Petition for Writ of Certiorari — Massachusetts v. Greenwood Trust Co.

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No. 92-

feta ews

In the Supreme Court of-the ‘J

United States

October Term, 1992

COMMONWEALTH OF MASSACHUSETTS, et al

Petitioners.

Vv.

GREENWOOD TRUST COMPANY,

Respondent.

PETITION FOR A WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS

FOR THE FIRST CIRCUIT

PETITION FOR A WRIT OF CERTIORARI

SCOTT HARSHBARGER

ATTORNEY GENERAL

OF MASSACHUSETTS

Emest L. Sarason, Jr.*

William N. Brownsberger

Assistant Atomeys General

Public Protection Bureau

One Ashburton Place

Boston, Massachusetts 02108

*Counsel of Record (617) 727-2200

QUESTIONS PRESENTED

1. Did Congress preempt state

consumer protection laws regulating late

charges and other non-interest loan fees

when it expressly preempted interest

rate restrictions on state chartered

banks through Section 521 of the

Depository Institutions Deregulation and

Monetary Control Act of 1980?

2. After finding that the text and

legislative history of an express

preemption statute are "at bottom

inconclusive" as to preemptive scope,

may a court then define the preemptive

scope broadly so as to find preemption?

(1)

TABLE OF CONTENTS

QUESTION PRESENTED

TABLE OF AUTHORITIES

OPINION BELOW

JURISDICTION

CONSTITUTIONAL AND STATUTORY

PROVISIONS INVOLVED

STATEMENT OF THE CASE

REASONS FOR GRANTING THE WRIT

Skis

THE FIRST CIRCUIT’S

DECISION MAY HAVE A

DRAMATIC IMPACT ON

THE TRADITIONAL STATE

REGULATION OF LENDING

PRACTICES.

THE FIRST CIRCUIT’S

DECISION DISREGARDED

THE PLAIN LANGUAGE AND

UNAMBIGUOUS LEGISLATIVE

HISTORY OF DIDA.

AFTER FINDING THAT

"DIDA’S TEXT AND

LEGISLATIVE HISTORY

ARE, AT BOTTOM,

INCONCLUSIVE," THE

FIRST CIRCUIT SHOULD

NOT HAVE FOUND PREEMPTION.

(11)

Page

Iv. THE FIRST CIRCUIT’S

HOLDING IS INCONSISTENT

WITH THE DECISIONS OF

THIS COURT AND OF OTHER

CIRCUITS AS TO THE

PREEMPTIVE SCOPE OF THE

NATIONAL BANK ACT.

V. THE FIRST CIRCUIT’S

CONSTRUCTION OF SECTION 521

OF DIDA, TO INCLUDE

LATE CHARGES WITHIN

THE TERM "INTEREST,"

CONFLICTS WITH THE

TRUTH-IN-LENDING ACT AND

OTHER RELEVANT AUTHORITY.

CONCLUSION

APPENDICES (see separate Appendix)

(iii)

TABLE OF AUTHORITIES

Cases Page

Aldens, Inc. v. Packel,

524 F.2d 38 (3rd Cir. 1975), cert.

denied, 425 U.S. 943 (1976). 11

Allen v. Grand Central

Aircraft Co., 347 U.S.

535 (1954) 46

American Timber and

Trading Co. v. First

National Bank, 690 F.2d 781

(9th Cir. 1982) 28

Anderson National Bank v.

Luckett, 321 U.S. 233 (1944) 37

Beasley v. Wells Fargo Bank,

N.A., 1 Cal. Rptr. 2d 446,

235 Cal. App. 3d 1383 (1991)

review denied (Mar. 1992) is, 48

Cable Television Association

v. Finneran, 954 F.2d 91

(2d Cir. 1992) 33, 34

Chevron U.S.A., Inc.

v. National Resources Defense

Council, Inc. 467 U.S. 837 (1984) 42

Cipollone v. Ligget Group, Inc.,

112 S.Ct 2608 (1992) >

Cronkleton v. Hall, 66 F.2d 384

(8th Cir. 1933) 29

(iv)

Daagas v. Phoenix National Bank,

177 U.S. 549 (1900)

Demarest v. Manspeaker,

111 S.ct 599 (1991)

Evans v. National Bank,

251 U.S. 108 (1919)

First National Bank in Mena v.

