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Smiley v. Citibank
Citations: 900 P.2d 690; 11 Cal. 4th 138; 44 Cal. Rptr. 2d 441; 95 Daily Journal DAR 11931; 95 Cal. Daily Op. Serv. 7006; 1995 Cal. LEXIS 4967Docket: S041711
Court: California Supreme Court; September 1, 1995; California; State Supreme Court
The Supreme Court of California reviewed a case involving Barbara Smiley as the plaintiff against Citibank (South Dakota) N.A. regarding the interpretation of section 30 of the National Bank Act of 1864, codified as section 85 of title 12 of the U.S. Code. This provision permits national banks to charge interest rates allowed by the laws of the state in which they are located. The primary legal question was whether 'interest' could include late payment fees. The court concluded that it can, as long as such fees are permissible in the bank's home state. Smiley's complaint was filed in the Los Angeles Superior Court on behalf of herself and others similarly situated, specifically targeting California residents who had been charged late fees on their Citibank credit cards. She claimed that Citibank, chartered in South Dakota, imposed a late fee of up to $15 on California consumers regardless of their credit card balance. Smiley was charged late payment fees by Citibank on her credit card accounts and alleged various causes of action under California law, seeking relief related to these fees. Citibank removed the case from state court to the U.S. District Court for the Central District of California, citing diversity jurisdiction under 28 U.S.C. § 1332(a)(1), which requires that the parties be citizens of different states and that the amount in controversy exceed $50,000. In federal court, Citibank asserted an affirmative defense claiming that Smiley's complaint was insufficient due to preemption under section 85 of the National Bank Act, as upheld by the supremacy clause. Smiley then moved to remand the case back to state court, arguing that the matter in controversy did not exceed $50,000, thus lacking diversity jurisdiction. Citibank sought to amend its notice of removal to include a federal question jurisdiction basis under 28 U.S.C. § 1441(b) due to the preemption argument. The federal district court denied Citibank's motion to amend as untimely but acknowledged the strength of its preemption argument and the public interest in federal banking law. The court granted Smiley's motion to remand, confirming that diversity jurisdiction was indeed lacking. Subsequently, Citibank filed a motion for judgment on the pleadings in state court, again claiming that Smiley's complaint was preempted. Smiley opposed this motion, and the United States filed a statement of interest as amicus curiae supporting Citibank. The superior court denied Citibank's motion, prompting Citibank to petition the Court of Appeal, Second Appellate District, to compel the superior court to vacate its order and grant Citibank's request. The Court of Appeal issued an alternate writ of mandate after receiving opposition from Smiley, compelling the superior court to vacate its previous denial of Citibank's motion or to show cause for not doing so. The superior court complied by vacating its earlier order and granting Citibank's request. Smiley then filed a notice of appeal, leading to the Court of Appeal discharging the writ and dismissing Citibank's petition as moot. The superior court subsequently issued an order granting Citibank's motion and filed a judgment of dismissal, which the Court of Appeal affirmed on appeal. A majority of justices agreed with the superior court's ruling based on preemption under section 85, referencing Greenwood Trust Co. v. Com. of Mass. and the Comptroller of the Currency's stance. A dissenting justice criticized both the Greenwood Trust decision and the Comptroller's views. Smiley argued that the Court of Appeal erred in upholding the superior court's order granting Citibank's common law motion for judgment on the pleadings. In ruling on such a motion, the trial court assesses whether the plaintiff's complaint states sufficient facts for a cause of action, relying primarily on the complaint's allegations. The appellate court independently reviews the trial court's order related to this motion. In *Crain v. Electronic Memories & Magnetics Corp.*, the court engages in de novo review of a lower appellate court's decision regarding a trial court's order on a motion for judgment on the pleadings, as this involves a legal question. The analysis centers on Section 85, which allows national banks to charge interest on loans at state rate laws, and confirms that national banks can issue credit cards and provide funds under them, classifying these actions as "loans." The discussion incorporates the Supremacy Clause, establishing that federal law prevails over conflicting state law, as established in *McCulloch v. Maryland*. Preemption of state law by federal law is determined by congressional intent and occurs under three conditions: explicit definition by Congress, regulation of a field intended for federal exclusivity, or actual conflict with federal law. The excerpt addresses the legal principles surrounding the Supremacy Clause and state