge . . .” in return

for checking privileges, and one could infer that they

agreed to do so by affixing their signatures to the card.

Complaints filed by plaintiff in an earlier action stated

expressly that the signature card was a contract.®

Plaintiff argues, however, that even if a signature

card is a contract to establish a checking account, it is

not a contract authorizing NSF charges. He contends

that the contract is illusory because it permits the bank

to set and change the NSF charges at its discretion, and

without assent from the customer except such as may

be inferred from the fact that the customer does not

cancel his account after the bank posts notice of its rates.°®

5 The parties dispute whether the language in the complaints filed

in action S.F. Super. Ct. No. 720-309 are binding upon plaintiff in

the present case. It is well settled that a court may consider lan-

guage of prior complaints in the same action in ruling on a de-

murrer (Reichert v. General Ins. Co. (1968) 68 Cal.2d 822, 836),

but the cases do not discuss the effect of a prior complaint in a

different action.

6 Financial Code section 865.4, subdivision (b) (1) requires a bank

to give custcmers 15 days’ notice of any change in charges imposed

on bank accounts.

ee —oVoVunXaXJ3—eeee eee]

6a

Plaintiff relies on the rule that “[a]n agreement that

provides that the price to be paid, or other performance

to be rendered, shall be left to the will and discretion of

one of the parties is not enforceable.” (Automatic Vend-

ing Co. v. Wisdom (1960) 182 Cal.App.2d 354, 357.)

That rule, however, applies only if the total discretion

granted one party renders the contract lacking in con-

sideration. (See ibid.) If there are reciprocal promises,

as in the present case, the fact that the contract permits

one party to set or change the price charged for goods

or services does not render the contract illusory. Thus

in Cal. Lettuce Growers v. Union Sugar Co. (1955) 45

Cal.2d 474, the court upheld a contract permitting the

buyer of sugar beets to set the price to be paid. The

buyer did not have arbitrary power, the court explained,

because “where a contract confers on one party a dis-

cretionary power affecting the rights of the other, a duty

is imposed to exercise that discretion in good faith and

in accordance with fair dealing.” (P. 484; see Auto-

matic Vending Co. v. Wisdom, supra, 182 Cal.App.2d

354, 358 and cases there cited; ef. Civ. Code, § 1611;

Cal. U. Com. Code, § 2305; 1 Corbin, Contracts (1963

ed.) § 98.) Likewise, “a contracting party’s discretionary

power to vary the price or other performance does not

render the agreement illusory if the party’s actual exer-

cise of the power is reasonable.” (Powell v. Central Cal.

Fed. Sav. & Loan Assn. (1976) 59 Cal.App.3d 540, 549,

italics original; see Vanguard Investments v. Central

Cal. Fed. Sav. & Loan Assn. (1977) 68 Cai.App.3d 950,

958; Frankini v. Bank of America (1939) 31 Cal.App.2d

666, 676.)

The recent decision in Lazar v. Hertz Corp. (1983)

143 Cal.App.3d 128, offers an analogy to the present liti-

gation. Hertz’ car rental agreement permitted it to

determine unilaterally the price charged for gas used to

fill the tanks of returned rental cars. Plainiiff’s suit

alleged that Hertz fixed unreasonably high prices, in

Ta

breach of its duty of good faith and fair dealing. Dis-

cussing this cause of action, the court said that “[t]he

essence of the good faith covenant is objectively reason-

able conduct. Under California law, an open term in a

contract must be filled in by the party having discretion

within the standard of good faith and fair dealing.”

{P. 141.)

We conclude that plaintiff here is not entitled to a

judicial declaration that the bank’s signature card is not

a contract authorizing NSF charges. To the contrary, we

hold as a matter of law that the card is a contract au-

thorizing the bank to impose such charges, subject to the

bank’s duty of good faith and fair dealing in setting or

varying such charges. Plaintiff may, upon remand of

this case, amend his complaint to seek a judicial declara-

tion determining whether the charges actually set by the

bank are consonant with that duty.

II. Plaintiff's second cause of action: whether the

bank’s NSF charges are oppressive, unreasonable,

or unconscionable.

Plaintiff’s second cause of action alleges that the sig-

nature card is drafted by defendant bank which enjoys a

superior bargaining position by reason of its greater

economic power, knowledge, experience and _ resources.

Depositors have no alternative but to acquiesce in the

relationship as offered by defendant or to accept a similar

arrangement with another bank.’ The complaint alleges

that the card is vague and uncertain, that it is unclear

whether it is intended as an identification card or a con-

tract, that it imposes no obligation upon the bank, and

permits the bank to alter or terminate the relationship at

7 Defendant and other banks now offer some depositors an ar-

rangement under which, for a fee, the bank will treat NSF checks

up to a certain amount as credit card transactions, and honor such

checks. We do not know whether such arrangements were avail-

able when plaintiff filed his complaint.

8a

any time.® It then asserts that “The disparity between

the actual cost to defendants and the amount charged by

defendants for processing an NSF check unreasonably

and oppressively imposes excessive and unfair liability

upon plaintiffs.” Plaintiff seeks a declaratory judgment

to determine the rights and duties of the parties.

Plaintiff’s allegations point to the conclusion that the

signature card, if it is a contract, is one of adhesion.

The term contract of adhesion “signifies a standardized

contract, which, imposed and drafted by the party of

superior bargaining strength, relegates to the subscrib-

ing party only the opportunity to adhere to the contract

or reject it.” (Neal v. State Farm Ins. Co. (1961) 188

Cal.App.2d 690, 694; Graham v. Scissor-Tail, Inc. (1981)

28 Cal.3d 807, 817.) The signature card, drafted by the

bank ard offered to the customer without negotiation, is

a classic example of a contract of adhesion; the bank

concedes as much.

In Graham v. Scissor-Tail, Inc., supra, 28 Cal.38d 807,

we observed that “To describe a contract as adhesive in

character is not to indicate its legal effect .... [A]

contract of adhesion is fully enforceable according to its

terms [citations] unless certain other factors are present

which, under established legal rules—legislative or ju-

dicial—operate to render it otherwise.” (Pp. 819-820, fn.

omitted.) “Generally speaking,” we explained, “there are

two judicially imposed limitations on the enforcement of

adhesion contracts or provisions thereof. The first is that

such a contract or provision which does not fall within

the reasonable expectations of the weaker or ‘adhering’

party will not be enforced against him. [Citations.]

The second—a principle of equity applicable to all con-

tracts generally—is that a contract or provision, even if

8 The depositor also has the right to terminate the relationship at

any time, but lacks the right asserted by the bank to alter the

relationship without terminating it.

9a

consistent with the reasonable expectations of the parties,

will be denied enforcement if, considered in its context,

it is unduly oppressive or ‘unconscionable.’”’ (P. 820, fns.

omitted.) ®

In 1979, the Legislature enacted Civil Code section

1670.5, which codified the established doctrine that a

court can refuse to enforce an unconscionable provision

in a contract.’ Section 1670.5 reads as follows: “(a) If

the court as a matter of law finds the contract or any

clause of the contract to have been unconscionable at the

time it was made the court may refuse to enforce the

contract, or it may enforce the remainder of the contract

without the unconscionable clause, or it may so limit the

application of any unconscionable clause as to avoid any

unconscionable result. {{] (b) When it is claimed or

appears to the court that the contract or any clause

thereof may be unconscionable the parties shall be af-

® The Court of Appeal decision in A & M Produce Co. v. FMC

Corp. (1982) 135 Cal.App.3d 473, offers an alternative analytical

framework. It treats “unconscionability” as the only basis for re-

fusing to enforce a provision. (Graham v. Scissor-Tail, Inc., supra,

28 Cal.3d 807, spoke of “frustration of reasonable expectations” and

“unconscionability” as alternative bases for refusing enforcement.)

A & M Produce then divided the analysis of unconscionability into

two elements—procedural and substantive. The procedural element

included “oppression” arising from unequal bargaining power and

“surprise” arising from the assertion of hidden and unexpected

provisions. The substantive element involved consideration of

whether the provision was one-sided, unreasonable, and lacked jus-

tification. (See 1385 Cal.App.3d at pp. 485-487.)

Graham V. Scissor-Tail, Inc. comports somewhat more closely to

the California precedent; A & M Produce conforms more closely to

the Uniform Commercial Code. and the cases decided under that

code. Both pathways should lead to the same result.

10 Section 1670.5 is based upon Uniform Commercial Code section

2-302, but expands coverage to include noncommercial contracts.

For review of the legislative history of section 1670.5, see IMO

Development Corp. v. Dow Corning Corp. (1982) 135 Cal.App.3d

451, 459-460.

10a

forded a reasonable opportunity to present evidence as to

its commercial setting, purpose, and effect to aid the court

in making the determination.”

In construing this section, we cannot go so far as plain-

tiff, who contends that even a conclusory allegation of

unconscionability requires an evidentiary hearing. We

do view the section, however, as legislative recognition

that a claim of unconscionability often cannot be deter-

mined merely by examining the face of the contract, but

will require inquiry into its setting, purpose, and effect.

Plaintiff bases his claim of unconscionability on the

alleged 2,000 percent differential between the NSF charge

of $6 and the alleged cost to the bank of $0.30."' The

parties have cited numerous cases on whether the price

of an item can be so excessive as to be unconscionable.

The cited cases are from other jurisdictions, often from

trial courts or intermediate appellate courts, and none

is truly authoritative on the issue. Taken together, how-

ever, they provide a useful guide to analysis of the claim

that a price is so excessive as to be unconscionable.

To begin with, it is clear that the price term, like any

other term in a contract, may be unconscionable. (Pat-

terson v. Walker-Thomas Furniture Co. (D.C.Ct. App.

1971) 277 A.2d 111, 113 and cases there cited (fn. 6);

see Central Budget Corp. v. Sanchez (N.Y. City Civ. Ct.

1967) 279 N.Y.Supp.2d 391, 392; Merrel v. Research &

Data, Ine. (Kan.Ct.App. 1979) 589 P.2d 120, 123

(dictum); Vom Lehn v. Astor Art Galleries, Ltd. (N.Y.

Sup. Ct. 1976) 380 N.Y.Supp.2d 532, 541.) Allegations

11 The bank’s briefs claim the alleged $0.30 cost is too low and

plaintiff’s briefs admit that a higher figure, but still $1 or less,

might be more accurate. We do not, however, find in plaintiff's

briefs a sufficiently clear concession to enable us to depart from the

general principle that, in reviewing a judgment after the sustain-

ing of a general demurrer without leave to amend, we must assume

the truth of all material factual allegations in the complaint.

(Alcorn v. Anbro Engineering, Inc., swpra, 2 Cal.3d 493, 496.)

lla

that the price exceeds cost or fair value, standing alone,

do not state a cause of action. (Morris v. Capitol Furni-

ture Co. (App. D.C. 1971) 280 A.2d 775 [100 percent

markup over cost]; Patterson v. Walker-Thomas Furni-

ture Co., supra, 277 A.2d 111, 114 [price alleged to be

in excess of fair value]; Bennett v. Behring Corp. (S.D.

Fla. 1979) 466 F.Supp. 689, 696-698 [price in excess of

value].) Instead, plaintiff’s case will turn upon further

allegations and proof setting forth the circumstances of

the transaction.

The courts look to the basis and justification for the

price (cf. A & M Produce Co. v. FMC Corp., supra, 135

Cal.App.3d 473, 487), including “the price actually being

paid by . . . other similarly situated consumers in a

similar transaction.” (Bennett v. Behring Corp., supra,

466 F.Supp. 689, 697, italics omitted.) The cases, how-

ever, do not support defendant’s contention that a price

equal to the market price cannot be held unconscionable.

While it is unlikely that a court would find a price set

by a freely competitive market to be unconscionable (see

Bradford v. Plains Cotton Cooperative Assn. (10th Cir.

1976) 539 F.2d 1249, 1255 [cotton futures]), the market

price set by an oligopoly should not be immune from

scrutiny. Thus courts consider not only the market price,

but also the cost of the goods or services to the seller

(Frostifresh Corporation v. Reynoso (N.Y. Dist. Ct.

1966) 274 N.Y.Supp. 757; Toker v. Westerman (N.J.

1970) 274 A.2d 78), the inconvenience imposed on the

seller (see Merrel v. Research & Data, Inc., supra, 589

P.2d 120, 123), and the true value of the produce [sic] or

service (American Home Improvements, Inc. v. Maclver

(N.H. 1964) 201 A.2d 886, 889).

In addition to the price justification, decisions examine

what Justice Weiner in A & M Produce called the “pro-

cedural aspects” of unconscionability. (See A & M Pro-

duce Co., supra, at p. 489.) Cases may turn on the

absence of meaningful choice (Patterson v. Walker-

12a

Thomas Furniture Co., supra, 277 A.2d 111, 113 and

cases there cited), the lack of sophistication of the buyer

(compare Geldermann & Co., Ine. v. Lane Processing,

Inc. (8th Cir. 1975) 527 F.2d 571, 576 [relief denied to

sophisticated investor) with Forstifresh Corporation v.

Reynoso, supra, 284 N.Y.Supp.2d 757 [relief granted to

unsophisticated vuyers]) and the presence of deceptive

practices by the seller (ibid.; Vom Lehn v. Astor Art

Galleries, Ltd., supra, 380 N.Y.Supp.2d 532).

Applying this analysis to our review of the complaint

at hand, we cannot endorse defendant’s argument that

the $6 charge is so obviously reasonable that no inquiry

into its basis or justification is necessary.’* In 1978 $6

for processing NSF checks may not seem exorbitant,’

12In Jacobs v. Citibank, N.A. (1984) N.Y. , the New

York Court of Appeals upheld a summary judgment for defendant

bank in a suit attacking NSF check charges. In rejecting the claim

that such charges were unconscionable, the court said that “[p]}lain-

tiffs have failed to show that they were deprived of a meaningful

choice of banks with which they could do business and that the

terms of these agreements with defendant were unreasonably

favorable to the bank.” (P. -—.)

While the New York court ruled on a motion for summary judg-

ment, we rule upon a demurrer, and look only to plaintiff’s allega-

tions, not to the proof he had advanced to support those allega-

ticns. Plaintiff here has alleged that the charges imposed by de-

fendant bank were excessive, and that similar arrangements would

be imposed by other banks. Such allegations, which we must

assume to be true, distinguish the New York decision.

13 Defendant cites Merrel v. Research & Data, Inc., supra, 589

P.2d 120, which held a $5 fee imposed by merchants for NSF checks

was a “modest” amount (p. 123) and not unconscionable. NSF

checks pose a substantial inconvenience to a seller, who has been

deceived into an involuntary extension of credit to a customer

whose credit standing may not be very good. A bank, however,

is not deceived. It checks the balance of the account, and may

reject any overdraft. A fee reasonable to compensate the merchant

for the cost, inconvenience, and risk of an NSF check may be

excessive if exacted by a bank.

13a

but price alone is not a reliable guide. Small charges ap-

plied to a large volume of transactions may yield a

sizable sum. The complaint asserts that the cost of proc-

essing NSF checks is only $0.30 per check, which means

that a $6 charge would produce a 2,000 percent profit;

even at the higher cost estimate of $1 a check mentioned

in plaintiff’s petition for hearing, the profit is 600 per-

cent.'* Such profit percentages may not be automatically

unconscionable, but they indicate the need for further

inquiry.”

Other aspects of the transaction confirm plaintiff’s

right to a factual hearing. Defendant presents the de-

positor with a document which serves at least in part as

a handwriting exemplar, and whose contractual character

is not obvious. The contractual language appears in print

so small that many could not read it. State law may im-

pose obligations on the bank (e.g., the duty to honor a

check when the account has sufficient funds (Allen v.

Bank of America, supra, 58 Cal.App.2d 124, 127)), but

so far as the signature card drafted by the bank is con-

cerned, the bank has all the rights and the depositor all

the duties. The signature card provides that the depositor

will be bound by the bank’s rules, regulations, practices

and charges, but the bank does not furnish the depositor

with a copy of the relevant documents. The bank reserves

the power to change its practices and fees at any time,

subject only to the notice requirements of state law.

14 The complaint does not state the market price for the service

of processing NSF checks, although one might infer it is similar

to defendant’s price since plaintiff alleges that if he did not con-

tract with defendant, he would be “forced to accept a similar ar-

rangement with other banks.” The complaint does not set a figure

for the “fair” or “true” value or worth of the service.

15 We observe that the bank charges the same fee whether it

honors or rejects an NSF check. The fee, consequently, cannot be

intended as compensation for the credit risk arising from paying

such a check, or for the interest on the amount loaned.