Nowlin, 509 F.2d 872 (8th Cir. 1975)

First National Bank v.

Dickinson, 396 U.S. 122 (1969)

Fisher v. First National Bank,

548 F.2d 255 (8th Cir. i977) ai,

Franklin National Bank

v. New Y

ork, 347 U.S. 373 (1954)

Gade Vv.

National Solid Wastes

Management Association,

112 S.Ct 2374 (1992)

Garrett

v. Coast and

Southern Federal Savings

and Loan Ass‘’n, 511 P.2d 1197

(Cal. 1973)

Hill v. Chemical Bank, Civ. Nos.

3-92-255, 3-92-387 (D. Minn.

Aug. 4, 1992)

Johnson v. McCracken-Sturman

Ford, Inc.,

(3d Cir.

1975)

$27 F.2d 257

(v)

47,

45,

Laing v. U.S., 423 U.S.

161 (1976) 18

Marquette National Bank

v. First of Omaha Service

Corp., 439 U.S. 299 (1978) 19, 41, 42

Morales v. Trans World

Aivriines,. Ine... 112 8.6.

2031 (1992) 21, 30

National Bank v. Johnson,

104 U.S. 271 (1881) 28

National State Bank v.

Long, 630 F.2d 981 (3d Cir. 1980) 37

Nelson v. Citibank, 794 F. Supp.

312 (D. Minn. 1992) 27

Northway Lanes v. Hackley

Union National Bank

and Trust Co.,

464 F.2d 855 (6th Cir. 1972) 28

Panos v. Smith, 116 F.2d 445

(6th Cir. 1940) 29

Perdue v. Crocker National Bank

702 P.2d 503 (Cal. 1985),

appeal dismissed 475 U.S.

1001 (1986) 38, 39, 42

State of North Dakota

v. Merchants National Bank

and Trust Co., 634 F.2d 368,

(8th Cir. 1980) 38

(vi)

Tikkanen v. Citibank (South Dakota),

NWA.» Civ. Nos. 4-92-286, 4-92-2287

(D.Minn. Sept. 10, 1992) 27

U.S. v. Philadelphia

National Bank, 374 U.S. 321

(1963) 37

Constitutional Provisions

U.S. Const., art. VI, cl. 2 3

Statutes and Regulations

12 U.S.C. §85 passim

12 U.S.C. §1831d(a)

(1988 & Supp. 1990) passim

15 U.S.C. §1601 44

15 U.S.C. §1605(a) 44

15 U.S.C. §1637 26

28 U.S.C. §1254(1) (1988) 2

28 U.S.C. §1292(b) (1988) 8

28 U.8.C. $4332 2

28 U.S.C. §133e2 2

28 U.8.C. §13337 2

U.C.C. §2-718 (1983) 47

12 C.F.R. §226.4(c) (2) 45

(vil)

16 C.F.R. 444 (49 Fed. Reg. 7789,

March 1, 1984)

Mass. Gen. Laws Ann.,

ch. 140, §114B (West 1991)

Mass. Gen. Laws Ann.,

ch. 255, £13 (West 1988)

Legislative Materials

126 Cong. Rec. 6965

(March 27, 1980)

S. Rep. No. 368, 96 Cong.,

lst Sess. 19 (1979)

Other Authorities

Business Week, Feb. 24, 1992,

at 32

“Small States Teach a Big

Banking Lesson," Chicago Fed

Letter, June 1986.

ALI, Restatement of

Contracts § 339

Ausubel, "The Failure of

Competition in the Credit

Card Market," The American

Economic Review, March, 1991.

Corbin, Contracts § 1058

(viii)

Credit Card Management,

Card Industry Directory:

The Blue Book of the Credit

and Debit Card Industry

in the United States,

1992 ed. i3, 26,

Field, The Law of Damages

Ch. 9 & § 22 (1876)

New York Times, Business,

September 13, 1992, at 13.