police powers, emphasizing that federal law does not supersede state authority unless Congress clearly intends to do so. Specifically, it highlights that state police powers encompass consumer protection and banking, as supported by various court decisions. The discussion focuses on preemption, particularly in relation to the National Bank Act and section 85, which allows national banks to charge interest rates based on their home state's laws regardless of other states' regulations. This was established in Marquette Nat. Bank v. First of Omaha Corp., where the Supreme Court affirmed that national banks can "export" their home state's interest rates, even if it undermines state usury laws. The court concluded that any concern regarding the impact on state usury laws should be directed to Congress, as the issue is a matter of legislative policy rather than judicial interpretation. Section 85 delegates the authority to determine the lawfulness of interest rates set by national banks to their home states exclusively. The key issue is not whether preemption exists under this section but rather the extent of its application, hinging on the interpretation of the term "interest," which is not explicitly defined within the provision. Historical context reveals that section 85 originates from section 30 of the National Bank Act, enacted in 1864 to establish a national banking system and secure a national currency. The Act repealed and replaced an earlier statute from 1863. The United States Supreme Court has affirmed that the National Bank Act's purpose is to create a competitive environment for national banks, granting them "most favored lender" status in their home states to ensure they can compete effectively against state banks. This status is vital for national banks to avoid being disadvantaged by state laws that could limit their operational flexibility and interest rates, thereby safeguarding their viability in various states. A prescribed interest rate that is excessively low could hinder banking operations, potentially causing losses. To mitigate this risk, Congress permitted National associations to charge the highest interest rate allowed by state law, aligning with Congressional intent to protect national banks from detrimental state legislation and competition from state banks. The thirtieth section of the National Bank Act was designed to grant national banks "most favored lender" status, safeguarding them against unfavorable state laws. This section's reference to state law serves to create a self-executing mechanism that adapts to changes in state regulations. The National Bank Act does not explicitly define "interest," but an implied definition can be inferred from its context. Historical legal definitions describe interest as compensation for the loan or use of money, encompassing charges based on a percentage of sums lent, and potentially including fees for late payments. The Supreme Court has articulated that interest is compensation established by law or agreement for the use or delay of money. Thus, "interest" can refer to both regular charges and additional fees contingent upon default, suggesting a broader interpretation of the term in legal contexts. The term "interest" in section 30 of the National Bank Act includes late payment fees if permitted by the national bank's home state. This interpretation aligns with the definitions of interest as compensation for the loan or use of money. Historical case law supports this understanding, emphasizing that late payment fees serve as compensation for retaining money beyond the loan term. If "interest" were narrowly defined, it could undermine the intended facilitation of a national banking system, allowing states to impose unfavorable regulations that could disadvantage national banks compared to other lenders. Congress did define "interest" primarily as a periodic percentage charge due at maturity, but it also intended the term to encompass broader meanings, considering the rapidly evolving banking landscape and previous state legislation that adversely affected national banks. This broader interpretation aims to prevent restrictive state laws that could hinder national banks' ability to operate profitably. Congress intended the National Bank Act to provide broad protections against state legislation that could impose unfavorable terms on national banks, without limiting this protection solely to specific financial charges, such as periodic percentage fees. The Act was designed for permanence, as noted by Representative Hooper, and aimed to support the stability of the Union rather than test theoretical monetary concepts. Over the years, no amendments to the Act have restricted the interpretation of "interest" as defined under Section 85, which should encompass late payment fees, provided these fees are permissible under the bank's home state laws. This interpretation aligns with judicial decisions from various courts and is supported by the Comptroller of the Currency, who has indicated that "interest" includes late fees in regulatory writings. Section 521 of the DIDA grants covered financial institutions the right to charge late fees permitted by their home state, which can