Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_07-cv-00671/USCOURTS-cand-3_07-cv-00671-26/pdf.json

Nature of Suit Code: 371
Nature of Suit: Truth in Lending
Cause of Action: 15:1601 Truth in Lending

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United States District Court

For the Northern District of California

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IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

DAVID VAN SLYKE, FRANKLIN CHAN,

and THOMAS E. BROWNING, on behalf of

themselves and all others similarly situated, 

Plaintiffs,

 v.

CAPITAL ONE BANK, CAPITAL ONE

FINANCIAL CORPORATION, and DOES

1–100, inclusive, 

Defendants. /

No. C 07-00671 WHA

ORDER DENYING PLAINTIFFS’

MOTION FOR LEAVE TO FILE

AN AMENDED COMPLAINT

INTRODUCTION

In this putative class action regarding defendants’ credit card practices, a prior order

allowed plaintiffs to file a motion for leave to file a third amended complaint. Plaintiffs wanted

to assert a claim under the Truth in Lending Act based on interest charged on late and overlimit

fees on cardholders’ accounts. Defendants have shown that plaintiffs’ proposed amendment

would be futile. Accordingly, plaintiffs’ motion to for leave to file a third amended complaint

is DENIED. Plaintiffs’ TILA claims are DISMISSED. 

STATEMENT

The facts involved in this action have been set out in a number of prior orders. In brief,

plaintiffs filed this class action against defendants alleging that their practices in issuing credit

cards to subprime customers violated federal and state laws. When targeting the subprime

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credit card market, defendants allegedly do so with the expectation that card holders will default

on at least one account allowing defendants to charge very high fees. Capital One Bank

allegedly offers several credit cards with low credit limits, around $250 to $500, to its subprime

customers, betting that they will exceed the limit on at least one card, allowing Capital One to

charge fees on all card accounts. 

Plaintiffs also allege that Capital One Bank’s disclosures related to the cost of credit for

its subprime products are inadequate and deceptive. For example, credit card customers receive

a monthly statement that shows a minimum payment that customers must pay. Many of Capital

One’s subprime customers are allegedly led to think they need only make the minimum

payment to keep from defaulting on their account. Problems arise when Capital One adds late

fees or overlimit fees to the account. With alleged deceptiveness, the minimum payment does

not include those fees, so even though a customer pays the stated minimum payment, his or her

account is still in default because of the additional fees, leading to a daisy chain of further

penalties. 

An order issued on August 17, 2007, granting defendants’ motion to dismiss plaintiffs’

TILA claim. Plaintiffs had alleged that defendants sent pre-approved, unsolicited credit card

offers, that defendants had failed to disclose the minimum payment, and that defendants stopped

sending statements to accounts deemed uncollectible. The order held that even taking all

pleaded facts as true, none of those practices violated TILA. At the hearing on the motion,

plaintiffs’ counsel raised a new theory of how defendants’ credit card practices could violate

TILA. Capital One allegedly charges interest on fees without informing cardholders, which

according to plaintiffs, violated TILA.

Although defendants’ motion to dismiss was granted, plaintiffs were allowed to file a

motion for leave to file an amended complaint. The amendments were to address only the

interest-on-fees theory plaintiffs mentioned at the hearing. A briefing schedule was set. Both

sides sent in unsolicited supplemental declarations. 

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ANALYSIS

Leave to amend a complaint shall be freely given when justice so requires under FRCP

15(a). This standard is applied liberally. Rule 15(a) does not apply, however, when a district

court has established a deadline for amended pleadings under FRCP 16(b). See Johnson v.

Mammoth Recreations, Inc., 975 F.2d 604, 607–608 (9th Cir. 1992). Once the Court has

entered a scheduling order, the liberal policy favoring amendments no long applies. Subsequent

amendments are not allowed without a request to first modify the scheduling order. At that

point, any modification must be based on a showing of good cause. Coleman v. Quaker Oats

Co., 232 F.3d 1271, 1294 (9th Cir. 2000). “Leave to amend need not be granted when an

amendment would be futile.” In re Vantive Corp. Sec. Litig., 283 F.3d 1079, 1097 (9th Cir.

2002). 

Plaintiffs and defendants raise a number of arguments as to whether plaintiffs should be

allowed to file an amended complaint. In particular, defendants contend that plaintiffs cannot

show good cause and that amendment would cause them prejudice. Plaintiffs fire back

asserting that any delay or prejudice was defendants’ fault because of their filing numerous

motions. Then defendants accuse plaintiffs of delay tactics in discovery. None of these

arguments are helpful here as they do not address the merits of plaintiffs’ proposed amendment. 

