Every creditor has a "Death Policy" if a cardholder/borrower dies.  Citibank does as well.  It's not like they don't encounter it often.

Typically, if a death certificate copy is sent along with appropriate forms, service charges/penalties will be dropped.  However, if the person died and had recently made a charge that wasn't reflected until the month's bill after their death, that amount is still owed and will incur interest/penalties.  But, even then, most will waive penalties if it only takes a month or so to get the Estate set up/probated and paying claims made against it.

I've never had a problem with any creditors acknowledging a death and resolving the issue without continually adding penalties and "late" fees.  Normal interest will accrue but, they'll usually understand if there is a problem with accessing accounts of the deceased in order to get them paid.

I suspect the letter above is not a real occurrence or the Manager happened to be a complete moron who wasn't aware of his own company's policies.