Sedgewick, Damages §§ 389-427

(9th ed. 1912)

Stewart, “How Penalty Fees

are Rewarding Banks," Credit

Card Management, November 1991.

The Nilson Report, Nov. 1991. 15,

U.S. Department of Commerce, A

Statistical Abstract Supplement:

State and Metropolitan Area Data

Book, 1986, 1986

Williston, Contracts §§ 769-792

(1920) and 781 (3d ed.)

(ix)

IN THE SUPREME COURT OF THE

UNITED STATES

October Term, 1992

COMMONWEALTH OF MASSACHUSETTS, et al,

Petitioners

Vv.

GREENWOOD TRUST COMPANY,

Respondent.

PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE FIRST CIRCUIT

The Commonwealth of Massachusetts

and the Attorney General of

Massachusetts petition for a writ of

certiorari to review the judgment of the

Court of Appeals for the First Circuit,

entered in this case on August 6, 1992.

OPINION BELOW

The opinion of the Court of Appeals

for the First Circuit is reported at 971

F.2d 818 and is reproduced as Appendix A

-lj-

hereto. The decision of the United

States District Court for the District

of Massachusetts is reported at 776 F.

Supp. 21 and is reproduced as Appendix C

hereto. The final judgment under Fed.

R. Civ. P. 54(b) and the "Supplement to

the Court’s Memorandum and Order of

October 22, 1991" of the United States

District Court are reproduced as

Appendices B and D hereto,

respectively. Appendices A-D are

included in a separate Appendix.

JURISDICTION

The judgment of the Court of

Appeals for the First Circuit was

entered on August 6, 1992. Petitioners

invoke the jurisdiction of this Court

under 28 U.S.C. §1254(1) (1988). The

respondent invoked District Court

jurisdiction under 28 U.S.C. §§1331,

1332 and 1337.

CONSTITUTIONAL AND STATUTORY

PROVISIONS INVOLVED

The Supremacy Clause of the United

States Constitution provides:

This Constitution, and the

Laws of the United States which

shall be made in Pursuance thereof;

and all Treaties made, or which

shall be made, under the Authority

of the United States, shall be the

supreme Law of the Land; and the

Judges in every State shall be

bound thereby, any Thing in the

Constitution or Laws of any State

to the Contrary notwithstanding.

Const., art. VI, cl. 2.

12 U.S.C. §1831d(a) (1988 & Supp.

1990) provides, in pertinent part:

In order to prevent

discrimination against

State-chartered insured depository

institutions, including insured

savings banks, or insured branches

of foreign banks with respect to

interest rates, if the applicable

rate prescribed in this subsection

exceeds the rate such State bank or

insured branch of a foreign bank

would be permitted to charge in the

absence of this subsection, such

State bank or such insured branch

of a foreign bank may,

-3-

notwithstanding any State

constitution or statute which is

hereby preempted for the purposes

of this section, take, receive,

reserve, and charge on any loan or

discount made, or upon any note,

bill of exchange, or other evidence

of debt, interest at a rate of not

more than 1 per centum in excess of

the discount rate on ninety-day

commercial paper in effect at the

Federal Reserve bank in the Federal

Reserve district where such State

bank or such insured branch of a

foreign bank is located or at the

rate allowed by the laws of the

State, territory, or district where

the bank is located, whichever may

be greater.

Mass. Gen. Laws Ann., ch. 140,

§114B (West 1991) provides, in pertinent

part:

No creditor shall impose a

delinquency charge, late charge, or

Similar charge on loans made

pursuant to such an open end credit

plan.

STATEMENT OF THE CASE

The facts giving rise to this

controversy are undisputed. Greenwood

Trust Company ("Greenwood"), a Delaware

-4-

state bank insured by the FDIC, issues

the Discover Card to customers

nationwide, including several hundred

thousand Massachusetts residents. In

addition to charging a monthly periodic

rate of 1.65%, Greenwood imposes a

$10.00 "late charge" if a required

payment is not made within 20 days after

the monthly payment due date. A

Massachusetts consumer protection

statute, Mass. Gen. Laws Ann., ch. 140,

§114B (1991), prohibits credit card late

charges. App. A - 6, 7.