Here, the primary issue is futility and whether plaintiffs’ proposed amendment can state

a claim under TILA. The proposed amended pleading alleges that (Mot. Exh. 1, ¶¶ 54–55)

(emphasis in original): 

54. Defendants failed to disclose that interest is charged on

penalty fees. Defendants also failed to disclose that they bill

penalty fees and interest thereon in the cycle following the month

in which they were incurred.

55. Capital One’s failure to disclose that interest is charged on

penalty fees in its applications and solicitations and in its billing

statements, or in any document submitted to actual or potential

customers, violates the TILA because Capital One does not

disclose:

(a) The balance upon which a finance charge will be

imposed in violation of 15 U.S.C. § 1637(a)(2);

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(b) The method for determining the amount of the

finance charge in violation of 15 U.S.C. § 1637(a)(3);

(c) The range of balances to which an interest rate will

be applied in violation of 15 U.S.C. § 1637(a)(4);

(d) The amount of finance charges on its billing

statements in a billing cycle for which penalty fees

were assessed in violation of 15 U.S.C.

§ 1637(b)(4);

(e) The date by which payment must be made in its

billing statement to avoid additional finance

charges in violation of 15 U.S.C. § 1637(b)(9). 

Plaintiffs argue that Capital One bills its late and overlimit fees on the first date of the next

payment cycle after the one in which they were incurred. Capital One charges interest on those

fees starting at the time the fee is incurred through the time the fee is actually billed to the

account. Plaintiffs allege that they do not disclose this. 

First, to the extent that plaintiffs attempt to bring a TILA claim against Capital One

Financial, they may not do so. The order dated August 17, 2007, granted partial summary

judgment and held that Capital One Financial was not a creditor within the meaning of TILA. 

Van Slyke v. Capital One Bank, 2007 WL 2385108, *8 (N.D. Cal. Aug. 17, 2007). Since only

creditors can be held liable under that statute, plaintiffs cannot state a claim against Capital One

Financial. 

Turning to the substance of the new theory, nothing in TILA prohibits a creditor from

billing and itemizing overlimit and late fees to the billing cycle after which they were incurred. 

Indeed, it is difficult to understand how creditors could bill such fees at any other time. For

instance, if a cardholder goes over the limit on the twentieth day of the month, with the billing

cycle closing at the end of the month, the creditor could not, as a practical matter, alert

cardholders to those fees until the next statement. The creditor has no way of knowing in any

given month whether any particular customer will incur fees. Thus, it would be impossible for

them to be billed on anything other than the next month’s statement. 

Plaintiffs assert that the problem arises when Capital One starts charging interest on

those fees as of the date they were incurred. To use plaintiffs’ example, a cardholders’ billing

cycle begins on the first date of a month. The cardholder incurs an overlimit fee on April 10,

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but the cycle does not end until April 30. Capital One charges interest on that fee from April

10, to April 30, but the fee and the interest are not billed to the account until May 1. Then,

according to plaintiffs, the cardholder does not know that he or she is required to pay the fee

and the interest in addition to the minimum payment stated on the bill to avoid incurring more

finance charges in May. 

There are three parts to plaintiffs’ theory: (1) Capital One charges interest on fees

before they show up on a statement; (2) Capital One does not tell cardholders that it charges

interest on fees before the fees show up on a statement; and (3) the amount of the minimum

payment on cardholders’ statements will not keep the account out of default because it does not

include the interest and the fees. 

Defendants contend that nothing in TILA prohibits creditors from charging interest on

fees before they are billed to the statement. Plaintiffs do not point to any such provision. 

Although plaintiffs skirt the issue, the guts of this theory is that late and overlimit fees are added

automatically to the balance on the account, where they incur fees (Mottek Reply Decl. Exh. 1,

120:7–15). Even though such practices seem harsh toward plaintiffs, as long as defendants

disclose them, then defendants do not run afoul of TILA. Indeed, the majority of their

arguments focus on the information required to be disclosed to consumers. 

As to the second part of plaintiffs’ theory, defendants argue that they have, in fact, met

all of their obligations as to disclosures under TILA. In the initial disclosures, TILA requires

creditors to disclose the method it uses to determine the balance imposed, the method it uses to

compute finance charges, and the range of balances to which interest rates will apply. 15

U.S.C. 1637(a)(2)–(4). Defendants claim that they have done precisely that — the initial

disclosures for plaintiffs’ accounts state that late and overlimit fees are added to the purchase

segment of the account (McGuire Decl. Exh. G, H). The initial disclosures also explain how

finance charges are calculated on the purchase segment of the balance (ibid.). Plaintiffs seem to

argue that defendants should spell out precisely when interest begins to run, but this is not

required under TILA. These practices could arguably be deceptive, but they are not a violation

of TILA. At least with respect to the initial disclosures, it appears that this theory fails. 

