Opinion
No. 12–P–603.
5-17-2013
CITIBANK (SOUTH DAKOTA), N.A. v. Rosemary Walker DECRISTOFORO.
Under § 86, a national banking association, such as Citibank, “charging a rate of interest greater than is allowed by [12 U.S.C. § ] 85 ... shall be deemed a forfeiture of the entire interest which the note, bill, or other evidence of the debt carries with it.” DeCristoforo argues that because the South Dakota statute does not fix a specific maximum interest rate, § 85 of the NBA prohibits Citibank from charging more than seven percent interest on its credit card accounts. According to DeCristoforo's interpretation, Citibank therefore forfeited its right to receive 1 Section 54–11–9 governs the creation of a contract between a credit card issuer and a cardholder. any interest on the debt when it charged more than seven percent interest. See 12 U.S.C. § 86.
83 Mass.App.Ct. 1131 987 N.E.2d 619 CITIBANK (SOUTH DAKOTA), N.A. v. Rosemary Walker DECRISTOFORO. No. 12–P–603. Appeals Court of Massachusetts. May 17, 2013. By the Court (TRAINOR, BROWN & MILKEY, JJ.). MEMORANDUM AND ORDER PURSUANT TO RULE 1:28 The plaintiff, Citibank (South Dakota), N.A. (Citibank), appeals from a judgment awarding it approximately $28,000 for the default on the debt incurred on two credit card accounts by the defendant, DeCristoforo. On appeal, Citibank argues that the judge erred in concluding that interest rates in excess of eighteen percent were unconscionable. The issue of unconscionability was not pleaded, briefed, or argued by the parties. DeCristoforo cross appeals, claiming that Citibank was not entitled to any interest on the credit card accounts because it violated Federal law by charging an interest rate above seven percent. Background. We briefly summarize the undisputed facts. In 1984, DeCristoforo, a Massachusetts resident, opened a credit card account with Citibank, a national bank located in South Dakota. Ten years later, she opened a second credit card account with Citibank. DeCristoforo used these credit cards to procure goods, services, and cash advances, and Citibank mailed periodic billing statements for both accounts. DeCristoforo's last payments on the accounts occurred in August, 2008; she paid $812.36 on the 1984 account and $316.15 on the 1994 account. She then defaulted on both accounts by making no further payments. In 2009, Citibank filed suit in Superior Court to collect the outstanding balances of $25,870.44 on the 1984 account and $8,465.69 on the 1994 account. DeCristoforo counterclaimed, alleging that Citibank forfeited its right to any interest because it charged a usurious rate under the National Banking Act (NBA). 12 U.S.Code §§ 85, 86 (2006). During the life of both accounts, Citibank charged annual interest rates in excess of seven percent. DeCristoforo moved for partial summary judgment as to her liability, and Citibank responded with a cross motion for summary judgment on its claim. The judge rejected DeCristoforo's argument that Citibank violated the NBA by charging interest rates above seven percent. Nevertheless, the judge sua sponte decided that interest rates greater than eighteen percent, such as those charged by Citibank, were unconscionable as a matter of Massachusetts common law. On Citibank's cross motion, the judge determined that DeCristoforo was “clearly liable for the goods, services, and/or cash advances she incurred under each account,” but denied summary judgment because there was no agreement between the parties as to what DeCristoforo owed to Citibank for interest costs, due to the unconscionable interest rates. The judge then entered a final judgment in Citibank's favor for $21,745.99 on the 1984 account and $6,505.37 on the 1994 account, with all interest rates in excess of eighteen percent recalculated at eighteen percent. Both parties now appeal. DeCristoforo seeks a ruling that Citibank violated Federal law by charging an interest rate above seven percent, and thereby voided any right to recovery under § 86. Citibank asks us to overrule the judge's conclusion that the interest rate should be capped at eighteen percent. Discussion. “The standard of review of a grant of summary judgment is whether, viewing the evidence in the light most favorable to the nonmoving party, all material facts have been established and the moving party is entitled to a judgment as a matter of law. An order granting or denying summary judgment will be upheld if the trial judge ruled on undisputed material facts and his ruling was correct as a matter of law.” Greater Lawrence Sanitary Dist. v. North Andover, 439 Mass. 16, 20–21 (2003) (citations omitted). DeCristoforo argues here, as she did below, that the plain language of the NBA, and the underlying legislative intent, prohibit a national bank located within a State that has not established a fixed maximum rate of interest from setting a rate of interest above seven percent. The relevant portion of 12 U.S.C. § 85, provides: “Any association may take, receive, reserve, and charge on any loan or discount made, or upon any notes, bills of exchange or other evidence of debt, interest at the rate allowed by the laws of the State, Territory, or District where the bank is located .... when no rate is fixed by the laws of the State, or Territory, or District, the bank may take, receive, reserve, or charge a rate not exceeding 7 per centum....” Under § 86, a national banking association, such as Citibank, “charging a rate of interest greater than is allowed by [12 U.S.C. § ] 85 ... shall be deemed a forfeiture of the entire interest which the note, bill, or other evidence of the debt carries with it.” Here, Citibank is organized and chartered in South Dakota. Although the South Dakota statute, S.D. Codified Laws § 54–3–1.1 (2004), does not express a specific maximum interest rate, it does allow contracting parties to set their own rate by written agreement: “Unless a maximum interest rate or charge is specifically established elsewhere in the code, there is no maximum interest rate or charge, or usury rate restriction between or among persons, corporations, limited liability companies, estates, fiduciaries, associations, or any other entities if they establish the interest rate or charge by written agreement. A written agreement includes the contract created by [S.D. Cofified Laws] § 54–11–9.” 