On October 27, 1989, the Attorney

General of Massachusetts sent written

notice to Greenwood that Greenwood’s

imposition of late charges on its

Massachusetts Discover Card customers

violated the Massachusetts statute.

Greenwood then filed a Complaint for

Declaratory and Injunctive Relief in the

-5-

U.S. District Court for the District of

Massachusetts, alleging that Delaware

law allowed the imposition of credit

card late charges on Massachusetts

consumers, and that the Massachusetts

statute was preempted by the Supremacy

Clause of the United States Constitution

and by Section 521 of the Depository

Institutions Deregulation and Monetary

Control Act ("Section 521" and

"prpa") .2/

l/ Greenwood also alleged that its late

charges did not violate the

Massachusetts statute and that, pursuant

to a choice of law provision in its

Cardmember Agreement, more permissive

Delaware law controlled its contractval

relationships with its Massachusetts

customers. Those allegations, which

were rejected by the District Court in

its Memorandum and Order of October 24,

1991 (App. C - 126), were not addressed

by the Court of Appeals (App. A - 55),

and are not at issue in this petition.

In its Answer and Counterclain,

Massachusetts denied that its late

charge statute was preempted by federal

law and asked the District Court for

civil penalties and restitution of the

late charges illegally collected.

On cross-motions for summary

judgment, the District Court ruled in

favor of the Commonwealth stating that

Greenwood had not met its heavy burden

of showing preemption. App. C - 84.

The District Court held that "(t]he

plain meaning of section 521 does not

evince Congressional intent to preempt

state regulation as to other credit

terms, apart from interest rates, such

as the late charges challenged by

Massachusetts." App. C - 22,23. The

court also noted that "[{t]he record of

Congressional debate and deliberation

-7J7-

concerning the enactment of DIDA is

generally supportive of the

Commonwealth’s argument that preemption

of credit card regulation under DIDA is

confined to numerical interest rates."

App. C = 33.

The District Court certified its

rulings for Greenwood’s interlocutory

appeal under 28 U.S.C. §1292(b)

(1988). The First Circuit accepted the

certification, noting:

In light of the pivotal

importance and broad commercial

consequence of the questions

presented, we accepted the

certification. (As an aside, we

remark that our belief as to the

importance of the questions

presented has been validated to

some degree by the outpouring of

amicus briefs, some favoring

appellant’s position and some

opposing it.) App. A - 8.

On August 6, 1992, the First

Circuit reversed the District Court.

The First Circuit found the statute’s

"text and legislative history .. . at

bottom, inconclusive." App. A - 41.

The court went on to hold that the

preemptive reach of DIDA goes beyond

numerical percentage rates of interest,

and preempts Massachusetts’ law

prohibiting credit card late charges.

REASONS FOR GRANTING THE WRIT

1. THE FIRST CIRCUIT’S OPINION

MAY HAVE A DRAMATIC IMPACT ON

THE TRADITIONAL STATE

REGULATION OF LENDING

PRACTICES.

The First Circuit’s opinion, if

allowed to stand, may result in the

preemption of much state regulation of

lending practices. Even the narrowest

reasonable reading of the First

Circuit’s holding affects the allocation

between consumers and the banking

industry of hundreds of millions of

dollars in late charges annually.

-9-

The First Circuit’s ruling may

place most loan-related charges beyond

the reach of state regulation. 2/

States have, in fact, historically

regulated many of these charges. 2/

2/ The court’s statement that a late

charge is "related to the use or

forbearance of money, or .. . damages

for its detention", App. A - 25, 26

(emphasis added), implies that any state

restriction of loan related charges

affecting a lender’s total return is

preempted under §521. For example,

charges for exceeding the credit limit,

replacement card fees, and charges for

duplicate statements are arguably all

“related to" the use or forbearance of

money (at least under the First

Circuit’s expansive reading of §521),

"interest," and therefore exportable,

regardless of the law of the

cardholder’s state. This analysis could

also lead to the preemption, for

example, of limitations on attorney’s

fees under state law.

