Smiley v. Citibank
Encyclopedia
Smiley v. Citibank, is a 1996 U.S. Supreme Court
decision upholding a regulation of the Comptroller of Currency which included credit card
late fee
s and other penalties within the definition of interest and thus prevented individual states from limiting them when charged by nationally-chartered banks. Justice Antonin Scalia
wrote for a unanimous court that the regulation was reasonable enough under the Court's own Chevron
standard for the justices to defer to the Comptroller.
The decision, which had begun as a class action
in California, was seen as a victory for banks and credit-card issuers, who could mostly charge late fees as they pleased. For that same reason consumer advocates
were displeased, warning that late fees could rise to previously unseen levels. They did, and one of the Citibank attorneys has expressed regret for his involvement.
decision, the court had unanimously held that the National Banking Act
of 1863, which created nationally-chartered banks in addition to the state ones that had previously existed, barred states from enforcing their anti-usury laws, which set caps on interest rate
s, against any national bank based in another state. Two years later, Citibank
took advantage of that decision and moved its money-losing credit-card operations to South Dakota
, after persuading that state's legislature and governor
to repeal its anti-usury law. Other states and banks followed the example, and by 1990 the number of credit cards in circulation had doubled, while the average household's revolving
balance
increased more than fivefold. At the time late fees were bringing in $2 billion annually to the industry.
The increased use of more freely available credit changed the American economy
, but not without creating some backlash. Consumer advocates complained that some issuers were using late fee
s of $5 or $10, charged if a single month's payment was even one day overdue, to gouge extra profits from customers who might otherwise be borrowing and spending responsibly. Laws in some states limited those fees, yet companies and banks continued to charge rates above those limits, claiming the late fees were a form of interest and thus not subject to the laws of those states as long as they were headquartered elsewhere.
, Michael Donovan, Michael Malakoff and Ann Miller had filed one of their own, with the intent of taking it to the Supreme Court and forcing a resolution of the issue. Barbara Smiley, a California
woman who had filed a class action
against Citibank
's South Dakota subsidiary
in her state's courts in 1992 alleging that the $15 late fee she was charged for her Citibank Classic card violated California law. After reading about the Pennsylvania lawyers in Business Week, she contacted them to represent her.
Citibank responded to Smiley's original filing with a motion to dismiss on the grounds that late fees were interest covered by the National Banking Act. California's Superior Court
in Los Angeles County
denied the motion, but after Citibank appealed that denial, the Second District of the California Courts of Appeal ordered the lower court to either grant the motion or explain why it wasn't. The Superior Court granted the motion and dismissed the case, a decision upheld on appeal.
On March 3, 1995, after the Superior Court had dismissed the complaint, the Office of the Comptroller of Currency (OCC), the official charged by the National Banking Act with regulating national banks, issued a proposed regulation defining "interest" under the Act as including "any payment compensating a creditor or prospective creditor ... [for] any default or breach by a borrower of a condition upon which credit was extended." It specifically included late fees, among many others that had been criticized as unfair and misleading to consumers. It was formally adopted a year later.
Later in 1995, the California Supreme Court agreed to review Smiley's case, and did so. It affirmed the lower courts, but with two justices dissenting. Since New Jersey
's Supreme Court
had reached the opposite conclusion in a similar case, the Supreme Court granted Smiley's certiorari
petition.
He claimed that it was not entitled to the deference the Court accorded agencies of the executive branch. It was not, he said, a reasonable interpretation of the National Banking Act and thus, per the rule it had established in the 1984 Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc.
case, the Court should review it afresh and rule on whether it was the best interpretation of the statute.
Richard Kendall of the Los Angeles
firm Shearman & Sterling
argued the case for Citibank. He was joined by Irving Gornstein on behalf of the government as amicus curiae
. Both argued for the Court to defer to the Comptroller's statutory interpretation.
, the Court ruled unanimously in Citibank's favor. Antonin Scalia
wrote for the Court.
The cases from New Jersey and California, he uncharacteristically agreed, made it "difficult indeed to contend that the word 'interest' in the National Bank Act is unambiguous with regard to the point at issue here." Nevertheless, he rejected all of Donovan's arguments.