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Plaintiffs also allege that this practice violates 15 U.S.C. 1637(b)(9), which requires

creditors to disclose in their periodic statements “[t]he date by which or the period (if any)

within which, payment must be made to avoid additional finance charges, except that the

creditor may, at his election and without disclosure, impose no such additional finance charge if

payment is received after such date or the termination of such period.” Here, plaintiffs’

allegation has nothing to do with the period in which payment must be made to avoid finance

charges. Since Capital One states that it adds fees directly to the purchase segment of the

account, this regulation does not apply to those fees. The purchase segment is not subject to

any grace period described in this regulation. Capital One’s billing practices are rough on

cardholders who incur fees, but they do not appear to be illegal under TILA. The initial

disclosures state that the fees are added to the purchase segment, and that interest accrues on the

purchase segment. 

They also allege that not including this information violates 15 U.S.C. 1637(b)(4),

which requires that creditors disclose “[t]he amount of any finance charge added to the account

during the period, itemized to show the amounts, if any, due to the application of percentage

rates and the amount, if any, imposed as a minimum or fixed charge.” Overlimit and late fees

are not, by themselves, finance charges. 12 C.F.R. 226.4(c). Interest accrued on late and

overlimit fees is a finance charge. Under Regulation Z, creditors are required to disclose on

periodic statements the balance on which the a periodic rate was applied and the manner in

which that balance was determined. 12 C.F.R. 226.7(e). Again, defendants argue that they

have done precisely that. A box appears on statements received by plaintiff Robert Hart that

displays that balance on which the periodic interest rate was applied. The late and overlimit

fees are not broken out into component parts of the balance, but this is not required under

Regulation Z. It only requires the balance to be disclosed on the statement. Moreover, the

statements list the past due fee under the heading marked “transactions” and they also tell the

cardholder when the fee was incurred (McGuire Decl. Exh. I). 

Again, plaintiffs assert that defendants should have to separately itemize the late and

overlimit fees and any interest incurred thereon in the periodic statements. TILA does not

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require such a disclosure. It requires defendants to state the balance on which finance charges

were assessed. Late and overlimit fees are included in the balance. Again, this theory could be

better suited to plaintiffs’ claims for deceit and unfair business practices. Here, it appears that

defendants have complied with the letter of TILA, and amending the complaint would be futile. 

Turning to the third part of the theory, this Court has already held that creditors are not

required to disclose minimum payments under TILA in the order on defendants’ motion to

dismiss. Van Slyke, 2007 WL 2385108 at *4–*5. For the same reasons, plaintiffs’ argument

that the minimum payment on cardholders’ statements is not enough to keep them from

incurring more fees fails as well. As stated previously, this allegation probably fits better in

plaintiffs’ deceit or unfair business practices claim. 

Finally, plaintiffs contend that it is not enough to comply with the letter of TILA. In

support, they ask that the Court take judicial notice of a letter from the Office of the Controller

of Currency (Pl. RJN Exh. A). They note that the letter states that “depending on the totality of

the circumstances, an institution may be engaged in unfair or deceptive actions or practices for

marketing or other practices even if the transaction is otherwise in technical compliance with

applicable TILA and Regulation Z provisions” (ibid.). Defendants oppose the request for

judicial notice. First, defendants are not a national bank, and the OCC regulates only national

banks. Second, and more importantly, this statement has nothing to do with whether plaintiffs

can state a claim under TILA. It is axiomatic that it is not enough to only comply with TILA. 

Banks are still subject to state consumer-protection laws, such as California’s § 17200, under

which plaintiffs have asserted a claim. The OCC’s statement merely warns national banks that

they could be liable under laws, like state consumer-protection statutes, other than TILA. The

statement does not provide any interpretation of TILA. Overall, this interest-on-fees theory

seems much better suited to plaintiffs’ state-law unfair business practices and deceit claims than

to a claim under TILA. Accordingly, plaintiffs’ motion for leave to file a third amended

complaint is DENIED. 

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CONCLUSION

For all of the above-stated reasons, plaintiffs’ motion for leave to file an amended

complaint is DENIED. Defendants shall have TEN DAYS from the date of this order in which to

answer. 

IT IS SO ORDERED.

Dated: September 28, 2007. WILLIAM ALSUP

UNITED STATES DISTRICT JUDGE

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