3/ For example, Washington, since 1899,

has restricted loan "setup charges."

Wash. Rev. Code Ann. § 19.52.020 (Supp.

1992). New Mexico, since 1912, has

restricted loan commissions. N.M. Stat.

Ann. §56-8-7 (1978). South Carolina,

Since 1962, and Louisiana, since 1988,

have restricted over-limit charges.

(footnote continued)

-10-

The First Circuit’s opinion will

encourage more and more lenders to flout

long-standing state consumer protection

laws. As state law enforcement officers

attempt to fulfill their legitimate

roles, they will be met by declaratory

judgment actions citing Greenwood Trust.

Even read as limited to its facts,

the First Circuit’s opinion is of

national importance. It holds that

section 521 of DIDA preempts state

regulation of late charges in open-end

credit agreements with out-of-state

banks and allows interstate

(footnote continued)

S.C. Code Ann. §37-2-202(c)(ii) (Law

Co-op. 1991); La. Rev. Stat. Ann.

§3530(E) (West 1991). Congress

recognized the state’s historic role in

this type of regulation when it passed

the Truth in Lending Act -- a

comprehensive scheme of lending

regulation far broader than the usury

deregulation in s.521. Aldens, Inc. v.

Packel, 524 F.2d 38, 46 (3d Cir. 1975),

cert. denied, 425 U.S. 943 (1976).

-ll-

"exportation" of late charge

deregulation. Given that most open-end

credit agreements now cross state lines

and originate from bank entities

domiciled in low-regulation states, +/

4/ "Credit card loans at commercial

banks in the United States increased by

$72.4 billion from 1980 to 1987. Just

two states accounted for half of that

increase -- Delaware for $25.0 billion

and South Dakota for $12.3 billion."

See "Small States Teach a Big Banking

Lesson," Chicago Fed Letter, June 1986.

To achieve this result, the states

repealed all consumer protection

legislation applicable to consumer

lending. In 1980, South Dakota removed

all usury ceilings for credit card loans

and other types of consumer lending. In

1981, Delaware eliminated interest rate

ceilings on all types of loans and

passed laws allowing banks to charge a

variety of fees associated with the

extension of credit. Id. See App. C-20.

The ten largest holders of bank card

receivables hold 50.9% of the market

share. Of t'e 10 largest holders of

bank card riveivables, six are located

in Delaware and one is located in South

Dakota. The six Delaware banks

accounted for approximately 26% of the

total bank card receivables in 1991; the

one South Dakota bank accounted for

(footnote continued)

-12-

the result of this holding, in effect,

is that states may no longer regulate

late charges.

This derogation of the states’

historically accepted police powers will

have a very significant economic

impact. Today, 32 states, as well as

Puerto Rico and the District of

Columbia, prohibit or significantly

restrict credit card late charges. Six

(footnote continued)

approximately 18%. Credit Card

Management, Card Industry Directory:

The ue Book of the Credit and Debit

Card Industry in the United States, 1992

ed., at 35, 68-72. Clearly, the

residents of these two states, with

populations of 594,000 and 708,000,

ranking 47th and 45th in population

size, respectively, do not account for

these receivables. U.S. Department of

Commerce, A Statistical Abstract

Supplement: State and Metropolitan Area

Data Book, 1986, 1986, at 504.

states prohibit late charges, —’ 24

states plus the District of Columbia and

Puerto Rico impose percentage and/or

total dollar limitations on such

charges, ©/

5/ COLO. REV. STAT. §5-3-203NJ(5) (a)

(1992); MASS. GEN. LAWS ANN. ch. 255,

§12H (West 1988); N.J. STAT. ANN.

§17:16C-50 (West 1984); 69 PA. CONS.

STAT. ANN. §1906 (Purdon SUPP. 1992);

TEX. REV. CIV. STAT. ANN. art.

5069-15.02(f), 3.15(8), 3.16(3) (Vernon

1987); VT. STAT. ANN. tit. 9, §2406(c)

(1987)).

6/ ARIZ. REV. STAT. ANN. §44-6002G

(SUPP. 1991); CONN. GEN. STAT. ANN.

