Court Opinion

ID: 9540887
Source: CourtListenerOpinion
Date Created: 2023-08-07 16:20:29.650795+00
Date Added: 2024-06-11T15:01:27.272718
License: Public Domain

GEORGE, J.
I respectfully dissent.
The question before us is whether federal law precludes California from applying its state consumer protection laws to late payment charges imposed upon California consumers by a national bank that is chartered in another state but is doing business in California. As I shall explain, I believe that the majority, in concluding that federal law prohibits the application of California law to such late payment charges, has failed to recognize the clear distinction that traditionally has been drawn between such late payment charges and charges that commonly are characterized as “interest.”
*178I
In analyzing the question before us, it is helpful to begin by placing the matter in perspective. As a general rule, of course, out-of-state corporations that conduct business in California ordinarily are subject to this state’s consumer protection laws. (See, e.g., California v. ARC America Corp. (1989) 490 U.S. 93,101 [104 L.Ed.2d 86, 94, 109 S.Ct. 1661].) Furthermore, although Congress clearly possesses the authority to exempt nationally chartered banks from the general operation of state law, as we explained in Perdue v. Crocker National Bank (1985) 38 Cal.3d 913, 937 [216 Cal.Rptr. 345, 702 P.2d 503], “Congress has declined to provide an entire system of federal law to govern every aspect of national bank operations . . . [and] national banks have traditionally been ‘governed in their daily course of business far more by the laws of the State than of the [n]ation. . . .’” (Quoting National Bankv. Commonwealth (1870) 76 U.S. (9 Wall.) 353, 362 [19 L.Ed. 701, 703]; see also McClellan v. Chipman (1896) 164 U.S. 347, 357 [41 L.Ed. 461, 465, 17 S.Ct. 85]; Anderson Nat. Bank v. Luckett (1944) 321 U.S. 233, 248 [88 L.Ed. 692, 705-706, 64 S.Ct. 599, 151 A.L.R. 824].) Thus, in the Perdue decision itself, we held that California properly could apply its state consumer protection laws in determining the validity of fees imposed by the defendant national bank for the processing of “bounced” or “NSF” checks (i.e., checks drawn on accounts with insufficient funds).
Although, as Perdue demonstrates, it is well established that federal law does not broadly preempt states from applying state law to the operations of national banks, at the same time it is quite clear that, under the federal statute at issue in this case, 12 U.S.C. § 85 (hereafter section 85), the rate of interest that may be charged on loaned funds is a subject as to which California may not apply its own state law in evaluating the validity of the actions of defendant Citibank. In Marquette Nat. Bank v. First of Omaha Corp. (1978) 439 U.S. 299 [58 L.Ed.2d 534, 99 S.Ct. 540], the United States Supreme Court held that the State of Minnesota could not apply its own state law limits on the rate of interest (that could be charged on consumer credit card accounts) to a national bank whose home state was Nebraska. The high court concluded that, under section 85, the Nebraska national bank was entitled to impose a rate of interest authorized by Nebraska law even in its dealings with Minnesota residents. Thus, under the Marquette decision, it is clear that, because defendant Citibank is a national bank whose home state is South Dakota, California may not apply the limits on interest rates embodied in California law to restrict the rate of interest Citibank charges California consumers on their Citibank credit card accounts.
The Marquette decision, however, involved only the question of interest rates and did not address the issue whether section 85 applies to the type of *179late payment fees at issue in the present case. As I shall explain, I believe that section 85, read as a whole and according to the ordinary meaning of its terms, does not support the majority’s conclusion that the late payment charges here at issue constitute “interest” within the meaning of that statute.
II
Section 85 provides in relevant part: “Any [national bank] may take, receive, reserve and charge on any loan or discount made . . . interest at the rate allowed by the laws of the State . . . where the bank is located, or at a rate of 1 per centum in excess of the discount rate on ninety-day commercial paper in effect at the Federal reserve bank . . . , whichever may be the greater, and no more .... When no rate is fixed by the laws of the State ... the bank may . . . charge a rate not exceeding 7 per centum, or 1 per centum in excess of the discount rate on ninety-day commercial paper in effect at the Federal reserve bank . . . , whichever may be the greater . . . .” (Italics added.)
