UPDATE 2-Capital One ordered to defend credit card lawsuit

* Plaintiff alleged disclosures on rate hike inadequate

* Court divides 2-1 over disclosure issue

* Shares of Capital One fall (Adds quotes from ruling, lawyers, byline)

By Jonathan Stempel

NEW YORK, July 21 (Reuters) - A divided U.S. federal appeals court on Wednesday reinstated a aawsuit accusing Capital One Financial Corp (COF.N) of more than doubling the rate it charged a credit card holder, after burying its ability to raise the rate in the fine print.

In a 2-1 ruling, the 9th U.S. Circuit Court of Appeals in San Francisco said Capital One failed to show it made "clear and conspicuous" disclosures before raising a cardholder's annual percentage rate to 15.9 percent from a "fixed" 6.99 percent, though she had done nothing wrong.

"It is not 'clear and conspicuous' to describe an APR as 'fixed' when the creditor has reserved the right to change the APR for any reason," Judge Betty Fletcher wrote.

The disclosures by Capital One, one of the largest issuers of MasterCard and Visa cards, were not "reasonably understandable" and "readily noticeable" to consumers, the judge said.

The ruling reverses a lower court's dismissal of claims by Raquel Rubio that Capital One violated the Truth in Lending Act and a California unfair competition law. It upheld the dismissal of a breach of contract claim.

"Consumers were being misled by having the word 'fixed' in their agreements, when the card company could change the terms at will," Rubio's lawyer Behram Parekh said in a telephone interview.

"This is a very significant victory, and is a significant issue for a card industry defending other lawsuits like this," he said.

Rubio, a Los Angeles resident, has sought class-action status on behalf of other cardholders. Her case was returned to the district court for further proceedings.

"We disagree with this latest opinion and we will continue to defend ourselves in court," Capital One, based in McLean, Virginia said in a statement.

"HOBSON'S CHOICE"

Rubio had accepted a February 2004 mail solicitation from Capital One that offered a credit card with a 6.99 percent rate on balance transfers and purchases, according to the ruling.

The solicitation included a required table that said in 10-point type that the rate could rise if Rubio missed a payment, exceeded her credit limit or had a payment returned.

But in eight-point type on the same page, it also said terms were "subject to change," and a cardholder agreement that Rubio received the next month said Capital One could "amend or change any part" of her agreement "at any time."

Capital One raised Rubio's rate in August 2007 though she had not triggered any of the conditions warranting a hike.

This created what Fletcher called a "Hobson's choice" for her to accept the higher rate or cancel her card.

U.S. Appeals Judge Susan Graber dissented in part, saying Rubio's lawsuit should proceed, but that the clarity of the disclosure is a question of fact.

Graber said federal appeals courts appear divided over whether disclosure clarity is a question of law or fact.

Such a "circuit split" increases the chance that the U.S. Supreme Court might consider an issue.

In afternoon trading, Capital One shares were down $1.19, or 2.9 percent, at $40.27 on the New York Stock Exchange.

The case is Raquel Rubio v. Capital One Bank, 9th U.S. Circuit Court of Appeals, No. 08-56544. (Reporting by Jonathan Stempel in New York)