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MORRISON FOERSTER Contemporaneous Notice of Credit Card

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MORRISON I FOERSTER




Legal Updates & News
Legal Updates




   Contemporaneous Notice of Credit Card Default
   Interest Rate Increase Not Required, Says Ninth
   Circuit
   Circuit                                                                                    Related Practices:
                                                                                                        Practices:
   April 2008                                                                                     Financial Services Law
                                                                                               • Financial Services Law
        Robert S. Stern, Angela L. Padilla
   by Robert S. Stern, Angela L. Padilla                                                          Financial Services Litigation
                                                                                               • Financial Services Litigation
                                                                                                  Litigation
                                                                                               • Litigation

                                                                                         N.A.’s
   On February 22, 2008, the Ninth Circuit rejected a challenge to Chase Bank USA, N.A.'s default
                 practices. Evans v.                                          Specifically, the court held
   interest rate practices. Evans v. Chase Bank USA, N.A., No. 06-1522. Specifically, the court held
                  Chase’s
   that because Chase's Cardmember Agreement set forth the circumstances constituting default and
                                                                   (“TILA”)
   the maximum default interest rate, the Truth in Lending Act ("TILA") did not require additional notice
                                                  default interest rate increase. The court
   after a cardmember’s default and before the default interest rate increase. The court further held
            cardmember's
   that Chase’s contractually authorized practice of applying the default interest rate on the first day of
        Chase's
                                                           violate TILA.
   the billing cycle in which the default occurred did not violate TILA.

   Plaintiffs filed the putative class action in the United States District Court for the Northern District of
   California, asserting that Chase’s default notice practices and the timing of the default interest rate
                                Chase's
                                                                                               an illegal
   increase violated Section 226.9(c) of Regulation Z (12 C.F.R. § 226.9(c)), constituted an illegal
   penalty, were unconscionable, constituted a breach of contract and of the implied covenant of good
                                                         Delaware consumer protection statutes.
   faith and fair dealing, and violated California and Delaware consumer protection statutes.
   Section 226.9(c) requires banks to provide notice of changes to terms that must be disclosed in the
                                                     advance or before the efective date of the change,
   initial customer agreement either 15 days in advance or before the effective date of the change,
                                  the change.
   depending on the nature of the change.

                                Chase's motion to dismiss with prejudice. On
   The district court granted Chase’s motion to dismiss with prejudice. On the TILA claim, the district
   court noted that the Official Staff Commentary to Section 226.9(c) created an exception to the notice
                                          “set
   requirement for changes that were "set forth initially” and held that Chase’s default interest rate
                                                    initially"             Chase's
              fell within this exception because the specific changes - the circumstances constituting
   practices fell within this exception because the specific changes — the circumstances constituting
           and the maximum default interest rate - were                      plaintifs' Cardmember
   default and the maximum default interest rate — were set forth in the plaintiffs’ Cardmember
                   The district court further held that none of the other causes of action stated
   Agreements. The district court further held that none of the other causes of action stated a claim
                               practices were authorized by plaintifs' Cardmember Agreements
   because the challenged practices were authorized by plaintiffs’ Cardmember Agreements and
   Delaware banking law. law.

              Circuit afirmed the          court’s           The decision cites the Federal
   The Ninth Circuit affirmed the district court's decision. The decision cites the Federal Reserve
                                                                             Board’s
   Board’s interpretation of the current version of Section 226.9(c) in the Board's pending Proposed
   Board's
   Rules, which would add a new provision requiring the notice plaintiffs sought in this suit. The court
                 would add a new provision requiring the notice plaintiffs sought in this suit.
   also held that any claim that state laws required additional notice is preempted by the National Bank
                  regulations.
   Act and OCC regulations.

   Plaintiffs’ counsel in Evans filed additional suits against Chase and several other national banks and
   Plaintiffs'
                                      Each of these cases was dismissed with prejudice, with several
   thrifts, asserting similar claims. Each of these cases was dismissed with prejudice, with several
                           Although the Ninth Circuit’s Memorandum is not binding precedent,
   currently on appeal. Although the Ninth Circuit's Memorandum is not binding precedent, it may be
                                                      Rule 36-3(b).
   cited to courts in the Ninth Circuit under Circuit Rule 36-3(b).


                                   0 1996-2008 Morrison & Foerster LLP. AU rights reserved.

				
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