The U.S. Court of Appeals for the Ninth Circuit has now joined the First and Seventh Circuits in holding that the Delaware Banking Act permits discretionary post-default rate increases by credit card issuers. The ruling was made on August 19, 2011, in McCoy v. Chase Manhattan Bank, USA, which the U.S. Supreme Court had remanded to the Ninth Circuit earlier this year after reversing its interpretation of the Truth in Lending Act (TILA) and Regulation Z. (See our prior legal alert on the Supreme Court’s decision.)
Under its credit card agreement with James McCoy, Chase had the right to increase the rate up to a stated maximum upon his default. The Supreme Court rejected the Ninth Circuit’s conclusion that, under TILA and Reg. Z as they existed at the time, Chase was required to notify McCoy of the increase by the date it took effect. However, as state law issues were not before it, the Supreme Court did not directly address the Ninth Circuit’s troubling interpretation of Delaware law. The Delaware Banking Act allows interest rates that “vary in accordance with a schedule or formula.” Prior to remand, the Ninth Circuit had held that McCoy’s rate increase was not made according to a “formula or schedule” because the cardholder agreement did not require Chase to increase the rate on default or specify the amount of the increase.
On remand, the Ninth Circuit observed that, subsequent to its original McCoy decision, the First and Seventh Circuits both concluded that Delaware law allows credit card issuers to reserve the right in a cardholder agreement to make discretionary rate increases upon default up to a maximum rate. It also found that not only did those decisions cause it to question its prior interpretation of the Delaware “formula or schedule” provision, but that a clarifying amendment to the provision indicated that the Delaware legislature agreed with the First and Seventh Circuits’ interpretation. That amendment added language stating that nothing in the provision “precludes a bank from charging or reserving a right to charge, by discretion or otherwise, a rate lower than any maximum rate provided for in any schedule or formula.”
Having found that Delaware law permitted Chase’s action, the Ninth Circuit affirmed the district court’s dismissal of McCoy’s state law claims for declaratory relief, reformation, damages for assessment of an illegal penalty, and breach of contract. Those claims had previously been reinstated by the Ninth Circuit on the grounds that the rate increase might be “unconscionable” because it was not authorized by Delaware law.