Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-2_07-cv-02418/USCOURTS-caed-2_07-cv-02418-0/pdf.json

Parties Involved:
Chase Bank USA, N.A.
Unknown
Washington Mutual Bank
Defendant
Elvis Williams
Plaintiff

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1

UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF CALIFORNIA

----oo0oo----

ELVIS WILLIAMS, an individual,

on behalf of himself and

others similarly situated,

 NO. CIV. 07-2418 WBS GGH

Plaintiff,

v. MEMORANDUM AND ORDER RE: MOTION TO DISMISS

WASHINGTON MUTUAL BANK and DOES

1 through 10, inclusive,

Defendant.

----oo0oo----

Plaintiff Elvis Williams filed this class action

against defendant Washington Mutual Bank after defendant

increased his annual percentage rate (APR) and provided notice of

such an increase only in its initial disclosures. Defendant now

moves to dismiss plaintiff’s complaint for failure to state a

claim upon which relief can be granted. 

I. Factual and Procedural Background

Defendant issued a credit card to plaintiff on May 17,

2006. (Gorman Decl. Ex. A.) Before sending plaintiff his new

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credit card, defendant sent him its Terms Sheet and Account

Agreement. (Id.) Among other disclosures, the Terms Sheet and

Account Agreement informed plaintiff that defendant could

increase his interest rate if he defaulted on his account

(“default APR”). (Id.) Per the Terms Sheet, Account Agreement,

and the September 2006 Important Notice of Changes to the Account

Agreement (“Notice of Changes”), plaintiff’s October 5, 2006

billing statement informed plaintiff that defendant increased his

APR because of a default. (Compl. ¶ 11.) Defendant applied the

default APR to all purchases plaintiff made during the billing

cycle for the October billing statement. (Id.) Doing so

resulted in the default APR applying to purchases plaintiff made

before defendant informed him that it had increased his APR. 

(Id.) Between November 6, 2006 and February 6, 2006, defendant

further increased plaintiff’s default APR. (Id.) 

On September 27, 2007, plaintiff filed this action in

state court, alleging that defendant’s practice (1) violates the

Fair Truth in Lending Act (TILA); (2) constitutes an illegal

penalty; (3) violates California’s Unfair Competition Law (UCL);

(4) breaches its contract with plaintiff; and (5) constitutes a

tortious breach of the implied covenant of good faith and fair

dealing. Defendant removed the case to federal court and now

moves to dismiss plaintiff’s complaint for failure to state a

claim. 

II. Discussion

On a motion to dismiss, the court must accept the

allegations in the complaint as true and draw all reasonable

inferences in favor of the plaintiff. Scheuer v. Rhodes, 416

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U.S. 232, 236 (1974), overruled on other grounds by Davis v.

Scherer, 468 U.S. 183 (1984); Cruz v. Beto, 405 U.S. 319, 322

(1972). To survive a motion to dismiss, a plaintiff needs to

plead “only enough facts to state a claim to relief that is

plausible on its face.” Bell Atl. Corp. v. Twombly, 127 S. Ct.

1955, 1974 (2007). Dismissal is appropriate, however, where the

plaintiff fails to state a claim supportable by a cognizable

legal theory. Balistreri v. Pacifica Police Dep’t, 901 F.2d 696,

699 (9th Cir. 1990); see also Conley v. Gibson, 355 U.S. 41, 47

(1957), abrogated on other grounds by Twombly, 127 S. Ct. at 1968

(complaint must “give the defendant fair notice of what the

plaintiff’s claim is and the grounds upon which it rests”). 

In general, the court may not consider materials other

than the facts alleged in the complaint when ruling on a motion

to dismiss. Anderson v. Angelone, 86 F.3d 932, 934 (9th Cir.

1996). The court may, however, consider materials if plaintiff

has alleged the existence of the materials in his complaint and

the authenticity of the materials is not disputed. See Branch v.

Tunne11, 14 F.3d 449, 454 (9th Cir. 1994), overruled on other

grounds by Galbraith v. County of Santa Clara, 307 F.3d 1119 (9th

Cir. 2002) (on a motion to dismiss, courts may properly review

“documents whose contents are alleged in the complaint and whose

authenticity no party questions, but which are not physically

attached to the plaintiff’s pleading”). 

Defendant has provided the court with its Terms Sheet,

Account Agreement, and Notice of Changes and plaintiff’s

September 6, 2006 billing statement. (Gorman Decl. Exs. A, B,

C.) Plaintiff has alleged the existence of these documents in

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1 “Unless demonstrably irrational, Federal Reserve Board

staff opinion construing the Act or Regulation should be

dispositive . . . .” Ford Motor Credit Co. v. Milhollin, 444

U.S. 555, 565 (1980).