14a

In short, the bank structured a totally one-sided trans-

action. The absence of equality of bargaining power,

open negotiation, full disclosure, and a contract which

fairly sets out the rights and duties of each party

demonstrates that the transaction lacks those checks and

balances which would inhibit the charging of uncon-

scionable fees. In such a setting, plaintiff’s charge that

the bank’s NSF fee is exorbitant, yielding a profit far

in excess of cost, cannot be dismissed on demurrer. Un-

der Civil Code section 1670.5, the parties should be

afforded a reasonable opportunity to present evidence as

to the commercial setting, purpose, and effect of the sig-

nature card and the NSF charge in order to determine

whether that charge is unconscionable.

Ill. Plaintiff's fourth cause of action: whether the

bank has performed acts of unfair competition.

Business and Professions Code section 17200 defines

“unfair competition” to include any “unlawful, unfair,

or fraudulent business practice.” This language is in-

tended to protect consumers as well as business com-

petitors; its prohibitory reach is not limited to deceptive

or fraudulent conduct but extends to any unlawful busi-

ness conduct. (Committee on Children’s TV, Ine. v. Gen-

eral Foods Corp., supra, 35 Cal.3d 197, 209-210; Stoiber

v. Honeychuck (1980) 101 Cal.App.3d 903, 927.)

The complaint charges two acts of unfair competition.

First, it asserts that the “signature card is used in a

manner which is unfair, deceptive and misleading, in

that plaintiffs are led to believe that it is a signature

card for identification purposes and the defendants treat

the signature card, without disclosure of said fact, as

the legal authority to impose the NSF charge on plain-

tiffs’ checking accounts.” Second, it asserts that “de

fendants arbitrarily and capriciously waive the NSF

charge for preferred or commercial accounts,” thus shift-

ing the costs of processing NSF checks from those pre-

ferred customers to others whose accounts are charged.

15a

Neither allegation is clear and precise. After reading

paragraph 38, we are uncertain whether plaintiff con-

tends that the signature card itself is deceptive, or

whether he contends that the bank employs misrepre-

sentations or other deceptive practices in presenting the

card to the depositor. If the latter is plaintiff’s conten-

tion, the complaint should set out the challenged repre-

sentations or practices.

It is, of course, clear that if plaintiff can show that

the card or the manner in which it is presented to the

customer is deceptive and misleading, he can prove a

cause of action for unfair competition. Since he seeks

only injunctive relief under this cause of action, he need

not show that he himself was misled; he need only prove

that “members of the public are likely to be deceived.”

(Chern v. Bank of America (1976) 15 Cal.3d 866, 876;

Committee on Children’s TV, Inc. v. General Foods Corp.,

supra, 35 Cal.3d 197, 211.) Thus the defect in plaintiff’s

allegation is not one of substance, but only of lack of

certainty. Such a defect would not justify the sustaining

of a demurrer without leave to amend. (Minsky v. City

of Los Angeles (1974) 11 Cal.38d 113, 118; La Sala v.

American Sav. & Loan Assn. (1971) 5 Cal.3d 864, 876.)

Plaintiff’s assertion in paragraph 39 that the bank

arbitrarily waives NSF charges for some customers con-

tains a more serious defect. Although price discrimina-

tion is often unlawful, depending upon the context of the

act and the intent of the perpetrator (see the Unfair

Practices Act, Bus. & Prof. Code, § 17000 et seq.), “arbi-

trary” price discrimination in itself is not necessarily

illegal. This defect is one of substance; while plaintiff’s

accusation in paragraph 38 of deceptive and misleading

practices describes acts of unfair competition, albeit in

very general terms, his accusation of arbitrary waiver of

NSF charges does not.

Plaintiff could amend his complaint to add particulars

which would show that the bank’s discriminatory waiver

l6a

of NSF charges violated some legal requirement. We are

disturbed, however, that plaintiff has never advanced any

theory under which the waiver would constitute unfair

competition. Plaintiff has argued only that the waiver of

NSF charges as to some customers shifts the processing

costs to others. Even if true, that allegation would not

suffice to prove unfair competition.

In conclusion, the superior court properly sustained a

demurrer to plaintiff’s fourth cause of action, but erred

in denying leave to amend. Plaintiff should be permitted

to amend to set out the alleged deceptive practices em-

ployed by defendant. The trial court would be within its

discretion in denying leave to amend to claim unlawful

discrimination in waiving NSF charges, but since plain-

tiff must be allowed to amend on the deceptive practices

issue, the court may choose to permit amendment as to

the waiver issue as well.

IV. Plaintiff's fifth cause of action: whether the

bank’s charge for NSF checks is an unlawful

penalty.

Paragraph 42 of the complaint states that “[c]ausing

NSF checks to be presented for payment is a breach by

plaintiffs of their contractual obligations to defendant

. .’ The NSF charge collected by defendants, how-

ever, “is a penalty and is not imposed to compensate

defendants for damages incurred by plaintiffs’ breach”,

and therefore violates Civil Code sections 1670 and 1671.

The complaint concludes that “[pJ]laintiffs are entitled

to recover the difference between the unlawful charges

collected and defendants’ actual damages... .”

By these allegations, plaintiff seeks to invoke the rule

that a contractual provision specifying damages for

breach is valid only if it “represent[s] the result of

a reasonable endeavor by the parties to estimate a fair

average compensation for any loss that may be sus-

17a

tained.” (Better Food Mkts. v. Amer. Dist. Teleg. Co.

(1953) 40 Cal.2d 179, 187; Garrett v. Coast & Southern

Fed. Sav. & Loan Assn., supra, 9 Cal.38d 731, 739.) An

amount disproportionate to the anticipated damages is

termed a “penalty.” A contractual provision imposing a

“nenalty” is ineffective, and the wronged party can col-

lect only the actual damages sustained."®

Two Court of Appeal decisions have addressed plain-

tiff’s contention and concluded that the writing of an

NSF check is not a breach of contract, and thus the fee

charged for processing the check is not a penalty.’’ In

Hoffman v. Security Pacific Nat. Bank (1981) 121 Cai.

App.3d 964, 968-969, the court said that “[p]laintiff

argued, and attempted to prove, that the depositors en-

tered into a covenant not to write NSF checks when they

16Tn Garrett v. Coast Southern Fed. Sav. & Loan Assn., supra,

9 Cal.3d 731, the leading case, we considered a provision which

imposed a charge for late payment of installments due under a

trust deed, but computed that charge as a percentage of the un-

paid principal balance. Defendant savings and loan association

contended that the provision did not impose a penalty for breach of

obligation, but offered borrowers an alternative method for per-

forming their obligation.

We concluded, however, that “the only reasonable interpretation

of the clause providing for imposition of an increased interest rate

is that the parties agreed upon the rate which should govern the

contract and then, realizing that the borrowers might fail to make

timely payment, they further agreed that such borrowers were to

pay an additional sum as damages for their breach which sum was

determined by applying the increased rate to the entire unpaid

principal balance. Inasmuch as this increased interest charge is

assessed only upon default, it is invalid unless it meets the re-

quirements of section 1671. [Citations.]” (P. 738.) We held that

the liquidated damages provision was invalid because it calculated

damages on the basis of the entire unpaid balance, not on the

basis of the amount of the overdue installment or the cost to the

defendant. (P. 740.)

17 A New York decision, Jacobs v. Citibank, N.A., supra, ——

N.Y. ——-, ——— reached the same conclusion.

18a

executed signature cards... . Plaintiff attempted to

show that industry custom prohibited the writing of

overdrafts without prior agreement and that the de-

positors’ promise to pay a service charge for any NSF

check contained an implied covenant not to write such

checks. [f]] Plaintiff failed to establish any such custom

or any agreement on the depositors’ part not to write

overdrafts. Moreover, statutes governing the obligations

of banks and their depositors, which are incorporated into

and become part of the contract between a bank and its

depositors [citations], treat an overdraft as an applica-

tion for advance credit rather than as a breach of an

express or implied covenant. California Uniform Com-

mercial Code section 4401 specifically authorizes a bank

to pay overdafts and to charge customers’ accounts to

recover amounts paid, even when payments result in

overdrafts on the account. While a bank has a statutory

obligation to honor any check drawn by a depositor for

an amount not exceeding the balance in his account, and

while the depositor has a contractual obligation to pay a

service charge when he presents a NSF check, the de-

positor has no statutory or contractual obligation to

refrain from drawing checks for amounts in excess of

the balance in his account. (Cal. U. Com. Code, § 4401.)”

(Pp. 968-969; accord, Shapiro v. United California Bank

(1982) 133 Cal.App.3d 256, 262.)

We cannot entirely agree with Hoffman and Shapiro

that the contract between the bank and the depositor

treats an overdraft as an application for advance credit.

The contract in fact is silent on the characterization of

an NSF check, and the bank is aware that a depositor

often writes overdrafts in the mistaken belief that he

has, or will have, sufficient funds to cover the check, and

without any intent to apply for credit..* We agree with

18 Contrary to the contention of the bank, such overdrafts are not

necessarily the result of carelessness by the depositor; they may

be the result of bank delay in crediting a deposit or of bank dis-

19a

those decisions, however, that because the depositor has

never agreed to refrain from writing NSF checks, the

writing of such a check is not a breach of contract. The

fee that the bank may charge for processing such a check

is limited by principles of good faith, reasonableness,

unconscionability, and the like, but it is not limited to the

amount which a bank could recover in a suit for breach

of contract. We conclude that the court correctly sus-

tained the demurrer to plaintiff’s fifth cause of action

without leave to amend.

V. Whether California law, as applied to NSF charges

imposed by national banks, is preempted by fed-

eral law.

Defendant contends that the provisions of California

law on which plaintiff bases his causes of action are pre-

empted by federai law. Since we have concluded that

plaintiff’s complaint states no cause of action for recovery

of penalties under Civil Code section 1671, we do not

discuss whether federal law preempts application of that

section to banking charges. Instead, we focus our dis-

cussion on whether California law is preempted to the

extent that it prohibits banks from exacting unreason-

able charges (a doctrine applicable only when the con-

tract does not expressly fix the charge) or enforcing un-

conscionable provisions (a doctrine applicable to all con-

tracts) .’®

honor of an NSF check submitted for deposit under a reasonable

belief that the check was good.

19 We note preliminarily that defendant appears to assume that

if state law is preempted, federally chartered banks are free to

enforce unconscionable contracts. We question that assumption;

we believe that a federal court, deciding federal common law,

might choose to follow the lead of the state courts and legislatures

and limit the power of banks te enforce oppressive contracts. In

particular, we suggest that the provisions of the Uniform Com-

mercial Code, now in effect in 49 states, express a national con-

sensus that courts should have the power to avoid unfair and

20a

No provision of federal law discusses bank charges for

NSF checks, or, for that matter, bank charges for any

service performed for depositors. No federal statute con-

siders whether provisions in contracts between banks and

their customers may exact unreasonable or unconscionable

fees. Defendant’s preemption argument, consequently, is

essentially an argument that even though the federal

government has largely declined to regulate this area,*°

Congress has nevertheless decided to preclude state regu-

lation.

Defendant cites various statutes and a newly promul-

gated administrative regulation as a basis for preemp-

tion. First, it refers to the National Bank Act of 1864,

13 Statutes at Large 99. Section 24 of this act (12

U.S.C. § 24) grants national banks general corporate

powers upon proper filing of articles of association and

an organizational certificate. Paragraph 7 empowers the

board of directors or duly authorized officers or agents

to exercise “all such incidental powers as shall be neces-

sary to carry on the business of banking . . . by receiv-

ing deposits ....” Defendant asserts that the power

to receive deposits necessarily includes the power to con-

trol related charges, and hence that such charges are

exempt from state law. Amicus California Bankers As-

sociation also points to the statutory requirement that

bank directors refrain from any “unsafe or unsound

practice” (12 U.S.C. §1818(e)), and argues that a

oppressive contractual provisions. We need not decide questions

of federal common law, however, because we have concluded that

absent an evidentiary showing that the challenged state laws

will impair the efficiency of national banks or their ability to per-

form their duties—which showing cannot be made by demurrer—

federal law asserts no preemptive effect in this case.

20 The Comptroller of the Currency could enjoin a bank service

charge, or any other act of a national bank, which he considered

an unsafe or unsound practice. (12 U.S.C. §1818(b).) To our

knowledge, this authority has never been used to curb excessive

bank charges.

2la

charge for NSF checks low enough to avoid an attack as

unconscionable or penal might be inadequate to dis-

courage the writing of such checks, and thus constitute

an unsound practice.”

Next, defendant cites the Depository Institutes [sic]

Deregulation and Monetary Control Act of 1980, 94 Stat-

utes 132 (hereafter 1980 Act) and the Garn-St. Germain

Depository Institutions Act of 1982, 96 Statutes at Large

1469 (hereafter 1982 Act). The 1980 and 1982 Acts

aimed at the gradual removal of federal regulations

limiting the interest banks could pay to depositors. The

1980 Act also preempted state usury laws to the extent

that they limited the interest banks could collect on

mortgages, but left intact state limits on other loan

charges. Apart from that provision, neither act expressly

preempts state law; neither discusses bank charges for

NSF checks or other depositor services. Defendant never-

theless argues that Congress contemplated that after de-

regulation, banks would pay higher interest to depositors,

21 Defendant also cites 12 United States Code section 484, which

provides that “{n]o national bank shall be subject to any visitorial

powers except as authorized by Federal law.”’ Cases construing this

section do not make clear when an unauthorized person or agency

may, without violating this section, examine bank records for a

limited purpose. (Compare Guthrie v. Harkness (1905) 199 U.S.

148, 157-159 [stockholder may inspect to determine the value of

his stock] and Peoples Bank of Danville v. Williams (D.Va. 1978)

449 F.Supp. 254, 259-260 [Securities Exchange Commission may

inspect to detect fraud in sale of bank stock] with National State

Bank, Elizabeth N.J. v. Long (3d Cir. 1980) 630 F.2d 981, 989

[state commissioner may not inspect to enforce law against “red-

lining” ].) Thus, it is possible that section 484 may serve to limit

plaintiff’s ability to examine records by way of discovery, or to

subpoena such records at trial. Difficulties in proof, however, are

irrelevant in ruling upon a demurrer. Since the bank can comply

with California law without violating section 484, and plaintiff can

state a cause of action for violation of such law without violating

section 484, we find no present conflict between state law and sec-

tion 484. Plaintiff will simply have to prove his case without using

methods which violate that section.

22a

and raise charges for services previously subsidized by

the below-market interest rates on deposit accounts. Fur-

ther, defendant claims. Congress intended such charges

to be set in a compe .ve market free of regulation.

Finally, defendant relies on a regulation promulgated

by the Comptroller of the Currency just prior to argu-

ment in the present case. The new regulation, effective

December 2, 1983, amends 12 Code of Federal Regula-

tions section 7.8000, which previously provided only that

“alll charges to customers should be arrived at by each

bank on a competitive basis and not on the basis of any

agreement, arrangement, undertaking, understanding or

even discussion among banks or their officers.” As subse-

quently amended March 10, 1984, the new regulation adds

subdivisions (b) and (c) to section 7.8000, to read as

follows:

“(b) Establishment of deposit account service charges,

and the amounts thereof, is a business decision to be

made by each bank according to sound banking judgment

and federal standards of safety and soundness. In estab-

lishing deposit account service charges, the bank may

consider, but is not limited to considering: [{[] (1) Costs

incurred by the bank, plus a profit margin, in providing

the service; [f] (2) The deterrence of misuse by cus-

tomers of banking services; [{] (3) The enhancement

of the competitive position of the bank in accord with

the bank’s marketing strategy; [{] (4) Maintenance of

the safety and soundness of the institution.

“(e) A national bank may establish any deposit ac-

count service charge pursuant to paragraphs (a) and

(b) of this section notwithstanding any state laws which

prohibit the charge assessed or limit or restrict the

*2 Plaintiff charges that this regulation was promulgated to in-

fluence the decision of the court in the present case. We find no

impropriety in an administrative agency issuing a regulation to

clarify its position on contested issues in pending litigation.

