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UCL Class Action Defense Cases–Davis v. Pacific Capital: Ninth Circuit Holds Bank Not Required To Refund Any Portion Of Finance Charge Assessed For IRS Refund Anticipation Loan Following Early Payoff By Borrower

As Matter of First Impression, Finance Charge by Bank for IRS Refund Anticipation Loan was not “Interest” within the Meaning of 15 U.S.C. § 1615 so District Court Properly Dismissed Class Action Ninth Circuit Holds

Plaintiff filed a class action against Pacific Capital Bank alleging violations of California’s Unfair Competition Law (UCL); the class action complaint alleged that plaintiff obtained a “Refund Anticipation Loan” (RAL) from the Bank secured by her “anticipated federal income tax refund” and authorized the IRS to deposit her refund into an account established by the Bank. Davis v. Pacific Capital Bank, N. A., ___ F.3d ___ (9th Cir. December 24, 2008) [Slip Opn., at 16773-74]. According to the allegations underlying the class action, the Bank agreed to loan plaintiff $1115 for a fee of $85, and required that 48 days after the loan, plaintiff pay the Bank $1200 (representing a yearly interest rate of 57.969%). Id., at 16774. The loan documents expressly provided that plaintiff was not entitled to recover any part of the $85 finance charge, even if plaintiff repaid the loan early, but did not require plaintiff to additional finance charges if the loan was repaid late. Id. The IRS deposited plaintiff’s refund 10 days before the 48-day deadline for repayment, and plaintiff filed her class action alleging that it was unlawful for the Bank to retain the $17.74 pro-rated portion of her finance charge; the theory underlying the class action was that federal law prohibited the Bank from retaining “unearned interest.” Id. Defense attorneys moved to dismiss the class action on the ground that the $85 finance charge was not interest, and that the class action’s UCL claim was preempted by the National Bank Act. Id., at 16773-74 and n.1. The district court granted the defense motion and dismissed the class action, id., at 16774. The Ninth Circuit affirmed.

The issue presented to the Ninth Circuit was as follows: “Must a creditor who imposes a flat finance charge that does not vary with the term of a Refund Anticipation Loan refund a portion of the charge as ‘unearned interest’ under 15 U.S.C. §1615 when the loan is repaid earlier than anticipated in the loan agreement?” Davis, at 16773. Section 1615 provides, “If a consumer prepays in full the financed amount under any consumer credit transaction, the creditor shall promptly refund any unearned portion of the interest charge to the consumer.” 15 U.S.C. § 1615(a)(1). The difficulty with the class action case was that “Congress did not define the word ‘interest’ as used in § 1615, [so] it is not immediately obvious whether it encompasses the finance charge at issue.” Id., at 16774. Based on the Circuit Court’s analysis of the proper statutory interpretation to be given § 1615, and particularly the legislative history, see id., at 16775-77, the Court held that § 1615 did not require the Bank to refund any portion of the $85 finance charge, id., at 16777. And because the class action’s UCL claims were premised on the allegedly “unfair” and “unlawful” refusal of the Bank to refund a portion of the finance charge, the district court properly dismissed the class action complaint. Id., at 16777. Accordingly, the Ninth Circuit affirmed the judgment.

Download PDF file of Davis v. Pacific Capital Bank