1 DeCristoforo argues that because the South Dakota statute does not fix a specific maximum interest rate, § 85 of the NBA prohibits Citibank from charging more than seven percent interest on its credit card accounts. According to DeCristoforo's interpretation, Citibank therefore forfeited its right to receive 1 Section 54–11–9 governs the creation of a contract between a credit card issuer and a cardholder. any interest on the debt when it charged more than seven percent interest. See 12 U.S.C. § 86. The Supreme Court considered this question in Daggs v. Phoenix Natl. Bank, 177 U.S. 549 (1900). In Daggs, the Court considered the relationship between the NBA and the interest-setting law of the Arizona territory. The Arizona law at issue in that case allowed the parties to set any rate of interest by written agreement, even though it did not expressly articulate a maximum rate. Id. at 554. 2 In interpreting the NBA, the Court determined that “ ‘ [f]ixed by the laws ’ must be construed to mean ‘ allowed by the laws. ’ not a rate expressed in the laws.'' id. at 555. “The intention of the national law is to adopt the state law, and permit to national banks what the state law allows to its citizens and to the banks organized by it.” Ibid. Under the holding of Daggs, a State law that allows the parties to agree to an interest rate is, for purposes of the NBA, the same as a law that sets a specific, numerically articulated value as a maximum interest rate. 3 , 4 The NBA's seven percent cap on interest rates, therefore, applies only when the State statute is silent on a maximum allowable interest rate. See Hawkins v. Citicorp Credit Servs., Inc., 665 F.Supp.2d 518, 523 (D.Md.2009). Here, while the South Dakota statute does not expressly codify a specific, maximum numerical rate, it does allow the parties to set any rate or rates by written agreement. See S.D. Codified Laws § 54–3–1.1. This situation is nearly identical to the one in Daggs. We conclude that the South Dakota statute, as did the Arizona statute, fixes an interest rate for purposes of the NBA. Citibank is therefore not limited to the seven percent cap and, consistent with South Dakota law, may charge any interest rate that a customer agrees to in writing. The judge's analysis on this point is correct. He next determined, however, citing such authorities as Frontline, PBS, and Fox News, that the “general public is drowning in credit card debt,” and that bank executives took advantage of economic conditions in a few States, such as South Dakota, to the disadvantage of credit card consumers. The judge found sua sponte that the contract between the parties was unconscionable because it allowed interest rates in excess of eighteen percent, which violated Massachusetts common law. The judge made this finding despite the fact that neither party alleged, briefed, or argued a theory of unconscionability below. See Demoulas v. Demoulas, 428 Mass. 555, 575 n.16 (1998) (“[G]enerally, a failure to plead an affirmative defense results in a waiver and exclusion of the defense from the case.... [T]he purpose of [Mass.R.Civ.P.] 8 ( c )[, 365 Mass. 749 (1974),] is to provide notice to the plaintiffs of defenses that will be raised”)Both parties agree here that the law of South Dakota controls all aspects of their relationship, not Massachusetts law which the judge applied, and the record is completely devoid of any evidence upon which a determination of procedural or substantive unconscionability could be based. Significantly, the summary judgment record does not even include the contract governing the parties' accounts, as it was not necessary to the case as originally pleaded. We must vacate all of these findings. Conclusion. We conclude that Citibank is not barred from imposing an interest rate greater than seven percent, and that the determination that the contract between the parties is unconscionable is vacated. We therefore vacate the final judgment that was entered in Citibank's favor and remand the matter to the Superior Court for entry of a new judgment. On the 1984 account, judgment shall enter for Citibank for goods, services, cash advances, and interest in the amount of $25,870.44. On the 1994 account, judgment shall enter for Citibank for goods, services, cash advances, and interest in the amount of $8,465.69. So ordered. -------- Notes: 1. Section 54–11–9 governs the creation of a contract between a credit card issuer and a cardholder. 2. The pertinent portion of the Arizona statute read: “Parties may agree in writing for the payment of any rate of interest whatever on money due or to become due on any contract.” Id. at 554. 3. Daggs has been cited favorably for this proposition in the Commonwealth. See Westminster Natl. Bank v. Graustein, 270 Mass. 565, 586–587 (1930) (“[I]t has been decided that ‘[a] national bank may charge interest at the rate allowed by the laws of the State or Territory where it is located’ ”), and Rockland–Atlas Natl. Bank of Boston v. Murphy, 329 Mass. 755, 759 (1953) (“It was held that the proper interpretation of what is now § 85 was that, where no rate was ‘fixed by the laws' of the State, the rate must be construed to mean one ‘allowed by the laws,’ not a rate expressed in the laws”), both quoting from Daggs, supra at 555. 4. DeCristoforo also argues, based on stare decisis principles, that Daggs is not controlling precedent because the Supreme Court considered issues different from those that are before us. We are unconvinced because the facts and circumstances surrounding Daggs are analogous to the facts and circumstances here. What is more, Daggs was used as controlling precedent in cases where a cardholder challenged interest rates above seven percent on credit cards issued by South Dakota banks. See Hawkins v. Citicorp Credit Servs. Inc., 665 F.Supp.2d 518, 523 (D.Md.2009).