WASHINGTON - A California appeals court slashed a judgment against First Interstate Bank by more than $9 million, ruling that credit card holders can't use a quirk of California law to avoid high interest charges by refusing to pay their bills.

The California Court of Appeal for the First Appellate District, in reducing the $14 million judgment, said cardholders can't attempt to invalidate their card contracts, and thus avoid interest payments, by exceeding their credit limits or failing to pay their balances on time.

The consumers had claimed that their credit card contracts became invalid once they refused to pay their balance or exceeded their credit limit. State law requires the bank, lacking a valid contract, to charge them the low federal funds rate rather than the standard 21% rate it charges valid cardholders, they said.

The appeals court rejected that argument on Sept. 14, saying the interest rate provisions of the contract remained in force even after the cardholders breached the deal.

"The good news is the court allowed the bank to keep the full contract rate of interest to which it is entitled," said Michael Crotty, deputy general counsel for litigation at the American Bankers Association. "A contrary decision, in essence, would have made it less expensive for a customer to pay late rather than on time. That is bad public policy."

The court let stand the remaining $4.8 million of the award, saying the bank could not prove that it used late and overlimit fees to cover its costs, as required by state law, rather than to make money.

Sherill Johnson, managing counsel at First Interstate, said the bank is considering an appeal. "We are very pleased with the interest portion," she said. "But we haven't decided what to do about the remaining provisions of the judgment."

The First Interstate case dates back to 1982, when the bank altered the method it uses to calculate late and overlimit fees. Instead of imposing a flat rate, the bank charged a late fee of 5% of the amount due, up to a maximum of $5. It also set a $10 overlimit fee.

A group of credit card holders filed a class-action lawsuit in 1983, charging that the new fees were an "unlawful business practice" under the state's consumer protection laws. A state trial court judge agreed with the consumers in October 1991, awarding them $14 million.

This will probably be the last of the California credit card fee cases, said Christopher Chenoweth, general counsel to the California Bankers Association. The state legislature passed a law last year permitting late and overdraft fees, he said.

"This book is now closed," he said. "It is to everyone's benefit that this is over and there is some certainty to what is going on."

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