Section 85 includes no special definition of the term “interest” as used in the statute, and no indication that the term was used in other than its ordinary and commonly understood sense. As numerous cases have recognized, a late payment charge that is set at a fixed-dollar amount unrelated either to the amount of the loan or the time period for which funds are advanced, and that is assessed only if the borrower fails timely to make a required payment, ordinarily is not considered “interest.” (See, e.g., Tackett v. First Sav. of Arkansas, F.A. (1991) 306 Ark. 158 [810 S.W.2d 927, 931-932]; Rangen, Inc. v. Valley Trout Farms, Inc. (1983) 104 Idaho 284 [658 P.2d 955, 957-960]; Barbour v. Handlos Real Est. and Bldg. Corp. (1986) 152 Mich.App. 174 [393 N.W.2d 581, 587] [$15 late payment fee “do[es] not constitute interest”].) Unlike a loan origination fee or other charge that is imposed by a lender without regard to the subsequent conduct of the borrower and that ordinarily would be included in calculating the “effective” rate of interest at which a loan is made, a late payment fee that is assessed if, and only if, the borrower fails to make a timely payment during the period of the loan, properly is viewed as either a “penalty” or as “liquidated damages,” imposed upon the basis of conduct that is within the control of the borrower. (See, e.g., Garrett v. Coast & Southern Fed. Sav. & Loan Assn. (1973) 9 Cal.3d 731, 735-742 [108 Cal.Rptr. 845, 511 P.2d 1197, 63 A.L.R..3d 39] [holding that a late charge in a home loan contract does not constitute interest but, instead, reasonably must be viewed as either a penalty or liquidated damages].) Such a conditional or contingent late payment charge or assessment traditionally has been distinguished from interest for purposes of determining whether a loan has been made at a rate in excess of the *180permitted rate of interest. (See, e.g., First American Title Ins. & Trust Co. v. Cook (1970) 12 Cal.App.3d 592, 596-597 [90 Cal.Rptr. 645] [holding that $5 late charge could not be regarded as interest on a loan for the purpose of determining whether the loan was usurious: “Whether a transaction is usurious must be determined as of the time of the transaction. An agreement which is not usurious in its inception cannot become so by reason of the borrower’s subsequent default. [Citations.] The penalty provisions to which Cook now objects come into play only in the event of his default. Such payments are not regarded as interest on the loan itself, but as a penalty for nonperformance of a legitimate agreement. [Citation.]”]; Fox v. Federated Department Stores, Inc. (1979) 94 Cal.App.3d 867, 884 [156 Cal.Rptr. 893] [holding that late payment finance charge on credit card account is not usurious: “Since the contract at its inception does not require a usurious payment, and it is only because of the customer’s voluntary act in failing to make the payment when due that a finance charge is levied, under the applicable law such charge cannot be usurious.”].)
There is absolutely nothing in section 85 that suggests that Congress, when it enacted this provision in 1864, intended the statutory reference to “interest” to include the type of late payment fee at issue in the present case. Indeed, at the time of the 1864 enactment, the leading United States Supreme Court decisions on the subject made it quite clear that such a late payment charge, whose payment was contingent upon the borrower’s own conduct during the term of the loan, would not be considered interest for the purpose of determining whether the loan exceeded the legally permitted rate of interest. (See Spain v. Hamilton’s Administrator (1863) 68 U.S. (1 Wall.) 604, 626 [17 L.Ed. 619, 625] [“The payment of anything additional depends also upon a contingency, and not upon any happening of a certain event, which of itself would be deemed insufficient to make a loan usurious.” (Italics added.)]; Lloyd v. Scott (1830) 29 U.S. (4 Pet.) 205, 226 [7 L.Ed. 833, 840] [“If a party agree to pay a specific sum, exceeding the lawful interest, provided he do not pay the principal by a day certain, it is not usury. By a punctual payment of the principal, he may avoid the payment of the sum stated, which is considered as a penalty.” (Italics added.)].) Although the majority cites a few, isolated pre-1864 cases that held that, under some circumstances, such charges might be viewed as rendering a loan usurious (see maj. opn., ante, at pp. 152-153), the very annotation cited by the majority states explicitly and unequivocally that “the general rule” at that time (and thereafter) was to the contrary, and corresponded to the above quoted statements of the United States Supreme Court in the Spain, supra, 68 U.S. (1 Wall.) 604, and Lloyd, supra, 29 U.S. (4 Pet.) 205, decisions. (See Annot. (1933) 82 A.L.R. 1213, 1214.) Under these circumstances, I believe it is unreasonable for the majority to conclude that, when enacted, the term *181“interest,” as employed in section 85, was intended to encompass the late payment charges here at issue.1
III
The majority maintains, however, that the term “interest” in section 85 must be given an unusually broad interpretation, encompassing late payment fees, in order to effectuate the legislative purpose of the statute. It reasons: “If ‘interest’ were not read as indicated above, the purpose of facilitating a national banking system by granting national banks ‘most favored lender’ status in their home states could be frustrated by unfriendly state legislation. Thus, a state could allow periodic percentage charges payable absolutely by maturity for all lenders, including national banks, but fix them at a rate so low that they could lend only at a loss. It might then allow late payment fees to some lenders, not including national banks, at a level high enough that they could lend at a profit. Such a result would be untenable.” (Maj. opn., ante, at p. 154, original italics, fn. omitted.)
