Smiley v. Citibank (South Dakota), N. A.

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Smiley v. Citibank, 517 U.S. 735 (1996), is a United States Supreme Court decision upholding a regulation of the Comptroller of Currency which included credit card late fees and other penalties within the definition of interest and thus prevented individual states from limiting them when charged by nationally-chartered banks. Justice Antonin Scalia wrote for a unanimous court that the regulation was reasonable enough under the Court's own _Chevron _ standard for the justices to defer to the Comptroller.

The decision, which had begun as a class action in California, was seen as a victory for banks and credit-card issuers, who could mostly charge late fees as they pleased. For that same reason consumer advocates were displeased, warning that late fees could rise to previously unseen levels. They did, and one of the Citibank attorneys has expressed regret for his involvement.

Contents

• 1 The case

  • 1.1 Background

  • 1.2 Litigation and regulation

• 2 Before the Court

• 3 Decision

• 4 Reaction

• 5 Aftermath

• 6 See also

• 7 References

• 8 External links

The case

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Background

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In its 1978 _Marquette Bank _ decision, the court had unanimously held that the National Banking Act of 1863, which created nationally-chartered banks in addition to the state ones that had previously existed, barred states from enforcing their anti-usury laws , which set caps on interest rates , against any national bank based in another state. In 1980, Citibank took advantage of that decision and moved its money-losing credit-card operations to South Dakota , after persuading that state's legislature and governor to repeal its anti-usury law. Other states and banks followed the example, and by 1990 the number of credit cards in circulation had doubled, while the average household's revolving balance increased more than fivefold. At the time late fees were bringing in $2 billion annually to the industry.

The increased use of more freely available credit changed the American economy , but not without creating some backlash. Consumer advocates complained that some issuers were using late fees of $5 or $10, charged if a single month's payment was even one day overdue, to gouge extra profits from customers who might otherwise be borrowing and spending responsibly. Laws in some states limited those fees, yet companies and banks continued to charge above those limits, claiming the late fees were a form of interest and thus not subject to the laws of those states as long as they were headquartered elsewhere.

Litigation and regulation

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Activist lawyers were challenging this notion in lawsuits across the country, mostly in state courts, with different degrees of success at different levels. In Pennsylvania , Michael Donovan, Michael Malakoff and Ann Miller had filed one of their own, with the intent of taking it to the Supreme Court and forcing a resolution of the issue. Barbara Smiley was a California woman who had filed a class action against Citibank 's South Dakota subsidiary in her state's courts in 1992 alleging that the $15 late fee she was charged for her Citibank Classic card violated California law. After reading about the Pennsylvania lawyers in _Business Week _, she had contacted them to represent her.

Citibank responded to Smiley's original filing with a motion to dismiss on the grounds that late fees were interest covered by the National Banking Act. California's Superior Court in Los Angeles County denied the motion, but after Citibank appealed that denial, the Second District of the California Courts of Appeal ordered the lower court to either grant the motion or explain why it wasn't. The Superior Court granted the motion and dismissed the case, a decision upheld on appeal.

On March 3, 1995, after the Superior Court had dismissed the complaint, the Office of the Comptroller of Currency (OCC), the official charged by the National Banking Act with regulating national banks, issued a proposed regulation defining "interest" under the Act as including "any payment compensating a creditor or prospective creditor ... [for] any default or breach by a borrower of a condition upon which credit was extended." It specifically included late fees, among many others that had been criticized as unfair and misleading to consumers. It was formally adopted a year later.

Later in 1995, the California Supreme Court agreed to review Smiley's case, and did so. It affirmed the lower courts, but with two justices dissenting. Since New Jersey 's Supreme Court had reached the opposite conclusion in a similar case, the Supreme Court granted Smiley's _certiorari _ petition.

Before the Court

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Donovan argued Smiley's case before the justices. Late fees, he said, were not interest whatever the Comptroller's regulation said since they were fixed amounts and did not vary based on the money owed or schedule of payments. He also pointed to two previous documents from OCC suggesting that, in the past, it did not consider penalty fees of any kind to be interest. For more than a hundred years, he noted, OCC had not seen fit to define specifically what kind of payments were considered interest. Yet, coincidentally, only when a case turning on that issue appeared headed to the Supreme Court did it see a need to do so.

He claimed that it was not entitled to the deference the Court accorded agencies of the executive branch . It was not, he said, a reasonable interpretation of the National Banking Act and thus, per the rule it had established in the 1984 _Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc. _ case, the Court should review it afresh and rule on whether it was the best interpretation of the statute.

Richard Kendall of the Los Angeles firm Shearman & Sterling argued the case for Citibank. He was joined by Irving Gornstein on behalf of the government as _amicus curiae _. Both argued for the Court to defer to the Comptroller's statutory interpretation.

Decision

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Two months after oral argument , the Court ruled unanimously in Citibank's favor. [Antonin Scalia](https://en

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