23a

amount of that charge. Such state laws are preempted by

the comprehensive federal statutory scheme governing

the deposit-taking function of national banks.” *

The parties dispute whether the regulation is legisla-

tive or interpretative in character.** Plaintiff contends

that it is legislative, and hence invalid because the Comp-

troller failed to comply with the notice and hearing re-

23 The regulation as promulgated on November 28, 1983, dif-

fered from the present version in two respects. First, subdivision

(b), after stating that the setting of deposit account charges is a

business decision made by each bank, added “and the Office will

not substitute its judgment.” According to the statement published

in connection with the March 1984 amendment, this language was

eliminated to avoid the implication that the Comptroller would not

review bank service charges to determine whether they represented

sound banking practice. (See 49 Fed. Reg. 28237 (July 11, 1934).)

Second, former subdivision (c) asserted that state laws limiting

banking service charges “impair the efficiency of national banks and

conflict with the regulatory scheme governing the national bank-

ing system and are preempted by federal law.” The present reg-

ulation asserts that such state laws “are preempted by the com-

prehensive federal statutory scheme governing the deposit-taking

function of national banks.” According to the Comptroller’s state-

ment, the language was changed to avoid any inference that the

regulation itself, and not the statutes it purports to interpret,

preempted state law. (/bid.) We note, however, that the March

amendment also changes the basis for preemption from the actual

effect of state laws upon the federal program to the claim that the

federal statutory scheme so occupies the field as to exclude state

regulation.

24 “Generally speaking, it seems to be established that ‘regula-

tions,’ ‘substantive rules’ or ‘legislative rules’ are those which create

law, usually implementary to an existing law; whereas interpreta-

tive rules are statements as to what the administrative officer thinks

the statute or regulation means.” (Gibson Wine Co. v. Snyder

(D.C.Cir. 1952) 194 F.2d 329, 331.) Interpretative “rules are es-

sentially hortatory and instructional. ... By merely clarifying the

law’s terms as applied situationally, interpretative or administra-

tive-type rules are used more for discretionary fine-tuning than

for general law making.” (Alcarez v. Block (9th Cir. 1984) 746 F.2d

593, 613.)

24a

quirements of the Administrative Procedure Act (5

U.S.C. § 553). Defendant maintains that it fails within

the Administrative Procedure Act’s exception for “in-

terpretive rules” (5 U.S.C. § 553(b) (3) (A)).” As an

interpretative regulation, section 7.8000 would be en-

25 “The APA’s prescription of notice and comment procedures for

agency rulemaking, 5 U.S.C. § 553, together with its broad defini-

tion of what amounts to a ‘rule’, U.S.C. §551(4), reflect a commit-

ment ‘to reintroduce public participation and fairness to affected

parties after governmental authority has been delegated to un-

representative agencies.’ Batterton v. Marshall, 648 F.2d 694, 703

(D.C.Cir. 1980) (footnote omitted). Among the limited exceptions

to the general notice and comment requirement is the exemption for

‘interpretive rules,’ 5 U.S.C. § 553(b) (3) (A). This exemption, like

the others, is to be narrowly construed. Humana of South Caro-

lina, Inc. v. Califano, 590 F.2d 1070, 1082 (D.C.Cir. 1978).” (Credit

Union National Association v. National Credit Union Administra-

tion Board (D.D.C. 1983) 573 F.Supp. 586, 591.)

Consequently, the Comptroller’s decision to characterize his regu-

lation as interpretative is not dispositive. (Columbia Broadcasting

System, Inc. v. United States (1942) 316 U.S. 407, 416; Louisiana-

Pacific Corp. v. Block (9th Cir. 1982) 694 F.2d 1205, 1210; Credit

Union National Association v. National Credit Union Administra-

tion Board, supra, 573 F.Supp. 586, 591.) Courts inquire also into

the function of the regulation in the administra ive structure (see

British Caledonian Airways, Ltd. v. C.A.B. (D.C.Cir. 1978) 584

F.2d 982, 994; Joseph v. United States Civil Service Commission

(D.C.Cir. 1977) 554 F.2d 1140, 1153), and into its foreseeable effect

(Louisiana-Pacific Corp. v. Block, supra, 694 F.2d 1205, 1210;

Chamber of Commerce of United States v. O.S.H.A. (D.C.Cir. 1980)

636 F.2d 464, 469). It appears now to be generally agreed that

proof that a regulation will have a “substantial impact” is not it-

self sufficient to require classifying that regulation as legislative

in character, but that such impact is a proper factor for judicial

consideration. (See Cabias v. Egger (D.C.Cir. 1982) 690 F.2d 234,

237.)

There is one exception to the foregoing principles: if the agency

labels the regulation as legislative and promulgates it in accord

with the requirements of the Administrative Procedure Act, then

the regulation has the authority of a legislative rule even though

it arguably constitutes only an interpretation of statutory law.

(Cf. Levesque v. Block (ist Cir. 1983) 723 F.2d 175, 181-182.)

25a

titled to consideration and weight, but would not be bind-

ing on the courts.”°

We now turn to the question whether the foregoing

statutes preempt application of California law in the case

at bar. As the United States Supreme Court explained

26 Interpretative rules, “while not controlling upon the courts

by reason of their authority, do constitute a body of experience

and informed judgment to which courts and litigants may properly

resort for guidance. The weight of such a [ruling] in a particu-

lar case will depend upon the thoroughness evident in its considera-

tion, the validity of its reasoning, its consistency with earlier and

later pronouncements, and all those factors which give it power to

persuade, if lacking power to control.” (Skidmore v. Swift & Co.

(1944) 323 U.S. 134, 140; General Electric Co. v. Gilbert (1976)

429 U.S. 125, 141-142.)

Other cases note that greater weight is given to an interpretation

by an agency charged with the duty of administering the statute in

question (Red Lion Broadcasting Co. v. FCC (1969) 395 U.S. 367,

381), particularly if the agency took part in the formulation of the

statute (Miller v. Youakim (1979) 440 U.S. 125, 144), promulgated

its interpretation contemporaneously with the enactment of the

statute (see General Electric Co. v. Gilbert, supra, 429 U.S. 125,

142), or represents a consistent administrative construction of the

act (id.). In the present case, these factors fall on both sides of

the line. The Comptroller is charged with the execution of the

relevant statutes. He took part in the drafting of the 1980 and

1982 Acts, and issued the regulation within a short time of the

enactment of the later act. The regulation, on the other hand, is

plainly not contemporaneous with the enactment of the National

Bank Act. It does not represent a consistent administrative inter-

pretation, since previous actions by the office of the Comptroller

have not taken a consistent stand. (Defendant calls our attention

to a letter from the Comptroller to the Chairman of the Legal

and Monetary Affairs Subcommittee of the House of Representa-

tives Committee on Governmental Affairs, dated Nov. 5, 1963,

stating a preference for bank service charges set by free competi-

tion instead of local regulation. The letter does not purport to be

interpreting existing statutes, or suggest that those statutes, with-

out supplementary legislation, preempt state regulation. Plaintiff

refers to an Aug. 27, 1977, letter from the Legal Advisory Services

Division of the Comptroller’s office stating that state limitations

on service charges are not preempted. )

26a

in Silkwood v. Kerr-McGee Corp. (1984) US. ——

[52 U.S. L. Week 4043], “state law can be preempted

in either of two general ways. If Congress evidences an

intent to occupy a given field, any state law falling

within that field is preempted. [Citations.] If Congress

has not entirely displaced state regulation over the mat-

ter in question, state law is still preempted to the extent

it actually conflicts with federal law, that is, when it

is impossible to comply with both state and federal law

[citation], or where the state law stands as an obstacle

to the accomplishment of the full purposes and objec-

tives of Congress...” ( U.S. at p. [52 US.

L. Week at p. 4046]; accord, Pac. Gas & Electric v. St.

Energy Resources Conserv. (1984) US. :

[103 S.Ct. 1713, 1722]|.) Defendant bears the burden

of persuasion on this issue; “[c]ourts are reluctant to

infer preemption, and it is the burden of the party claim-

ing Congress intended to preempt state law to prove

it.” (Elsworth v. Beech Aireraft Corp. (1984) 37 Cal.3d

540, 548 and cases there cited.)

Defendant contends that Congress, by comprehensive

regulation, has occupied the field of regulation of con-

tracts between national banks and their depositors. One

hundred and fifteen years of practice under -the national

banking system argue to the contrary. While nationally

chartered banks are subject to the paramount authority

of the United States,*? Congress has declined to provide

an entire system of federal law to govern every aspect

27 Davis v. Elmira Savings Bank (1896) 161 U.S. 275, 283.

Under our dual banking system, commercial banks have the option

of being federally or state chartered. Federally chartered (na-

tional) banks are governed by the National Bank Act of 1874 [sic]

(12 U.S.C. § 21 et seq.) which sets forth chartering criteria, basic

banking and investment powers, lending and borrowing limitations,

and corporate powers and duties. As required members of the

Federal Reserve System and insured of the Federal Deposit In-

surance Corporation (FDIC), national banks are also subject to the

Federal Reserve Act (12 U.S.C. §§ 221-530), and the FDIC Act

(12 U.S.C. § 1811 et seq.).

27a

of national bank operations. Consequently, national

banks have traditionally been “governed in their daily

course of business far more by the laws of the State than

of the nation. All their contracts are governed and con-

strued by State laws.” (National Bank v. Commonwealth

(1869) 76 U.S. (9 Wall) 358, 362; see Scott, The Dual

Banking System: A Model of Competition in Regulation

(1977) 30 Stan. L. Rev. 1.)*% As explained in National

State Bank, Elizabeth, N.J. v. Long (3d Cir. 1980) 630

F.2d 981, “[w]hatever may be the history of federal-

state relations in other fields, regulation of banking has

been one of dual control since the passage of the first

National Bank Act in 1863. ... In only a few instances

has Congress explicitly preempted state regulation of

national banks. More commonly, it has been left to

the courts to delineate the proper boundaries of federal

and state supervision. [f}] The judicial test has been

a tolerant one. [National banks’] right to contract,

collect debts, and acquire and transfer property are all

based on state law.” (P. 985.) Thus the rule is that

state laws apply, “the exception being the cessation of

the operation of such laws whenever they expressly '*”!

conflict with the laws of the United States or frustrate

the purpose for which national banks were created, or

impair their efficiency to discharge |their] duties... .”

(McClellan v. Chipman (1896) 164 U.S. 347, 357.)*°

28 Courts have routinely applied state contract law in cases in-

volving national banks. See, e.g., Wichita Eagle & Beacon Pub-

lishing Co. Inc. v. Pacific Nat’] Bank (9th Cir. 1974) 493 F.2d

1285; Fowler v. Security First National Bank (1956) 146 Cal.App.

2d 37; Security First National Bank v. Rospaw (1951) 107 Cal.

App.2d 220.

29 The Supreme Court has at times preempted state law on the

basis of an implied, rather than an express, conflict. (Compare,

Franklin Nat’l] Bank v. New York (1954) 347 U.S. 373 with Davis

v. Elmira Savings Bank, supra, 161 U.S. 275.)

30 This rule has been consistently followed over the years. Lewis

v. Fidelity & Deposit Co. (1934) 292 U.S. 559, 566; First Nat’l

|

28a

The assertion in the regulation that state laws limiting

bank service charges “are preempted by the comprehen-

sive federal statutory scheme governing the deposit-

taking function of national banks” (12 C.F.R. § 7.8000,

subd. (c)) is palpably erroneous. There is no compre-

hensive federal statutory scheme governing the taking

of deposits. There is one relevant statute, section 24

of the National Bank Act, and that merely authorizes

banks to accept deposits. Section 24 may by implication

also authorize banks to charge for deposit-related services

as an incidental power necessary to carry on the busi-

ness of receiving deposits, but such implied authority

does not constitute a regulatory scheme so comprehen-

sive as to displace state law.*'

Under the Comptroller’s interpretation, any banking

matter related to deposits would be exempt from state

law. The result would be far-reaching and extremely

disruptive. Currently, California and most other states

extensively regulate all banks within their territory. For

example, article 4 of the Uniform Commercial Ccde

(codified at Cal. U. Com. Code, §§ 4101-4407), entitled

Bank v. Missouri (1923) 263 U.S. 640; Nat’l. State Bank v. Long

(3d Cir. 1980) 630 F.2d 981, 985-986; Brown v. United Community

Nat’l Bank (D.D.C. 1968) 282 F.Supp. 781, 783; South Dakota v.

Nat’! Bank (D.S.D. 1963) 219 F.Supp. 842, 844-845, affirmed (8th

Cir. 1964) 335 F.2d 444, certiorari denied (1965) 379 U.S. 970.

The test has sometimes been phrased more loosely; see, e.g., Ander-

son Nat’l Bank v. Luckett (1944) 321 U.S. 233, 248 (“national

banks are subject to state laws, unless those laws infringe the na-

tional banking laws or impose an undue burden on the perform-

ance of the banks’ functions”).

31 Cf. Joy v. North (D.Conn. 1981) 519 F.Supp. 1312, 1323, re-

versed on other grounds (2d Cir. 1982) 692 F.2d 880, certiorari de-

nied, Citytrust v. Joy (1983) 103 S.Ct. 1498. Joy rejected the ar-

gument that section 24’s granting of general corporate powers pre-

empts state corporation law: “This section [12 U.S.C. § 24] simply

sets forth the general corporate powers of associations. It does not

provide that the powers therein are meant tc preempt state law.”

29a

“Bank Deposits and Collections” has been adopted in 49

states and is routinely applied to national banks.* Also,

numerous provisions of the California Financial Code

regulate deposit-related practices.** Financial Code sec-

tion 100 specifically subjects national banks to its provi-

sions insofar as those provisions do not conflict with

federai law. The Comptroller’s interpretation would sud-

denly exempt national banks from many, if not all, of

these regulatory measures. There is nothing to suggest

that Congress, by authorizing national banks to receive

deposits, intended such a result.

The United States Supreme Court decisions constru-

ing section 24 do not support the Comptroller’s expansive

interpretation. Instead, whether upholding or preempt-

ing the state law, the court has focused on the narrow

issue of whether the state law impeded the bank’s ability

to receive deposits. For example, Franklin Nat’l Bank

v. New York (1954) 347 U.S. 373 held that a New York

statute which prohibited all banks except nonprofit state

chartered banks from using the term “savings” in their

advertising, conflicted with the national bank’s author-

ization to receive deposits.** Emphasizing the importance

32 See, e.g., Bullis v. Security Pacific Nat’l Bank, supra, 21

Cal.3d 801 (§ 4103); Security Pacific National Bank v. Associated

Motor Sales (1980) 106 Cal.App.3d 171 (§ 4301, 4212); Fireman’s

Fund Insurance Co. v. Security Pacific Nat’] Bank (1978) 85

Cal.App.3d 797 (§§ 4202, 4207, 4401); Bank of America v. Se-

curity Pacific Nat. Bank (1972) 23 Cal.App.3d 638 (§ 4308).

33 For example, chapters 7 and 8 of the Financial Code contain

the following provisions affecting deposits: Section 850 (minors),

section 851 (married person), section 852 (joint accounts), section

852.5 (pay-on-death provisions), section 860 (public official as of-

ficer of depository of public funds), section 863 (penalties for fail-

ure to deposit), sections 865.2 and 865.4 (disclosure of consumer

bank account charges), section 874 (dormant accounts), sections

953, 954, 970, 971 (withdrawals and collections).

34In addition to section 24 of the National Bank Act, the court

also relied on the Federal Reserve Act which provides that a na-

30a

of advertising in competing for deposits, the court rea-

soned that the statute interfered with the bank’s ability

to receive deposits. “[W]e [cannot] construe the [Na-

tional Bank Act and the Federal Reserve Act] as per-

mitting only a passive acceptance of deposits thrust upon

them. Modern competition for business finds advertising

one of the most usual and useful of weapons.” (Jd., at

p. 377.)

Similarly, in another case the court found that a

California law which automatically escheated dormant

accounts to the state was preempted by section 24 be-

cause it impeded the bank’s ability to attract deposits.

(First National Bank v. California (1923) 262 USS.

366.) But as the court later explained in Anderson Nat’l

Bank v. Luckett, supra, 321 U.S. 233, 250, not all state

escheat laws are preempted: “[The] decision [in First

Nat’l] turned . . . on the effect of the state statute in

altering the contracts of deposit in a manner considered

so unusual and so harsh in its application to depositors

as to deter them from placing or keeping their funds

in national banks.” * Nowhere did the court suggest

that section 24 preempts all state regulation of deposit-

related matters.

In an attempt to bring itself within these cases, de-

fendant argues that Franklin in particular implies that

tional bank “‘may continue .. . to receive time and savings de-

posits....” (12 U.S.C. § 371.)

The purpose of the New York statute was to prevent consumer

confusion between commercial banks and the state chartered in-

stitutions which pay larger returns on deposits.