be considered part of the interest rate. This interpretation aligns with the views of legal commentators, including Clark and Rosenblum. Smiley contends that "interest" in section 85 should not encompass late payment fees, arguing that it should refer only to compensation based on the loan balance or time. However, her interpretation is deemed unpersuasive and unsupported by authority, potentially leading to a restriction on credit terms across states, which could disrupt the interstate banking system and limit both banks' lending flexibility and borrowers' options. Smiley's assertion that Congress has improperly delegated the definition of "interest" to states is also refuted, as Congress has implicitly defined it to include late fees allowed by a national bank's home state. Congress has established that the usury law of a national bank's home state governs all loans made by that bank, including those across state lines, without delegating legislative authority to the states. This principle was affirmed in United States v. Sharpnack, where the Supreme Court ruled that Congress did not delegate its powers in adopting state criminal laws for federal enclaves. Similarly, in section 85 of the National Bank Act, Congress adopted the usury laws of the state where a national bank is located without delegating legislative power. Smiley argues that the term "interest" in section 85 should not include late payment fees, suggesting it has a narrower definition in other contexts. However, the interpretation of "interest" in section 85 is determinative, and the authorities Smiley cites do not conclusively support a limited definition. Section 521 of the Depository Institutions Deregulation and Monetary Control Act (DIDA) aims to create parity between national and state banks without restricting the term "interest" as used in section 85. Legislative history indicates no intent to narrow the definition of "interest" in section 85 based on section 521. While some cases do apply a narrow definition of "interest," they do not pertain directly to section 85, reinforcing that "interest" in this context remains broad and inclusive. Section 102 et seq. of the Truth in Lending Act (TILA) and its regulation, Regulation Z, do not define "finance charge" in relation to "interest" as per section 85 of the National Bank Act. TILA, codified in 15 U.S.C. 1601 et seq. and 12 C.F.R. 226, focuses on full disclosure of credit terms rather than the regulation of credit extension terms. The definition of "finance charge" in TILA excludes certain fees like late payment fees, which Smiley argues are penalties and thus outside the definition of "interest." However, case law suggests that late fees can be classified as interest, with references to dictionary definitions and historical rulings indicating no inherent exclusion of late fees from "interest." Smiley's assertion that late payment fees are per se unlawful under common law is incorrect, as well as her claim that they lack policy justification. Late payment fees serve a purpose by imposing costs on late payers to prevent the financial burden from falling on timely payers, promoting fairness and efficient resource use. Moreover, the use of differential periodic percentage charges to manage default costs reflects a similar rationale, allowing for equitable treatment of borrowers based on their payment behavior. Smiley argues that even if late payment fees are considered "interest" under section 85, such fees should not preempt a sister state's laws concerning consumer protection and banking unless there is a clear intent from Congress to do so. Citing Cipollone v. Liggett Group, Smiley contends that federal law does not preempt state law unless explicitly stated. She further asserts that if late payment fees are permissible in a national bank's home state, they should not be deemed preemptive against another state's common law or usury laws, but finds no support for her position in reason or legal authority. Smiley proposes a limitation on how late payment fees should be treated relative to periodic charges, arguing that they should not be classified as "interest" in a way that allows interstate application. However, the text argues that such a limitation lacks logical or practical grounding, emphasizing that the impact on borrowers is the same regardless of the classification of fees. The document also notes that Smiley's interpretation of section 521 of DIDA is overly narrow and not applicable, and it mentions that implied preemption can exist even with an express preemption clause. Lastly, the acknowledgment is made that interpreting "interest" to include late fees could allow a national bank to apply its home state's usury laws, thus obstructing sister states from enforcing their own usury regulations against that bank. The excerpt addresses the conflict between state usury laws and the National Bank Act, particularly regarding Citibank's late payment fees. It emphasizes that the structure of the National Bank Act inherently displaces the usury laws of sister states, allowing residents to seek credit in states with more lenient laws, such as South Dakota, where Citibank is based. The court rejected Smiley's argument