The Court did not find the timing of the regulation to be fatal. "[N]either antiquity nor contemporaneity with the statute is a condition of validity." It was "irrelevant" that it was issued in advance of a case to be heard by the Supreme Court. He also found the regulation to be rational. "It seems to us perfectly possible to draw a line, as the regulation does, between [penalties] and ... all other payments." Nor did he find the prior documents in which representatives of the Comptroller's office had said that they did not consider late fees could be considered as interest payments adequately controlling since they did not fully represent an official agency position. "What these statements show, if anything, is that there was good reason for the Comptroller to promulgate the new regulation, in order to eliminate uncertainty and confusion."
After dealing with another issue Donovan raised, that the regulation was not entitled to deference because it pre-empted state laws, by saying two issues had been confused and thus that question was moot, Scalia said "[T]he question before us is not whether it represents the best interpretation of the statute, but whether it represents a reasonable one. The answer is obviously yes." Legal dictionaries of the late 19th century, as well as the Court's own jurisprudence of that era, did not define interest so narrowly, and indeed such flat fees were often intended to evade state anti-usury laws, as state courts of that era had ruled. Finally, he rejected an argument that penalties were inherently separate from interest by suggesting the petitioner had misread the case they were relying on and citing what he considered more appropriate. The section of the National Banking Act at issue, he noted, did not distinguish between interest and penalties.
spokeswoman. "There's no reason why those of us who pay on time should subsidize those who do not", said Kendall. That's not equity."
On the other side, Donovan described the result as "an unfortunate interpretation ... that will allow small states to override the longstanding consumer protection laws of more heavily populated ... states." His co-counsel Ann Miller called the decision "incorrect and shortsighted ... I don't think that the answer the U.S. Supreme Court came up with is going to be the long-term resolution of the problems posed by old laws trying to deal with new and very changed banking practices."
Donovan was especially critical of the role played by the OCC. "We got tackled by a player standing on the sideline as we were sprinting toward the goal line". However, it did show him that he'd underestimated the role played by a regulatory body that, he recalled William Rehnquist
saying during oral argument, had never come before the Court with a regulation that wasn't favorable to the banking industry. "We should have focused more on the appropriateness of an executive agency defining what Congress meant by a law as opposed to a court defining what Congress meant by a law."
"I certainly didn't imagine that someday we might've ended up creating Frankenstein," he told PBS
's Frontline a decade later. "Millions and millions of people are being excessively charged late fees and bad-check fees and over-the-limit fees and then these 25 percent APRs to make the profits for the industry, so that they can keep the rates lower for people who are rate sensitive, who can in fact shop the system."
Supreme Court of the United States
The Supreme Court of the United States is the highest court in the United States. It has ultimate appellate jurisdiction over all state and federal courts, and original jurisdiction over a small range of cases...
decision upholding a regulation of the Comptroller of Currency which included credit card
Credit card
A credit card is a small plastic card issued to users as a system of payment. It allows its holder to buy goods and services based on the holder's promise to pay for these goods and services...
late fee
Late fee
A late fee, also known as a late fine or a past due fee, is a charge levied against a client by a company or organization for not paying a bill or returning a rented or borrowed item by its due date. Its use is most commonly associated with businesses like creditors, video rental outlets and...
s and other penalties within the definition of interest and thus prevented individual states from limiting them when charged by nationally-chartered banks. Justice Antonin Scalia
Antonin Scalia
Antonin Gregory Scalia is an American jurist who serves as an Associate Justice of the Supreme Court of the United States. As the longest-serving justice on the Court, Scalia is the Senior Associate Justice...
wrote for a unanimous court that the regulation was reasonable enough under the Court's own Chevron
Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc.
Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 , was a case in which the United States Supreme Court set forth the legal test for determining whether to grant deference to a government agency's interpretation of a statute which it administers...
standard for the justices to defer to the Comptroller.
The decision, which had begun as a class action
Class action
In law, a class action, a class suit, or a representative action is a form of lawsuit in which a large group of people collectively bring a claim to court and/or in which a class of defendants is being sued...
in California, was seen as a victory for banks and credit-card issuers, who could mostly charge late fees as they pleased. For that same reason consumer advocates
Consumerism
Consumerism is a social and economic order that is based on the systematic creation and fostering of a desire to purchase goods and services in ever greater amounts. The term is often associated with criticisms of consumption starting with Thorstein Veblen...
were displeased, warning that late fees could rise to previously unseen levels. They did, and one of the Citibank attorneys has expressed regret for his involvement.
Background
In its 1978 Marquette BankMarquette Nat. Bank of Minneapolis v. First of Omaha Service Corp.