35In Anderson, the court found a Kentucky law requiring trans-

fer of abandoned, as opposed to merely dormant, accounts to the

state was not preempted by section 24. “We cannot say that the

protective custody of long inactive bank accounts, for which the

Kentucky statute provides, and which in many circumstances may

operate for the benefit and security of depositors . . . will deter them

from placing their funds in national banks in that state.” (/d.,

at p. 252.)

3la

all terms and conditions upon which national banks may

compete for deposits are presumed to be the exclusive

province of federal law. This reading of Franklin is

unduly broad. Franklin preempted the New York law

because of its deterrent effect on deposits. This holding

does not logically extend into the broader proposition that

every possible term or practice which may be the subject

of competition between banks is beyond the reach of

state law. As the numerous regulations cited earlier

demonstrate, it is possible for states to regulate such

“terms or conditions” without impeding banks’ ability

to attract deposits. And in the present setting, it is

difficult to believe that persons would be deterred from

depositing in federally chartered banks by the knowledge

that such banks, like their state chartered counterparts,

were prohibited by state law from enforcing unreason-

able charges or unconscionable contracts.*

36 The bank’s reliance on Fidelity Federal Savings & Loan Ass’n

v. de la Cuesta (1982) 458 U.S. 141 is also misplaced. As de-

fendant concedes, the court in that case identified an express con-

flict between our decision in Wellenkamp v. Bank of America

(1978) 21 Cal.3d 943, which invalidated “due-on-sale” clauses as

unreasonable restraints on alienation, and a Federal Home Loan

Bank Board legislative regulation which provided that federal sav-

ings and loans have the power to include and enforce “‘due-on-sale”

clauses in their loan instruments. (12 C.F.R. § 545.8-3(f) (1982).)

Relying largely on the regulation’s preamble, which stated that

“due-on-sale” practices should be governed by federal law and not

subject to conflicting state law, the court found the board’s intent

to preempt Wellenkamp was unambiguous and unequivocal. Thus

the court’s holding was clearly based upon a finding of an express

conflict and an unambiguous intent to preempt state law, neither

of which is present here.

Nevertheless, defendant makes the unfounded assertion that the

court also held that state law is preempted, even in the absence of a

direct conflict, on the strength of the federal interest in the fi-

nancial well-being of federally chartered banking institutions.

The court expressly noted that because it found a direct conflict,

it did not reach the issue of whether Congress has occupied the

entire field of federally chartered savings and loans, much less

national banks.

——————

32a

If the National Bank Act does not displace state reg-

ulation of bank service charges, the additional enact-

ment of the 1980 and 1982 Acts adds nothing. As we

have seen, these statutes do not mention bank service

charges; neither separately nor in combination with the

National Bank Act can they be described as a compre-

hensive scheme regulating such charges. Moreover, when

in the 1980 Act Congress expressly preempted state usury

laws, it deliberately left in effect other provisions of

state law regulating charges in contracts between banks

and borrowers.” —> is not plausible that the same Con-

gress intended by silence to preempt all state laws reg-

ulating charges in contracts between banks and depos-

itors.

We conclude that the Comptroller’s assertion that state

laws regulating service charges are preempted by a

“comprehensive federal statutory scheme governing the

deposit-taking function of national banks” (12 C.F.R.

§ 7.8000) is not a reasonable interpretation of the con-

trolling statutes. It is not an attempt to interpret the

language of the statute,®* fill in the gaps in the statutory

37 The Senate committee report on the 1980 Act states that

“Tijn exempting mortgage loans from state usury limitations, the

Committee intends to exempt only those limitations that are in-

cluded in the annual percentage rate. The Committee does not

intend to exempt limitations on prepayment charges, attorney

fees, late charges or similar limitations designed to protect bor-

rowers.” (Sen. Rep. No. 96-368, Ist Sess., p. 19 (1979).) Thus

the committee intended to leave many features of the contract

between a bank and a borrower to be governed by state law, in-

cluding state provisions which placed a limit on the amount the

bank could charge.

38 In determining whether a regulation represents a reasonable

interpretation, the courts look initially to the plain meaning of the

statutory language. (See, e.g., Addison v. Holly Hill Co. (1944)

322 U.S. 607, 617-618; Cabais v. Egger (D.C.Cir. 1982) 690 F.2d

234, 238.) In State of N.J. v. Department of Health & Human

Services (3d Cir. 1981) 670 F.2d 1262 at page 1283, footnote 17,

when the court upheld a regulation as a reasonable statutory inter-

33a

coverage,” or to explain how the Comptroller will exer-

cise his discretion.* Instead, the regulation, insofar as

it claims federal preemption, represents legislation of

far-reaching character and effect, of a type never con-

sidered by Congress, which would radically alter the

respective roles of the states and the Comptroller in the

regulation of bank-depositor contracts. Such legislation

cannot be enacted in the guise of statutory interpreta-

tion.*?

pretation, it distinguished an earlier case, Reser v. Califano (W.D.

Mo. 1979) 467 F.Supp. 446, on the ground that “‘[t]he Agency

in Reser did not purport to derive the prohibition . . . from any

specific language in the Act.’ ”

89 Compare Ford Motor Credit Co. v. Milhollin (1980) 444 U.S.

555, 566, upholding intersticial administrative regulations; 2 Davis,

Administrative Law Treatise (2d ed. 1979) session [sic] 7.11. The

decision of the Court of Appeal in Chamber of Commerce of the

United States v. O.S.H.A., supra, 636 F.2d 464, illustrates the

limits on the use of interpretative rules to fill in legislative gaps.

Holding invalid a rule requiring “walkaround pay,” the court

said that “[t]he Administration could not be explaining or clarify-

ing the Act’s language, for ... the Act neither prohibits nor com-

pels pay for walkaround time. ... Congress has not ‘legislated

and indicated its will’ on the question of walkaround pay, there-

fore the Administration must have done more than exercise its

‘power to fill up the details.’ [{] It is clear to us that the Administra-

tion has attempted through this regulation to supplement the Act,

not simply to construe it, and therefore the regulation must be

treated as a legislative rule.” (P. 469.)

40 Compare Guardian Federal S & L v. Federal S & L Ins. Corp.

(D.C.Cir. 1978) 589 F.2d 658, 664; 2 Davis, op. cit. supra, section

7.15.

41 During the 1960’s the Comptroller issued a number of. in-

terpretative regulations which purported to interpret the provision

of section 24 of the National Bank Act authorizing banks to con-

duct activities “convenient or useful’ to the business of banking,

to permit banks to engage in data processing, auto leasing, travel

agent services and armored car services. The courts consistently

held such regulations invalid. (See Arnold Tours, Inc. v. Camp

(1st Cir. 1972) 472 F.2d 427, and cases cited p. 436, fn. 12.) We

34a

Thus the application of state law to bank service

charges is not preempted by a comprehensive federal stat-

utory scheme which occupies the field. We therefore turn

to the second preemption issue, whether the application

of state law in this case will create an actual conflict

with federal law in the sense that “it is impossible to

comply with both state and federal law.” (Silkwood v.

Kerr-McGee Corp., supra, US. ; [52

U.S. L. Week 4043, 4046].) As we have noted, no provi-

sion of federal law discusses bank service charges in

general or bank charges for NSF checks in particular.

Amicus California Bankers Association nevertheless

points to a possibility of actual conflict. Bank directors,

it observes, are required to refrain from engaging “in

any unsafe or unsound practice.” (12 U.S.C. § 1818

(e).) Conceivably directors might believe a charge for

NSF checks low enough to avoid attack as unreason-

able or unconscionable might fail to discourage the

writing of NSF checks, and thus constitute an unsafe or

unsound practice.

Amicus’ argument proves too much, for if the mere

possibility that bank directors might deem compliance

with a state law to be unsound banking practice was

enough to preempt the state law, the dual system of

banking regulation would disappear. We recognize, of

course, that in the unlikely event of actual conflict, banks

must follow the federal requirements. But such actual

conflict is a remote and unlikely possibility; a contractual

term must be overreaching and oppressive before it is

denominated “unreasonable” or “unconscionable.” Surely

sound banking practices would rarely, if ever, require

the enforcement of oppressive contracts.”

find an analogy to the present case, in which the Comptroller is also

seeking to construe very general language in section 24 to achieve

a specific purpose not within the contemplation of Congress.

42 Under the Comptroller’s regulation, in setting fees for services

[sic] bank may consider (1) costs plus a profit margin, (2) the de-

terrence of misuse of banking services, (3) the enhancement of the

35a

Finally, we come to the question whether the applica-

tion of state law will stand as an obstacle to the accom-

plishment of the full purposes Congress sought to achieve.

Defendant’s argument on this matter centers on the

1980 and 1982 Acts discussed earlier in this opinion,

(Ante, p. .)* As we there noted, these acts pro-

vided for gradual removal of federal regulations limit-

ing interest paid depositors, but, apart from preempt-

ing state usury laws, did not expressly discuss the role

of state regulation. Neither act mentions charges for

services to depositors.

The extensive legislative history of the acts shows that

Congress expected deregulation to lead banks to puy

higher interest to depositors, ending the bank’s ability

to subsidize depositor services by paying below-market

interest on deposits. Thus, Congress clearly anticipated

that banks would be able to charge fees for depositor

services sufficient to recover the cost of such services.

Arguably a state law which required that services be

offered free, or below cost, would frustrate the con-

gressional intent by preventing the bank from paying

market interest to depositors.

The state laws in question, however, permit the bank

to charge fees sufficient to recover the cost of the services

and a reasonable profit. We find nothing in the legisla-

tive history to suggest that Congress thought it essen-

tial that the banks be able to charge more. While an

excessive charge for depositor services might help the

economic status of a bank, and could enable it to sub-

sidize interest payments and pay above-market interest,

we find no indication that such is essential to the con-

gressiona! purpose.

bank’s competitive position, and (4) maintenance of the safety

and soundness of the bank. These same factors could be considered

by a court in deciding whether a fee was unreasonable or uncon-

scionable.

* Typed opinion at page 29.

ee

36a

Defendant also argues that underlying both the 1980

and 1982 Acts is the philosophy that service charges as

well as interest rates should be set by market forces, not

government regulations.** Defendant’s argument mis-

takes the purpose of the provisions of state law at issue~

here. Those provisions are part of the common law

governing all commercial transactions; they regulate not

only sale of bank services but the sale of groceries, auto-

mobiles, furniture or medical services. The duty of good

faith and fair dealing, and protection against uncon-

scionable contracts, have never been thought incompat-

ible with a free and competitive market. Defendant is

really asking for a market free of those restraints

against oppression and overreaching applicable to all

other commercial operations. We find no indication that

Congress envisioned not only a free and competitive

market, but one freer than any other market.

In sum, the controlling doctrines of California law

do not facially conflict with any federal statute or regu-

lation. Neither does it appear from the pleading that

the application of these doctrines to national bank con-

tracts will impair the efficiency or viability of national

banks, or frustrate the purpose of legislation regulating

(or deregulating) those banks. Although conceivably

information not contained in the pleadings might lead

to a different conclusion, such information is not before

us in reviewing a judgment upon demurrer. We can-

not presume, without evidence, that prohibiting a na-

tional bank from setting unreasonable prices or en-

forcing an unconscionable contract will render that bank

*3 Defendant consistently assumes throughout its argument that

because its charges for processing NSF charges are within the

range of fees charged by its competitors, its fees are the product

of a free and competitive market. The conclusion does not follow

from the premise. It may well be, as plaintiff charges, that banks

do not compete in the setting of NSF check fees, but set fees

arbitrarily, deterred only by the desirability of minimizing cus-

tomer dissatisfaction.

37a

less efficient, less competitive or less able to fulfill its

function in a national banking system.**

VI. Conclusion.

Plaintiff’s second and third causes of action state

grounds for relief without need for further amendment;

his first and fourth causes of action can be amended to

state such grounds. The fifth cause of action alone is

fatally defective. We conclude that tle trial court erred

in sustaining defendant’s demurrer without leave to

amend and in entering judgment for defendant.

The judgment is reversed, and the cause remanded to

the superior court for further proceedings consistent

with this opinion.

BROUSSARD, J.

WE CONCUR:

BIRD, C.J.

Mosk, J.

REYNOSO, J.

* WHITE, J.P.T.

* BREINER, J.P.T.

* SAVITT, J.P.T.

[Designation of counsel and trial court and appended

signature card exemplar omitted]

44 Plaintiff’s fourth cause of action charged the bank with un-

fair and deceptive practices. We have concluded that this cause

of action is uncertain, and until the uncertainty is clarified, and the

alleged unfair or deceptive practices specified, we cannot determine

whether that cause of action is barred by federal law. We note,

however, that although many federal statutes and regulations deal

with the subject of unfair competition and deceptive practices,

such statutes and regulations generally coexist peacefully with

state laws regulating the same activity. (Cf. People v. Western

Airlines (1984) 155 Cal.App.3d 597, cert. den. sub. nom. California

v. Western Airlines (1985) —— U.S. a

* Assigned by the Chairperson of the Judicial Council.

38a

APPENDIX B

[Designation of counsel and certificate of service omitted]

SUPERIOR COURT OF THE STATE OF

CALIFORNIA FOR THE CITY AND COUNTY

OF SAN FRANCISCO

No. 740-352

PAUL PERDUE, on behalf of himself and

all other persons similarly situated,

Plaintiffs,

v.

CROCKER NATIONAL BANK, and DOE ONE

through DoE ONE HUNDRED, inclusive,

Defendants.

{Filed February 16, 1979]

JUDGMENT OF DISMISSAL

Defendant Crocker National Bank’s general demurrer

to plaintiff’s Complaint was considered by the Court on

the briefs of the parties and without oral argument.

Gary J. Near appeared as attorney for plaintiff Paul R.

Perdue. Melvin F. Goldman, Charles R. Farrar, Jr.,

and Tony J. Tanke of Morrison & Foerster, appeared as

attorneys for defendant Crocker National Bank (here-

inafter “Crocker”’). This Court has entered its Order

sustaining without leave to amend Crocker’s general

demurrers to the Complaint, and each purported cause

of action therein, for failure to state facts sufficient to

constitute a cause of action.

39a

Whereupon:

IT IS HEREBY ORDERED, ADJUDGED, AND DE-

CREED AS FOLLOWS:

1. That the Complaint, and each purported cause of

action therein, are dismissed with prejudice for failure

to state facts sufficient to constitute a cause of action;

2. That plaintiff is entitled to no relief in connec-

tion with any controversy alleged in the Complaint;

3. That each of plaintiff's prayers for relief is de-

nied; and that plaintiff shall take nothing by his Com-

plaint;

4. That Crocker shall recover from plaintiff its costs

of suit.

Dated: February 15, 1979

/s/ Ira A. Brown, Jr.

IRA A. BROWN, JR.

Judge of the Superior Court

APPROVED AS TO FoRM:

/s/ Gary J. Near

GARY J. NEAR

Attorney for plaintiff

Paul Perdue

40a

APPENDIX C

{Emended to reflect April 22, 1983

order on rehearing |

IN THE COURT OF APPEAL OF THE

STATE OF CALIFORNIA

FIRST APPELLATE DISTRICT

DIVISION ONE

1 Civil No. 46808

(AO 13838)

(S.Ct.No. 740351)

PAUL PERDUE,

Plaintiff and Appellant,

V.

CROCKER NATIONAL BANK,

Defendant and Respondent.

[Filed March 25, 1983]

Appellant Paul Perdue, a depositor with respondent

Crocker National Bank (Crocker), filed a purported

class action below challenging the validity of charges

assessed by Crocker against its depositors for processing

checks drawn on commercial checking accounts without

sufficient funds. Thereafter, Crocker’s general demurrer

4la

was sustained without leave to amend and a judgment

of dismissal entered. This appeal ensued.

We examine the complaint before us under established

principles governing review of a judgment of dismissal

based upon a claimed failure to state a valid cause of

action. (E.g., Tameny v. Atlantic Richfield Co. (1980)

27 Cal.38d 167, 170; Alcorn v. Anbro Engineering, Inc.

(1970) 2 Cal.3d 493, 496.)

The complaint asserts five causes of action alleging in

substance that Crocker’s customary practice in dealing

with a check drawn by a depositor on an account lacking

sufficient funds (“NSF check’) is either to honor and

pay it as an overdraft or to dishonor and return it to

the payee’s banks; that in either event Crocker assesses

a special handling charge (“NSF charge’) against the

account of its depositor-maker. It is further alleged that

appellant has periodically drawn NSF checks on his

Crocker checking account which Crocker—in either hon.

oring or dishonoring such checks—has assessed a special

handling charge of $6 for processing each NSF check.