that her complaint regarding California's late payment fee laws was valid, ruling that Citibank's fees are categorized as "interest" under section 85 of the National Bank Act and thus preempted by South Dakota law. Smiley's claim that these fees were penalties under California law was dismissed as unfounded, as her complaint did not adequately support this assertion. The court affirmed the Court of Appeal's decision to uphold the superior court's ruling in favor of Citibank. A dissenting opinion criticized the majority's interpretation of banking history and statutory text, arguing it misrepresents the intentions of the Civil War Congress and overlooks significant aspects of American banking. The dual banking system allows states to regulate national banks on all matters except those vital to their federal role. California's Legislature has the authority to regulate non-interest-rate credit card terms, including late payment penalties charged to California consumers by out-of-state national banks. This regulation should not be dictated by a few small states that have relaxed consumer credit laws to attract national banks. The future may lie in a nationwide banking system, but Congress must determine the means to implement this, not merely large national banks supported by accommodating state legislatures. The majority opinion asserts that the National Bank Act of 1864 aimed to grant national banks "most favored lender status," enabling them to charge the highest interest rates permitted by the state where they are located. While this interpretation aligns with the Supreme Court's decision in Tiffany v. National Bank of Missouri, the majority's expanded definition of "interest" to include non-interest-rate terms like late fees lacks textual or legislative support. The majority argues that without this broader interpretation, state legislatures could undermine national banks with discriminatory regulations, which Congress would not have intended. However, this reasoning is based on a misinterpretation of Tiffany and a misunderstanding of the historical context surrounding the National Bank Act. The original text of the statute emphasizes the term "rate" more frequently than "interest," suggesting a narrower, more traditional definition of interest that does not encompass late payment fees. The statute connects "rates of interest" explicitly, with references to "interest" typically linked to the lending of money calculated as a percentage over time. While broader interpretations of "interest" existed in mid-19th century American society, Congress likely intended a narrower meaning when enacting section 30 in 1864, aligning with the "popular sense" of the term. The text of the statute indicates that Congress did not intend for "interest at a rate" to imply anything beyond the ordinary understanding of interest. Past court rulings, such as Copeland v. MBNA America and Mazaika v. Bank One, emphasize that congressional intent must be evident from the statute's language and legislative history. During the Senate debates on the National Bank Act, discussions centered on specific interest rates, such as proposed ceilings and state variations, with no indication that the drafters intended an expansive definition of interest. The debates reflect a desire for a uniform interest rate, underscoring that the framers were focused on conventional notions of "rates of interest." The congressional debates on the term "interest" in the National Bank Act provide clear evidence that Congress intended "interest" to be fundamentally associated with interest rates. The consistent association of "interest" with "rates of interest" in both the statute and Senate discussions is so evident that any argument deviating from this plain meaning lacks foundation. The majority opinion attempts to redefine "interest" expansively, invoking the Supreme Court's ruling in Tiffany, which was issued shortly after the National Bank Act's passage. This ruling is misinterpreted by the majority to suggest that Congress was concerned about state discrimination against national banks in setting interest rates. However, the original intent behind Tiffany was to address the potential for state legislatures to eliminate all banking, not to protect national banks from discriminatory rate-setting practices. Justice Strong's opinion in Tiffany indicates that national banks were to have competitive advantages over state banks, necessitating equal rates of interest to prevent unfriendly state legislation from jeopardizing their existence. Thus, the majority's broad interpretation of "interest" to include non-interest-rate charges, such as late fees, does not align with the evident legislative intent regarding interest rates as outlined in section 30 of the National Bank Act. Justice Strong's opinion suggests that states could enact legislation that eliminates banks entirely, transferring lending activities to nonbank lenders. He previously indicated that universal interest rate ceilings would render banking unfeasible. Historically, some states, including Texas, Iowa, and Arkansas, had adopted policies to prohibit banks. The period leading up to 1864 was marked by financial instability, characterized