Wednesday, January 22, 2014
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Due Process Does Not Prevent Excessive Fees in Contracts—Panel
By MICHAEL J. PEIL, Staff Writer
Constitutional due process does not prevent the enforcement of excessive credit cardholder penalty fees since they originate from private contract, the U.S. Ninth Circuit Court of Appeals held yesterday.
The panel, in an opinion by Judge Dorothy W. Nelson, affirmed the dismissal of a suit brought by a class of credit cardholders for failure state a claim, holding that the limitations imposed upon disproportionate punitive damages in the tort context does not apply where penalty fees arise from a private agreement.
The individual cardholders, who held consumer credit cards, filed suit claiming that fees imposed when a payment is made late or a cardholder exceeds a credit limit were purely punitive, and did not mirror the damage incurred by a bank since compensation for any delinquency was already established by the rising interest rates on the card.
Credit Card Issuers
The defendants—Bank of America, Capital One, Chase, Citigroup, Wells Fargo, and others—provided substantially similar agreements in their credit card agreements, which provided for penalties that would be incurred for delinquency, ranging from $15 to $39.
The fees are authorized by federal statute, under the National Bank Act, 12 U.S.C. §85 and §86, and the Depository Institutions and Monetary Control Act, 12. U.S.C. §1831d(a).
The statutes provide that banks may charge customers interest rates as permitted by state law in which the bank resides.
Federal regulators used the term “interest,” Nelson said, to include both the annual percentage rates charged on a credit balance and any payments made to compensate creditors when a borrower defaults upon a provision of which the credit was extended.
The statutes also have a remedial provision for cardholders, however, which permit a borrower to recover damages if charged in excess of what the law permits.
Plaintiff’s Argument
The cardholders argued that, under the remedial provision, the credit card fees exceeded what the law permits, because the penalties are a liquidated damage clause, which is to be paid strictly as a punitive award for the bank, without any relation to the bank’s actual damages. As such, they contended, the fees deserved the same substantive due process analysis as torts law, which provides that constitutional due process is violated when punitive damages awards are disproportionate to actual damages.
Nelson disagreed, saying:
“[C]onsidering that the penalty clauses at issue originate from the parties’ private—albeit adhesive—contracts, they are distinct from the jury-determined punitive damages awards at issue [in torts cases]…We therefore conclude that the due process analysis developed in the context of jury-awarded punitive damages is not applicable to contractual penalty clauses.”
In a concurring opinion, Judge Stephen Reinhardt reluctantly agreed, saying:
“[I]f due process is violated when courts award disproportionate punitive damages in the tort context, due process is equally violated when courts enforce the punitive and substantially more disproportionate penalty clauses in contracts of adhesion. I ultimately agree with the opinion of the court, however, that the Constitution has not yet been so interpreted.”
The cardholders also disputed the dismissal of their claim under California’s Unfair Competition Law, of the Business & Professional Code §17200, which provides that violations of federal or state law are independently actionable as unlawful practices.
Unlawful Practices
The panel disagreed, however, saying that because the National Bank Act and Monetary Control Act permit banks to charge fees for the provisions of credit agreements, the fees are not in violation of any law, prohibiting the invocation of §17200 as a basis for the cardholders claims.
The court noted that the fees provided for in credit card agreements have been receiving substantial legislative interest as of late, citing the passage of the 2009 Credit Card Accountability Responsibility and Disclosure Act, which prohibits more than one overlimit fee per billing cycle. But as of now, the court said, the fees remain authorized by statute.
The case is Pinon v. Bank of America; 08-15218.
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