Citibank and Dean Witter, Discover & Co. said they plan to appeal to the U.S. Supreme Court to overturn a ruling that prevents credit card issuers from exporting late fees to New Jersey.
The New Jersey Supreme Court ruled Monday that credit card issuers based in other states cannot charge late fees to Garden State residents. The 4- to-3 ruling is directly at odds with the decisions of two other state supreme courts.
Lawyers on both sides of the issue agreed that the conflict between state supreme court rulings makes a compelling case for Supreme Court review, perhaps by next spring.
Review by the high court is "beginning to look like the only solution to the problem," said Michael Crotty, deputy general counsel at the American Bankers Association.
Michael Donovan, lead counsel for the plaintiffs in the New Jersey case, said the conflict between the state tribunals is "direct and dramatic."
Because Citibank and Dean Witter, which issues the Discover card, market credit cards nationally, the New Jersey case was governed by the National Bank Act.
Among the questions that could be raised by the Supreme Court, Mr. Donovan said, are "What is the meaning of the National Bank Act? Did Congress intend the National Bank Act to empower a bank's home state to overrule all of the lending laws of the (credit card) borrower's state? If Congress intended that, did it act within the provisions of the U.S. Constitution?"
If the Supreme Court takes up the New Jersey case for review, it will have plenty of precedents to study.
The high court ruled in 1978 that a national bank could export interest rates beyond its home state. That landmark ruling, in Marquette National Bank of Minneapolis v. First of Omaha Services Corp., allowed banks to market credit cards nationally at rates that exceeded some states' usury ceilings.
A week ago, the Colorado Supreme Court ruled that the state cannot prevent out-of-state credit card companies from charging late fees to its residents. And in September, California's highest court reached the same conclusion. More than two dozen lower courts have issued similar rulings.
In a 1992 case, Greenwood Trust v. Massachusetts, the U.S. Court of Appeals for the First Circuit ruled that late-payment fees fall under the category of interest under federal law.
New Jersey's highest court rejected those rulings.
"We hold that late-payment fees are not 'interest' within the intendment and purpose of the applicable federal statute," it held in the case, Sherman v. Citibank. "Rather, 'interest at a rate allowed by the state ... where the bank is located' refers only to the periodic percentage rate charged on outstanding balances.
"Therefore, plaintiff's state-law defenses to the bank's charges do not conflict with federal law, are not preempted, and the late-payment fees are illegal under New Jersey law," the court concluded.
In Hunter v. Greenwood Trust Co., a case involving a federally insured state bank chartered in Delaware, the court said New Jersey's usury law prohibiting banks from charging late fees does not conflict with the federal statute giving national banks and federally insured state banks preferential treatment with lending authority.
Mr. Donovan said what turned the tide in this case was "the hesitancy of the New Jersey Supreme Court to allow its state law to be overruled by the legislative decision of Delaware or South Dakota."
On Thursday, Mr. Donovan's law firm, Chimicles, Jacobsen & Tikellis in Haverford, Pa., filed a petition with the U.S. Supreme Court to overrule a California Supreme Court decision in September that said out-of-state credit card banks could export those fees.
Meanwhile, the Pennsylvania Supreme Court will argue a consolidated credit card exportation case the week of Jan. 22, and the third circuit court of appeals in Philadelphia is expected to rule on a similar case any day.
Given "the fact that a court of the significance of the New Jersey Supreme Court has ruled contrary to what others have ruled, it seems a likely Supreme Court candidate, no matter how the other courts rule," said L. Robert Griffin, director of litigation division, for the Office of the Comptroller of the Currency.
"At some point the Supreme Court may say, let's revisit this," said Paul Schieber, a partner at Blank, Rome, Comiskey & McCauley in Philadelphia. "But until they do that, I still think no matter what the Pennsylvania and New Jersey courts say, the federal law is clear, that a bank can export its rates and its fees."
Mr. Crotty of the ABA said, "So long as you've got one or two out there going the other way, it keeps the issue alive; it keeps the plaintiffs' class action hopes of big settlements and big judgments alive in a lot of states."
If the Supreme Court upholds the New Jersey court ruling, Mr. Griffin said, it would force banks to follow fee and service-charge limits set by each state and territory. If it rejects the New Jersey ruling, issuers can operate as they do now, collecting an estimated $1 billion annually in fees.
