Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_05-cv-03968/USCOURTS-cand-3_05-cv-03968-1/pdf.json

Nature of Suit Code: 190
Nature of Suit: Other Contract Actions
Cause of Action: 28:1332 Diversity-Other Contract

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United States District Court

For the Northern District of California

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UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNIA

ROBYN EVANS and DENNIS J. BARELA,

on behalf of themselves

individually, and all others

similarly situated,

Plaintiffs,

 v.

CHASE MANHATTAN BANK USA, N.A.,

Defendant. 

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No. C-05-3968 SC

ORDER GRANTING

DEFENDANT'S MOTION TO

DISMISS 

I. INTRODUCTION

Robyn Evans and Dennis J. Barela ("Plaintiffs"), on behalf of

themselves and all others similarly situated, allege that Chase

Manhattan Bank USA, N.A. ("Chase" or "Defendant") improperly

increased interest rates on credit card accounts in default,

violating the Truth in Lending Act ("TILA"), the Cardmember

Agreement, as well as state contract and fraud laws.

Presently before the Court is Chase's motion to dismiss

Plaintiffs' eight claims pursuant to Federal Rule of Civil

Procedure ("FRCP") 12(b)(6). The Court, having reviewed the

parties' submissions, hereby GRANTS Defendant's motion to dismiss. 

// 

//

Case 3:05-cv-03968-SC Document 20 Filed 01/27/06 Page 1 of 14
United States District Court

For the Northern District of California

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1 Plaintiff calls the first type an "on-Chase" delinquency and

the second an "off-Chase" delinquency. Compl. at 4. 

2 It should be noted that Plaintiffs' counsel, Brian R.

Strange, filed an action in March 2005 in the Superior Court for

the County of Orange, California alleging similar claims against

2

II. BACKGROUND

Except as noted, the following allegations are taken from

Plaintiffs' papers and will be assumed as true for purposes of the

present motion. 

Plaintiffs have two central grievances. First, Plaintiffs

allege that Chase, without advance notice, increased cardmembers'

interest rates because of a "single late payment to Chase, or...a

reported late payment to some other creditor." Complaint ¶ 2

("Compl.").1

 Because Chase failed to give advance notice of a

rate increase, customers in default often "do not become aware of

rate increases for an extended period of time, and some customers

never discover such increases or find out the reasons therefor." 

Id. ¶ 17. The unfairness of this action is increased because

Chase, Plaintiffs allege, fails to verify the accuracy of offChase delinquencies, thereby increasing rates based on false or

inaccurate information. Id. ¶¶ 19, 20. 

Second, Plaintiffs bewail Chase's practice of backdating the

rate increase to the beginning of the billing cycle. Id. ¶ 9. 

Such unannounced and furtively applied rate increases are "unfair,

unconscionable, and punitive." Id. ¶ 20. Because these rate

increases are imposed in addition to other late fees, "they

constitute illegal penalties." Id. ¶ 12. 

Plaintiffs articulated these grievances in the Complaint.2

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Chase, but with Faith Dugan and Jeanine Hill named as plaintiffs. 

See Defendant's Request for Judicial Notice in Support of Motion to

Dismiss and Sanction, Ex. A at 1. Chase removed the case to

Federal Court in the Central District of California. See

Defendant's Memorandum in Support of Motion to Dismiss at 1. The

Honorable Cormac J. Carney granted Chase's motion to dismiss with

leave to amend. Id. Dugan and Hill filed an amended complaint and

then voluntarily dismissed it in August 2005. Id., Ex. D at 1. 

3

 The Complaint has two pages marked with "25." The second

"25" is the 26th page.

3

The Complaint alleges that (1) Chase violated TILA, (2) Plaintiffs

are owed declaratory relief and damages, (3) the Court should

sever the unconscionable contract terms, (4) the Court should

declare that Chase is imposing and enforcing an illegal penalty,

(5) Chase committed consumer fraud, (6) Chase breached its

contract with Plaintiffs, (7) Chase breached the covenant of good

faith and fair dealing, and (8) Chase's actions constitute unfair

and deceptive practices under California law. Compl. at 25-26.3

 

