Smiley V. Citibank - The Case - Litigation and Regulation

Litigation and Regulation

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, 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 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 ... 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.