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From Banking and Finance Law Daily, August 7, 2014

Federal courts have no jurisdiction over Hawaii’s credit card suit

By Richard A. Roth, J.D.

The federal courts do not have jurisdiction over a suit by the Hawaii attorney general claiming that banks’ credit card add-on service practices violated state laws, according to the U.S. Court of Appeals for the Ninth Circuit. The Class Action Fairness Act did not create federal court jurisdiction, and the state’s claims were not completely preempted by the National Bank Act’s provisions on interest rates, the court decided. As a result, the suit will be remanded to the state court where it initially was filed (Hawaii v. HSBC Bank Nevada, N.A., Aug. 1, 2014, Hurwitz, Circuit Judge).

According to the appellate court, the Hawaii attorney general filed essentially identical complaints against six national banks and their affiliates asserting that the financial institutions deceptively marketed various credit card ancillary products to Hawaii cardholders or enrolled the cardholders in the plans without the cardholders’ consent. The products included payment protection plans, extended warranties, identity theft protection, stolen card protection, credit score tracking, and payment warranties, but the attorney general focused mainly on the payment protection plans.

The complaint specifically alleged that the institutions:

  • enrolled cardholders without their consent;

  • enrolled cardholders who did not qualify;

  • used deceptive marketing, contract language, and billing; and

  • targeted vulnerable groups like subprime or elderly borrowers.

The complaint said these were deceptive trade acts and practices and also constituted unjust enrichment in violation of Hawaii law. It explicitly disclaimed any intent to describe a class action and any claims that would support federal court jurisdiction.

Trial court decision. The banks removed the state’s suit to federal district court, and the state sought to have it remanded to the state court. The federal court did not have jurisdiction, the state argued.

The federal court judge agreed, but only in part. Since the complaint relied explicitly only on the attorney general’s authority to being a parens patriae suit and disclaimed any intent to bring a class action, CAFA did not provide jurisdiction, the judge said. CAFA applies only if a plaintiff labels a suit a class action or invokes state or federal class action rules of procedure.

However, the judge also said that federal law completely preempted some of the state’s claims, and complete preemption creates federal court jurisdiction. According to the judge, by claiming that the banks had substantially increased their profits by charging significant fees in exchange for minimal benefits, the state had implicitly alleged that the banks charged impermissible rates of interest. Because the National Bank Act preempts all state laws on interest that can be charged by national banks, the interest-related claims gave the federal court jurisdiction.

The state attorney general appealed.

Complete preemption. As a general rule, a suit arises under federal law, and thus offers federal court jurisdiction, only if the plaintiff’s complaint shows that the claim is based on federal law. Complete preemption is an exception to that general rule. If a federal law completely preempts state law and offers the only remedy for the plaintiff’s injury, then the suit will be deemed to arise under federal law. The banks claimed that the NBA preemption of state interest rate laws established federal court jurisdiction.

The NBA did completely preempt state interest laws, the appellate court agreed, pointing to 12 U.S.C. §85 and 12 U.S.C. §86. However, that did not mean that federal court jurisdiction over the suit existed.

Interest is a payment that compensates a creditor for extending credit, the court said. This probably does not include payment protection plan compensation because that compensation would be a fee specifically assigned to services that were incidental to the credit.

More importantly, even if the fees were interest, the state had not claimed that the institutions had charged interest rates greater than were allowed, the court continued. The state’s complaint invoked state laws against disclosures, contract terms, and trade practices, none of which addressed interest rates. It also complained that the banks had been unjustly enriched, and an unjust enrichment claim cannot be asserted when an express contract, like a credit card account agreement, exists.

In considering a similar suit brought by the Mississippi attorney general, the U.S. Court of Appeals for the Fifth Circuit said “there is a difference between alleging that certain customers are being charged too much, and alleging that they should have never been charged for the service in the first place” (Hood ex re. Mississippi v. JPMorgan Chase & Co., discussed in Banking and Finance Law Daily, Dec. 3, 2013). For the same reason, the Ninth Circuit said, the NBA interest rate provisions did not preempt the Hawaii attorney general’s claims.

CAFA. The court then went on to consider whether the district court judge properly found there was no jurisdiction under CAFA.

CAFA establishes federal court jurisdiction over “a class action” that meets specified criteria (28 U.S.C. §1332(d)). It also defines “class action” as a suit filed under Federal Rule of Civil Procedure 23 or a similar state procedural rule allowing one or more persons to represent a class in a suit. The Hawaii attorney general asserted that he was bringing the suit under his parens patriae authority, not as a class action. This authority was not similar to FRCP 23, the appellate court said.

Looking at the provisions of Hawaii law, the court conceded it was possible the attorney general actually could proceed only through a class action. However, the court could not disregard the unequivocal statement in the complaint that no class action was intended. Since the attorney general had no intent to seek the certification of a class, the suit was not akin to a class action, and there was no federal court jurisdiction under CAFA.

The case is No. 13-15611.

Attorneys: Laura J. Baughman, J. Burton LeBlanc IV, and Sherri Ann Saucer (Baron & Budd, P.C.) for the State of Hawaii. Michael C. Bird (Watanabe Ing LLP) for HSBC Bank Nevada, N.A., and HSBC Card Services. James F. McCabe and James R. McGuire (Morrison & Foerster LLP) for Capital One Bank (USA), N.A., and Capital One Services, LLC. Michael Purpura and Michael J. Scanlon (Carlsmith Ball LLP) for Citigroup Inc., Citibank, N.A., and Department Stores National Bank.

Companies: Capital One Bank (USA); Capital One Services, LLC; Citibank, N.A.; Citigroup, Inc.; Department Stores National Bank; HSBC Bank Nevada, N.A.; HSBC Card Services, Inc.

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