I.

The gravamen of the first three causes of action for

declaratory relief and unjust enrichment is that Crocker

lacked any contractual or statutory authority to impose

charges for NSF checks. The first cause of action seeks

a declaration that the signature card signed by appellant

upon opening his account, which contains an agreement

that the account shall be “subject to all applicable laws,

to the Bank’s present and future rules, regulations, prac-

tices and charges” does not constitute a valid contract

to serve as a basis for imposing NSF charges. (Empha-

sis added.) In the second cause of action, appellant seeks

a declaration that the signature card constitutes an

unenforceable contract of adhesion. In the third cause

of action for unjust enrichment, damages are sought by

, 42a

way of a refund of the difference between the charges

assessed and Crocker’s actual cost in processing the NSF

charges.

We will conclude that neither theory survives critical

analysis. [Appellant concedes the third cause of action

is viable only if one of the first two causes of action is

valid. |

We consider the validity of the several causes of action

in a sequence convenient for discussion.

I.

The courts have long recognized that a bank signature

ecard serves as a contract between the depositor and the

bank for the handling of the account. (See Bullis v.

Security Pac. Nat. Bank (1978) 21 Cal.3d 801, 811-812;

Blackmon v. Hale (1970) 1 Cal.38d 548, 556; Manti v.

Gunart (1970) 5 Cal.App.3d 442, 450-451; Torrance N.

Bk. v. Enesco F. Credit Union (1955) 134 Cal.App.2d

316, 320-321; Larrus v. First National Bank (1954) 122

Cal.App.2d 884, 889-890; Faulkner v. Bank of Italy

(1924) 69 Cal.App. 370, 374-375.) The fact that the

signature card itself does not indicate the amount of

Crocker’s NSF charges does not negate the contractual

nature of such charges, particularly where, as here, the

bank’s rules and regulations specifying the charges are

incorporated into the signature card agreement. (State

v. San Francisco Sav. ete. Soc. (1924) 66 Cal.App. 53,

61; Larrus v. First Nat. Bank, supra, 122 Cal.App.2d

at pp. 889-890.) Moreover, since appellant acknowledges

he had notice of the bank’s scheduled charges for process-

ing NSF checks ($6 per check), the argument advanced

is patently untenable. Under the terms of the subsisting

agreement, Crocker has express contractual authority to

assess its scheduled service charges whenever its depos-

itor, including appellant, presents an NSF check.

A similar contention was raised and implicitly rejected

in Hoffman v. Security Pacific Nat. Bank (1981) 121

nee

43a

Cal.App.3d 964, involving a depositor’s claim that the

bank’s imposition of service charges for processing an

NSF cheek constituted unlawful liquidated charges on

the theory that the agreement contained in the signature

ecard to pay scheduled service charges amounted to an

implied covenant by the depositor not to write over-

drafts. In upholding a judgment of nonsuit, the court

reasoned as follows: “Plaintiff failed to establish any

such custom or any agreement on the depositors’ part

not to write overdrafts. Moreover, statutes governing

the obligations of banks and their depositors, which

are incorporated into and become part of the contract be-

tween a bank and its depositors [citations], treat an

overdraft as an application for advance credit rather

than as a breach of an express or implied covenant.

California Uniform Commercial Code section 4401 spe-

cifically authorizes a bank to pay overdrafts and to

charge customers’ accounts to recover amounts paid,

even when payments result in overdrafts on the account.

While a bank has a statutory obligation to honor any

check drawn by a depositor for an amount not exceeding

the balance in his account, and while the depositor has a

contractual obligation to pay a service charge when he

presents a NSF check, the depositor has no statutory or

contractual obligation to refrain from drawing checks

for amounts in excess of the balance in his account.

(Cal. U. Com. Code, § 4401.) In brief, plaintiff did

not and could not prove that the depositors breached an

obligation to Bank when they negotiated NSF checks.

Accordingly, the service charge they agreed in advance

to pay for presenting such an overdraft was not a pen-

alty under former Civil Code section 1670.” (Jd., p.

969; emphasis added.) (Accord Shapiro v. United Cali-

fornia Bank (1982) 133 Cal.App.3d 256.)

Nor do we find merit in appellant’s further argument

that the signature ecard is an illusory contract because _

it permits the bank unilaterally to fix the NSF charges

ES

44a

and to make future changes at will. It is well established

that an agreement which reserves the power to one

party to vary a term is not thereby rendered illusory

or otherwise void for lack of mutuality. (See Vanguard

Investments v. Central Cal. Fed. Sav. & Loan Assn.

(1977) 68 Cal.App.3d 950, 958; Powell v. Central Cal.

Fed. Sav. & Loan Assn. (1976) 59 Cal.App.3d 540, 549

[loan agreement permitting lender to increase rate of

interest]; Automatic Vending Co. v. Wisdom (1960)

182 Cal.App.2d 354, 358 [agreement permitting vendor

to change commission rate]; Inderkum v. German Old

People’s Home (1937) 23 Cal. App.2d 733, 735 [life care

contract subject to future amendments of by-laws].)

However, the exercise of the power to effect changes

must be reasonable. Thus, for example, in /nderkum the

court held that the future by-law amendments must be

“reasonable administrative amendments” and not changes

impairing the substance of the contract. (23 Cal.App.2d

at p. 738.) In Automatic Vending, the court held the

new price must be fixed “in such amount as the object

of the contract is reasonably worth.” (182 Cal.App.2d

at p. 358.) And in Powell v. Central Cal. Fed. Sav. &

Loan Assn., supra, the court fourd the lender’s one

percent increase in the interest ry. te was reasonable

when compared with the interest increases for depos-

itors. (59 Cal.App.3d at pp. 549-550.)!

Appellant advances an alternative argument that the

signature card constitutes an unenforceable contract of

adhesion because depositors receive inadequate notice

that execution of the signature card subjects them to

NSF charges and by reason of the great disparity be-

tween the NSF charge and the bank’s actual cost of

1 We emphasize that no question is raised in this case regarding

Crocker’s exercise of its power to change the NSF charges. Ac-

cordingly, we express no opinion as to the permissible latitude in

increasing such charges unilaterally.

45a

processing NSF checks. We disagree on the record be-

fore us.

ce

Conceptually, a contract of adhesion generally ina

signifies a standardized contract, which, imposed and

drafted by the party of superior bargaining strength,

relegates to the subscribing party only the opportunity

to adhere to the contract or reject it.” (Graham v.

Scissor-Tail, Ine. (1981) 28 Cal.3d 807, 817; Neal v.

State Farm Ins. Cos. (1961) 188 Cal.App.2d 690, 694.)

Although arguably the signature card may reasonably be

interpreted as a contract of adhesion between the bank

and its depositor, such determination does not end the

inquiry. “There is nothing sinful or illegal about a

contract of adhesion; the only significant result of the

existence of such a contract is that it is interpreted

against the supplier of the goods or services {who pre-

pared it) so as to meet the reasonable expectations of

the customer.” (Powell v. Central Cal. Fed. Sav. &

Loan Assn., supra, 59 Cal.App.3d 540, 551.)

As Scissor-Tail instructs, the provisions of an adhe-

sion contract are fully enforceable in the absence of two

judicially imposed constraints: “The first is that such

a contract or provision which does not fall within the

reasonable expectations of the weaker or ‘adhering’

party will not be enforced against him. (See, e.g., Gray

v. Zurich Insurance Co. (1966) 65 Cal.2d 263, 271-272

[54 Cal.Rptr. 164, 419 P.2d 168]; Steven v. Fidelity &

Casualty Co. (1962) 58 Cal.2d 862, 869-870 [27 Cal.

Rptr. 172, 377 P.2d 284]; Wheeler v. St. Joseph Hospital,

supra, 63 Cal.App.3d 345, 357; see generally Sybert,

supra, at pp. 305-306, and cases there cited.) The

second—a principle of equity applicable to all contracts

generally—is that a contract or provision, even if con-

sistent with the reasonable expectations of the parties,

will be denied enforcement if, considered in its context,

it is unduly oppressive or ‘unconscionable.’ (See, e.g.,

Steven, supra, 58 Cal.2d at pp. 878-879; Jacklich v. Baer

oO

46a

(1943) 57 Cal.App.2d 684 [135 P.2d 179].)” (Fns.

omitted.) (Graham v. Scissor-Tail, Inc., supra, 28 Cal.

3d at p. 820; see also Holmes v. City of Los Angeles

(1981) 117 Cal.App.3d 212, 216-217, app. dis. 454 U.S.

884.) Although in Scissor-Tail the court determined that

the contract between a sophisticated promoter and a

music performer was a contract of adhesion, the court

further concluded that the contractual provision requir-

ing arbitration of disputes was in nowise contrary to

the promoter’s expectations, particularly since he had

been a party to literally thousands of contracts contain-

ing similar arbitration provisions and was undoubtedly

aware of the arbitration requirement. (Graham v.

Scissor-Tail, Inc., supra, at p. 821.)

In congruent analysis, we find nothing ambiguous or

unexpected about the specific NSF charges imposed by

Crocker. The signature card agreement plainly states

that the depositor will pay the bank’s scheduled process-

ing charges. As noted, appellant acknowledges he was

aware of the NSF charges before he wrote the NSF

checks. Under such uncontroverted circumstances, we

conclude that the signature card in no way conflicts with

appellant’s reasonable expectations.

Appellant’s next argument, to which the parties and

amici devote considerable discussion in their briefs,

focuses on the second factor underscored in Scissor-Tail

limiting enforcement of adhesion contracts: namely,

whether the contract or provision is unduly oppressive

or unconscionable. Appellant contends that the disparity

between the bank’s actual costs of processing NSF checks

(alleged to be 30¢ per check) and the charges imposed

($6 per check) is so excessive as to render the contract

unconscionable and unenforceable. Again we are unable

to agree.

In the recent decision of A & M Produce Co. v. FMC

Corp. (1982) 1385 Cal.App.38d 473, the appellate court

47a

thoroughly examined the flexible concept of unconscion-

ability in the context of the enforceability of a warranty

disclaimer and damages exclusion clause contained in a

commercial contract. We can add little to that enlight-

ening exegisis by Justice Wiener which we adopt in

pertinent part herein: “Phrased another way, uncon-

scionability has both a ‘procedural’ and a ‘substantive’

element. (Industralease Automated & Scientific Eq.

Corp., etc. (1977) 58 App.Div.2d 482 [396 N.Y.S.2d

427, 431, fn. 4]; see also Leff, supra, 115 U.Pa.L.Rev.

at p. 487; White and Summers, supra, § 4-3 at p. 151.)

“The procedural element focuses on two factors: ‘op-

pression’ and ‘surprise.’ (See U. Com. Code com. No. 1,

23A West’s Ann. Cal. U. Com. Code (1964 ed.) § 2302,

p. 198; Geldermann and Company, Inc. v. Lane Process-

ing, Inc. (8th Cir. 1975) 527 F.2d 571, 575.) ‘Oppres-

sion’ arises from an inequality of bargaining power

which results in no real negotiation and ‘an absence of

meaningful choice.’ (Williams v. Walker-Thomas Fur-

niture Company, supra, 350 F.2d at p. 449; Fleischmann

Distilling Corp. v. Distillers Co. Ltd. (S.D.N.Y. 1975)

395 F.Supp. 221, 232; see Spanogle, Analyzing Uncon-

scionability Problems (1969) 117 U.Pa.L.Rev. 931, 944-

946.) ‘Surprise’ involves the extent to which the sup-

posedly agreed-upon terms of the bargain are hidden

in a prolix printed form drafted by the party seeking

to enforce the disputed terms. (See Ellinghaus, Jn

Defense of Unconscionability (1969) 78 Yale L.J. 757,

764-765; Eddy, On the ‘Essential’ Purposes of Limited

Remedies: The Metaphysics of UCC Section 2-719(2)

(1977) 65 Cal.L.Rev. 28, 43; Spanogle, supra, 117 U.Pa.

L.Rev. at pp. 934-935, 943.) Characteristically, the

form contract is drafted by the party with the superior

bargaining position. (See Calamari and Perillo, Con-

tracts (2d ed. 1977) § 9-40, p. 325.)

“Of course the mere fact that a contract term is not

read or understood by the nondrafting party or that the

48a

drafting party occupies a superior bargaining position

will not authorize a court to refuse to enforce the con-

tract . . . [since] commercial practicalities dictate that

unbargained-for terms only be denied enforcement where

they are also substantively unreasonable. (Ellinghaus,

supra, 78 Yale L.J. at pp. 766-767; Murray on Contracts,

supra, at pp. 748-749.) No precise definition of substan-

tive unconscionability can be proffered. Cases have

talked in terms of ‘overlyharsh’ or ‘one-sided’ results.

(See, e.g., Schroeder v. Fageol Motors, Inc. (1975) 86

Wn.2d 256 [544 P.2d 20, 23]; Weaver v. American Oil

Company (1972) 257 Ind. 458 [276 N.E.2d 144, 146, 49

A.L.R.3d 306].) One commentator has pointed out, how-

ever, that ‘. . . unconscionability turns not only on a

“one-sided” result, but also on an absence of “‘justifica-

tion” for it’ (Eddy, supra, 65 Cal.L.Rev. at p. 45),

which is only to say that substantive unconscionability

must be evaluated as of the time the contract was made.

(See U. Com. Code, § 2-302.) The most detailed and

specific commentaries observe that a contract is largely

an allocation of risks between the parties, and therefore

that a contractual term is substantively suspect if it

reallocates the risks of the bargain in an objectively

unreasonable or unexpected manner. (Murray, Uncon-

scionability: Unconscionability (1969) 31 U.Pitt.L.Rev.

1, 12-23; see also Eddy, supra, 65 Cal.L.Rev. at pp. 45-

51; Geldermann and Company, Inc. v. Lane Processing,

Inc., supra, 527 F.2d at p. 576.) But not all unreason-

able risk reallocations are unconscionable; rather, en-

forceability of the clause is tied to the procedural aspects

of unconscionability (see ante, pp. 485-476 [sic]) such

that the greater the unfair surprise or inequality of bar-

gaining power, the less unreasonable the risk reallocation

which will be tclerated. (See Spanogle, supra, 117 U.Pa.

L.Rev. at pp. 950, 968.)” (Jd., at pp. 486-487.)

In this case, although the procedural aspects of un-

conscionability arguably are manifest, we find nothing

49a

commercially or objectively unreasonable in the NSF

charges actually imposed. The extent of the service

charge imposed for the bank’s handling of an NSF check

was neither hidden nor unexpected, but instead was con-

cededly known to appellant before he wrote NSF checks.

Appellant could have easily avoided the NSF charge by

simply refraining from writing checks on an account

with insufficient funds. Under governing principles and

in light of the total circumstances reflected in this rec-

ord, we determine as a matter of law that the alleged

disparity between the cost of processing and the charges

actually imposed do not rise to the level of substantive

unconscionability so as to deny enforcement of the ser-

vice charge agreement.’

In conclusion, we hold that Crocker possessed a valid

and enforceable contractual right to impose the particu-

lar NSF service charges alleged. Accordingly, the de-

murrer was properly sustained as to the first three

causes of action.

Il.

Appellant’s fourth cause of action alleges unfair and

deceptive business practices by Crocker in that depositors

were not apprised that the signature card subjected

them to NSF charges, and were led to believe the card

was only a handwriting exemplar.* But the complaint

fails to allege any ultimate facts indicating in what

2 We are not unmindful of the compelling policy arguments ad-

vanced by amici in support of appellant. Our decision is, of course,

limited to the record before us and is itself subject to review.

But the question of potential abuse in the form of expansive or in-

discriminate charges is not before us; any corrective measures

necessary to prevent such likelihood should be directed to the

Legislature and not the courts.

8 Unfair competition, proscribed by sections 17200-17208 of the

Business and Professions Code, is defined to include an “unlawful,

unfair or fraudulent business practice. .. .”’ (Bus. & Prof. Code,

§ 17200).

ooo

50a

manner depositors were misled or deceived. As repeti-

tively shown, the signature card explicitly recites the

depositor’s agreement to pay service charges, a fact

openly acknowledged by appellant. Such facial inade-

quacy was vulnerable to a general demurrer; the order

sustaining Crocker’s demurrer thereto was clearly

proper.

Il.

In his fifth cause of action,‘ appellant complains that

the NSF charges constitute unenforceable liquidated

damages under the provisions of former Civil Code sec-

tion 1670 (repealed by Stats. 1977, ch. 198, § 2, opera-

tive July 1, 1978; see now Civ. Code § 1671, as amended).