III. LEGAL STANDARD

"[A] complaint should not be dismissed for failure to state a

claim unless it appears beyond doubt that the plaintiff can prove

no set of facts in support of his claim which would entitle him to

relief." Conley v. Gibson, 355 U.S. 41, 45-46 (1957). "In

reviewing a 12(b)(6) motion, this Court must accept the factual

allegations of the complaint as true and must draw all reasonable

inferences in favor of the plaintiff." Bernheim v. Litt, 79 F.3d

318, 321 (2d Cir. 1996); see also Usher v. City of Los Angeles,

828 F.2d 556, 561 (9th Cir. 1987). The complaint need not set out

the facts in detail; what is required is a "short and plain

statement of the claim showing that the pleader is entitled to

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relief." FRCP 8(a); see also La Salvia v. United Dairymen, 804

F.2d 1113, 1116 (9th Cir. 1986). Thus, the Court's task "is

merely to assess the legal feasibility of the complaint, not to

assay the weight of the evidence which might be offered in support

thereof." Cooper v. Parsky, 140 F.3d 433, 440 (2d Cir. 1998). 

IV. DISCUSSION

A. First Claim: Violations of TILA

Plaintiffs contend that Chase violated Regulation Z of TILA,

12 C.F.R. § 226.9(c), by "failing to notify its customers of

increases in interest rates on or before the effective date of the

change." Compl. ¶ 25. Plaintiffs bolster their contention by

pointing to the fact that the APR increases are discretionary, are

based on unknown factors, and are applied retroactively. 

Plaintiffs' Memorandum in Opposition to Motion to Dismiss at 7-8

("Pls' Mem."). 

Chase contends that Plaintiffs "misconstrue the scope of the

notice provisions in Regulation Z," which, Chase asserts, does not

apply to the facts at hand. Defendant's Memorandum in Support of

Motion to Dismiss at 5 ("Def's Mem."). Specifically, Chase

contends that "Plaintiffs point to no change in Chase's terms. 

Rather, the increases complained of are the implementation of

terms explicitly disclosed to Plaintiffs." Id. 

Regulation Z, 12 C.F.R. § 226.9(c)(1), requires creditors to

notify consumers whenever "any term required under § 226.6 is

changed." The Official Staff Commentary to Regulation Z

("Commentary"), requires Chase to provide written notice "if there

is an increased periodic rate or any other finance charge

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4

 The Commentary, which is put forth by the Board of Governors

of the Federal Reserve System is entitled to a great deal of

deference. See Anderson Bros. Ford v. Valencia, 452 U.S. 205, 219

(1981). 

5

attributable to the consumer's delinquency or default." 12 C.F.R.

pt. 226, Supp. I, § 226.9 (c)(1), cmt. 3.4 The Commentary goes on

to state, however, that "[n]o notice of a change in terms need be

given if the specific change is set forth initially, such as: 

[r]ate increases under a properly disclosed variable-rate plan." 

12 C.F.R. pt. 226, Supp. I, § 226.9(c), cmt. 1. 

Under the Cardmember Agreement, Chase "may vary" a 

cardmember's Annual Percentage Rate ("APR") if certain

circumstances exist, including if the cardmember is "in default

under this agreement...[or if he] fail[s] to make a payment to

another creditor when due." Declaration of Melissa Beck in

Support of Defendant's Motion to Dismiss, Ex. B at 3 ("Beck

Decl."). The Cardmember Agreement also states that the "default

rate will take effect as of the first day of the billing cycle in

which the default occurs, and will apply to purchase balances from

the previous billing cycle for which periodic finance charges have

not been already billed." Id. 

The Court finds that Plaintiffs have failed to allege facts

sufficient to sustain their claim under TILA. The Commentary, as

stated above, states that creditors need not give notice if the

specific change is set forth initially, such as in a variable rate

plan. The Cardmember Agreement gives cardmembers notice of these

changes. 

On a final note, the Court is unimpressed by Plaintiffs'

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5

 Chase discloses the maximum rate it will set an APR in the

event of a cardmember's default. The Cardmember Agreement states

that "[i]f any of these [default] events occurs, we may increase

the APRs (including any promotional APR) on all balances up to a

maximum of the default rate stated in the Rates and Fees Schedule." 

Beck Decl., Ex. B at 3.

