The U.S. Court of Appeals for the Ninth Circuit recently held that § 944
of the Delaware Banking Act permits a creditor to make a discretionary
increase in a consumer's interest rate following a late payment.
A copy of the opinion is available at:
The cardholder plaintiff brought a putative class action against Chase
Manhattan Bank, USA, N.A. ("Chase"), alleging that Chase unlawfully
increased his interest rate retroactively to the beginning of his payment
cycle as a result of a late payment to Chase or another creditor. The
plaintiff claimed the rate increase violated TILA because Chase failed to
give him notice of the increase until it had already taken effect. He
also asserted violations of state law, claiming that the Delaware Banking
Act did not authorize discretionary post-default rate increases, but only
rates of interest that "vary in accordance with a schedule or formula."
Manhattan Bank, USA, N.A. ("Chase"), alleging that Chase unlawfully
increased his interest rate retroactively to the beginning of his payment
cycle as a result of a late payment to Chase or another creditor. The
plaintiff claimed the rate increase violated TILA because Chase failed to
give him notice of the increase until it had already taken effect. He
also asserted violations of state law, claiming that the Delaware Banking
Act did not authorize discretionary post-default rate increases, but only
rates of interest that "vary in accordance with a schedule or formula."
In a prior ruling in this same lawsuit, the Ninth Circuit reversed the
dismissal of the plaintiff's TILA claims, finding that he stated a TILA
claim for failure to give notice of a discretionary interest rate increase
due to consumer default, and also several state law claims under Delaware
law. The Supreme Court then reversed the Ninth Circuit with respect to
the TILA claim, and remanded for further proceedings. (See our prior
update, below.) The Supreme Court did not specifically address the state
law claims.
dismissal of the plaintiff's TILA claims, finding that he stated a TILA
claim for failure to give notice of a discretionary interest rate increase
due to consumer default, and also several state law claims under Delaware
law. The Supreme Court then reversed the Ninth Circuit with respect to
the TILA claim, and remanded for further proceedings. (See our prior
update, below.) The Supreme Court did not specifically address the state
law claims.
On remand, the Ninth Circuit held that since it made its previous ruling,
there had been significant legal developments with respect to the state
law claims. The Court noted that the Seventh Circuit in Swanson v. Bank
of America, 563 F.3d 634 (7th Cir. 2009), and the First Circuit in Shaner
v. Chase Bank USA, N.A., 587 F.3d 488 (1st Cir. 2009), disagreed with the
Ninth Circuit's prior opinion interpreting § 944 of the Delaware Banking
Act.
there had been significant legal developments with respect to the state
law claims. The Court noted that the Seventh Circuit in Swanson v. Bank
of America, 563 F.3d 634 (7th Cir. 2009), and the First Circuit in Shaner
v. Chase Bank USA, N.A., 587 F.3d 488 (1st Cir. 2009), disagreed with the
Ninth Circuit's prior opinion interpreting § 944 of the Delaware Banking
Act.
Moreover, the Court found that a 2010 amendment to § 944 clarified the
statute. The amendment added the following language: "Nothing herein
precludes a bank from charging or reserving a right to charge, by
discretion or otherwise, a rate lower than any maximum rate provided for
in any schedule or formula."
statute. The amendment added the following language: "Nothing herein
precludes a bank from charging or reserving a right to charge, by
discretion or otherwise, a rate lower than any maximum rate provided for
in any schedule or formula."
The cardholder plaintiff argued that the Ninth Circuit should not apply
the 2010 amendment retroactively. However, the court stated that "the
amendment here does not alter the meaning of § 944 but merely clarifies
the meaning of the prior language, to the extent the former provision was
ambiguous and leading to conflicting results in the courts."
the 2010 amendment retroactively. However, the court stated that "the
amendment here does not alter the meaning of § 944 but merely clarifies
the meaning of the prior language, to the extent the former provision was
ambiguous and leading to conflicting results in the courts."
The plaintiff further argued that even as clarified § 944 required the
rate increase to be in accordance with some "schedule or formula." The
Ninth Circuit disagreed, finding "the statute clearly indicates that a
'permissible schedule or formula' can include a provision to change the
interest rate 'contingent upon the happening of any event or circumstance
specified in the plan,' which may include borrower default."
rate increase to be in accordance with some "schedule or formula." The
Ninth Circuit disagreed, finding "the statute clearly indicates that a
'permissible schedule or formula' can include a provision to change the
interest rate 'contingent upon the happening of any event or circumstance
specified in the plan,' which may include borrower default."
The Ninth Circuit concluded that because Delaware law permitted the
actions taken by Chase, the plaintiff's "state law causes of action [were]
foreclosed."
actions taken by Chase, the plaintiff's "state law causes of action [were]
foreclosed."
Finally, the Court held that the plaintiff failed to state a claim for
consumer fraud because "Chase openly and expressly notifies cardholders of
the actions it reserves the right to take in the event of default." The
Court also held that the plaintiff failed to state a claim for breach of
an implied duty of good faith and fair dealing "because the contract
already contained an express obligation for Chase to provide notices as
required by law" and therefore the implied covenant of good faith and fair
dealing did not come into play.
consumer fraud because "Chase openly and expressly notifies cardholders of
the actions it reserves the right to take in the event of default." The
Court also held that the plaintiff failed to state a claim for breach of
an implied duty of good faith and fair dealing "because the contract
already contained an express obligation for Chase to provide notices as
required by law" and therefore the implied covenant of good faith and fair
dealing did not come into play.
Eric Tsai
McGinnis Wutscher Beiramee LLP
Emerald Plaza
402 West Broadway, Suite 400
San Diego, CA 92101
Direct: (619) 955-6989
McGinnis Wutscher Beiramee LLP
Emerald Plaza
402 West Broadway, Suite 400
San Diego, CA 92101
Direct: (619) 955-6989
Fax: (866) 581-9302
Mobile: (714) 600-6000
Email: etsai@mwbllp.com
Admitted to practice law in California, Nevada and Oregon
McGinnis Wutscher Beiramee LLP
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