Jackson v. Pasadena Receivables, Inc.

WILNER, J. This case began as a routine collection action in the District Court to recover judgment on a $5,146 credit card debt. The debtor, Sheri Jackson, has never denied that she used the credit card to purchase the items which, together with finance charges, comprise the debt and that, at some point, she simply stopped making payments on the account. Her defense, presented entirely through counsel, was that, because she never signed the credit card agreement and the credit card issuer, Citibank, made no reasonable attempt to obtain her signature, the credit card agreement violates a provision of the Maryland Retail Credit Accounts Law (RCAL), codified at Maryland Code, § 12-503(e)(l) of the Commercial Law Article (CL). As a result, Ms. Jackson claimed that, in accordance with CL § 12-513(a), all of the finance charges that had ever been assessed during the nine years that she used the credit card were forfeited.

Jackson made no effort to calculate the amount of those charges, so, except for an unsworn assertion by Pasadena that they did not exceed $1,745, the record is silent as to what they are—what proportion of the acknowledged $5,146 balance they might be. No counter-claim was filed by Jackson. She simply argued that, because of the statutory violation, neither Citibank nor the plaintiff in the action, Pasadena Receivables, Inc., to which Citibank had assigned the account, was entitled to recover any part of the $5,146 balance. The District Court found no merit in Jackson’s defense and entered judgment for Pasadena.

On appeal, the Circuit Court for Baltimore City affirmed the District Court judgment. We ⁶¹³ granted certiorari and shall affirm the judgment of the Circuit Court. BACKGROUND Maryland’s RCAL was first enacted in 1967; it now appears as title 12, subtitle 5 of the Commercial Law Article (CL § § 12-501 through 12-515). Section 12-501(1) defines “retail credit account” as “an agreement or transaction for the retail sale of goods or services, which is negotiated or entered into and pursuant to which a time sale price is established” and adds that the definition “includes credit card financing by a financial institution.” Section 12-502(a) requires that every retail credit account established after May 31, 1967 comply with the subtitle.

Section 12-512 provides that “[n]o act, agreement, or statement of a buyer may constitute a valid waiver of any benefit or protection provided to him under this subtitle.” The law establishes detailed requirements with respect to retail credit accounts, including maximum interest that may be charged, information that must be disclosed to the buyer, the size of type that must be used to convey certain information, and the frequency with which information must be disclosed. The specific requirement most relevant here is contained in § 12-503(e)(l)—that a retail credit account agreement shall be in writing and that either it shall be signed by the buyer, or the seller or financial institution shall have made a reasonable attempt to obtain the signature of the buyer to the agreement. Section 12-513(a) imposes a civil penalty for violation of the Act: “if a holder violates any provision of this subtitle, no holder may collect or receive any finance charge from the buyer.” Jackson at some point received a credit card from Citibank, a national bank located in South Dakota. With its Statement of Claim, Citibank’s assignee, Pasadena, asserted that the account was initially opened in December, 1994, but that the original application and contract had either been destroyed or lost and was unavailable.

It attached a 1999 Credit Card ⁶¹⁴ Agreement, which set forth the terms and conditions relating to the credit card and its use and, among other things, stated, under the heading “Applicable Law,” that “[t]he terms and enforcement of this Agreement shall be governed by federal law and the law of South Dakota, where we are located.” There is no place in the agreement for a signature by the holder. Jackson used the card to make purchases for approximately nine years; and, apparently without any ■ objection regarding the absence of a signed agreement, consistently maintained a balance on the card since then. At the time suit was filed, the balance on the account was $5,146. It was agreed that the account had never been used to obtain cash advances, but only to purchase goods and services, and that it had been validly assigned to Pasadena.

Other than the unsworn assertion by Jackson’s counsel, there was no evidence that Jackson had not signed an application for the credit card or the original credit card agreement or that no effort had been made by Citibank to obtain her signature. Pasadena refused to stipulate to those assertions by counsel, although its attorney acknowledged that would be her testimony. There never was any testimony by Jackson, however, or by anyone else. . The case proceeded solely on the stipulation that Jackson had . the account, that she used the account to make purchases but not cash advances, that she kept a balance on the account over a nine-year period, that the principal balance on the account was $5,146, that the account had been assigned to Pasadena, and that the court could consider the documents that had been attached to Pasadena’s complaint, among which was the 1999 agreement.