6

complaints that the rate increases are discretionary, that they

are based on unknown factors, and that the rate increases are

retroactive. These complaints have nothing to do with Regulation

Z's notice requirements. The Official Staff Commentary to

Regulation Z states that "notice must be given if the contract

allows the creditor to increase the rate at its discretion but

does not include specific terms for an increase." 12 C.F.R. 

pt. 226, Supp. I, § 226.9(c), cmt. 1. According to the

Commentary, because Chase's Cardmember Agreement discloses the

specific terms for its increases, it is not bound by Regulation

Z's notice requirements.5 Similarly, because Chase gives the

reasons for its rate changes, Plaintiffs' contention that they are

based on unknown factors is simply not accurate. Finally, that

Chase applies rate increases retroactively is disclosed by the

Cardmember Agreement. 

The Court grants Defendant's motion and dismisses Plaintiffs'

first claim.

 B. Second, Third and Fourth Claims: Request for

Declaratory Relief, Severance of Terms, and Damages

Plaintiffs' second, third and fourth claims are based on the

alleged unconscionability of certain terms in the Cardmember

Agreement. See Compl. ¶¶ 33-51. 

Plaintiffs, in these claims, contend that the terms are

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unconscionable because cardmembers "have no choice with respect to

the inclusion of the terms of the standard credit card agreement,

nor the amount of the interest rate increases." Compl. ¶ 34. 

Specifically, Plaintiffs' second claim asks the Court for a

"determination and a declaration that these provisions [penalizing

rate increases, backdating charges, basing penalties on off-Chase

delinquencies] constitute an illegal penalty and as such are

unconscionable and unenforceable," and for "damages to the extent

Chase has enforced the [unconscionable and illegal] terms." Id. 

¶ 38-39. Plaintiffs' third claim asks the Court to sever the

unconscionable contract terms and for appropriate damages. Id. 

¶¶ 44-45. Plaintiffs' fourth claim asks the Court for an order

"preliminarily and permanently enjoining Chase from further

enforcement and collection of [improperly] increased finance

charges." Id. ¶ 51. Plaintiffs also ask the Court to order Chase

to make restitution and disgorge its profits. Id. 

Chase contends that the provisions cannot be unconscionable

because they are "authorized by the law of Chase's home state,

Delaware." Def's Mem. at 7. 

The Cardmember Agreement states that the terms of the

agreement "shall be governed and interpreted in accordance

with...the law of Delaware." Beck Decl., Ex. B at 6. Under

Delaware law, a "contract of adhesion may be declared

unenforceable, in whole or in part, if its terms are

unconscionable within the meaning of 6 Del.C. § 2-302." Del. 

C. § 2-302 states that the court must determine whether a contract

or clause is unconscionable as a matter of law. 

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6 Plaintiffs contend that there is "no such 'schedule or

formula' specified in the Cardmember Agreements or otherwise

provided to Chase customers...Chase's rate increase in the event of

a default may or may not be imposed by Chase, and the amount of any

increase is discretionary. A discretionary rate increase in an

unstated amount is not a change 'in accordance with a schedule or

formula.'" Pls' Mem. at 14.

 This analysis blinks the very words of Section 944. The

statute declares that a permissible formula or schedule can be

based on the occurrence or non-occurrence of an event or

circumstance described in the agreement, such as we see in the

Cardmember Agreement. 

8

Section 944 of the Delaware Banking Act, 5 Del. C. § 944,

states that "[i]f the agreement governing the revolving credit

plan so provides, the...rates of interest under such plan may vary

in accordance with a schedule or formula." The Delaware Banking

Act states that:

a permissible schedule or formula may include provision in

the agreement governing the plan for a change in...rates of

interest applicable to all or any part of outstanding unpaid

indebtedness contingent upon the happening of any event or

circumstance specified in the plan, which event or

circumstance may include the failure of the borrower to

perform in accordance with the terms of the plan.6

 

Id. The Cardmember Agreement, by describing what events will

cause default rates to go into effect, complies with these

requirements.

Therefore, the Court finds that the terms are not

unconscionable because they are specifically authorized by

statute. If Delaware law were silent as to this issue,

Plaintiffs' unconscionability contention may have had some weight. 

Where, as here, Delaware law not only speaks directly to the

issue, but specifically authorizes the custom, the Court will not

declare the terms unconscionable. 