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his complaint (Compl. ¶¶ 11, 25, 37) and neither party questions

their authenticity. Accordingly, the court will consider these

materials in deciding this motion. 

A. First Cause of Action: TILA Violations

Unless an exception applies, Regulation Z of TILA

requires a creditor to provide written notice whenever a finance

charge is changed, including an increase in the consumer’s APR

because of the consumer’s default or delinquency. 12 C.F.R. §

226.9(c)(1) (requiring written notice whenever “any term required

to be disclosed under section 226.6 is changed”); id. § 266.6(a)

(requiring disclosure of a change in finance charge); id. §

226.9(c)(2) (listing exceptions). The Official Staff Commentary1

to Regulation Z explains that notice of a change in terms is not

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

Rate increases under a properly disclosed variable-rate plan . .

. .” Id. pt. 226, Supp. I, § 226.9(c), cmt. 1. 

Defendant’s Terms Sheet and Notice of Changes inform

the consumer that “[y]our APR(s) may vary based on changes in the

Prime Rate” and “[e]ach time you default . . . the APRs

(including any introductory rate) for new and existing balances

in any Balance Category may increase up to the Prime Rate plus

23.74% (the “Default APR”). (Gorman Decl. Exs. A, C (emphasis in

originals).) In similar cases brought by plaintiff’s counsel,

three federal courts have held that substantially the same

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2 Without identifying a single difference, plaintiff

inaccurately argues that the agreements were substantially

different in those cases. (Pl.’s Mem. in Opp’n to Def.’s Mot. to

Dismiss 1:15-16, 13:13-15.)

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language2 in account agreements provided adequate initial notice

of a rate increase due to default and thus negated the

requirement for notice at the time of default. Evans v. Chase

Manhattan Bank USA, N.A., No. 05-3968, 2006 WL 213740, at *2-*3

(N.D. Cal. Jan. 27, 2006); Penner v. Chase Bank USA, N.A., No.

06-3968, 2006 WL 2192435, at *2-*3 (W.D. Wash. Aug. 1, 2006);

McCoy v. Chase Manhattan Bank USA, No. 06-107, Civil Minutes, at

*5-*6 (C.D. Cal. Aug. 10, 2006). 

Proposed rule amendments to TILA also underscore that

defendant’s practice does not violate the current version of

TILA. Specifically, in explaining proposed rule amendments, the

Federal Reserve Board states:

Advance notice currently is not required in all cases. .

. . [N]o change-in-terms notice is required if the

specific change is set forth initially by the creditor in

the account-opening disclosures. For example, some

credit card account agreements permit the card issuer to

increase the periodic rate if the consumer makes a late

payment. Because the circumstances of the increase are

specified in advance in the account agreement, the

creditor currently need not provide a change-in-terms

notice; under current § 226.7(d) the new rate will appear

on the periodic statement for the cycle in which the

increase occurs.

72 Fed. Reg. 33009 (June 14, 2007). Therefore, the federal cases

addressing the same issue and the Board’s recent comments about

potential amendments lead this court to conclude that defendant’s

practice of notifying consumers about default rate increases only

in its initial disclosures does not violate TILA. 

Plaintiff also argues that, even if initial notice of a

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default rate increase is sufficient under TILA, defendant’s

notice does not comply with TILA because (1) the notice does not

provide the “specific terms” for an increase and (2) the notice

gives defendant discretion to decide whether to increase the APR

if a consumer defaults. (Pl.’s Mem. in Opp’n to Def.’s Mot. to

Dismiss 5:3-9.) Plaintiff correctly notes that the Official

Commentary requires that notice “be given if the contract allows

the creditor to increase the rate at its discretion but does not

include specific terms for an increase (for example, when an

increase may occur under the creditor’s contract reservation

right to increase the periodic rate).” 12 C.F.R. pt. 226, Supp.

I, § 226.9(c), cmt. 1. Plaintiff’s reliance on this language,

however, goes too far. 

Defendant’s Terms Sheet and Notice of Changes do

include the required “specific terms” for an increase in the rate

due to default. First, they establish the method used to

calculate the default APR and set the maximum default APR at “the

Prime Rate plus 23.74%.” (See Gorman Decl. Exs. A, C) (also

providing an example of the calculation).) Second, the

disclosures list the specific acts that can constitute a default,

thus triggering a potential increase: 

Each time you default under any Washington Mutual Account

Agreement because you fail to make at least the Minimum

Payment by the Payment Due Date, exceed your Credit Line,

or make a payment to us that is not honored by your bank,

the APRs (including any introductory rate) for new and

existing balances in any Balance Category may increase .

. . .

