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Van Slyke v. Capital One Bank

June 7, 2007


The opinion of the court was delivered by: Alsup, District Judge.

Order on Motion for Reconsideration July 3, 2007



In this putative class action challenging defendants' credit card practices, defendants move to dismiss three of plaintiffs' four claims under Rule 12(b)(6). Defendants also move to transfer this action to the Eastern District of Virginia. Defendants have shown that the California Consumer Legal Remedies Act does not cover the credit card transactions at issue, so that claim must be dismissed. However, plaintiffs' California claims for unfair competition and deceit are not "preempted" by Virginia law. Although this action could have been brought in the Eastern District of Virginia, defendants have failed to show that the convenience and public interest factors favor transfer. Accordingly, defendants' motion to dismiss for failure to state a claim is Granted in Part and Denied in Part. Their motion to transfer is Denied.


Plaintiffs David Van Slyke, Franklin Chan, and Thomas E. Browning were all offered and accepted credit cards from defendants (Compl.¶ 9-11). They allege that they were charged unlawfully high and deceptive fees and were the victims of deceptive practices related to those credit card accounts ( ibid.). Van Slyke is a resident of Ashtabula County, Ohio; Chan is a resident of San Francisco, California; and Browning is a resident of Salem, Arkansas ( ibid.).

Defendant Capital One Bank is a Virginia-chartered bank with its principal place of business in McLean, Virginia ( id. at ¶ 13).*fn1 Capital One Bank offers credit cards and financial products to consumers throughout the United States but the majority of its credit card business is conducted in or around Richmond, Virginia (Forestell Decl. ¶¶ 3-4). Defendant Capital One Financial Corporation is a financial holding company incorporated in Delaware (Compl.¶ 12). It allegedly has its principal place of business in McLean, Virginia ( ibid.).

This action concerns defendants' subprime credit card business which it refers to as its Mainstreet line of credit cards (Forestell Decl. ¶ 6). When targeting the subprime credit card market, defendants allegedly do so with the expectation that card holders will default on at least one account allowing defendants to charge very high fees (Compl ¶ 18-22). Capital One Bank allegedly offers several credit cards with low credit limits, around $250 to $500, to its subprime customers, betting that they will exceed the limit on at least one card, allowing Capital One to charge fees on all card accounts ( ibid.). Plaintiffs also allege that the credit agreements contain an unconscionable provision that requires disputes to be settled in arbitration with a waiver of class-action relief ( id. at ¶¶ 55-57).*fn2

Finally, plaintiffs allege that Capital One Bank's disclosures related to the cost of credit for its Mainstreet products are inadequate and deceptive ( id. at ¶¶ 45-52). For example, credit card customers receive a monthly statement that shows a minimum payment that customers must pay. Many of Capital One's subprime customers are allegedly led to think they need only make the minimum payment to keep from defaulting on their account. Problems arise when Capital One has added late fees or over-the-limit fees to the account. With alleged deceptiveness, the minimum payment does not include those fees, so even though a customer pays the minimum payment, his or her account is still in default because of the additional fees, leading to a daisy chain of further penalties ( id. at ¶¶ 17-21).

At all times relevant to this action, the Mainstreet credit card business has been operated out of Goochland County, Virginia (Forestell Decl. ¶ 10). All policies related to those cards, including interest rates, late fees, conditions under which customers may obtain multiple cards, credit limits, default procedures, and disclosures regarding minimum payments were developed by employees working in or around Goochland County, Virginia ( id. at ¶ 10). Capital One Bank maintains its electronic customer records largely in Virginia, and copies of solicitations used to market its credit cards are also stored there ( id. at ¶ 9).

Defendants have identified a number of current and former Capital One Bank employees they believe may have information or be called as witnesses in this action. These include those responsible for designing solicitations, training customer service representatives to deal with customers, setting default rates and determining fee structures ( id. at ¶ 11-21). The vast majority of these people reside in or around Goochland County Virginia ( ibid.). No policies related to the cards were created in California.

Plaintiffs filed this action on February 1, 2007. The complaint alleges violations of the federal Truth-in-Lending Act, 15 U.S.C. 1601 et seq., the California Consumer Legal Remedies Act, California Civil Code §§ 1750 et seq. , California Business and Professions Code §§ 17200 et seq. , and a common-law claim for deceit or omission of material facts. Now, defendants move to dismiss the complaint and to transfer this action to the Eastern District of Virginia.


1. Motion to Dismiss.

A motion to dismiss under Rule 12(b)(6) tests the legal sufficiency of the claims alleged in the complaint. "While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, a plaintiff's obligation to provide the `grounds' of his `entitlement to relief' requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do." Bell Atlantic Corp. v. Twombly, --- U.S. ----, ---- - ----, 127 S.Ct. 1955, 1964-65, 127 S.Ct. 1955 (2007). "All allegations of material fact are taken as true and construed in the light most favorable to plaintiff. However, conclusory allegations of law and unwarranted inferences are insufficient to defeat a motion to dismiss for failure to state a claim." Epstein v. Wash. Energy Co., 83 F.3d 1136, 1140 (9th Cir.1996).

A. CLRA Claim.

Defendants move to dismiss plaintiffs' first claim under the California Consumer Legal Remedies Act. Plaintiffs allege that defendants' practices in issuing credit cards and charging fees constituted unfair or deceptive practices. The CLRA prohibits a long list of "unfair methods of competition and unfair or deceptive acts or practices undertaken by any person in a transaction intended to result or which results in the sale or lease of goods or services to any consumer." Cal. Civ.Code § 1770.