Marquette Nat. Bank of Minneapolis v. First of Omaha Service Corp. , is a unanimous 1978 U.S. Supreme Court decision holding that state anti-usury laws regulating interest rates cannot be enforced against nationally-chartered banks based in other states...
decision, the court had unanimously held that the National Banking Act
National Banking Act
The National Banking Acts of 1863 and 1864 were two United States federal laws that established a system of national charters for banks, and created the United States National Banking System. They encouraged development of a national currency backed by bank holdings of U.S...
of 1863, which created nationally-chartered banks in addition to the state ones that had previously existed, barred states from enforcing their anti-usury laws, which set caps on interest rate
Interest rate
An interest rate is the rate at which interest is paid by a borrower for the use of money that they borrow from a lender. For example, a small company borrows capital from a bank to buy new assets for their business, and in return the lender receives interest at a predetermined interest rate for...
s, against any national bank based in another state. Two years later, Citibank
Citibank
Citibank, a major international bank, is the consumer banking arm of financial services giant Citigroup. Citibank was founded in 1812 as the City Bank of New York, later First National City Bank of New York...
took advantage of that decision and moved its money-losing credit-card operations to South Dakota
South Dakota
South Dakota is a state located in the Midwestern region of the United States. It is named after the Lakota and Dakota Sioux American Indian tribes. Once a part of Dakota Territory, South Dakota became a state on November 2, 1889. The state has an area of and an estimated population of just over...
, after persuading that state's legislature and governor
Bill Janklow
William John "Bill" Janklow served as the 25th Attorney General of South Dakota, before being elected as South Dakota's 27th and 30th Governor, as well as to the United States House of Representatives where he served for a little more than a year. A Republican, Janklow's career has continued as a...
to repeal its anti-usury law. Other states and banks followed the example, and by 1990 the number of credit cards in circulation had doubled, while the average household's revolving
Revolving credit
Revolving credit is a type of credit that does not have a fixed number of payments, in contrast to installment credit. Examples of revolving credits used by consumers include credit cards. Corporate revolving credit facilities are typically used to provide liquidity for a company's day-to-day...
balance
Balance (accounting)
In banking and accountancy, the outstanding balance is the amount of money owed, , that remains in a deposit account at a given date, after all past remittances, payments and withdrawal have been accounted for. It can be positive or negative ....
increased more than fivefold. At the time late fees were bringing in $2 billion annually to the industry.
The increased use of more freely available credit changed the American economy
Economy of the United States
The economy of the United States is the world's largest national economy. Its nominal GDP was estimated to be nearly $14.5 trillion in 2010, approximately a quarter of nominal global GDP. The European Union has a larger collective economy, but is not a single nation...
, but not without creating some backlash. Consumer advocates complained that some issuers were using late fee
Late fee
A late fee, also known as a late fine or a past due fee, is a charge levied against a client by a company or organization for not paying a bill or returning a rented or borrowed item by its due date. Its use is most commonly associated with businesses like creditors, video rental outlets and...
s of $5 or $10, charged if a single month's payment was even one day overdue, to gouge extra profits from customers who might otherwise be borrowing and spending responsibly. Laws in some states limited those fees, yet companies and banks continued to charge rates above those limits, claiming the late fees were a form of interest and thus not subject to the laws of those states as long as they were headquartered elsewhere.
Litigation and regulation
Activist lawyers were challenging this notion in lawsuits across the country, mostly in state courts, with different degrees of success at different levels. In PennsylvaniaPennsylvania
The Commonwealth of Pennsylvania is a U.S. state that is located in the Northeastern and Mid-Atlantic regions of the United States. The state borders Delaware and Maryland to the south, West Virginia to the southwest, Ohio to the west, New York and Ontario, Canada, to the north, and New Jersey to...
, Michael Donovan, Michael Malakoff and Ann Miller had filed one of their own, with the intent of taking it to the Supreme Court and forcing a resolution of the issue. Barbara Smiley, a California
California
California is a state located on the West Coast of the United States. It is by far the most populous U.S. state, and the third-largest by land area...
woman who had filed a class action
Class action
In law, a class action, a class suit, or a representative action is a form of lawsuit in which a large group of people collectively bring a claim to court and/or in which a class of defendants is being sued...
against Citibank
Citibank
Citibank, a major international bank, is the consumer banking arm of financial services giant Citigroup. Citibank was founded in 1812 as the City Bank of New York, later First National City Bank of New York...