The specific cormplaint is likewise unfounded.

As earlier noted, identical arguments were urged un-

successfully in Shapiro v. United California Bank, supra,

133 Cal.App.3d 256, and Hoffman v. Security Pacific

Nat. Bank, supra, 121 Cal.App.3d 964. We subscribe to

the reasoning in those decisions that the standardized

signature card did not include an implied promise by the

depositor to refrain from writing NSF checks which

would support a conclusion that the provision amounted

to an unenforceable penalty. Rather, an NSF check is

deemed to be an application for advance credit. Conse:

quently, the issuance of an NSF check does not consti-

tute a breach of contract and the provisions of former

Civil Code section 1670 do not apply.

The judgment is affirmed.

4 The general demurrer to this count was sustained pursuant to

stipulation.

5la

CERTIFIED FOR PUBLICATION.

RACANELLI, P. J.

WE CONCUR:

ELKINGTON, J.

NEWSOM, J.

[Designation of counsel and trial court omitted |

52a

APPENDIX D

| Designation of counsel omitted ]

IN THE SUPERIOR COURT OF THE STATE OF

CALIFORNIA IN AND FOR THE CITY AND

COUNTY OF SAN FRANCISCO

No. 740352

PAUL PERDUE, on behalf of himself

and all others similarly situated,

Plaintiffs,

vs.

CROCKER NATIONAL BANK, and DoE 1

THROUGH DOE 100, INCLUSIVE,

Defendants.

[Filed July 3, 1978]

CLASS ACTION COMPLAINT FOR

DECLARATORY AND INJUNCTIVE

RELIEF AND DAMAGES

Plaintiff alleges:

FIRST CAUSE OF ACTION

DECLARATORY AND INJUNCTIVE RELIEF UPON

THE GROUNDS THAT THE SIGNATURE CARD

IS NOT A CONTRACT

1.

Plaintiff brings this action on behalf of all persons simi-

larly situated pursuant to CAL. CODE CIV. PROC § 382,

on the following grounds:

53a

A. Each class member has a checking account with

defendant and seeks declaratory and injunctive relief in

addition to damages for charges imposed by defendant

because of processing checks presented against insufficient

funds. This class also includes a subclass which exists of

persons who had accounts and paid the charge within the

applicable period of limitations.

This class and subclass consist of individual members

so numerous that joinder or other alternative proceedings

are impractical. The names and addresses of class mem-

bers are presently unknown to plaintiff, but can be readily

ascertained from the defendant’s business records. [Here-

after “plaintiff(s)” shall refer to the named plaintiff(s)

as well as members of the class. ]

B. The common cr similar issues of law and fact which

predominate over individual issues include, but are not

limited to, the following:

1. Each member of the class has or had a checking

account with defendant and the account has been charged

for the processing of checks presented against insufficient

funds.

2. The legal rights and obligations of the parties are

identical concerning the imposition of the amount charged

by defendant for processing checks presented against in-

sufficient funds on plaintiffs’ accounts.

3. Proof of common facts and legal doctrines by the

representative plaintiff will determine the claims of each

member of plaintiffs’ class.

4. The class action proceeding will provide a practical

basis for the determination of all interests of the parties,

prevent inconsistent adjudications, maximize judicial econ-

omy, and is superior to all other available methods of fair

and efficient adjudication of the controversy.

C. The named representative’s claims are typical and

representative of the class and subclass claims because

54a

(s)he has a checking account and has paid the special

handling charge.

D. The named representative will fairly and adequately

represent and protect the class interests because her/his

interests are neither adverse nor inconsistent with the

class interest.

2.

Defendant CROCKER NATIONAL BANK is a bank-

ing association, doing business and maintaining branch

offices in San Francisco.

3.

The true names, identies [sic] and legal capacities of

the defendants sued herein as DOE 1 through DOE 100 are

unknown to plaintiffs and therefore said defendants are

sued by fictitious names under the provisions of CAL.

CODE CIV. PROC. § 474. Each of said DOE defendants

was an agent, principal, employer, employee, subsidiary,

partner, associate, joint venturer or person exercising con-

trol of another defendant liable for the wrongful acts

alleged herein. Each of said DOE defendants is legally

responsible in some manner for the wrongful acts, injury

and damages alleged herein.

4.

Banking transactions are subjected to closer scrutiny

than ordinary commercial transactions by various regula-

tory bodies and the courts and defendants owe a duty of

fair dealing toward plaintiffs.

\

5.

The possession and use of a checking account is a prac-

tical necessity for the plaintiffs.

6.

Defendants offer to the plaintiffs and the general public

checking services. Defendants receive deposits of money

5a

or

on behalf of the plaintiffs and, upon presentation of a

check drawn by plaintiffs, disperse money as directed by

the check.

7.

Defendants offer said checking services in exchange

for a promise by plaintiffs to pay a predetermined charge

set by defendants [hereafter called the “maintenance

charge.” | Plaintiffs, at the commencement of the check-

ing account agreed to pay said maintenance charge, or to

maintain a minimum balance in their checking account or

some similar arrangement, unless such charge was waived.

This maintenance charge is stated on periodic statements

issued to the respective plaintiffs by the defendant.

8.

It is the practice of defendants to impose and collect a

unilaterally set charge for processing checks presented

against plaintiffs’ accounts when such accounts do not

contain sufficient funds to cover the amount of the check

[hereafter called “NSF checks”]. This charge, imposed

separately from and in addition to a maintenance charge

for other regular checking activity, is hereafter referred

to as the “NSF charge.”

9.

Defendants, in fact, can and do off-set the amount of

the NSF charge against any remaining balance in the

account and do not have to bring suit or take any other

affirmative action to collect the charge against plaintiffs’

accounts.

10.

Defendants have at various times unilaterally increased

the NSF charge to an amount the defendants deemed ap-

propriate, without reference to any criteria, and defend-

ants imposed and collected the said increased amount

without any explanation or justification by defendants to

plaintiffs.

56a

As.

Defendants require of each plaintiff a signature upon

an individual card. Attached as Exhibit 1 and incorpo-

rated by reference as though set forth in full is a copy

of such card used by the defendants and calied a signature

ecard.

12.

The signature card is retained by the defendants and

plaintiffs are not provided with a copy of the card.

13.

The defendants use the signature card to determine

and verify the authenticity of endorsements on checks.

For that purpose, the defendants require plaintiffs to sub-

mit an exemplar of their signatures on the signature

ecard.

14,

The signature card prepared by the defendants does

not identify the amount of any charge to be paid by the

plaintiffs for processing NSF checks and is not an agree-

ment for such payment. The card does not constitute

mutual assent to NSF charges in any particular sum or

at all and accordingly is not a contract conferring au-

thority to do the acts complained of herein.

15.

Based upon the language of the signature card, the

plaintiffs believed and expected that the signature card

was intended as a handwriting exemplar for purposes

of identification and verification only.

16.

In the course of checking account activity by the plain-

tiffs, certain checks of plaintiffs have been and will be

presented which exceed the amount then on deposit in

their respective accounts.

57a

ie

Defendants anticipate that plaintiffs will cause checks

to be presented against insufficient funds in their accounts

and defendants impose a charge for each NSF check

presented whether returned or honored. Said charge is

$6.00. Attached as Exhibit 2 is a true copy of a notice

of said charge to the named plaintiff.

18.

Plaintiffs allege, upon information and belief, that the

actual cost incurred by the defendants in processing an

NSF check is approximately $0.30, which cost was at all

times known to the defendants.

19.

Plaintiffs have performed all conditions required of

them, except as performance is excused or waived, relat-

ing to the checking account with the defendants.

20.

A present and actual controversy exists between the

plaintiffs and the defendants concerning their respective

rights and obligations. A controversy exists as to whether

the signature card is a valid or enforceable contract and

whether said signature card is a lawful basis for the im-

position of the NSF charge. Plaintiffs contend that the

signature card is not a contract and that the endorsement

of the signature card by the plaintiffs—given its lan-

guage, form and appearance—does not create a legal and

binding contract for the defendants’ authority to impose

the NSF charge. Defendants contend that the signature

card is a valid and enforceable contract and that it pro-

vides the lawful authority to impose and collect the NSF

charge.

21.

Plaintiffs desire a judicial determination of the nature,

scope, force and effect of the relationship created by the

EE |

58a

signature card. Declaratory relief is both necessary and

appropriate to resolve this question. Unless enjoined, de-

fendants will continue to do the acts complained of and

declared to be improper.

SECOND CAUSE OF ACTION:

DECLARATORY AND INJUNCTIVE RELIEF BASED

UPON THE GROUNDS THAT THE SIGNATURE

CARD IS ILLUSORY, AMBIGUOUS AND AN

OPPRESSIVE CONTRACT OF ADHESION

22.

Plaintiffs hereby incorporate Paragraphs 1 through 13

and Paragraphs 15 through 19 as though fully set forth

herein.

23.

The signature card used by defendants to conduct their

part of the checking account relationship is prepared and

drafted and imposed by defendants in a standard form.

24.

A disparity in bargaining power exists between plain-

tiffs and the defendants in favor of the defendants. The

relative economic power, knowledge, experience, resources

and expertise of the defendants in the checking account

relationship relegates the plaintiffs to an inferior bar-

gaining position at all stages of such relationship.

25.

Plaintiffs must acquiesce in the checking account rela-

tionship exactly as it is offered by the defendants. Plain-

tiffs are further forced to accept a similar arrangement

with other banks, or to forego checking services.

26.

The language of the signature card is illusory in that,

among other things, it fails to commit the defendants to

59a

any obligation, duty or responsibility. The language of

the signature card reserves the right to defendants to

alter, at any time, any aspect of the checking account

relationship, including the absolute right by defendants

to terminate the account without prior notice and to set

or alter the amount at any level of any charges including

the NSF charge. The defendants have unilaterally in-

creased the amount of the NSF charge from time to time,

and have terminated accounts of plaintiffs without prior

notice to such plaintiffs.

27.

The signature card is drafted by defendants in a man-

ner not adequate to create any enforceable contract right

to impose or collect the NSF charge.

28.

The signature card is ambiguous, vague and uncertain

as to whether it is an identification card or, as defendants

contend, a valid and enforceable contract to impose and

collect the NSF charge.

29.

The conduct and practice of defendants occasionally to

advance monies to the plaintiffs by honoring NSF checks,

in the sole discretion of the defendants, has resulted in

ambiguity, confusion and uncertainty as to the rights

and obligations of the plaintiffs in handling of their

checking accounts and as to the meaning of the signature

card.

30.

The disparity between the actual cost to defendants and

the amount charged by defendants for processing an NSF

check unreasonably and oppressively imposes excessive

and unfair liability upon plaintiffs.

31.

A present and actual controversy exists between the

plaintiffs and the defendants concerning their respective

60a

rights and duties as to whether: (A) Any obligation of

plaintiffs to pay NSF charges pursuant to any language

of the signature card is unenforceable because defendants

claim the power to and do alter or terminate the arrange-

ment at will; (B) Plaintiffs are not obligated to pay the

NSF charge pursuant to the signature card because it is

adhesive and does not unambiguously provide therefor;

(C) Defendants lack lawful authority pursuant to the

signature card to impose the NSF charge because the

NSF charge is an oppressive and unreasonable imposition

of liability upon plaintiffs which does not reflect the ac-

tual cost to defendants for processing the NSF check.

Defendants assert that the NSF charge is authorized by

the signature card; plaintiffs -ontend that the signature

card confers no such authority.

32.

Plaintiffs desire a judicial determination of their rights

and duties and a declaration as to whether or not the

NSF charge is authorized and enforceable by virtue of

the signature card. A judicial declaration is necessary

and appropriate so that plaintiffs may ascertain their

rights and duties. Unless enjoined, defendants will con-

tinue to do the acts complained of and declared to be

improper.

THIRD CAUSE OF ACTION

UNJUST ENRICHMENT

Plaintiffs hereby incorporate Paragraphs 1 through 10,

16 through 19, 23 through 25, and 30 as though fully set

forth herein.

33.

If plaintiffs prevail on either the First or Second Cause

of Action, then the defendants’ imposition of the NSF

charge on plaintiffs’ checking accounts has resulted in ‘le

payment of substantial sums of money to defendants,

which amounts properly belong to plaintiffs, aiid which

bla

amounts constitute an unjust enrichment to the defendants

to the extent said sums exceed the actual processing costs

of NSF checks.

34.

Defendants continue to retain said funds.

35.

Plaintiffs have been damaged by reason of defendants’

imposition and retention of the NSF charges in an amount

not known to plaintiffs but known to defendants.

36.

Plaintiffs request that the amounts retained by defen-

dants that constitute an unjust enrichment be returned

as damages to the plaintiffs.

FOURTH CAUSE OF ACTION

UNFAIR, DECEPTIVE AND MISLEADING

BUSINESS PRACTICES

37.

Plaintiffs hereby incorporate Paragraphs 1 through 18

and Paragraphs 23 through 30 as though fully set forth

herein.

38.

Said signature card is used in a manner which is un-

fair, deceptive and misleading, in that plaintiffs are led

to believe that it is a signature card for identification

purposes and the defendants treat the signature card,

without disclosure of said fact, as the legal authority to

impose the NSF charge on plaintiffs’ checking accounts.

39.

From time to time, defendants arbitrarily and capri-

ciously waive the NSF charge for preferred or commercial

accounts. Said waiver is a further unfair business prac-

62a

tice because it forces plaintiffs, who have had their ac-

counts charged, to shoulder the cost that the defendants

incur for processing NSF checks of others at the expense

of plaintiffs to the benefit of the preferred customers.

40.

Defendants’ practices are likely to deceive and have

deceived plaintiffs and other members of the public in

violation of CAL. BUS. & PROF. CODE §§ 17200 et seq.

Unless enjoined, said conduct will continue.

FIFTH CAUSE OF ACTION

CIVIL CODE § 1670

41.

Plaintiffs hereby incorporate Paragraphs 1 through 9,

11, 138, 16, 17, 18, 23, 24, 25 and 30 as though fully set

forth herein.

42.

Causing NSF checks to be presented for payment is a

breach by plaintiffs of their contractual obligations to

defendants to refrain from causing NSF checks to be

presented for payment or to maintain a positive account

balance.

43.

Defendants’ imposition of the NSF charge is a penalty

and is not imposed to compensate defendants for damages

incurred by plaintiffs’ breach by causing the presentation

of NSF checks and is therefore an unlawful charge.

44,

The imposition of said charge by defendants is a viola-

tion of and is contrary to the express provisions of CAL.

CIV. CODE § 1670 and is not exempted therefrom by

CAL. CIV. CODE § 1671.

63a

45,

From actual experience and knowledge, defendants can

determine the actual pro rata cost of NSF checks. On

information and belief, said cost is approevimately thirty

($0.30) cents.

46.

Plaintiffs are entitled to recover the difference between

the unlawful charges collected and defendants’ actual

damages sustained.

PRAYER

Plaintiffs request the following relief:

1. Declaratory relief whether the signature card is a

valid and enforceable contract and

(a) if so, what the rights and obligations of the

parties are thereunder and for an injunction

against any conduct complained of herein not

authorized thereunder ;

(b) if not, for an injunction against any claim or

use by defendants thereof as the authority for

imposing NSF charges;

2. An accounting of all NSF charges and for a deter-

mination as to how much thereof must be refunded to

plaintiffs;

3. An injunction against all unfair business practices

found to exist;

4. Reformation of the signature card in accordance

with the declaratory and injunctive relief granted;

5. An order enjoining the defendants from imposing

an NSF charge in excess of defendants’ actual costs of

processing an NSF check;

6. An order requiring defendants to advertise to and

advise the public and plaintiffs of their rights and obliga-

64a

tions concerning the checking account practices of the

defendants;

7. Reasonable attorneys’ fees and costs of suit; and

8. Such other relief as is just and proper.

DATED: June 27, 1978.

GARY J. NEAR

KIPPERMAN, SHAWN, KEKER

& BROCKETT

By

STEVEN M. KIPPERMAN

Counsel for Plaintiffs.

(Exhibit 1 and Exhibit 2 have been omitted. Exhibit 1

is a notice of advice of charges for special services—

checking account. Exhibit 2 is an exemplar of appellant’s

deposit account signature card contract. ]

65a

APPENDIX E

ORDER DUE

August 16, 1985

ORDER DENYING REHEARING

IN THE SUPREME COURT

OF THE STATE OF CALIFORNIA

SF No. 24591

PERDUE,

Appellant

Vv.

