Court Revives Lawsuit Over Balance Transfer Interest Rate Offer

Monday, January 26, 2009

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Court Revives Lawsuit Over Balance Transfer Interest Rate Offer

By STEVEN M. ELLIS, Staff Writer

The Ninth U.S. Circuit Court of Appeals Friday revived a man’s claim that JP Morgan Chase Bank violated California law when it charged interest on his transferred balance at a rate much higher than advertised based on his single late payment to a different creditor three months earlier.

Noting that the fine print in the balance transfer offer mailed to Timothy Hauk disclosed his lack of eligibility for the lower rate, the court nonetheless reversed summary judgment on Hauk’s state law claims because a material issue of fact existed whether the bank knew or should have known about the late payment before he accepted the offer.

Chase sent Hauk the balance transfer offer in October 2004, offering a promotional fixed annual percentage rate of 4.99 percent for any transferred balances. Hauk—who had opened a credit card account with Chase the previous year—accepted the offer, and transferred a $10,200 balance from another creditor during a telephone conversation with a Chase representative.

However, the offer incorporated terms of Chase’s card member agreement and indicated that Chase could impose an increased rate if Hauk made a late payment to Chase or any other creditors. Hauk initially received the 4.99 percent APR, but the following month’s statement showed a non-preferred rate of 28.74 percent, resulting in a $241 finance charge.

When Hauk contested the charge, he was informed that he was no longer eligible to receive the promotional rate because a credit reporting agency indicated that Hauk’s final mortgage payment in July 2004 had been made one day after the expiration of a 30-day grace period.

Hauk sued, claiming, among others, violations of the federal Truth in Lending Act and California’s Unfair Competition Law and False Advertising Law, but U.S. District Judge Stephen V. Wilson of the Central District of California granted summary judgment for the bank.

Wilson opined that Chase’s disclosures defeated the claims and that Hauk could not prove Chase had knowledge of his late payment before he accepted the offer, but U.S. District Judge William B. Shubb of the Eastern District of California, sitting by designation, rejected Wilson’s latter conclusion on appeal.

Affirming as to the TILA claim, Shubb noted the act is intended to “assure a meaningful disclosure of credit terms,” and wrote that a footnote in the offer indicating it was subject to eligibility, and another provision stating eligibility could change “if any minimum payment on any loan or account of yours with us or your other creditors was not made by the payment due date,” sufficiently disclosed Hauk might be ineligible.

But Shubb concluded that Chase could not rely on compliance with the TILA’s disclosure requirements to shield it from liability under Hauk’s state law claims if the bank knew or should have known about the late payment before Hauk’s acceptance, and he reversed, citing evidence from Hauk raising a question as to the bank’s knowledge.

Although neither party was able to produce direct evidence unequivocally establishing when the credit reporting agency first noted Hauk’s late payment on his credit report, Shubb wrote that Hauk provided circumstantial evidence from which a jury could conclude both that Chase discovered or should have discovered the payment when it reviewed his credit report in the months leading up to his acceptance, and that the bank had waived its right to impose the higher rate when it failed to do so immediately upon discovery of the late payment.

Shubb further noted, however, that the district court could decline to exercise supplementary jurisdiction and remand Hauk’s remaining claims to state court, given that summary judgment on Hauk’s TILA claim eliminated any federal question giving rise to subject matter jurisdiction.

Judges Consuelo M. Callahan and Sandra S. Ikuta joined Shubb in his opinion.

The case is Hauk v. J.P. Morgan Chase Bank USA, 06-56846.