by bank panics and unreliable currencies from state-chartered banks. The destruction of the second Bank of the United States and the chaotic "free banking" era contributed to public distrust of banks. The need for a uniform national currency, especially during the Civil War, prompted Treasury Secretary Salmon Chase to advocate for the National Bank Act. Congress aimed to prevent the abandonment of private commercial banking by linking national bank interest rate ceilings to those set by local legislatures for nonbank lenders. This connection does not support the notion that Congress intended the term "interest" in the statute to encompass late payment fees, as the primary goal was to ensure the viability of national banks rather than to protect them from discriminatory practices favoring state banks. The excerpt analyzes the historical context surrounding the Supreme Court's opinion in Tiffany v. National Bank, emphasizing that the court was focused on the legislative abolition of banks rather than discriminatory fee differentials against national banks. It highlights a well-established constitutional doctrine regarding the immunity of federal instrumentalities from state law impairments, referencing key cases such as Osborn v. Bank of the United States and McCulloch v. Maryland, which affirm that the Bank of the United States is a necessary instrument for executing federal powers and thus immune from state taxation. Additionally, the excerpt notes that the Dearing case reaffirmed the status of privately owned national banks as instruments aiding government functions. It asserts that both Congress and legal authorities recognized the constitutional prohibition against state measures discriminating against national banks. The text critiques the majority's interpretation of the term "interest" in the National Bank Act, arguing that it lacks justification and is influenced by the recent Marquette National Bank decision. This case is cited as a basis for the majority's reasoning concerning federal preemption and interstate banking, suggesting that the majority improperly expands the definition of "interest rates" to include noninterest-rate charges like late fees, a conclusion seen as flawed by the excerpt. The reasoning criticized here highlights that neither the Supreme Court's ruling in Marquette nor the Congress of 1864 considered the concept of interstate banking, which was nonexistent then and only began to emerge around 1978. Both the Marquette case and the National Bank Act were established within the context of a localized, intrastate banking system that has historically defined American banking. The opinion in Marquette, which focused solely on interest rates, does not support the majority's broader interpretation of "interest" to include various credit terms such as late fees. The argument that Congress intended for section 30 of the National Bank Act to encompass the concept of exporting credit terms is flawed, as the reality of interstate banking and its associated economic pressures were not anticipated in the 1864 legislative environment. Thus, the notion that Congress enacted legislation with an understanding of contemporary interstate banking practices is unfounded, as such practices were not recognized until much later. The term "exportation" pertaining to interest rates became relevant only after the Marquette decision, and the historical context shows that Congress could not have intended the implications attributed to them by the majority opinion. The excerpt critiques the majority's interpretation of congressional intent regarding the National Bank Act, arguing that it imposes a modern understanding of interstate banking that did not exist at the time of enactment. It emphasizes that the historical context shows Congress was primarily focused on supporting the survival of national banks within state boundaries. The text argues against the majority's assertion that South Dakota can dictate terms to California credit card holders based on a broad interpretation of "interest," asserting that such an interpretation misrepresents the historical realities of American banking. The author highlights that the principle of exportation, tied to federal preemption, requires a clear and manifest congressional purpose to invalidate state laws, a standard that has historically favored state regulation in banking matters. The excerpt cites various cases that establish a restrictive standard for preemption, noting that state laws should only be invalidated if they significantly impair national banks' operations or conflict with federal laws. The preemption test for state banking laws as they relate to national banks demonstrates significant deference to state regulations, consistent with the historical dual banking system. National banks are primarily governed by state law in their day-to-day operations, as established in case law such as McClellan v. Chipman and National Bank v. Commonwealth. The dual banking system, initiated by the National Bank Act of 1863, has seen limited instances of explicit federal preemption, with courts typically defining the boundaries of federal versus state regulation. State laws generally apply