Defendants argue that this statute, by its own terms, does not apply to the extension of lines of credit. It only applies to the sale of "goods or services," and credit does not constitute the sale of goods or services. In support, defendants first cite to the statute's legislative history. The original draft of this statute expressly included individuals who obtained credit. Assemb. B. No. 292, 1970 Reg. Sess (Cal. Jan. 21, 1970) (Defs' Req. Jud. Not. Exh. A). Before the bill was passed, persons who obtained credit were removed from the statute's definition of "consumers" under the CLRA. Assemb. B. No. 292, 1970 Reg. Sess. (Cal. Jan 21, 1970) (as amended Aug. 7, 1970) ( id. at Exh. B).

A recent California Court of Appeal decision relied on this legislative history in holding that the CLRA does not apply to the extension of lines of credit through credit cards, separate and apart from the sale of goods or services. Berry v. Amer. Exp. Publ'g., Inc., 147 Cal.App.4th 224, 227, 54 Cal.Rptr.3d 91 (2007). In Berry, the plaintiff brought a putative class action alleging that the defendants had been charging American Express cardholders, who paid annual fees for lines of credit, for travel magazines they had never received. The plaintiff's only claim alleged that the class action waiver in the credit agreement was unenforceable under the CLRA. The decision held that issuing a line of credit, apart from providing any other good or service, was not a transaction covered by the CLRA. In view of the relevant legislative history, this order finds Berry 's logic persuasive. Additionally, a recent federal court decision also held that the CLRA did not apply to credit cards. Augustine v. FIA Card Servs., N.A., 485 F.Supp.2d 1172, 1175 (E.D.Cal.2007).

Plaintiffs cite several decisions in response, none of which is persuasive. Klussman v. Cross Country Bank, 134 Cal.App.4th 1283, 36 Cal.Rptr.3d 728 (2005), denied the defendant's motion to compel arbitration. It did not address the question of whether the CLRA applies to mere extensions of credit. Plaintiffs argue that CLRA claims were "litigated" against a bank issuing lines of credit in Smith v. Wells Fargo Bank, N.A., 135 Cal.App.4th 1463, 38 Cal.Rptr.3d 653 (2005), but the decision merely held that CLRA claims were not preempted by federal law. In Badie v. Bank of America, 67 Cal.App.4th 779, 79 Cal.Rptr.2d 273 (1998), a CLRA claim was "litigated," but the court never reached the issue of whether the CLRA applies to the extension of credit. Hitz v. First Interstate Bank, 38 Cal.App.4th 274, 44 Cal.Rptr.2d 890 (1995), dealt with a claim for liquidated damages, not a claim under the CLRA. Finally, plaintiffs argue that in Discover Bank v. Superior Court, 36 Cal.4th 148, 160 n. 2, 30 Cal.Rptr.3d 76, 113 P.3d 1100 (2005), the California Supreme Court noted that the plaintiffs could have brought a CLRA claim based on extending a line of credit. Not so. Discover Bank merely stated that plaintiffs had not tried to plead a CLRA claim (because they wanted to certify a nationwide class). None of these decisions actually addressed whether a plaintiff could bring a CLRA claim based on the extension of credit.

Finally, plaintiffs present a recent decision from my colleague Judge Thelton Henderson, Jefferson v. Chase Home Finance LLC, 2007 WL 1302984 (N.D.Cal. May 3, 2007). Judge Henderson held that the CLRA did apply to financial services connected with mortgages, specifically to a program under which debtors were able to prepay their mortgages without penalty. The claim under the CLRA was not directed to the extension of credit itself. It was directed at the defendant's prepaid mortgage practices, a financial service provided to debtors, so this decision is not on point.

More generally, plaintiffs seem to argue that their claim does not deal with the extension of credit and instead deals with a predatory scheme involving the extension of multiple lines of credit and high and deceptive fees charged thereon. It is difficult to see the distinction. Even if this alleged scheme does shock the conscience, plaintiffs still have not identified any good or service-the challenge is to the extension of credit. Of course, plaintiffs bought goods and services with their credit cards. But not from defendants. Plaintiffs do not allege that they were given or had purchased special rights or options under their agreement. They do not allege that defendants sold them any goods under the credit agreement (other than a plastic card evidencing a line of credit). And, they do not allege that defendants sold them any services. In short, this case deals only with the extension of credit, in however unseemly a manner, not with the sale or lease of goods or services.

Because this order has held that the CLRA does not cover credit card transactions (unless the seller of the goods or services happens to be the one extending credit), it need not address defendants' other arguments for dismissal of this claim. Accordingly, plaintiffs have not pleaded a claim under the CLRA, and defendants' motion to dismiss is Granted as to this claim, and it must be Dismissed. Leave to amend would be futile.

B. Unfair Competition and Deceit Claims.

Defendants argue that plaintiffs' California unfair competition claim and common-law claim of deceit fail because they are both preempted by Virginia law. California's unfair competition law prohibits the use of "any unlawful, unfair or fraudulent business act or practice and unfair, deceptive, untrue or misleading advertising ...." Cal. Bus. & Prof.Code § 17200. There is a choice-of-law provision in each of the credit agreements. The relevant provision states that "[t]his agreement is governed by Virginia law and federal law" (Doome Decl. Exhs. A-D). This order must now determine whether Virginia law governs the state law claims.

When a federal district court is sitting in a diversity action, it must apply the choice-of-law rules of the state in which it sits. Klaxon Co. v. Stentor Elec. Manufacturing Co., Inc., 313 U.S. 487, 496, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941). California courts apply a governmental interest approach. ABF Capital Corp. v. Grove Properties, 126 Cal.App.4th 204, 215, 23 Cal.Rptr.3d 803 (2005). When there is a valid, bargained-for choice-of-law provision in a contract, California courts apply the approach outlined in the Restatement Second ...

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