§§36-233(d), 36-233b (SUPP. 1992); D.C.

CODE ANN. §28-3310 (1990); FLA. STAT.

ANN. §520.35 (West 1988); GA. CODE ANN.

§10-1-7 (1989); HAW. REV. STAT. §476-9

(1985); IND. CODE ANN. §24-4.5-3-203.5

(Burns 1991); IOWA CODE ANN.

§537.2502(4) (West SUPP. 1992); KAN.

STAT. ANN. §16a-2-502 (1988); KY. REV.

STAT. ANN. §287.750

(Michie/Bobbs-Merrill 1988); LA. REV.

STAT. ANN. §9:3527 (West 1991); ME.

REV. STAT. ANN. tit. 9A, §§2-402,

2-501(3), 2-502 (SUPP. 1991); MD. COM.

LAW CODE ANN. §12-506(6) (1990); MINN.

STAT. ANN. §§48.185(d), 168.71(a) (3)

(West SUPP. 1992); MISS. CODE ANN.

(footnote continued)

-14-

and two states specifically require such

charges to be reasonable.

More than 79 million Americans hold

one or more credit cards. 2/

Three-quarters of cardholders are

"borrowers" who pay interest (finance)

charges on their outstanding balances on

(footnote continued)

§75-17-19(3) (1991); MO. ANN. STAT.

§408.330(3) (Vernon SUPP. 1992); MONT.

CODE ANN. §31-1-235 (1991); NEV. REV.

STAT. §97.195 (1987); N.C. GEN. STAT.

§24-11(d1) (1991); P.R. LAWS ANN. art.

19(B); S.C. CODE ANN. §37-3-203 (Law.

Co-op. 1987); S.D.CODIFIED LAWS ANN.

§54-6-61 (1990); UTAH CODE ANN.

§70C-2-102 (SUPP. 1992); VA. CODE ANN.

§6.1-330.80 (1988); W.VA. CODE

§46A-3-113 (1992); WIS. STAT. ANN.

§422.202(2m) (a) (1988)).

7/. CAL. CIV. CODE §1671(c)(d) (West

1985) interpreted in Beasley v. Wells

Fargo Bank, N.A., 1 Cal. Rptr. 2d 446,

235 Cal. App. 3d 1383 (1991) review

denied (Mar. 1992) (credit card late

fees charged by National Bank were

unreasonable in amount) and WASH. REV.

CODE ANN. §63.14.090 (SUPP. 1992).

8/ The Nilson Report, Nov. 14, 1991

at 4.

-15-

a monthly basis. 2 In 1991, those

borrowers paid finance charges at an

average annual rate of approximately

18%, although these rates have declined

in recent months. +2/

Sixty five percent of banks charge

late fees to customers. These fees

average over $8.00 per month. 22/ In

1991, credit card issuers billed to and

received from consumers $858 million

9/ See Ausubel, "The Failure of

Competition in the Credit Card Market,"

The American Economic Review, March,

1991, at 71.

10/ See Credit Card Management, Card

Industry Directory: The Blue Book of the

Credit and Debit Card Industry in the

United States, 1992 ed, at 35, 37.

ll/ Stewart, "How Penalty Fees are

Rewarding Banks," Credit Card

Management, Nov. 1991, p.39.

-16-

in late charges. 22/ (It is safe to

assume that a material share of these

late charges are collected in apparent

violation of the state law of the

cardholder.)

Summarizing, millions of credit

card customers pay late charges as well

as high interest rates on their unpaid

balances when they cannot or do not make

12/ Business Week, Feb. 24, 1992 at

32. In 1981, there was $31.8 billion in

outstanding debt on bank credit cards.

See Credit Card Management, Card

Industry Directory: The Blue Book of the

Credit and Debit Card Industry in the

United States, 1992 ed. at 26. By 1992,

that figure had grown more than six

times to $189 billion; the average

outstanding balance on the major credit

cards exceeds $1200. See New York

Times, Business, September 13, 1992, at

13, citing Ram Research Corporation.