CROCKER NATIONAL BANK,

Respondent

KAUS, J. AND GRODIN, J., DID NOT PARTICIPATE.

[Filed Aug. 15, 1985]

IN BANK

Respondent’s petition for rehearing DENIED.

/s/ Bird

Chief Justice

ee

66a

APPENDIX F

IN THE SUPREME COURT

OF THE STATE OF CALIFORNIA

SF No. 24591

1 Civil No. A013838

Superior Court No. 740352

PAUL PERDUE,

Plaintiff and Appellant,

V.

CROCKER NATIONAL BANK,

Defendant and Respondent.

| Filed September 5, 1985]

NOTICE OF APPEAL TO THE

SUPREME COURT OF THE UNITED STATES

NOTICE IS HEREBY GIVEN that CROCKER NA-

TIONAL BANK, the defendant above-named, hereby ap-

peals to the Supreme Court of the United States from the

final judgment of the Supreme Court of the State of Cali-

fornia entered herein on July 18, 1985, sustaining the

validity of state statutes, including California Civil Code

§ 1670.5, against the claim that they are repugnant to

the Constitution, treaties or laws of the United States.

67a

This appeal is taken pursuant to 28 U.S.C. § 1257(2).

Dated: September 5, 1985.

s/ William Alsup

WILLIAM ALSUP

MORRISON & FOERSTER

One Market Plaza

Spear Street Tower

San Francisco, CA 94105

lenient

Telephone: (415) 777-6000

Attorneys for

Defendant-Respondent

CROCKER NATIONAL BANK

| Affidavit of service by mail and service list deleted ]

68a

APPENDIX G

12 U.S.C. § 24

Corporate powers of associations

Upon duly making and filing articles of association

and an organization certificate a national banking

association shall become, as from the date of the exe-

cution of its organization certificate, a body corpo-

rate, and as such, and in the name designated in the

organization certificate, it shall have power—

* * * *

Seventh. To exercise by its board of directors or

duly authorized officers or agents, subject to law, all

such incidental powers as shall be necessary to carry

on the business of banking; by discounting and ne-

gotiating promissory notes, drafts, bills of exchange,

and other evidences of debt; by receiving deposits... .

* * * *

12 U.S.C. § 484

Limitation on visitorial powers

(a) No national bank shall be subject to any visi-

torial powers except as authorized by Federal law,

vested in the courts of justice or such as shall be, or

have been exercised or directed by Congress or by

either House thereof or by any committee of Con-

gress or of either House duly authorized.

(b) Notwithstanding subsection (a) of this sec-

tion, lawfully authorized State auditors and exam-

iners may, at reasonable times and upon reasonable

notice to a bank, review its records solely to ensure

compliance with applicable State unclaimed property

or escheat laws upon reasonable cause to believe that

the bank has failed to comply with such laws.

|

694

APPENDIX H

12 U.S.C. § 3501

Congressional findings and declaration of purpose

(a) The Congress hereby finds that—

(1) limitations on the interest rates which are

payable on deposits and accounts discourage per-

sons from saving money, create inequities for

depositors, impede the ability of depository in-

stitutions to compete for funds, and have not

achieved their purpose of providing an even flow

of funds for home mortgage lending; and

(2) all depositors, and particularly those with

modest savings, are entitled to receive a market

rate of return on their savings as soon as it is

economically feasible for depository institutions

to pay such rate.

(b) It is the purpose of this subchapter to provide

for the orderly phase-out and the ultimate elimina-

tion of the limitations on the maximum rates of

interest and dividends which may be paid on deposits

and accounts by depository institutions by extending

the authority to impose such limitations for 6 years,

subject to specific standards designed to ensure a

phase-out of such limitations to market rates of

interest.

[Depository Institutions and Monetary Control Act of

1980, Pub. L. No. 96-221, Titie II, § 202, 94 Stat. 132,

142]

12 U.S.C. § 3502

Depository Institutions Deregulation Committee

(a) Transfer of statutory authorities

The authorities conferred by sections 371b, 1425b

(a), and 1828(g) of this title or by any other

70a

provision of Federal law, other than section 1763 of

this title, to prescribe rules governing the payment

of interest and dividends and the establishment of

classes of deposits or accounts, including limitations

on the maximum rates of interest and dividends

which may be paid on deposits and accounts, and the

authority conferred by the provisions of section 102

of Public Law 94-200 (12 U.S.C. 461 note) are here-

by transferred to the Depository Institutions De-

regulation Committee (hereinafter in this subchapter

referred to as the “Deregulation Committee’).

(b) Membership; meetings; voting

The Deregulation Committee shall consist of the

Secretary of the Treasury, the Chairman of the

Board of Governors of the Federal Reserve System,

the Chairman of the Board of Directors of the Fed-

eral Deposit Insurance Corporation, the Chairman of

the Federal Home Loan Bank Board, and the Chair-

man of the National Credit Union Administration

Board, who shall be voting members, and the Comp-

troller of the Currency who shall be a nonvoting

member of the Deregulation Committee. The De-

regulation Committee shall hold public meetings at

least quarterly. All meetings of the Deregulation

Committee shall be conducted in conformity with the

provisions of section 52b of title 5. The Deregula-

tion Committee may not take any action unless such

action is approved by a majority vote of the voting

members of the Deregulation Committee.

(ec) Delegation of authorities prohibited

The authorities conferred by this subchapter on

the Deregulation Committee and its members may

not be delegated.

[Depository Institutions and Monetary Control Act of

1980, Pub. L. No. 96-221, Title II, § 203, 94 Stat. 132,

142]

Ee OO

12 U.S.C. § 3503

Phase-out and elimination of limitations, and gradual

increas<s of maximum rates of interest and dividends

paid on deposits and accounts

(a) Exercise of authorities; methods employed

The Deregulation Committee shall, by regulation,

exercise the authorities transferred by section 3502

of this title to provide for the orderly phase-out

and the ultimate elimination of the limitations on

the maximum rates of interest and dividends which

may be paid on deposits and accounts as rapidly as

economic conditions warrant. The phase-out of such

limitations may poe achieved by the Deregulation

Committee hy the gradual increase in such limita-

tions applicable to all existing categories of accounts,

the complete elimination of the limitations applicable

to particular categories of accounts, the creation of

new categories of accounts not subject to limitations

or with limitations set at current market rates, any

combination of the above methods, or any other

method.

(b) Maximum amounts of increases

The Deregulation Committee shall work toward

providing all depositors with a market rate of

return on their savings with due regard for the

safety and soundness of depository institutions. Pur-

suant to the authority granted by this subchapter,

the Deregulation Committee shall increase all timita-

tions on the maximum rates of interest and dividends

which may be paid on deposits and accounts to mar-

ket rates as soon as feasible, except that the Deregu-

!ation Committee shall not increase such limitations

above market rates during the six-year period be-

ginning on March 31, 1980.

72a

(ec) (1) Money market deposit accounts; authoriza-

tion; competitiveness with money market mutual

funds; limitations on maximum rate of interest

barred; transaction account reserves requirement in-

applicable

The Committee shall issue a regulation authoriz-

ing a new deposit account, effective not later than

60 days after October 15, 1982. Such account shall

be directly equivalent to and competitive with money

market mutual funds registered with the Securities

and Exchange Commission under the Investment

Company Act of 1940 [15 U.S.C. § 80a-1 et seq.].

(2) No limitation on the maximum rate or rates

of interest payabie on deposit accounts shall apply to

the account authorized by this subsection.

(8) For purposes of section 461(b) of this title,

accounts established pursuant to this subsection

which are not “transaction accounts” as defined by

the reserve requirement regulations of the Board of

Governors of the Federal Reserve System as those

regulations existed on August 1, 1982, shall not be

subject to transaction account reserves, even though

no minimum maturity is required, and even though

up to three preauthorized or automatic transfers and

three transfers to third parties are permitted

monthly.

(4) The transitional adjustment provisions in sec-

tion 461(b) (8) of this title, providing for the phase-

in of reserve requirements, shall not apply to an ac-

count established pursuant to this subsection.

[Depository Institutions and Monetary Control Act of

1980, Pub. L. No. 96-221, Title II, § 204, 94 Stat. 132,

143; Garn-St Germain Depository Institutions Act of

1982, Pub. L. No. 97-320, Title III, § 327, 96 Stat. 1469,

1501]

ee ee a

73a

12 U.S.C. § 3504

Voting requirements respecting targets for limita-

tions on maximum rates of interest and dividends

paid on deposits and accounts and phase-out of in-

terest rate controls; adjustment of limitations

(a) In order to assist the Deregulation Committee

in establishing the limitations on the maximum rates

of interest and dividends which may be paid on all

deposits and accounts at market rates as soon as

feasible and in order to provide maximum assurance

that interest rate controls will be phased-out during

the 6-year period following March 31, 1980, the De-

regulation Committee shall vote, not later than 18

months after March 31, 1980, on whether to increase

the limitations on the maximum rates applicable to

passbook and similar savings accounts by at least

one-fourth of one percentage point during such 18-

month period, and shall vote, not later than the end

of the third, fourth, fifth, and sixth years after

March 31, 1980, on whether to increase the limita-

tions on the maximum rates applicable to all cate-

gories of deposits and accounts by at least one-half

of one percentage point.

(b) The Deregulation Committee may, consistent

with the purposes of this subchapter, adjust the limi-

tations on the rates applicable to all categories of

deposits and accounts to rates which are higher or

lower than the targets set forth in this section.

[Depository Institutions and Monetary Control Act of

1980, Pub. L. No. 96-221, Title II, § 205, 94 Stat. 132,

143]

12 U.S.C. § 3505

Reporting requirements for individual members of

Deregulation Committee; contents ©

Each member of the Deregulation Committee shall

separately report to the Congress annually after

74a

March 31, 1980 regarding the economic viability of

depository institutions. Each such report shall con-

tain—

(1) an assessment of whether the removal of

any differential between the rates payable on

deposits and accounts by banks and those pay-

able by thrift institutions will adversely affect

the housing finance market or the viability of the

thrift industry;

(2) recommendations for measures which

would encourage savings, provide for the equita-

ble treatment of small savers, and ensure a

steady and adequate flow of funds to thrift in-

stitutions and the housing market;

(3) findings concerning disintermediation of

savings deposits from insured banks and insured

thrift institutions to uninsured money market

innovators paying market rates to savers; and

(4) recommendations for such legislative and

administrative actions as the member involved

considers necessary to maintain the economic

viability of depository institutions.

[Depository Institutions and Monetary Control Act of

1980, Pub. L. No. 96-221, Title II, § 206, 94 Stat. 132,

143-44]

12 U.S.C. § 1832

Withdrawals by negotiable or transferable instru-

ments for transfers to third parties

(a) Authority of depository institution; applicability

(1) Notwithstanding any other provision of law

but subject to paragraph (2), a depository institu-

tion is authorized to permit the owner of a deposit

or account on which interest or dividends are paid

to make withdrawals by negotiable or transferable

75a

instruments for the purpose of making transfers to

third parties.

(2) Paragraph (1) shall apply only with respect

to deposits or accounts which consist solely of funds

in which the entire beneficial interest is held by one

or more individuals or by an organization which is

operated primarily for religious, philanthropic, char-

itable, educational, or other similar purposes and

which is not operated for profit, and with respect to

deposits of public funds by an officer, employee; or

agent of the United States, any State, county, mu-

nicipality, or political subdivision thereof, the Dis-

trict of Columbia, the Commonwealth of Puerto Rico,

American Samoa, Guam, any territory or possession

of the United States, or any political subdivision

thereof.

* * * *

[Depository Institutions and Monetary Control Act of

1980, Pub. L. No. 96-221, Title III, § 303, 94 Stat. 132,

146]

76a

APPENDIX I

48 Fed. Reg. 54319 (1983)

DEPARTMENT OF THE TREASURY

Comptroller of the Currency

.12 CFR Part 7

[Docket No. 83-53]

Interpretive Ruling Concerning

National Bank Service Charges

AGENCY: Office of the Comptroller of the Currency,

Treasury.

ACTION: Final rule.

SUMMARY: This interpretive final rule clarifies the

position of the Office regarding the ability of national

banks to levy charges relating to services performed for

customers in connection with deposit accounts. This

action is necessary to incorporate into the service charge

ruling interpretations which have been rendered under

that ruling and to clarify that state law which interferes

with the ability of national banks to establish service

charges is preempted. The intended effect of this action

is to provide certainty to banks and customers alike re-

garding, respectively, their ability io impose, or liability

for, service charges by national banks in connection with

deposit accounts.

EFFECTIVE DATE: December 2, 1983.

FOR FURTHER INFORMATION CONTACT: Jerome

Edelstein, Attorney, Legal Advisory Services Division,

[202] 447-1880, Office of the Comptroller of the Cur-

rency, Washington, D.C. 20219.

ei iA cic a

77a

SUPPLEMENTARY INFORMATION:

Background

The Office i: updating its interpretive ruling, 12 CFR

7.8000, regarding the imposition of service charges by

national banks. This action is taken in response to dis-

putes, including litigation, which have arisen over deposit

account service charges by national banks. Clarification

is particularly important at this time in light of current

competitive conditions and the lifting of interest ceilings

on certain deposit accounts. These changes underscore

the need for banks to have flexibility to develop pricing

policies to serve their corporate and competitive needs.

Thus, the Office is codifying and clarifying certain prin-

ciples relevant to the imposition of service charges by

national banks. It is expected that this codification will

provide needed certainty in this area.

Discussion

The ruling adds the following provisions to the current

interpretive ruling. First, the final rule restates the

longstanding Office position that the establishment of

deposit account service charges and the amounts thereof

are business decisions properly made by bank manage-

ment for which the Office does not substitute its judg-

ment. Second, the ruling makes it clear that in setting

deposit account service charges, national banks may con-

sider, but are not limited to considering:

—Recovering costs incurred by the bank in providing

the service, plus a profit margin. Absent the ability

to recover such costs and receive a profit, banks may

be unwilling to provide a given service, thus limiting

competition and customer choices.

—Deterring of misuse by borrowers. Certain deposit

account services provided by banks, such as the honor-

ing of checks drawn against nonsufficient funds, have

78a

the potential for misuse. It has been the Office posi-

tion that service charges should discourage customers

from frequently writing checks in amounts greater

than their account balances. Such a practice, if left

uncontrolled, provides a customer with automatic loans.

Alternatively, the bank could automatically dishonor

all checks drawn on nonsufficient funds. A bank, how-

ever, may hesitate to do this because of the embarrass-

ment to its customer. An appropriate option, the Office

believes, is to establish service charges to be levied in

connection with the writing of nonsufficient fund

checks by borrowers to discourage customers from fre-

quently writing such checks.

—Enhancing of the competitive position and the market-

ing strategy of the bank. It is the position of the

Office that banks should have the ability to set service

charges to encourage or discourage the use of certain

services in line with the bank’s goals and corporate

requirements.

—Maintaining of safety and soundness. Service charges

should always be established with consideration of their

impact on the financial health and profitability of the

bank.

Third, the ruling clarifies that in accordance with gen-

eral principle [sic] of federal preemption of state law,

the amounts of deposit account service charges may not be

limited, restricted or prohibited by state law. State law

that tends to impair the efficiency of national banks or

conflicts with the paramount laws of the United States

is preempted. State laws which limit, restrict, or pro-

hibit the amounts of deposit account service charges by

national banks impair the ability of national banks to

exercise their authority to take deposits under 12 U.S.C.

24 Seventh. Also, deregulation, including the lifting of

interest rate ceilings on numerous types of accounts,

underscores the need for national banks to have flexi-

bility in the establishment of deposit account service

79a

charges so that they may continue to pay depositors mar-

ket rates of interest. Further, the safety and soundness

of banks depends in significant part on their ability to

devise price structures appropriate for their needs. Any

state law impediments to national bank flexibility have

potentially serious implications for their continued safety

and soundness. In such circumstances, the authority to

regulate has been given by Congress to this Office as part

of its mission of monitoring the safety and soundness of

the national banking system. Attempts by states to reg-

ulate in the area are preempted as being in conflict with

the statutory scheme under which the national banking

system is regulated.

Title 12 CFR 7.8000 is not applicable to service

charges imposed by a national bank in its capacity as a

fiduciary. Those charges continue to be governed by 12

CFR Part 9. Title 12 CFR 7.7515, relating to service

charges on dormant accounts, and 12 CFR 7.7517, relat-

ing to checking charges by newly organized national

banks, remain in effect. The Office is considering amend-

ments to these interpretive rulings and may develop a

separate rulemaking proceeding concerning national bank

service charges.

