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

RESPONDENT: Citibank (South Dakota), N. A.
LOCATION: Virginia Military Institute

DOCKET NO.: 95-860
DECIDED BY: Rehnquist Court (1986-2005)
LOWER COURT: Supreme Court of California

CITATION: 517 US 735 (1996)
ARGUED: Apr 24, 1996
DECIDED: Jun 03, 1996

Irving L. Gornstein - Argued the cause for the United States as amicus curiae, supporting the respondent, urging affirmance
Michael D. Donovan - Argued the cause for the petitioner
Richard B. Kendall - Argued the cause for the respondent

Facts of the case

Barbara Smiley, a resident of California, possessed credits cards issued by Citibank, a national bank located in South Dakota. Under certain circumstances, Citibank will issue late-payment fees. In 1992, Smiley brought a class action against Citibank on behalf of herself and other California holders of Citibank's credit cards, alleging that the late-payment fees charged by Citibank, although legal under South Dakota law, violated California law. In response, Citibank argued that a provision of the National Bank Act of 1864, which permits a national bank to charge its loan customers "interest at the rate allowed by the laws of the State... where the bank is located," pre-empted Smiley's state law claims. After accepting Citibank's argument that late-payment fees constituted "interest," the California Superior Court ruled in its favor. The California Superior Court Supreme Court affirmed.


Does the National Bank Act of 1864 authorize a national bank to charge late-payment fees that are lawful in the bank's home State but prohibited in the States where the cardholders reside?

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

Audio Transcription for Oral Argument - April 24, 1996 in Smiley v. Citibank (South Dakota), N. A.

William H. Rehnquist:

We'll hear argument next in number 95-860, Barbara Smiley v. the CitiBank of South Dakota.

Mr. Donovan.

Michael D. Donovan:

Mr. Chief Justice, and may it please the Court:

This case concerns the meaning of the phrase 85 of the National Bank Act, which was passed by Congress originally in 1864.

In particular, this case brings before the Court the question of whether Congress intended "interest" and "rate" in that section... in that phrase to include some certain late fees that are not measured by time or based upon an unpaid balance or unpaid late payment, so as to preempt State contract laws, State laws governing liquidated damages that regulate such late fees in a borrower's home State.

The briefs of the parties here, Your Honors, have presented three contrasting views as to what Congress meant when it used the phrase 85.

In Petitioner's view, Congress meant a charge measured by time, based upon an unpaid balance.

In Respondent's view, Congress meant all lending charges; that is, all charges that have an impact upon the borrower/lender relationship so as to affect the yield that the lender receives from a loan.

There's a third contrasting view here, and that's presented by the Government that has filed an amicus brief in support of the bank in this case.

That view, espoused by the OCC recently, is that "interest at the rate" does not mean all lending charges, even though it might have meant that at one point, but it means something now or something less than all lending charges, but the agency will tell us precisely what interest charges are interest at the rate and what interest charges are not interest at--

Sandra Day O'Connor:

Well, Mr. Donovan, if... if the term "interest" is open to some interpretation, there either is or is going to be, I gather, a comptroller's interpretation of the term.

Michael D. Donovan:

--That is correct, Your Honor.

Sandra Day O'Connor:

Do we owe any deference to that, where it will expressly include late fees?

Michael D. Donovan:

The question of deference to the comptroller ought to be looked at initially by looking at the Statute itself, to determine whether the Statute itself addresses that, so as to whether there should be any need to turn to the comptroller.

And here, we believe that there are at least four phrases in the Statute or in the National Bank Act itself which give guidance to this Court as to why neither deference is appropriate and why "interest at the rate" mean... means what Petitioner says it means.

First, Your Honors, is the phrase "interest at the rate" itself.

Interest, both in 1864 and commonly today, was conceived of a charge that was somehow connected to the time during which money is received by a borrower and the time in which it's paid back.

It is also a charge that has some relationship to the amount of money received by the borrower and... and the time in which the borrower would then have to return that amount.

Another phrase that is in the Statute itself, Section 85 of the National Bank Act, is found further down in the Section, and it refers to a common type of lending practice that was prevalent in the mid-1800's, and that was the advance collection of interest on discounted notes, where a borrower would tend... tender his notes in exchange for a currency, and the bank would discount that note at the outset to collect interest.

Upon that--

Antonin Scalia:

That's still done now, isn't it?

That... that's not disappeared?

Michael D. Donovan:


In fact, it still happens today, Justice Scalia.

But what Congress allowed in Section 85 was that you may collect interest in advance... and I'll... and using the words of this Statute,

"reckoning the days for which the note, bill or other evidence of debt has to run. "

Now, reckoning isn't a common word today, but it was referring to some xx of calculation of time and amount, reckoning the two.

Antonin Scalia:

Well, that... that shows that it does include that kind of interest, the... the normal kind, but it doesn't show that it excludes the other kind.

The trouble I have with your position, Mr. Donovan, is I don't see how effective this provision in the Bank Act would be, which was intended to be a usury provision, if it said it's perfectly okay so long as you put in the loan agreement

"interest shall be 6 percent per year, plus $10 a week no matter what the outstanding balance is. "