In response to Jackson’s RCAL defense, Pasadena noted the choice of law provision in the agreement and pointed out, without contradiction, that South Dakota law.allows an account to be opened without a signed application.. It urged as well that (1) RCAL was preempted by §§ 85 and 86 of the National Banking Act, (2) a later-enacted Maryland law, § 5-408 of the Cts. & Jud. Proc. Article, provides that credit card agreements do not have to be signed by the buyer and thus, to the extent of that inconsistency, prevails over CL § 12-503(e), ⁶¹⁵ and (3) the finance charges that would be subject to forfeit under § 12-503(e) do not, in any event, exceed $1,745.

After considering memoranda filed by the parties, the District Court found the choice-of-law argument telling and therefore held that South Dakota law was applicable. Because that law permits a credit card account to be opened without a signed application, the court rejected Jackson’s RCAL defense and entered judgment for the agreed amount of $5,146, plus accrued interests, costs, and attorneys’ fees allowed under the agreement. The court did not address the preemption issue or any of Pasadena’s other arguments, as it was not neeessary to do so. Jackson filed a motion for reconsideration, complaining that the court had considered the 1999 agreement when it was apparent that the account had been opened much earlier.

In denying the motion, the court reminded Jackson that, through counsel, she had stipulated that the court could consider that agreement, which was attached to Pasadena’s complaint. On appeal, the Circuit Court affirmed, for the same reason applied by the District Court. The court noted that the “primary issue presented” was whether the (1999) credit card agreement was controlling and the choice-of-law provision in it was enforceable. The court answered both questions in the affirmative.

As did the District Court, the Circuit Court turned to Restatement (Second) of Conflicts, § 187(2), which provides that “[t]he law of the state chosen by the parties to govern their contractual rights and duties will be applied” unless (a) the chosen State has no substantial relationship to the parties or the transaction and there is no other reasonable basis for the parties’ choice, or (b) application of the law of the chosen State would be contrary to a fundamental policy of a State which has a materially greater interest than the chosen State in the determination of the particular issue. The court found neither exception applicable. DISCUSSION Although there may be other reasons why Jackson’s defense would fail, we shall follow the course of the two lower courts ⁶¹⁶ and base our decision on the choice of law provision in the credit card agreement. Whether or not rejection of Jackson’s RCAL defense would be required as well on a theory of Federal preemption, as argued by Pasadena, our enforcement of the contractual provision is clearly harmonious with the result that would obtain if we applied that doctrine. 1 Jackson has not denied the existence of the 1999 agreement’ that was attached to Pasadena’s Statement of Claim.

Her unsworn defense to that agreement is the same as to the initial agreement—she never signed it and Citibank made no attempt to obtain her signature. That defense, as noted, rests principally on three provisions of RCAL: § 12-503(e), which requires either that a retail credit account be signed by the buyer or that the issuer have made a reasonable attempt to ⁶¹⁷ obtain the buyer’s signature; § 12-512, which precludes a waiver by the buyer of any protection afforded by RCAL; and § 12-513(a), providing that if a holder violates any provision of the subtitle, no holder may collect or receive any finance charge from the buyer. Undisputedly, the Agreement states that the terms and enforcement of the Agreement shall be governed by Federal law and the law of South Dakota. No one has claimed that there is any Federal law that would require Maryland law to be applied; indeed, in urging its preemption defense, Pasadena insists that Federal law requires application of South Dakota law.

The relevant South Dakota law is S.D. Codified Laws, § 54-11-9 (2006): “The use of an accepted credit card or the issuance of a credit card agreement and the expiration of thirty days from the date of issuance without written notice from a card holder to cancel the account creates a binding contract between the card holder and the card issuer with reference to any accepted credit card, and any charges made with the authorization of the primary card holder.” Under South Dakota law, therefore, there is no requirement that the holder sign an agreement or that the issuer attempt to obtain the holder’s signature. If, as clearly occurred here, the holder accepts and uses the card to charge purchases, a binding contract exists. The issue we address, then, is whether, in light of the cited sections of RCAL, the choice of law provision in the credit card agreement is valid and enforceable. With limited exceptions, this Court has long recognized the ability of contracting parties to specify in their contract that the laws of a particular State will apply in any dispute over the validity, construction, or enforceability of the contract, and thereby trump the conflict of law rules that otherwise would be applied by the court.

