An appeals court in Los Angeles has ruled that Citicorp's credit card bank in South Dakota can export that state's unregulated rates and fees to customers in California.
In a 2-to-I decision issued Monday, the state Court of Appeal affirmed a trial court's decision to dismiss a class-action claim that Citibank charged excessive late fees on MasterCard and Preferred Visa accounts.
In itself, the California judges' ruling will not affect policy in other states. Nor will it be binding on another rate-exportation case, Harris v. Chase Manhattan, that is pending before a federal district court in San Francisco.
However, the Citibank decision, in a case called Smiley v. Citibank South Dakota, follows 23 other rulings that allowed banks to export fees and interest rates beyond their state of origin.
"As you get more and more of these decisions favoring the banking industry, you begin to develop a body of law that encompasses a very large area of the country," said Anita Boomstein, a partner in Hughes Hubbard & Reed, New York.
In effect, she said, it makes it harder for consumer class actions to prevail against banks.
Another Ruling for Banks
"This is a continuation of a line of decisions favoring the banks," said a Citibank spokeswoman. "Obviously, we're very pleased with it."
Ironically, the California Bankers Association supported the appellate ruling even though it has been complaining that California card issuers face pricing regulations that make it difficult to compete against nationally marketed products.
"In this particular instance, it has the quirky result of favoring something we support philosophically, but it hurts us competitively," said Gregory O. Wilhelm, director- of government relations for the. association.
The ruling comes as the California legislature considers a credit card deregulation bill that would raise the permitted late fee from $5.75 to at least $10, and up to $15, depending on the extent of the lateness.
"The exportation doctrine is not limited to credit cards," Mr. Wilhelm said. "For our banks, especially those with multistate operations, it makes a lot of sense to provide a uniform product with uniform pricing to all customers wherever they're located."
Because Citibank offers cards nationally, the California case was governed by the National Banking Act. One of the sticking points in interpreting the law is whether it covers fees in addition to interest rates. A number of courts have ruled yes, and the Office of the Comptroller of Currency has issued rules on that assumption.
The U.S. Supreme Court, in the 1978 case Marquette National Bank of Minneapolis v. First of Omaha Corp., ruled that a national bank could export interest rates beyond its home state.
In the Citibank case, the two-judge majority pointed out that borrowers had a choice to borrow in-state or from a national bank outside, and that the national bank would operate under rules that preempt the state's.
'Good for the Industry'
"This is an excellent ruling for the banks," Ms. Boomstein said. "It's very good for the industry because California has been a tough state with consumer laws."
The California plaintiffs, represented by the Haverford, Pa., firm Chimicles, Jacobsen & Tikellis, plan an appeal. Partner Michael Donovan said he was heartened by the California case's dissent, which urged a Supreme Court review.
The dissent took exception to a 1992 First U.S. Circuit Court of Appeals case, Greenwood Trust Co. v. Massachusetts, which said late-payment fees fall in the category of interest under federal law.
"Common citizens are unlikely to-think of the interest rate as including late payment fees," the dissent said. "If states are allowed to define interest as broadly as they like, late-payment fees may only be the beginning."