to national banks, including their rights to contract and collect debts, as noted in National State Bank, Elizabeth, N.J. v. Long. The California statute in question, section 1671, subdivisions (c) and (d) of the Civil Code, does not seem to violate constitutional standards under the current preemption test. Citibank, which bears the burden of proving federal preemption, has not successfully shown that California's prohibition of late fees unrelated to actual damages would hinder its federal responsibilities. Professor Geoffrey Miller highlights that the banking industry's evolution often occurs without stringent regulatory oversight, with changes arising from the exploitation of statutory powers and loopholes rather than direct legislative action. The case at hand exemplifies this dynamic, with late payment charges by credit card banks reaching nearly $2 billion in 1992, illustrating the significant financial implications of the regulatory environment. A significant portion of credit card revenue has been attributed to Citibank, the leading issuer in the interstate market, which has capitalized on perceived regulatory loopholes in federal-state banking laws. Citibank is noted as the largest issuer of Visa and Mastercard, with over $35 billion in billings. However, this situation raises concerns regarding California's legislative authority to protect its residents in credit transactions. The dissenting opinion argues that federal law should not inhibit California from enforcing its consumer protection laws on late payment charges imposed by out-of-state national banks operating within the state. Historically, out-of-state corporations engaging in business in California are generally subject to the state's consumer protection regulations. While Congress has the power to exempt national banks from state laws, it has not established a comprehensive federal legal framework governing all aspects of their operations. National banks have traditionally been more influenced by state laws than by federal law. The dissent cites precedent indicating that California can apply its consumer protection laws concerning certain fees, such as those associated with insufficient funds. However, it acknowledges that under federal law, specifically 12 U.S.C. § 85, California cannot impose its laws regarding interest rates on national banks like Citibank. In Marquette Nat. Bank v. First of Omaha Corp. (1978), the U.S. Supreme Court determined that Minnesota could not impose its interest rate limits on a national bank based in Nebraska, allowing the bank to charge rates authorized by Nebraska law to Minnesota residents. This precedent indicates that Citibank, as a national bank from South Dakota, is similarly exempt from California's interest rate restrictions on its credit card accounts. However, the Marquette decision did not clarify whether Section 85 of the National Bank Act applies to late payment fees. The analysis suggests that late payment charges do not qualify as "interest" under Section 85, as the term lacks a specific definition within the statute and is understood in its ordinary sense. Various cases illustrate that fixed late payment fees, not tied to the loan amount or duration, are typically categorized as penalties or liquidated damages, contingent on the borrower’s timely payment. Legal precedents support the view that late payment fees are distinct from interest charges, reinforcing that they should not be treated as such under the law. A late payment charge or assessment is distinct from interest regarding the determination of usury in loans. Notably, in *First American Title Ins. Trust Co. v. Cook*, it was established that a $5 late charge does not qualify as interest for usury evaluations, emphasizing that usury must be assessed at the transaction's inception. A non-usurious agreement cannot retroactively become usurious due to a borrower’s default. Late payment fees apply only upon default and are considered penalties for nonperformance rather than interest on the loan. In *Fox v. Federated Department Stores*, it was ruled that a late payment finance charge on a credit card is not usurious since the contract does not initially require such payment; the charge results from the borrower’s failure to make timely payments. Historical context shows that the statutory reference to "interest" in section 85, enacted in 1864, was not meant to include late payment fees, supported by precedents from the U.S. Supreme Court which clarify that contingent late charges are not classified as interest. The majority's view that "interest" should broadly encompass late fees to meet legislative intent is challenged, as the prevailing interpretation historically has excluded such charges from the definition of interest. The excerpt addresses the interpretation of "interest" under section 85, emphasizing that if not defined to include late payment charges, national banks could be disadvantaged by state laws favoring local lenders. The author critiques the majority's reasoning, arguing that states cannot discriminate against national banks as federal instrumentalities, citing historical case law. The excerpt also asserts that potential state discrimination in