Special Studies

A Regulatory Flexibility Analysis under the Regula-

tory Flexibility Act is not required for interpretive rul-

ings such as this where a notice of proposed rulemaking

is not required.

A Regulatory Impact Analysis is not required because

the OCC has determined that the rule is not a “major

rule” as defined by Executive Order 12291.

Notice and Comment

Publication for notice and comment and delayed effec-

tiveness as set forth in the Administrative Procedure

80a

Act 5 U.S.C. § 553 are not required for this document

which is an interpretive rule and therefore is exempt

(5 U.S.C. 553 (b) (A), (d) (2)).

List of Subjects in 12 CFR Part 7

National banks, Service charges, Deposit accounts.

PART 7—{ AMENDED]

Accordingly, for the reasons set forth above, Part 7

is amended by revising $ 7.8000 as follows:

1. The authority citation for Part 7 reads as follows:

Authority: R.S. 324 et seq., as amended; 12 U.S.C. 1

et seq., unless otherwise stated.

2. By revising 12 CFR 7.8000 as follows:

§ 7.8000 Charges by national banks.

(a) All charges to customers should be arrived at by

each bank on a competitive basis and not on the basis

of any agreement, arrangement, undertaking, under-

standing or discussion with other banks or their officers.

(b) Establishment of deposit account service charges,

and the amounts thereof, is a business decision made by

each bank and the Office will not substitute its judgment.

In establishing deposit account service charges, the bank

may consider, but is not limited to considering:

(1) Costs incurred by the bank, plus a profit margin,

in providing the service;

(2) The deterrence of misuse by customers of bank-

ing services;

(3) The enhancement of the competitive position of

the bank in accord with the bank’s marketing strategy;

(4) Maintenance of the safety and soundness of the

institution.

8la

{c) A national bank may establish any deposit account

service charge pursuant to paragraphs (a) and (b) of

this section notwithstanding any state laws which pro-

hibit the charge assessed or limit or restrict the amount

of that charge. Those laws impair the efficiency of na-

tional banks and conflict with the regulatory scheme gov-

erning the national banking system and are preempted

by federal law.

(d) This interpretive ruling does not apply to (1)

charges imposed by a national bank in its capacity as a

fiduciary, which are governed by 12 CFR 9; and (2)

service charges on dormant accounts which are governed

by 12 CFR 7.7515.

Dated: November 28, 1983.

C. T. Conover,

Comptroller of the Currency.

82a

49 Fed. Reg. 28237 (1984)

DEPARTMENT OF THE TREASURY

Comptroller of the Currency

12 CFR Part 7

[Docket No. 84-23]

Interpretive Ruling Concerning

National Bank Service Charges

AGENCY: Office of the Comptroller of the Currency,

Treasury.

ACTION: Final rule.

SUMMARY: This interpretive final rule amends an

earlier interpretive ruling of the Office published on

December 2, 1983. This amendment is necessary to clar-

ify some misperceptions regarding the ruling. There is

a misunderstanding on the part of some that the ruling

itself preempts state laws regarding nationa! bank ser-

vice charges on deposit accounts. One of the purposes

of this amendment is to make clear that this is not the

ease. Rather, the Office believes that the comprehensive

federal statutory scheme enacted by Congress over the

years, together with more recent legislative actions de-

regulating bank deposits, leave no room for states to

impose restrictions on national bank deposit account ser-

vice charges. Some have also expressed concern that the

ruling would permit any and all levels of pricing. This

amendment additionally makes clear that the Office has

the authority to deal with instances of unacceptable

pricing.

EFFECTIVE DATE: July 11, 1984.

FOR FURTHER INFORMATION CONTACT: Alan

Priest, Attorney, or Joseph Daly, Attorney, Legal Ad-

-visory Services Division, (202) 447-1880, Office of the

~ Comptroller of the Currency, Washington, D.C. 20219.

83a

SUPPLEMENTARY INFORMATION:

Background

On December 2, 1983, the Office updated its interpre-

tive ruling, 12 CFR 7.8000 (48 FR 54319), regarding

the imposition of service charges by national banks. The

ruling was updated in three respects. First, the final

rule restated the longstanding Office position that the

establishment of deposit account service charges and the

amounts thereof are business decisions properly made

by bank management. Second, the ruling made clear

that in setting deposit account service charges, national

banks may consider, but are not limited to considering:

—Recovering costs incurred by the bank in providing the

service, plus a profit margin. Absent the ability to

recover such costs and receive a profit, banks may be

unwilling to provide a given service, thus limiting com-

petition and customer choices.

—Deterring misuse by borrowers. Certain deposit ac-

count services provided by banks, such as the honoring

of checks drawn against nonsufficient funds, have the

potential for misuse. It has been the Office position

that service charges should discourage customers from

frequently writing checks in amounts greater than

their account balances. Such a practice, if left uncon-

trolled, provides a customer with automatic loans.

Alternatively, the bank could automatically dishonor

ali checks drawn on nonsufficient funds. A bank, how-

ever, may hesitate to do this because of the embarrass-

ment to its customers. An appropriate option, the

Office believes, is to establish service charges to be

levied in connection with the writing of nonsufficient

fund checks by borrowers to discourage customers from

frequently writing such checks.

—Enhancing the competitive position and the marketing

strategy of the bank. It is the position of the Office

84a

that banks should have the ability to set service

charges to encourage or discourage the use of certain

services in line with the bank’s goals and corporate

requirements.

—Maintaining safety and soundness. Service charges

should always be established with consideration of

their impact on the financial health and profitability

of the bank.

Third, the rule stated our opinion that federal law

preempts state laws that prohibit or limit service charges

on deposit accounts, with specified exceptions.

Two phrases in the existing rule have created con-

fusion and uncertainty. First, the language in subsec-

tion (b) that “the Office will not substitute its judg-

ment” has been misconstrued to mean that the Office

will not review the leve! of service charges imposed by

banks. That was not the intent, and the apparently mis-

leading language is amended by this final rule. The

Office fully recognizes its statutory, regulatory, and su-

pervisory authority and responsibility to deal with in-

stances of improper banking practices. The Office will

continue to review all banking practices, primarily

through its examination process, and to take appropriate

action when warranted.

Second, the preemption language in subsection (c) has

been misconstrued to imply that the interpretive ruling

itself preempts state law. That is not the opinion of

the Office regarding either the state of the law or the

effect of the interpretive ruling. Language has been

added to the rule indicating that it is the comprehensive

federal statutory scheme governing the deposit-taking

function of national banks (including recent federal

laws deregulating deposit accounts) that preempts state

laws that prohibit or limit the amount of a national

bank’s deposit account service charges.

eee |

Special Studies

A Regulatory Flexibility Analysis under the Regula-

tory Fexibility Act is not required for interpretive rul-

ings such as this where a notice of proposed rulemaking

is not required.

A Regulatory Impact Analysis is not required because

the Office has determined that the rule is not a “major

rule” as defined by Executive Order 12291.

Notice and Comment

Publication for notice and comment and delayed effec-

tiveness as set forth in the Administrative Procedure

Act 5 U.S.C. 553 are not required for this document

which is an interpretive rule and therefore is exempt

(5 U.S.C. 553 (b) (A), (d) (2)).

List of Subjects in 12 CFR Part 7

National banks, Service charges, Deposit accounts.

PART 7—[AMENDED]

Accordingly, for the reasons set forth above, Part 7

is amended by amending § 7.8000 as follows:

1. The authority citation for Part 7 reads as follows:

Authority: R.S. 324 et seg., as amended; 12 U.S.C. 1

et seq., unless otherwise stated.

2. By revising paragraphs (b) and (c) of 12 CFR

7.8000 as follows:

§$ 7.8000 Charges by national banks.

* * * & *

(b) Establishment of deposit account service charges,

and the amounts thereof, is a business decision to be

made by each bank according to sound banking judgment

and federal standards of safety and soundness. In es-

86a

tablishing deposit account service charges, the bank may

consider, but is not limited to considering:

(1) Costs ineurred by the bank, plus a profit margin,

in providing the service;

(2) The deterrence of misuse by customers of banking

services;

(3) The enhancement of the competitive position of

the bank in accord with the bank’s marketing strategy;

(4) Maintenance of the safety and soundness of the

institution.

(ce) A national bank may establish any deposit account

service charge pursuant to paragraphs (a) and (b) of

this section notwithstanding any state laws which pro-

hibit the charge assessed or limit or restrict the amount

of that charge. Such state laws are preempted by the

comprehensive federal statutory scheme governing the

deposit-taking function of national banks.

* * * * *

Dated: March 19, 1984.

C. T. Conover,

Comptroller of the Currency.

87a

APPENDIX J

Comptroller’s Handbook For National Bank Examiners

Introduction

General Introduction Section 1.1

This handbook is designed to aid the examiner in plan-

ning and conducting bank examinations. Although it

discusses selected areas of banking in general terms, it

is primarily oriented toward describing examination pro-

cedure and should not be viewed as a comprehensive

training guide. Separate training programs covering

every area in this handbook will provide more detailed

instructions to assist the examiner in better understand-

ing banking operations and the application of the exam-

ination procedures. The overall objective of the hand-

book is to organize and formalize long-standing exam-

ination objectives and procedures that will provide guid-

ance to the examiner and enhance the quality and con-

sistent application of examination procedures. Accord-

ingly, this handbook provides specific guidelines for:

® Determining the scope of general and specialized

examinations.

@ Determining the procedures to be used in the ex-

amination of all areas of a bank, including those

that may lead to the early detection of trends

which, if continued, might result in a deteriora-

tion in the condition of a bank.

@ Evaluating the adequacy of the bank’s written

policies and procedures, the degree of compliance

with them, and the adequacy of its internal con-

trols.

® Evaluating work performed by internal and ex-

ternal auditors.

lc eccsneeinaeeiieieeneeiaiaemiaill:

88a

® Evaluating the performance and activities of

management and the board of directors.

® Preparing working papers that support examina-

tion reports and aid in the evaluation of work per-

fermed.

® Using objective criteria as a basis for an overall

conclusion and resulting comments and criticisms

of the condition and quality of the bank and its

management.

The Office of the Comptroller of the Currency (OCC) is

responsibile for promoting and assuring the soundness

of the country’s system of national banks. The bank

examination process is the OCC’s fact-finding arm in

discharging that responsibility. The essential objectives

of an examination are: (1) to provide an objective eval-

uation of a bank’s soundness; (2) to permit the OCC to

appraise the quality of management and directors; and

(3) to identify those areas where corrective action is

required to strengthen the bank, to improve the quality

of its performance, and to enable it to comply with

applicable laws, rulings and regulations. The evaluation

of the prudency of practices, adherence to laws and regu-

lations, adequacy of liquidity and capital, quality of

assets and earnings, nature of operations, and adequacy

of internal control and internal audit are among the

procedures utilized to accomplish those objectives.

Although everything that either weakens or has the poten-

tial to weaken the condition of any national bank is of

interest to and should receive the attention of the OCC

and its staff, the primary concern of the former is the

soundness of the National Banking System. Under ideal

circumstances, therefore, the examiner’s role is to make

a qualitative analysis of the condition of the bank under

examination. Accordingly, the scope of an examination

may embrace every phase of banking activity, or it may

concentrate on specific areas which deserve greater em-

nn |

89a

phasis because of their potential impact on a bank’s sound-

ness.

The handbook should also serve as a working tool rather

than a reference manual. Examination procedures, verifi-

cation procedures and internal control questionnaires are

excerpted directly from the handbook to form the work

programs used to examine a particular bank.

+ * * 7

Bank management, bank directors and the OCC all have

individual and unique responsibilities to the National

Banking System. The procedures in this handbook are

consistent with an overall program that encourages those

parties to meet their responsibilities. The role of the OCC

S$ a supervisory agency and the nature of bank opera-

tions form the foundation for the material in each section.

* o « ad

Deposit Accounts

Introduction Section 301.1

Deposits represent funds which bank customers have ad-

vanced and the bank is obligated to repay on demand or

after a specific period of time. Deposits are the major

source of employable funds available to a bank, therefore,

it is important for a bank’s management to implement

programs to retain and expand the bank’s deposit base

and to monitor its character and volatility.

Bankers place great significance on deposit growth and

structure since favorable operating results are dependent,

in part, on an expanding, stable deposit base. Because of

competition for funds, the need of most individuals and

corporations to minimize idle funds and the effect of dis-

intermediation on a bank’s deposit base, bank manage-

ment must adopt and implement a development and reten-

tion program for all types of deposits. Management must

also establish a procedure for determining the volatility

—————E———————

90a

and the character of the deposit structure so that funds

car be employed properly while accommodating their po-

tential for withdrawal.

The examination process will analyze the deposit develop-

ment and retention program and methods used to deter-

mine the volatility and character of the deposit structure.

The deposit development and retention program includes:

® A marketing strategy.

@ Projections of deposit structure and associated

costs.

@® A formula for comparing results against projec-

tions.

@ A system for revising the plan when necessary.

* * r *

The examiner analyzes the character of the overall de-

posit structure. The information gathered in the various

examination procedures should be sufficient to allow the

examiner to judge the character of both volatile and hard

core deposits. It is important that bank management be

informed of the character of the deposit structure on a

periodic basis by internal reports. Management’s lack of

such knowledge, could lead to the unwise employment of

funds with problems arising at a later, inopportune date.

Ultimately, the examiner should be satisfied that manage-

ment has properly planned for the bank’s future.

It would be impossible for an examiner to review each

individual deposit account during the course of an exami-

nation. Accordingly, the examiner’s efforts should be di-

rected to those types of deposit accounts shown by experi-

ence to be most significant relative to the examination

objectives. The following paragraphs discuss common

types of deposit accounts that, under certain circumstances

can become major problems.

* * * *

The size, frequency and duration of deposit account over-

drafts are matters that should be governed by bank policy

EE 2

9la

and controlled by adequate internal controls, practices and

procedures. Overdreft approval authority should be as-

signed in the same manner as is lending authority and

should never exceed the employee’s lending authority.

Systems for monitoring and reporting overdrafts should

emphasize a secondary level of administrative contro! that

is distinct from other lending functions so that account

officers who are less than objective do not allow influential

customers to exploit their overdraft privileges. Overdraft

charges should discourage frequency [sic] usage but

penalty fees should never be considered an important

source of income.

Deposit Accounts

Examination Objectives Section 301.2

1. To determine if the policies, practices, procedures and

internal controls regarding deposit accounts are ade-

quate.

2. To determine if bank officers are operating in con-

formance with the established guidelines.

3. To evaluate the deposit structure and determine its

character and volatility.

4. To determine the scope and adequacy of the audit

function.

5. To determine compliance with applicable laws, rulings

and regulations.

6. To initiate corrective action when policies, practices,

procedures or internal controls are deficient or when

violations of laws, rulings or regulations have been

noted.

92a

Deposit Accounts

Examination Procedures Section 301.3

a

Complete or update the Deposit Accounts section of

the Internal Control Questionnaire.

Based on the evaluation of internal controls and the

work performed by internal/external auditors (see

separate program) determine the scope of the ex-

amination.

Test for compliance with policies, practices, proce-

dures and internal controls in conjunction with per-

forming the remaining examination procedural steps.

Also obtain a listing of any deficiencies noted in the

latest review done by internal/external auditors from

the examiner assigned “Internal and External Au-

dits,” and determine if appropriate corrections have

been made.

Perform appropriate verification procedures.

Obtain or prepare, as applicable, the following listed

reports. On an automated system, the examiner

should use available bank copies of printouts plus

transactions journals, microfiche or other visual

media to minimize expense to the bank. The exam-

iner should be guided by the minimum standards of

output for data processing systems in deciding what

information is available. On a manual system, the

information necessary to complete the examination

procedures and indicated verification procedures is

left to the examiner’s discretion.

a. For demand deposits:

® Trial balance.

© Overdrafts.

© Unposted items.

® Dormant accounts.

93a

® Public funds.

@ Trust department funds.

® Uncollected funds.

@ Due to banks.

® Average balance.

® Significant change.

®@ Demand certificates of deposits.

® Large balance report.

* * aa

10. Evaluate the effectiveness of procedures regarding

overdrafts and drawings against uncollected funds

by:

a.

Reviewing procedures and policies for extensions

of credit by such methods to determine that:

® Officer approval limits have been established.

@ A formal] system of review and approval is in

effect.

Ascertaining the adequacy of the bank’s policies

and reporting methods regarding drawings

against unc

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