Friday February 8, 10:20 pm Eastern Time

3rd Circuit Deals Blow to Banks Over Credit Card Fee Changes

Shannon P. Duffy (The Legal Intelligencer) --

In a significant defeat for banks, the 3rd U.S. Circuit Court of Appeals has ruled that credit card holders can sue under the Truth in Lending Act over an alleged "bait and switch" in which they say they were promised a card with no annual fee only to learn six months later that a fee was being imposed.

"Solicitation disclosures are intended to alert the consumer to the basic costs of the credit card he is considering -- a purpose unserved where the issuer conceals the temporary nature of a favorable fee or rate in this manner," 3rd Circuit Judge Anthony J. Scirica wrote in Rossman v. Fleet Bank.

The ruling reverses a decision by U.S. District Judge Bruce W. Kauffman, who found that the TILA has a narrow scope and requires only that banks disclose all the terms that will apply to credit card holders on the day they receive the card.

In dismissing the suit, Kauffman wrote: "If as alleged, Fleet lured consumers into opening credit card accounts with relatively favorable terms while intending to switch those terms shortly thereafter, then Fleet unquestioningly engaged in wrongdoing. But wrongdoing alone does not automatically trigger application of the TILA's provisions."

Instead, Kauffman found that Fleet's disclosures in the solicitations it sent to consumers in late 1999 were "accurate with respect to the terms offered at that time; the fact that Fleet allegedly intended to change those terms in the near future did not render the disclosures inaccurate for purposes of the TILA."

In the appeal, plaintiffs' attorney Michael D. Donovan of Philadelphia, Pennsylvania-based Donovan Searles argued that the TILA is a consumer protection statute that should prohibit a bait-and-switch in which a credit card issuer solicits new customers with a promise of no annual fee despite its secret intention of imposing a fee within the first year.

Donovan contends that even after Fleet imposed the annual fee on the lead plaintiff, Paula Rossman, it continued to mail solicitations that promised a card with no annual fee.

Fleet's lawyer, Burt M. Rublin of Philadelphia-based Ballard Spahr Andrews & Ingersoll, argued that the TILA should not be read as a consumer protection statute, but rather as a disclosure law.

Rublin said Kauffman got it right because he focused on Fleet's duty to disclose the terms that applied at the time the card was issued. And the cardholder agreement, he said, clearly spelled out that Fleet reserved the right to change the terms at any time.

But Scirica sided with Donovan and found that the TILA was designed to protect consumers and that it should, therefore, be liberally construed in the consumer's favor.

"Under the approach urged by Fleet, a credit issuer would be able to disclose any terms it wanted to, with no intention ultimately to offer those terms. It could send, together with the card, a new set of disclosures stating the terms it had always actually intended to provide," Scirica wrote in an opinion joined by Judges Samuel A. Alito and Maryanne Trump Barry.

"Fleet's approach would have the potential to render the solicitation disclosure requirements created by the 1988 amendments to the TILA entirely ineffectual. Misleading early disclosures would serve no informative purpose. And worse, the additional disclosure requirement mandated by Congress -- for the purpose of encouraging informed consumer choices -- could be used for the purpose of deceiving consumers."

In the suit, Rossman claims that she responded to a Fleet solicitation that pitched a credit card with no annual fee but that Fleet added a $35 annual fee just six months later.

Fleet's explanation for the annual fee was that the Federal Reserve Board had raised interest rates. But the suit alleges that Fleet planned all along to impose a fee if interest rates rose.

Rossman alleges that despite Fleet's protestations that it had been effectively forced to cease offering the card without an annual fee, it continued to solicit other new customers with offers for no-annual-fee credit cards.

Scirica found that the stated purpose of the TILA, which took effect in 1969, is "to assure a meaningful disclosure of credit terms so that the consumer will be able to compare more readily the various credit terms available to him and avoid the uninformed use of credit, and to protect the consumer against inaccurate and unfair credit billing and credit card practices."

The law requires a series of disclosures that must be made before the consummation of the underlying credit agreement, as well as at certain other specified times.

"Because the TILA is a remedial consumer protection statute, we have held it should be construed liberally in favor of the consumer," Scirica wrote.

In 1988, Scirica said, Congress decided to strengthen the TILA by passing the Fair Credit and Charge Card Disclosure Act, which bolstered the law's requirements with respect to credit cards.

Significantly, for the first time, the law imposed disclosure requirements on credit card applications and solicitations. The TILA now requires applications and solicitations to disclose the annual percentage rates, certain fees (including annual fees), the grace period for payments, and the balance calculation method.

Before the amendments, Scirica said, the TILA required only that credit card issuers make such disclosures before the opening of the account -- a requirement that was ordinarily fulfilled by the issuers providing the disclosures along with the card.

Scirica found that the disclosures required by the law "are intended to make the terms of the contractual agreement accessible to the consumer."

As a result, Scirica said, Fleet's statement that its card had no annual fee was lawful only if it met two conditions:

"First, it must have disclosed all of the information required by the statute. And second, it must have been true -- i.e., an accurate representation of the legal obligations of the parties at that time -- when the relevant solicitation was mailed."

Rossman's suit contained a three-prong attack.

First, she alleged that the statute requires not only disclosure of presently imposed annual fees, but also any annual fee that might be imposed in the future. Second, she argued that whether or not Fleet was required to disclose future fees, its disclosures failed to meet the requirements of the TILA because they misleadingly suggested there never would be an annual fee.

Finally, she claimed that Fleet used the disclosures as part of a bait-and-switch scheme by which it attracted business with the offer of a no-annual-fee card, even though it intended to charge an annual fee on the card soon thereafter.

Donovan argued that Kauffman misinterpreted the TILA by holding that the law requires disclosure of only the "presently imposed" fees.

Federal regulations, he said, require that banks disclose any fee "that may be imposed" -- a phrase that Donovan interpreted as requiring disclosure of all fees that might ever be imposed.

Scirica disagreed, saying, "The Federal Reserve Board's use of the word 'may' does not compel adoption of plaintiff's interpretation. The phrase 'may impose' means 'is permitted to impose' in this context, and not, as suggested by plaintiff, 'might impose.' Thus, the issuer is required to disclose any fees it is permitted to impose under the applicable agreement. The permissive sense of 'may' is more congruous with the structure of the TILA as a whole."

But Scirica sided with Donovan on the larger question of how the courts should interpret Fleet's promise of no annual fee.

"Because the TILA is a consumer protection act designed to provide easily understood information to ordinary consumers, it is appropriate to make this determination from the point of view of the consumer," Scirica wrote.

Scirica found that, at a minimum, such a claim should be interpreted as promising that no annual fee would be imposed in the first year.

"Interpreting the statement with an implied annual term is at least as natural as interpreting it with no such term, so the statement is ambiguous at best. And because the TILA, which 'should be construed liberally in favor of the consumer,' is intended to provide clear information to consumers, such ambiguities should be resolved in favor of the consumer," Scirica wrote.

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