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3 Prior to the Notice of Changes, defendant’s Terms Sheet

included a “universal default clause,” which provided that the

consumer would be in default if the consumer was “reported as

delinquent on an account with any other creditor.” (Id. Ex. A.) 

This questionable provision, which Nevada rendered illegal in

2007, Nev. Rev. Stat. § 666.410(3)(b), is not at issue in this

case.

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(See id. Ex. C (emphasis in original).)3 This language provides

the consumer with notice of the precise acts within the

consumer’s control that can constitute a default. Therefore,

because the disclosures provide notice of the maximum default APR

and the consumer’s acts that can trigger an increase, defendant’s

notice sufficiently provides the “specific terms for an

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

Plaintiff argues that the factors defendant lists as

considerations when it determines a default APR give defendant

too much discretion. (See id. (listing the factors defendant

considers in setting a default APR).) However, the latitude of

defendant’s discretion is not fatal because the consumer is on

notice of the maximum default APR and the circumstances, all of

which are in the consumer’s control, that can trigger an

increased APR. 

Defendant’s discretion not to increase a default APR is

also distinguishable from the discretion a creditor has under an

unlimited reservation of right to increase an interest rate. 

Defendant’s Terms Sheet establishes the maximum default APR and

gives defendant only the discretion to set a default APR below

the maximum or decline to impose a default APR. (Id.) Contrary

to plaintiff’s argument, section 2226.9(c)(2) provides that “[n]o

notice . . . is required when the change involves . . . a

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4 Plaintiff argues that Evans, Penner, and McCoy did not

address retroactive rate increases (Pl.’s Mem. in Opp’n to Def.’s

Mot. to Dismiss 20:12-13); however, Evans and Penner both discuss

that the plaintiffs in those cases, who were represented by the

same counsel as in this case, attacked the retroactive nature of

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reduction of any component of a finance or other charge.” 12

C.F.R. § 226.9(c)(2). Thus, because the Terms Sheet allows

defendant to increase the default APR to the maximum stated in

the Terms Sheet, defendant’s decision not to do so is akin to a

reduction of the consumer’s finance charge, which does not

require notice. See McCoy v. Chase Manhattan Bank USA, No. 06-

107, Civil Minutes, at *5, n.4 (C.D. Cal. Aug. 10, 2006) (“A

decision not to increase a rate is analytically indistinct from a

decision to lower a rate: in both cases the consumer benefits.”);

see also Penner v. Chase Bank USA, N.A., No. 06-3968, 2006 WL

2192435, at *2 (W.D. Wash. Aug. 1, 2006) (citing Evans v. Chase

Manhattan Bank USA, N.A., No. 05-3968, 2006 WL 213740, at *3-*4

(N.D. Cal. Jan. 27, 2006)). 

 Accordingly, just as three other federal courts 

recently addressing this very issue have done, this court must

grant defendant’s motion to dismiss plaintiff’s first cause of

action for failure to allege facts sufficient to assert a claim

under TILA. 

 B. Second Cause of Action: Illegal Penalty

Plaintiff alleges that defendant’s “contractual

provision which purportedly permits it to impose a rate increase

retroactively constitutes an illegal penalty provision” and is

“unlawful, void, against public policy, and unenforceable.” 

(Compl. 11:14-16, 12:2 (emphasis in original).)4

 The Account

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the rate increases. See Evans, 2006 WL 213740, at *2 (“On a

final note, the Court is unimpressed by Plaintiff’s complaint[] .

. . that the rate increases are retroactive.”); Penner, 2006 WL

2192435, at *3.

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Agreement states that the terms of the agreement are governed by

federal law and, “to the extent not preempted by federal law, the

State of Nevada.” (Gorman Decl. Ex A.) 

As discussed above, increasing an APR in the event of a

default if notice was initially provided is not illegal under

federal law. The retroactive nature of the default APR does not

change this conclusion because the initial disclosures provide

notice that the default APR will apply to “new and existing

balances in any Balance Category.” (See Gorman Decl. Ex. C.);

see also Evans, 2006 WL 213740, at *2-*3; Penner, 2006 WL

2192435, at *3; 72 Fed. Reg. 33009 (June 14, 2007) (stating that

“under current § 226.7(d) the new rate will appear on the

periodic statement for the cycle in which the increase occurs”). 

While plaintiff claims that defendant’s practice of

calculating the default APR at the end of the month and applying

it to that month’s billing cycle is an illegal penalty under

Nevada law, plaintiff does not cite a single Nevada statute or

case to support his position. Contrary to plaintiff’s position,

Nevada Revised Statute section 97A.140(3) requires only that

“[t]he rate of interest charged, and any other fees or charges

imposed for the use of the credit card, [] be in an amount agreed

upon by the issuer and the cardholder.” Nev. Rev. Stat. §

97A.140(3); see also id. § 97A.140(3) (defining “interest”). 