In my view, the foregoing reasoning of the majority is flawed in two distinct respects. First, I do not believe it is accurate to suggest that if section 85 ’s reference to “interest” were interpreted not to include late payment *182charges, a home state would be free to discriminate against national banks with regard to the imposition of such late fees. It has been quite well settled, since the early 1800’s, that—even in the absence of a specific federal statutory prohibition—a state may not discriminate against a “federal instrumentality” either in the enactment or the enforcement of state laws, and a national bank is, of course, a federal instrumentality. (See McCulloch v. Maryland (1819) 17 U.S. (4 Wheat.) 316 [4 L.Ed. 579]; Farmers’, etc. Nat. Bank v. Dearing (1875) 91 U.S. (1 Otto) 29 [23 L.Ed. 196]; Memphis Bank & Trust Co. v. Garner (1983) 459 U.S. 392, 397 [74 L.Ed.2d 562, 567, 103 S.Ct. 692].)
Furthermore, if, absent the application of section 85, a home state lawfully could discriminate against a national bank (vis-á-vis its local state banks or other lenders) and desired to do so, a state would be able to discriminate with regard to a great variety of matters—from building permits to minimum wages to health and safety requirements—and yet no one reasonably could maintain that all of these matters should be characterized as “interest,” within the meaning of section 85, simply because they are susceptible to discriminatory application. Thus, even if a state theoretically would be free (apart from section 85) to discriminate against a national bank with regard to late payment charges—a proposition I do not accept—that circumstance still would provide no logical basis for characterizing such charges as “interest” within the meaning of section 85.
Accordingly, I believe the majority has failed to demonstrate that the legislative purpose of section 85 justifies a departure from the ordinary reading of the statutory term “interest.”2
IV
In sum, I conclude that the word “interest,” as employed in section 85, cannot properly be interpreted to apply to the late payment charges at issue in this case. Of course, if Congress determines, as a matter of policy, that the validity of late payment charges imposed by a national bank should be *183determined by the law of the national bank’s home state, it may extend section 85 to reach such late payment charges. As currently written, however, I believe that the statute does not apply to such charges.
For the foregoing reasons, I would reverse the judgment of the Court of Appeal and permit plaintiff’s action to go forward.
The United States Supreme Court granted a petition for a writ of certiorari on January 19, 1996 (No. 95-860). The United States Supreme Court affirmed the decision of the California Supreme Court on June 3, 1996.

Although the majority acknowledges that the Spain v. Hamilton’s Administrator, supra, 68 U.S. (1 Wall.) 604, and Lloyd v. Scott, supra, 29 U.S. (4 Pet.) 205, decisions indicate that a late payment charge generally would not be considered in determining whether a lender had charged a usurious rate of interest, the majority suggests that those decisions are not inconsistent with its interpretation of section 85 because they do not indicate that a late-payment fee should not be considered “interest,” but rather simply indicate that a late-payment fee should not be considered “unlawful interest.” (Maj. opn., ante, p. 153, fn. 8.) I believe the majority’s suggestion reflects an unreasonable interpretation of the word “interest” as used in section 85. In my view, in providing in section 85 that a national bank may charge on any loan “interest at the rate allowed by the laws of the State . . . where the bank is located, or at a rate of 1 per centum in excess of the discount rate on ninety-day commercial paper in effect at the Federal reserve bank .... whichever [is] greater,” Congress clearly was referring to those charges imposed by a national bank that were subject to and limited by laws establishing legal “rates of interest,” and was not referring to other charges or fees that generally were not subject to the legal limitations imposed upon interest rates.
The conclusion that the term “interest,” as employed in section 85, should not be interpreted to encompass late payment charges is further supported by the circumstance that other federal statutes and regulations draw a clear distinction between interest and late payment charges or fees. (See, e.g., 12 C.F.R. §§ 226.4(b)(1), 226.4(c)(2) (1995), implementing 15 U.S.C. § 1605(a)(1) [under federal Truth in Lending Act, “finance charge” includes “interest” but excludes “[cjharges for actual unanticipated late payment”]; 12 C.F.R. § 590.3 (1995), implementing 12 U.S.C. § 1735f-7a [with respect to federally related mortgage loans, state laws “expressly limiting the rate or amount of interest. . . shall not apply,” but “[njothing in this section preempts limitation in state laws on . . . late charges . . . .”]. See also Seiter v. Veytia (Tex. 1988) 756 S.W.2d 303 [federal statute eliminating interest rate limitations on loans secured by first liens on residential real property did not include late charges, and thus federal statute did not preempt application of state law to such late charges].)

I recognize that the majority’s expansive interpretation of the word “interest,” as employed in section 85, follows the lead of a number of lower federal and sister-state courts. (See maj. opn., ante, at p. 156.) In Greenwood Trust Co. v. Com. of Mass. (1st Cir. 1992) 971 F.2d 818, perhaps the leading case in this line of decisions, the court relied upon a number of prior cases broadly interpreting section 85 to apply to a variety of bank charges or fees other than late payment fees, and did not consider specifically whether, when the predecessor to section 85 was enacted in 1864, the statutory reference to “interest” was intended to encompass late payment fees, as contrasted with the many other possible types of bank charges. (See 971 F.2d at pp. 829-830.) In any event, to the extent that prior decisions conclude that the term “interest,” as employed in section 85, was intended to refer to such late payment charges, I respectfully disagree for the reasons set out above.