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Plaintiffs' assertion that the terms are unconscionable

becomes, then, to a challenge of the law itself. Unless a law is

found to be constitutionally infirm, it is legitimate and

enforceable, however unfair the law may seem to allegedly

aggrieved persons. Plaintiffs have not contended that the statute

is unconstitutional or otherwise infirm.

There are three points the Court wishes to address as a coda

to its dismissal of Plaintiffs' second, third and fourth claims.

First, the Court finds no merit in Plaintiffs' contention

that the rate increases are "unenforceable penalties." Pls' Mem.

at 17. To support their contention, Plaintiffs cite a nineteenthcentury Nebraska Supreme Court case and a 1999 New Jersey Supreme

Court case. Id. at 18. For obvious reasons, the Court will not

concern itself with those cases. The only possibly relevant case

Plaintiffs mention, S.H. Deliveries v. Tristate Courier &

Carriage, 1997 Del. Super LEXIS 217 (Del. Super. Ct., July 16,

1997), an unpublished case, concerns the question whether a

stipulated sum provision in a contract constitutes liquidated

damages or a penalty. This case is inapposite to the facts of the

instant action.

Second, Plaintiffs declare that under 6 Del. C. § 2-302(2),

the "question of whether a contractual provision is unenforceable

requires an evidentiary hearing." Pls' Mem. at 19. The Court

finds no such requirement in the statute. Furthermore, the Court

has already determined that an allegation of unconscionability is

a challenge to the law itself, a challenge Plaintiffs have not

formally brought. 

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7 In their opposition, Plaintiffs appear to allege that

Chase's "practices for off-Chase delinquencies violate the Fair

Credit Reporting Act." Pls' Mem. at 19-20. 

Federal Rule of Civil Procedure 7(a) allows for the following

forms of pleading: a complaint, an answer, a reply to a

counterclaim, an answer to a cross-complaint, a third-party

complaint, and a third-party answer. "No other pleading shall be

allowed, except that the court may order a reply to answer or a

third-party answer." Id. 

In the instant case, if this is a new claim, this is the first

the Court has heard of it. If this is a new claim, the Court will

not address it because it has not been properly brought before the

Court through an appropriate form of pleading required by Federal

Rule of Civil Procedure 7(a). 

10

Third, the Court is unmoved by Plaintiffs' statement that

they "do not contend that the 'default' interest rates imposed by

Chase are unlawful in and of themselves. Rather, it is the manner

in which the increases are imposed to which plaintiffs object." 

Pls' Mem. at 17. "This manner directly violates federal laws,

Delaware laws, and Chase's own contracts." Id. 

The Court has already addressed these contentions. The Court 

determined previously that, based on the alleged facts, Chase's

actions do not violate federal law. As stated previously,

Plaintiffs have not alleged sufficient facts that the manner

violates Delaware laws or the contract. 

Because the Court finds that the terms are not unconscionable

under the facts pled, the Court dismisses Plaintiffs' second,

third, and fourth claims.7

C. Fifth Claim: Consumer Fraud under Delaware Law

Plaintiffs claim that Chase's actions (i.e., failure to

timely notify customers about increased APRs, apply rate increases

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retroactively, concealment of how new APRs are determined, use of

off-Chase defaults) constitute consumer fraud under the Delaware

Consumer Fraud Act, 6 Delaware Code §§ 2511-2527. See Compl. 

¶¶ 52-59 t 18-21. 

Chase contends that because Plaintiffs have failed to allege

any misrepresentation or omission - all terms being plainly stated

in the Cardmember Agreement - they cannot state a claim under this

statute. Def's Mem. at 12. 

The specific statute, 6 Delaware Code § 2513(a), makes it

unlawful for any person to use any "deception, fraud, false

pretense, false promise, misrepresentation, or the concealment,

suppression, or omission of any material fact with the intent that

others rely" on the deception "in connection with the sale, lease

or advertisement of any merchandise."

The Court finds that Plaintiffs have not stated a claim for

consumer fraud. Rather than practicing concealment or making 

false promises, Chase, from the beginning of the contractual

relationship, notifies cardmembers of the actions it may take in

the event of a default. Specifically, the Cardmember Agreement

notifies cardmembers that Chase may change a cardmember's APR,

that it would apply rate increases retroactively, and that it "may

consider" various factors in determining a new APR, such as offChase delinquencies. Beck Decl., Ex. B at 3. 