Credit cards are now used to charge more

than $200 billion for goods and services

per year. The Nilson Report, Nov. 14,

1991, at 5. Credit cards also generated

approximately $34.24 billion in revenues

for the banking industry and $5.83

billion in pre-tax profits. Id.

-17-

timely monthly payments. Thirty two

state legislatures have seen fit to

strike a better balance between the

average consumer and the credit card

industry. The First Circuit’s holding

would void the thoughtful decisions of

these policy-making bodies. The need

for this Court’s review is reinforced by

pending litigation potentially affected

by this ruling.+2/

The First Circuit has broadly

expanded the preemptive scope of DIDA.

The logic and language of the First

Circuit’s opinion suggests that not only

13/ The Commonwealth is aware of more

than 20 actions, most of which are class

actions, pending in seven jurisdictions,

which turn on the resolution of the

questions presented in this case. See

Laing v. U.S., 423 U.S. 161, 167 (1976)

(Solicitor General did not oppose

petition for certiorari because 70

pending federal tax cases depended on

resolution of conflict).

- 18-

iaiaecaiieanitiiauamatiaiaaiieaiii

late charges, but many other

loan-related charges and terms are now

beyond the reach of state regulation.

This interpretation would represent an

extraordinary incursion on state law and

state authority and may significantly

alter the state/federal balance in

banking regulation.

II. THE FIRST CIRCUIT’S DECISION

DISREGARDED THE PLAIN LANGUAGE

AND UNAMBIGUOUS LEGISLATIVE

HISTORY OF DIDA.

The plain language of DIDA §521

allows federally insured state-chartered

banks to export the "interest rate"

ceiling of their home states to foreign

14/

states.

14/ The language of DIDA §521 is

similar to the language of §85 of the

National Bank Act, 12 U.S.C. §85

("§85"). This Court held in Marquette

National Bank v. First of Omaha Service

Corp., 439 U.S. 299 (1978) that national

banks could disregard other states’

interest ceilings when doing business

outside their home states.

-19-

Section 521 of DIDA reads in pertinent

part as follows:

(I]f the applicable rate prescribed

in this subsection exceeds the rate

such State bank .. . would be

permitted to charge in the absence

of this subsection, such State bank

may, notwithstanding any State

constitution or statute which is

hereby preempted for the purposes of

this section, . . . charge on any

loan . . made .. . interest at [a

federal ceiling] rate ... or at

the rate allowed by the laws of the

State,... where the bank is located,

whichever may be greater.

12 U.S.C. §1831d(a) (1988 & Supp. 1990).

Congress, in the language of §521,

expressed its preemptory intent. The

scope of that preemption is clearly

limited to "interest." There is no

expressed intent to reach beyond

"interest" to deregulate late charges

and other loan fees.

The question at bottom is one of

statutory intent, and we accordingly

"begin with the language employed by

Congress and the assumption that the

-20-

ordinary meaning of that language

accurately expresses the legislative

purpose."

Morales v. Trans World Airlines, Inc.,

112 S. Ct. 2031, 2036 (1992) (quotation

marks and citations omitted).

The straightforward -- "interest"

means interest -- reading of the

statute, which the District Court

correctly applied, is consistent with

the legislative history of DIDA. In

1980, Congress faced a very clear

problem, and, in DIDA, crafted a very

focused, simple solution. Before the

Act, less-regulated deposit-taking

institutions -- especially money market

funds -- and the capital markets

generally were offering extremely high

interest rates on deposits and other

fixed income investments. Many state

banks were unable to offer competitive

-21-

rates for two reasons: (1) federal

regulations limited the maximum interest

rates state banks could pay on deposits;

and (2) state usury laws limited the

interest rates state banks could charge

on loans. The usury laws reinforced the

effect of the deposit rate regulations

by making it unprofitable to offer

competitive rates on deposits. The

final result, very destructive to local

economies, was that it was impossible

for many state banks to make loans --

lack of cash in-flow on the deposit side

(as a result of uncompetitive rates)

made cash out-flow on the loan side

impossible.

To solve this problem, Congress

raised the legal ceilings on both

-22-

5 ana ait

15/

deposit and loan interest rates.