's South Dakota subsidiary
Subsidiary
A subsidiary company, subsidiary, or daughter company is a company that is completely or partly owned and wholly controlled by another company that owns more than half of the subsidiary's stock. The subsidiary can be a company, corporation, or limited liability company. In some cases it is a...
in her state's courts in 1992 alleging that the $15 late fee she was charged for her Citibank Classic card violated California law. After reading about the Pennsylvania lawyers in Business Week, she contacted them to represent her.
Citibank responded to Smiley's original filing with a motion to dismiss on the grounds that late fees were interest covered by the National Banking Act. California's Superior Court
Superior Courts of California
The Superior Courts of California are the superior courts in the U.S. state of California with general jurisdiction to hear and decide any civil or criminal action which is not specially designated to be heard in some other court or before a government agency...
in Los Angeles County
Los Angeles County, California
Los Angeles County is a county in the U.S. state of California. As of 2010 U.S. Census, the county had a population of 9,818,605, making it the most populous county in the United States. Los Angeles County alone is more populous than 42 individual U.S. states...
denied the motion, but after Citibank appealed that denial, the Second District of the California Courts of Appeal ordered the lower court to either grant the motion or explain why it wasn't. The Superior Court granted the motion and dismissed the case, a decision upheld on appeal.
On March 3, 1995, after the Superior Court had dismissed the complaint, the Office of the Comptroller of Currency (OCC), the official charged by the National Banking Act with regulating national banks, issued a proposed regulation defining "interest" under the Act as including "any payment compensating a creditor or prospective creditor ... [for] any default or breach by a borrower of a condition upon which credit was extended." It specifically included late fees, among many others that had been criticized as unfair and misleading to consumers. It was formally adopted a year later.
Later in 1995, the California Supreme Court agreed to review Smiley's case, and did so. It affirmed the lower courts, but with two justices dissenting. Since New Jersey
New Jersey
New Jersey is a state in the Northeastern and Middle Atlantic regions of the United States. , its population was 8,791,894. It is bordered on the north and east by the state of New York, on the southeast and south by the Atlantic Ocean, on the west by Pennsylvania and on the southwest by Delaware...
's Supreme Court
New Jersey Supreme Court
The New Jersey Supreme Court is the highest court in the U.S. state of New Jersey. It has existed in three different forms under the three different state constitutions since the independence of the state in 1776...
had reached the opposite conclusion in a similar case, the Supreme Court granted Smiley's certiorari
Certiorari
Certiorari is a type of writ seeking judicial review, recognized in U.S., Roman, English, Philippine, and other law. Certiorari is the present passive infinitive of the Latin certiorare...
petition.
Before the Court
Donovan argued Smiley's case before the justices. Late fees, he said, were not interest whatever the Comptroller's regulation said since they were fixed amounts and did not vary based on the money owed or schedule of payments. He also pointed to two previous documents from OCC suggesting that, in the past, it did not consider penalty fees of any kind to be interest. For more than a hundred years, he noted, OCC had not seen fit to define specifically what kind of payments were considered interest. Yet, coincidentally, only when a case turning on that issue appeared headed to the Supreme Court did it see a need to do so.He claimed that it was not entitled to the deference the Court accorded agencies of the executive branch. It was not, he said, a reasonable interpretation of the National Banking Act and thus, per the rule it had established in the 1984 Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc.
Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc.
Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 , was a case in which the United States Supreme Court set forth the legal test for determining whether to grant deference to a government agency's interpretation of a statute which it administers...
case, the Court should review it afresh and rule on whether it was the best interpretation of the statute.
Richard Kendall of the Los Angeles
Los Angeles, California
Los Angeles , with a population at the 2010 United States Census of 3,792,621, is the most populous city in California, USA and the second most populous in the United States, after New York City. It has an area of , and is located in Southern California...
firm Shearman & Sterling
Shearman & Sterling
Shearman & Sterling LLP is a law firm headquartered in New York City with 20 offices located in major financial centers around the world founded in 1873. It is well known for both its litigation and transactional capabilities, especially in International Arbitration, Capital Markets, Finance, and...
argued the case for Citibank. He was joined by Irving Gornstein on behalf of the government as amicus curiae
Amicus curiae
An amicus curiae is someone, not a party to a case, who volunteers to offer information to assist a court in deciding a matter before it...
. Both argued for the Court to defer to the Comptroller's statutory interpretation.
Decision
Two months after oral argumentOral argument
Oral arguments are spoken presentations to a judge or appellate court by a lawyer of the legal reasons why they should prevail. Oral argument at the appellate level accompanies written briefs, which also advance the argument of each party in the legal dispute...