The Court first reached that conclusion in Williams v. N.Y. Life Ins. Co., 122 Md. 141, 147 , 89 A. 97, 99 (1913), where we held that “it was perfectly competent” for the parties to a contract made in Maryland to provide that ⁶¹⁸ the contract was to be construed in accordance with New York law. Sixty-seven years later, in Kronovet v. Lipchin, 288 Md. 30, 43 , 415 A.2d 1096, 1104 (1980), we confirmed that “[i]t is now generally accepted that the parties to a contract may agree as to the law which will govern their transactions, even as to issues going to the validity of the contract.” (Emphasis added). Citing Kronovet , we reconfirmed that principle more recently in National Glass v. J.C. Penney, 336 Md. 606, 610 , 650 A.2d 246, 248 (1994).

In both Kronovet and National Glass , the Court looked to Restatement (Second) of Conflict of Laws, § 187 as a proper statement of that principle and the exceptions to it. Like Caesar’s perception of Gaul, that section of the Restatement is in three parts, two of which are relevant here. Section 187(1) is particularly applicable when only one State has an interest in the parties or the transaction but the parties choose to have the law of another State apply; That was the situation in Williams—a Maryland contract in which the parties chose to have New York law apply. Section 187(1) provides: “The law of the state chosen by the parties to govern their contractual rights and duties will be applied if the particular issue is one which the parties could have resolved by an explicit provision in their agreement directed to that issue.” The Comment to that subsection explains that the subsection is not really a choice of law provision but one dealing with incorporation by reference.

The parties may spell out the specific terms of the contract or, if they choose, incorporate extrinsic material by reference, including provisions of foreign law. If they do the latter, the forum State will apply the applicable provisions of the chosen foreign law with respect to any issue that the parties could have provided for expressiy. The importance of this provision, the Comment adds, lies in the fact that “most rules of contract law are designed to fill gaps in a contract which the partiés themselves could have filled with express provisions,” including rules relating to construction, conditions, performance, frustration, and impossibility. The nature of the limitation stated in subsection (1)— ⁶¹⁹ that the foreign law will be applied only to issues that the parties could have resolved expressly—becomes clear from the Illustrations given by the authors.

Parties making a contract in State X cannot include in it a term that would be unlawful in State X, and, accordingly, they may not incorporate by reference the law of another State that has no interest in the contract that would produce that result. 2 Section 187(2), which applies where more than one State has an interest in the parties or the transaction, is the one more relevant to the case at hand. Subsection (2) provides: “The law of the state chosen by the parties to govern their contractual rights and duties will be applied, even if the particular issue is one which the parties could not have resolved by an explicit provision in their agreement directed to that issue, unless either (a) the chosen state has no substantial relationship to the parties or the transaction and there is no other reasonable basis for the parties choice, or (b) application of the law of the chosen state would be contrary to a fundamental policy of a state which has a materially greater interest than the chosen state in the determination of the particular issue and which, under the rule of § 188, would be the state of the applicable law in the absence of an effective choice of law by the parties.” 3 ⁶²⁰ Subject to the two exceptions noted, this subsection is broader, as it provides for the application of the chosen law even as to matters which the parties could not have resolved by explicit provision, and that is critical here. The Comment to subsection (2) points out that the rule enunciated there applies only when two or more States have an interest in the determination of the particular issue, but, subject to that qualification, “the rule of this Subsection applies when it is sought to have the chosen law determine issues which the parties could not have determined by explicit agreement directed to the particular issue,” and it gives as examples questions “involving capacity, formalities and substantial validity.” The Comment adds: “[A person] cannot dispense with formal requirements, such as that of a writing, by agreeing with the other party that the contract shall be binding without them. Nor can he by a similar device avoid issues of substantial validity, such as whether the contract is illegal.

Usually, however, the local law of the state chosen by the parties will be applied to regulate matters of this sort. And it will usually be applied even when to do so would require disregard of some local provision of the state which would otherwise be the state of the applicable law.” (Emphasis added). In stating its rationale for this expansive principle, the Restatement notes that the prime objectives of contract law “are to protect the justified expectations of the parties” and provide a measure of certainty as to their rights and liabilities, and it concludes that “[t]hese objectives may best be attained in multistate transactions by letting the parties choose the law to govern the validity of the contract and the rights created thereby.” This power of choice, the authors continue, “is also consistent with the fact that, in contrast to other areas of the law, persons are free within broad limits to determine the nature of their contractual obligations.” The Restatement ⁶²¹ acknowledges that Section 187(2) may permit the parties to “escape prohibitions prevailing in the state which would otherwise be the state of the applicable law,” but responds that “the demands of certainty, predictability and convenience dictate that, subject to some limitations, the parties should L ve power to choose the applicable law.” Unquestionably, the broad principle stated in §