Supreme Court Seeks Government Opinion on Chase Credit Card Case

January 25, 2010

The Supreme Court on Monday asked the U.S. government for its opinion on a lawsuit against JPMorgan Chase & Co. that says it violated federal law by failing to notify credit card holders before raising interest rates because of late payments or defaults.

The lead plaintiff in the class-action lawsuit, James McCoy, had accused Chase Manhattan Bank of violating the Truth in Lending Act by increasing interest rates retroactively to the beginning of his payment cycle after his account was closed after a late payment to Chase or another creditor.

In its cardmember agreement, Chase said it disclosed the conditions that McCoy had to comply with to remain eligible for the lower interest rate, as well as the maximum interest rate that could apply if he violated those terms.

The Supreme Court asked Solicitor General Elena Kagan to file a brief expressing the federal government’s views of the case, a process that could take several months.

At issue is whether a federal regulation requires notice, even though the contract terms have not changed, when a creditor increases the rate on a credit card in response to a cardholder default and in accord with the contract.

A federal judge in California dismissed the lawsuit, which was filed in 2006, but a U.S. appeals court, by a 2-1 vote, reinstated the lawsuit last year.

The appeals court ruled that McCoy can proceed with the lawsuit if Chase failed to notify him of the increase because of a delinquency or default, or if his cardmember contract does not spell out specific terms for an increase.

The appeals court said a Federal Reserve Board regulation requires contemporaneous notice in cases of discretionary rate increases that occur because of a cardholder’s default.

The Fed amended the regulation last year to require advance notice of 45 days for higher interest rates. The new regulation becomes effective in mid-2010, lawyers in the case said.

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