, the Court ruled unanimously in Citibank's favor. Antonin Scalia
Antonin Scalia
Antonin Gregory Scalia is an American jurist who serves as an Associate Justice of the Supreme Court of the United States. As the longest-serving justice on the Court, Scalia is the Senior Associate Justice...
wrote for the Court.
The cases from New Jersey and California, he uncharacteristically agreed, made it "difficult indeed to contend that the word 'interest' in the National Bank Act is unambiguous with regard to the point at issue here." Nevertheless, he rejected all of Donovan's arguments.
The Court did not find the timing of the regulation to be fatal. "[N]either antiquity nor contemporaneity with the statute is a condition of validity." It was "irrelevant" that it was issued in advance of a case to be heard by the Supreme Court. He also found the regulation to be rational. "It seems to us perfectly possible to draw a line, as the regulation does, between [penalties] and ... all other payments." Nor did he find the prior documents in which representatives of the Comptroller's office had said that they did not consider late fees could be considered as interest payments adequately controlling since they did not fully represent an official agency position. "What these statements show, if anything, is that there was good reason for the Comptroller to promulgate the new regulation, in order to eliminate uncertainty and confusion."
After dealing with another issue Donovan raised, that the regulation was not entitled to deference because it pre-empted state laws, by saying two issues had been confused and thus that question was moot, Scalia said "[T]he question before us is not whether it represents the best interpretation of the statute, but whether it represents a reasonable one. The answer is obviously yes." Legal dictionaries of the late 19th century, as well as the Court's own jurisprudence of that era, did not define interest so narrowly, and indeed such flat fees were often intended to evade state anti-usury laws, as state courts of that era had ruled. Finally, he rejected an argument that penalties were inherently separate from interest by suggesting the petitioner had misread the case they were relying on and citing what he considered more appropriate. The section of the National Banking Act at issue, he noted, did not distinguish between interest and penalties.
Reaction
Lawyers and lobbyists for the credit-card industry, who had feared costly litigation and a myriad of state laws if the Court ruled against OCC, praised the decision. "It's a big victory for the 97 percent or so of cardholders who pay their bills on time," said a CitibankCitibank
Citibank, a major international bank, is the consumer banking arm of financial services giant Citigroup. Citibank was founded in 1812 as the City Bank of New York, later First National City Bank of New York...
spokeswoman. "There's no reason why those of us who pay on time should subsidize those who do not", said Kendall. That's not equity."
On the other side, Donovan described the result as "an unfortunate interpretation ... that will allow small states to override the longstanding consumer protection laws of more heavily populated ... states." His co-counsel Ann Miller called the decision "incorrect and shortsighted ... I don't think that the answer the U.S. Supreme Court came up with is going to be the long-term resolution of the problems posed by old laws trying to deal with new and very changed banking practices."
Donovan was especially critical of the role played by the OCC. "We got tackled by a player standing on the sideline as we were sprinting toward the goal line". However, it did show him that he'd underestimated the role played by a regulatory body that, he recalled William Rehnquist
William Rehnquist
William Hubbs Rehnquist was an American lawyer, jurist, and political figure who served as an Associate Justice on the Supreme Court of the United States and later as the 16th Chief Justice of the United States...
saying during oral argument, had never come before the Court with a regulation that wasn't favorable to the banking industry. "We should have focused more on the appropriateness of an executive agency defining what Congress meant by a law as opposed to a court defining what Congress meant by a law."
Aftermath
Duncan McDonald, formerly general counsel for Citibank's credit-card division. He and others had merely hoped to have the freedom to set the fees at the $15 they had calculated as a fair market rate, but afterwards some cards late fees went as high as $39."I certainly didn't imagine that someday we might've ended up creating Frankenstein," he told PBS
Public Broadcasting Service
The Public Broadcasting Service is an American non-profit public broadcasting television network with 354 member TV stations in the United States which hold collective ownership. Its headquarters is in Arlington, Virginia....
's Frontline a decade later. "Millions and millions of people are being excessively charged late fees and bad-check fees and over-the-limit fees and then these 25 percent APRs to make the profits for the industry, so that they can keep the rates lower for people who are rate sensitive, who can in fact shop the system."
See also
- List of class action lawsuits
- List of United States Supreme Court cases, volume 517
- List of United States Supreme Court cases
- Lists of United States Supreme Court cases by volume
- List of United States Supreme Court cases by the Rehnquist Court