other regulatory areas does not justify classifying late payment charges as "interest." Ultimately, the author concludes that "interest" in section 85 should not encompass late payment charges and suggests that Congress could amend the statute if it wishes to include such charges. The author calls for the reversal of the Court of Appeal's judgment, allowing the plaintiff's action to proceed. The United States Supreme Court upheld the California Supreme Court's decision on June 3, 1996. The Court of Appeal treated Smiley's appeal as originating from the superior court's judgment, which was appealable, rather than from an order granting Citibank's motion, which was not. Citibank sought judicial notice of various documents, including decisions from federal and sister-state courts, documents from the Office of the Comptroller of the Currency, and materials related to Citibank's credit card accounts, which were accepted as permissible under evidentiary law. Smiley challenged some of this judicial notice without success. Additionally, Chase Manhattan Bank, N.A. supported Citibank's position and also requested judicial notice of similar items, which was granted. Smiley attempted to strike a brief filed by the Comptroller of the Currency, claiming he exceeded his authority, but this request was denied. The document notes recent additions to the Code of Civil Procedure and Financial Code, although neither party raised issues regarding their relevance to the case. Smiley further contended that the superior court's order did not accurately reflect the proceedings, but the court found no basis for this assertion. Lastly, it was noted that the "three categories" of preemption mentioned should not be viewed as entirely separate. Field pre-emption is a form of conflict pre-emption where state laws within a pre-empted field contradict Congress' intent to limit state regulation. Justice Arabian, in dissent, argues that state laws should only be invalidated if they hinder national banks' duties to the government, citing McClellan v. Chipman. However, this perspective is challenged by the Supreme Court's analysis in Marquette, which does not consider whether state laws incapacitate national banks. Marquette established that national banks can charge interest rates up to the highest allowed by state law, aligning with the regulations of the Comptroller of the Currency. The historical context of "interest" is also explored, differentiating it from "usury" and highlighting its broad legal definition in both English and American law. In essence, the text emphasizes the supremacy of federal regulation over conflicting state laws in the banking sector and clarifies the definition and implications of interest in legal terms. The institution of interest, originating from Roman law, was a penalty imposed on debtors who delayed or defaulted on loan repayments, quantified as id quod interest—which represents the difference between the creditor's current position and what it would have been had the loan been repaid on time. Justice George's dissent overlooks the broader interpretation of "interest" in American law at the time the National Bank Act was enacted, failing to cite relevant case law. The term "interest," even when associated with a "rate," should not be restricted to periodic charges. For example, a promissory note specifies that upon default, interest accrues at a defined rate until paid, regardless of being termed a late payment fee. Justice George incorrectly contends that "interest" excludes late payment fees; however, legal precedents indicate that such fees do not constitute usury if avoidable by timely payment. Notably, one referenced case clarifies that late payment fees can be considered lawful interest. Annotations on the subject support the view that late payment fees are generally lawful and do not render a loan usurious, provided good faith is maintained in the contract. Thus, assertions that late payment fees are not considered interest are misleading, as they are typically recognized as lawful interest within the context of determining compliance with usury laws. Justice Arabian's dissent argues that "interest" does not encompass late payment fees, repeatedly categorizing them as a "non-interest-rate term." He and Justice George contend that Congress did not need to protect national banks under the "most favored lender" doctrine regarding late payment fees, citing the longstanding principle that states cannot discriminate against federal instrumentalities. However, their position contradicts the United States Supreme Court's ruling in Tiffany, which affirmed that Congress provided such protections. Justice Arabian's attempt to redefine the "most favored lender" doctrine as a barrier against states abolishing banking fails to account for historical legislative intent and judicial interpretations, particularly those articulated during the enactment of the National Bank Act and reaffirmed in Marquette. Justice George further asserts that section 30 of the National Bank Act does not imply that "interest" includes late payment fees, yet overlooks the broader legal definitions of "interest" at the time of the Act's passage. Ultimately, both