WASHINGTON - The California Supreme Court gave out-of-state credit card banks a major victory Friday, ruling that they can ignore the Golden State's restrictions on fee and service charges.
Lawyers familiar with the dispute said the 5-2 ruling could help the credit card industry in similar cases pending before three other state supreme courts and one federal appeals panel.
"This is a tremendous step forward for the banking industry," said Alan S. Kaplinsky, a partner at Philadelphia's Ballard, Spahr, Andrews & Ingersoll. "It is by far the best opinion written for the industry."
"It is so well done and so well reasoned, it should show the way for other courts," he added.
Acting California Chief Justice Stanley Mosk wrote that the National Bank Act gives a credit card bank's home state the power to restrict late fees and service charges.
Out-of-state banks are free to ignore more restrictive California laws, the court said.
Bankers fear that the courts will force them to follow fee and service- charge limits set by each state and territory.
The administrative burden could sink some national credit card operations, said Michael Crotty, deputy general counsel at the American Bankers Association. It also would increase costs for the banks, which would probably pass on the increase as higher interest rates.
Bankers have challenged fee-limit laws in several states. Cases are pending before the federal appeals court in Philadelphia and the Pennsylvania, Colorado, and New Jersey supreme courts. The industry has won on the lower-court level except in Pennsylvania.
The California case puts added pressure on the Pennsylvania Supreme Court to side with the banks, Mr. Crotty said.
In the national economy nowadays, states can't afford "to be out their on their own," he said. "It is increasingly apparent that is where Pennsylvania is today."
The California dispute began in 1992, when Barbara Smiley sued Citibank South Dakota for charging her a $15 late fee in violation of California law. A state appeals court ruled in 1993 that Ms. Smiley had failed to prove that Citibank broke the law.
The state Supreme Court pinned its ruling Friday to the definition of "interest." The court said the term - as defined by Congress in the 1864 National Bank Act - included all money paid to the creditor. The justices cited a series of court opinions from the mid-1800s, all which include late fees and annual service charges as interest.
"In view of the foregoing, we believe the term 'interest' in section 30 of the National Bank Act should be construed to cover late payment fees, if such fees are allowed by a national bank's home state," the court said.
The court also said that the law benefits the public by making those must responsible for defaults pay more. "Fairness is served thereby," the court said.
The court completely rejected Ms. Smiley's argument that interest includes only payments based on the loan amount.
"Her interpretation is peculiar," the court said. "It is not supported by either reason or authority. Hence, it cannot be accepted."