Section 99.050 also provides that “[p]arties may agree for the

payment of . . . any other charges or fees.” Id. § 99.050. 

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Similar to federal law, section 974A.140 neither prohibits

initial disclosures from satisfying the disclosure requirements

nor prohibits retroactive interest. Id. § 97A.140. Therefore,

plaintiff has failed to cite, and this court is unaware of, a

Nevada statute or case that renders an agreed-upon retroactive

default interest an illegal penalty. Accordingly, the court must

grant defendant’s motion to dismiss plaintiff’s second cause of

action. 

C. Third Cause of Action: Unfair and/or Deceptive Business

Practices

California’s UCL restricts “any unlawful, unfair, or

fraudulent business act or practice and unfair, deceptive,

untrue, or misleading advertising.” Cal. Bus. & Prof. Code §

17200. The UCL “‘borrows’ violations from other laws by making

them independently actionable as unfair competitive practices.” 

Korea Supply Co. v. Lockhead Martin Corp., 29 Cal. 4th 1134, 1143

(2003). However, “[w]hen specific legislation provides a ‘safe

harbor,’ plaintiffs may not use the general unfair competition

law to assault that harbor.” Cal-Tech Commc’ns, Inc. v. L.A.

Cellular Tel. Co., 20 Cal. 4th 163, 182-83 (1999); Schnall v.

Hertz Corp., 78 Cal. App. 4th 1144, 1154 (2000). Therefore,

plaintiff cannot assert a UCL claim if a federal or state law

legalizes defendant’s practice. See Augustine v. FIA Card

Servs., N.A., 485 F. Supp. 2d 1172, 1176 (E.D. Cal. 2007)

(stating that federal or state law can provide a safe harbor). 

As discussed above, FILA authorizes defendant’s

practice because defendant provides sufficient notice in its

initial disclosures. Defendant’s practice comes within the UCL’s

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“safe harbor,” thus negating plaintiff’s ability to challenge the

practice under the UCL. Cal-Tech Commc’ns, Inc., 20 Cal. 4th at

182-83. Accordingly, the court must dismiss plaintiff’s third

cause of action. 

D. Fourth Cause of Action: Breach of Contract

In his complaint, plaintiff rests his breach of

contract claim solely on defendant’s alleged violation of

Regulation Z. (Compl. ¶¶ 37-42.) Because this court concludes

that plaintiff has not stated a claim for violation of Regulation

Z, plaintiff’s breach of contract claim necessarily fails. See,

e.g., Evans v. Chase Manhattan Bank USA, N.A., No. 05-3968, 2006

WL 213740, at *5 (N.D. Cal. Jan. 27, 2006). Accordingly, the

court must grant defendant’s motion to dismiss plaintiff’s fourth

cause of action. 

E. Fifth Cause of Action: Tortious Breach of the Implied

Covenant of Good Faith and Fair Dealing

Under Nevada law, a “tort action for breach of the

implied covenant of good faith and fair dealing requires a

special element of reliance or fiduciary duty, and is limited to

‘rare and exceptional cases.’” Great Am. Ins. Co. v. Gen.

Builders, Inc., 113 Nev. 346, 354-55 (1997) (internal citations

omitted). To constitute a “special relationship,” the

relationship between the parties must be “characterized by

elements of public interest, adhesion, and fiduciary

responsibility,” such as employment, bailment, insurance,

partnership, and franchise relationships. Id. at 355. In his 

complaint, plaintiff does not allege a special relationship

between himself and defendant, nor is this court aware of a

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Nevada case that recognizes a creditor-consumer relationship as a

special relationship. 

Still, even if Nevada law recognizes a creditorconsumer relationship as a special relationship, plaintiff’s

claim for tortious breach of the implied covenant of good faith

and fair dealing would still be insufficient. Such a claim can

prevail only if “‘the party in the superior or entrusted

position’ has engaged in ‘grievous or perfidious misconduct.’” 

Id. Here, the conduct plaintiff alleges amounted to a tortious

breach of the implied covenant of good faith and fair dealing is

the same conduct supporting his other claims. (Compl. ¶¶ 44-45.) 

Because FILA authorizes this conduct, it does not amount to

“grievous or perfidious misconduct.” Accordingly, the court must

also grant defendant’s motion to dismiss plaintiff’s fifth cause

of action. 

IT IS THEREFORE ORDERED that defendant’s motion to

dismiss plaintiff’s complaint be, and the same hereby is,

GRANTED. 

DATED: January 10, 2008

 

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