15/ In DIDA, Congress changed the

financial system in "three particularly

critical ways":

The high interest rates available to

savers from money market funds,

certificates of deposits, and other

instruments has sharply discouraged

passbook savings accounts for those

who can afford an alternative, and

left the small saver dependent on

his passbook account severely

discriminated against. This bill

will phase out interest rate

ceilings to give small savers a

better break and to encourage

savings. At the same time it will

broaden the services available from

thrift institutions, and expand

their opportunities for improving

earnings.

Usury ceilings in some 24 States

have left lenders unable to lend and

borrowers unable to borrow,

diverting credit availability out of

these states and distorting the

economy in myriad ways. The bill

lifts usury ceilings to reflect the

realities of the marketplace and

makes it possible for banks and

thrift associations to continue

necessary lending. The provisions

protect States’ rights by allowing

States to restore the usury ceiling

promptly if they wish to do so.

(footnote continued)

-23-

Title II of DIDA deregulated deposit

interest rates; Title V deregulated loan

interest rates. Each section of Title V

deregulates rates for a particular type

of loan. Section 521, in particular,

deregulates loan interest rates for

state chartered banks. It does not

preempt late charges or other incidental

loan charges. An analytic reading of

§521 in conjunction with other sections

of Title V and their legislative

histories reinforces the conclusion that

late charges are not preempted by §521.

See the District Court’s opinion in this

case, App. C= 21 to 50.

Massachusetts’ ban on late charges

in no way “interferes with or is

(footnote continued)

126 Cong. Rec. 6965 (March 27, 1980).

Remarks of Rep. Henry S. Reuss,

Chairman, Committee on Banking, Finance

and Urban Affairs.

-24-

seaieiamaaciaaaaiaceiaiia sia aa aii

contrary to federal law" or Congress’s

purpose. Gade v. National Solid Wastes

Management Association, 112 S.€e. 2374,

2388 (1992). Massachusetts’ late charge

law does not limit Greenwood’s abilities

to charge and earn high interest rates

on its loans, or to pay competitive

rates on its deposits, or to supply

adequate credit to the economy.

The Massachusetts prohibition

against credit card late charges,

enacted in 1981, 2+2/ does not limit

bank interest income. It is a consumer

protection law designed to bar what the

Massachusetts legislature viewed as an

16/ Mass. Gen. Laws Ann. ch. 140,

§114B, amended by Mass. Stat. 1981, ch.

384, §1. See App Cc - 101 to 116.

-2 5-

unfair and deceptive practice.2Y The

Massachusetts statute was not preempted

by Congress in DIDA.

Nonetheless, the First Circuit

determined that Congress intended to

preempt late charge laws. The First

Circuit’s fundamental error was to read

state and federal cases applying usury

laws as a guide to Congress’s preemptive

intent in enacting §521. Finding the

17/ Massachusetts Representative

Antoine Aguiar, Chairman of the

Massachusetts Joint Committee on Banks

and Banking, refers to late fees and

Similar fees as "the notorious hidden

charges that we have fought for years to

eliminate." State House News Service,

October 26, 1981. App. C - 116.

Consumers shopping for credit are often

unaware of differences in late fee

practices, because they do not intend or

expect to make late payments. See

Statement of Basis and Purpose for FTC

Trade Regulation Rule Concerning Credit

Practices, 16 C.F.R. 444 (49 Fed. Reg.

7789, March 1, 1984). Credit card

advertising and marketing do not focus

on late fees except when required by

law. See 1988 Fair Credit and Charge

Card Disclosure Act, 15 U.S.C. §1637.

-26-

statute and legislative history unclear,

and finding no case law directly

addressing the issue of whether late

charges or other loan fees are preempted

by §521 or §85 of the National Bank Act

(12 U.S.C. §85) ,+8/ the court turned

to a completely distinct line of cases,

cases analyzing how interest should be

computed for the purpose of applying

usury laws. Courts in these cases often

broadly interpreted "interest" to cover

19/

a wide variety of charges.

18/ The court did reference a recent

preliminary late fee decision under the

National Bank Act in Nelson v. Citibank,

794 F. Supp. 312, 318 (D. Minn. 1992).