The Court grants Defendant's motion and dismisses this claim.

D. Sixth Claim: Breach of Implied Contract

Plaintiffs assert that because the Cardmember Agreement

incorporates federal law, Chase is bound by the notification

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requirements of Regulation Z. Compl. ¶ 61. By failing to

properly notify customers as Regulation Z requires, Plaintiffs

contend Chase has breached an implied contract created by federal

law. Id. 

The Court finds that this is a reiteration of Plaintiffs'

first claim and dismisses it for the same reasons. The Cardmember

Agreement provides notice that Chase may vary a cardmember's APR. 

Regulation Z does not require any additional action from Chase. 

So, even if federal law applies, Chase has not, under the facts

alleged, infracted it. 

The Court grants Defendant's motion and dismisses Plaintiffs'

sixth claim.

E. Seventh Claim: Breach of the Covenant of Good Faith and

Fair Dealing

Plaintiffs contend that by taking the contested actions,

Chase breached the covenant of good faith and fair dealing

implicit in all contracts.

Judge Carney, as described in Footnote 2, dismissed a similar

claim made by Counsel Strange's previous clients by declaring that

"Plaintiffs' Second Cause of Action for tortious breach of the

implied covenant of good faith and fair dealing is deficient

because it seeks to imply terms into the parties' agreement that

are inconsistent with the express terms of their agreement and

impose new obligations on Defendant." Def's Req., Ex. B at 1. 

The Court finds no reason to depart from the reasoning and

conclusion of Judge Carney, and therefore the Court grants

Defendant's motion and dimisses Plaintiffs' seventh claim. 

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F. Eighth Claim: Unfair and Deceptive Practices under

California Civil Code § 1770

Plaintiffs contend that Chase's actions constitute unfair and

deceptive practices under California Civil Code §§ 1770(a)(5) and

(19). Compl. ¶ 74. Plaintiffs seek an order "enjoining defendant

from employing the practices described in this complaint against

any California resident." Id. 

Plaintiffs quote the following portion of California Civil

Code § 1770:

The following unfair methods of competition and unfair or

deceptive acts or practices undertaken by any person in a

transaction intended to result or which results in the sale

or lease of goods or services to any consumer are unlawful: 

...Representing that goods or services have sponsorship,

approval, characteristics, ingredients, uses, benefits, or

quantities which they do not have...Inserting an

unconscionable provision in the contract.

Plaintiffs contend that Defendant's failure to notify consumers

before a rate effect was put in place "constituted an implied

representation that the APRs being charged had not been

increased." Compl. at 24. Plaintiffs contend that by imposing

retroactive rate increases Chase has "rendered its previous

representations as to the characteristics of its services (namely,

the APR interest rates) false." Id. ¶ 75. Finally, Plaintiffs

contend that the use of off-Chase delinquencies is

"unconscionable." Id.

The Court finds that Plaintiffs have not alleged facts

sufficient to state a claim for unfair or deceptive acts. First,

because Chase was acting under the fully-disclosed terms of the

contract, its actions cannot plausibly be labeled a deception. 

Second, the Court has already determined that the terms are not

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unconscionable. 

G. Sanctions for Judge Shopping

Chase asks the Court to assess sanctions against Plaintiffs

and Plaintiffs' counsel for judge-shopping. See Defendant's

Request for Judicial Notice in Support of Motion to Dismiss and

Sanctions. 

A Court has inherent authority to sanction bad faith conduct

by parties, such as judge-shopping. See Hernandez v. City of El

Monte, 138 F.3d 393, 398 (9th Cir. 1997).

At present, the Court declines to exercise its authority on

this issue. The Court will not at present determine whether

Plaintiffs or Plaintiffs' counsel engaged in judge-shopping. 

Accordingly, the Court will not at this time assess sanctions

against Plaintiffs or Plaintiffs' counsel. 

The Court, however, 

V. CONCLUSION

The Court finds that Plaintiffs have not alleged facts

sufficient to sustain claims of violations of TILA, state law, and

contractual agreements. 

Accordingly, the Court DISMISSES Plaintiffs' eight claims and

thereby the Complaint and the case with prejudice.

IT IS SO ORDERED.

Dated: January 27, 2006

 

UNITED STATES DISTRICT JUDGE

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