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Argument preview: Must a card-issuer inform a card-holder of a rate change in response to a default?

Chase Bank USA v. McCoy, scheduled for oral argument on December 8, is an oddity on the Court’s docket.  The question presented by the case is a narrow one: whether a card issuer that responds to a cardholder default by raising the cardholder’s interest rate must send advance notice to the cardholder that it is changing the terms of the account.  All agree that the issue is resolved by the details of the Federal Reserve’s Regulation Z, which governs many aspects of a credit card issuer’s treatment of its cardholder.  And all agree that the regulation in effect at the time this dispute arose was amended in 2009; the revised regulation explicitly requires the notice Chase did not send in this case.

So what I was doing when I first read the papers in McCoy was mulling what would motivate the Court to grant review in such a self-evidently trivial matter.  I suggest a confluence of three features of the case.  I doubt that any of the three standing alone would have been adequate to warrant review, but together they apparently were adequate.  Writing from the perspective of an advocate, the first is that Chase retained former Solicitor General Seth Waxman, who wrote a first-rate petition.  Obviously the Court doesn’t grant every petition written by an experienced Supreme Court advocate.  This is especially true in cases that involve issues of such indisputably narrow scope as this one.  But the petition in this case did a masterful job of documenting a substantial monetary and practical impact for a case that (given the 2009 amendments to Regulation Z) easily could have been dismissed out of hand.

The second obvious thing about the case is the lineup of the court below: the decision comes from the Ninth Circuit, where Judge Hawkins (with Judge Pregerson) ruled for the cardholder over a dissent from the Seventh Circuit’s Judge Cudahy.  It is natural to assume that the Court’s lack of confidence in the Ninth Circuit’s fidelity motivated at least some of the Justices that voted to grant review.  Again, the context makes this noteworthy: nobody is surprised to see the Court reviewing the judgments of the Ninth Circuit in an error-correction mode, but in the great majority of those cases the disputes involve the government – either the federal government challenging intrusion into federal programs or state governments defending their criminal processes.  It is much less common in cases arising out of the Ninth Circuit (as opposed, for example, the Federal Circuit) to see the error-correction mode in a wholly private dispute.  Even as skilled an advocate as Seth Waxman will have a hard time persuading the Court to take seriously the need for error correction in a wholly private dispute.

The third thing about the case is the sense of flagrancy.  Although respondent James McCoy does a workmanlike job of debating the rules about when an agency interpretation is binding, it is plain that the Ninth Circuit panel understood its decision as a rejection of the agency’s long-standing understanding of its own regulation.  Among other things, the agency’s notice of the changes it proposed to make in 2009 explained with clarity the agency’s understanding of its old regulations – as a basis for altering the regulations to call for a different result.  Even more compelling, by the time the case reached the Court, the Federal Reserve had filed an amicus brief in the Second Circuit rejecting the Ninth Circuit’s reading of the regulation. Judge Cudahy’s dissent also contributed to the sense of flagrancy, emphasizing the panel’s departure from a unanimous course of prior decisions (admittedly at the district court level), all of which had rejected the cardholder’s view.

I was following the case at the petition stage.  And I will admit that I thought at the time that the petition had little likelihood of success.  But when the Court called for the views of the Solicitor General, the terrain had shifted: once the Court decided to look closely at this case, the likelihood that the Ninth Circuit’s decision would remain intact diminished substantially.  Even then, though, I thought the most likely outcome (as the Solicitor General recommended) was some type of summary reversal, perhaps giving the Ninth Circuit an opportunity to investigate the more fulsome subsequent development of the views of the Federal Reserve about its regulations.  As it stands, however, the case is instead on the Court’s plenary docket.

On the merits, the arguments are exactly what you would expect.  Chase emphasizes the normality of the conduct in question: it did nothing here that every credit card issuer has not done thousands of times each of the last twenty years.  Chase naturally contends that the plain language of the regulation compels its position, but an objective observer would regard its reading of the text as somewhat strained if it were not accompanied by persuasive evidence of longstanding industry practice acquiesced in by the Federal Reserve.  Thus, Chase’s most compelling point is the commentary to the regulation, which at the time of this case explicitly and unambiguously supported the process it followed.

Conversely, McCoy rests directly on the plain language of the regulation, which certainly could be read to support his contention that a fifteen-day advance notice of the increased interest rate is required.  McCoy’s weak point, in turn, is his effort to minimize the significance of the Federal Reserve’s understanding of the regulation.  This does provide an interesting debate about the level of formality necessary for a Court to be bound by an agency’s views about the meaning of its own regulations.  And that is the kind of issue where Justice Scalia may well have a more austere view than his colleagues regarding the types of material that fairly can be treated as relevant to the interpretation of such a regulation.

In the end, though, it is difficult to believe the Court will see this as an occasion to take a stand on forcing the Federal Reserve to adhere to a plain-language interpretation that the Federal Reserve never contemplated.

Recommended Citation: Ronald Mann, Argument preview: Must a card-issuer inform a card-holder of a rate change in response to a default?, SCOTUSblog (Nov. 18, 2010, 2:12 PM),