justices' interpretations struggle against established precedent. The United States Supreme Court classified periodic percentage charges on credit card transactions as "interest," particularly when incurred due to a borrower's failure to pay the full balance. The Pennsylvania Superior Court, in Mazaika v. Bank One, limited the definition of "interest" under section 85 of the National Bank Act to only those charges that are absolutely payable by maturity. Subsequent cases, such as Gadon v. Chase Manhattan Bank and In re Citibank, adhered to Mazaika's interpretation. However, the current document finds Mazaika unpersuasive, arguing that it misrepresents Congress's intent regarding the term "interest" as understood by the average person. The Pennsylvania Supreme Court has accepted appeals in both Mazaika and In re Citibank. Additionally, a 1964 letter from the Comptroller of the Currency suggested that certain consumer charges, like late fees, are not considered interest but did not provide a definitive ruling on the matter within the context of section 85. Legislative history from the Senate Report on DIDA clarifies that only charges included in the annual percentage rate are exempt from state usury limitations, excluding late fees and similar charges. Other cases cited fail to clarify the definition of "interest" adequately. The document references several legal precedents regarding the definition of "interest" under the National Bank Act, noting that multiple cases, including *Insurance Company v. Piaggio* (1873) and *United States v. Childs* (1924), have not defined "interest" either generally or under specific sections of the Act. It emphasizes that interest serves as compensation, while penalties are considered punitive measures. The document also discusses the implications of liquidated damages versus penalties in relation to attorney's fees and suggests that certain cases, such as *Perdue v. Crocker National Bank* (1985) and *Beasley v. Wells Fargo Bank* (1991), do not pertain to section 85 of the National Bank Act. It notes a comparison between Citibank's late payment fees and those authorized by section 4001 of the Financial Code, indicating that the fees may align with the definition of interest as proposed by Smiley. Furthermore, the document addresses Smiley's argument that the Court of Appeal erred by not granting leave to amend her complaint, concluding that there is no reasonable possibility of curing the defects in the complaint, particularly regarding Citibank’s late payment fees. Judge Douglas Ginsburg highlighted the strategic relocation of banks like Citicorp, Chase Manhattan, and Morgan to states like South Dakota and Delaware in 1981, where they could benefit from favorable local laws and unlimited interest rates under national charters. This shift allowed banks to extend credit to residents in other states at their new home state's interest rates. The South Dakota Legislature's authority extends beyond late payment penalties to influence various credit card charges, including annual fees, grace periods, and attorney fees, raising questions about the extent of its regulatory power. Historical context was provided, referencing a 1863 account of the chaotic currency system in the West, illustrating the financial disarray of the time. Additionally, the National Bank Act aimed to dismantle the state banking system by imposing a tax on state bank notes, leading to a sharp decline in state banks from 1,089 to 259 between 1864 and 1869, while national banks grew significantly. Over time, state banks regained some footing, achieving a balance with national banks due to the growing use of bank drafts. The dual banking system emerged post-National Bank Act, characterized by the coexistence of state and federally chartered banks. At the time of the Tiffany opinion, national banks significantly outnumbered state banks, which were struggling due to federal regulations on circulating notes. This context raised concerns that states might respond by implementing usury laws favoring non-bank lenders. The majority opinion acknowledges that previous rulings, such as Spain v. Hamilton's Administrator and Lloyd v. Scott, suggest late payment charges are not typically regarded as usurious interest. However, it argues these cases do not negate the possibility of late-payment fees being classified as "interest," but rather as "unlawful interest." The author contends that section 85 of the National Bank Act was intended to limit national banks to charging interest as defined by state law and not to include additional fees like late payment charges, which are usually not subject to interest rate regulations. The author references federal statutes that distinguish between interest and late payment fees, such as the Truth in Lending Act, which defines "finance charge" to include interest but exclude late payment charges. Additionally, a Texas case supports the notion that federal legislation does not preempt state laws concerning late fees. The author's critique emphasizes that the majority's broad interpretation of "interest" in section 85 aligns with lower federal court cases but lacks historical backing regarding the inclusion of late payment fees.