Friday, July 12, 2013

Causes of Actions pleaded by banks and assignees in debt collection suits


The terms debt and debt suit – or debt collection suit -- may be a good-enough label to identify the type of lawsuit, but debt is not a cause of action in and of itself.  Cause of action refers to the legal basis of a plaintiff’s  claim and consists of multiple essential elements that the plaintiff must support with admissible evidence sufficient to satisfy the applicable evidentiary standard for purposes of summary judgment or at trial. The amount of damages is only one element.

Without a valid cause of action, the lawsuit lacks a basis in law and as a result there can be no liability and no judgment. Even good evidence supporting the amount of money claimed to be owed by the Defendant would be useless.  


Because a cause of action is a prerequisite for making out a proper claim for judicial relief, the pleadings must state at least one. If the Plaintiff’s original petition does not do so, it can be challenged as deficient in form. The vehicle to do so under the Texas rules of procedure are special exceptions, which is a fancy term for a motion complaining that the Plaintiff’s pleadings suffer from a defect in form and asking the judge to order the plaintiff to re-plead and fix the problem.  A party generally has the right to correct pleading deficiencies by amendment. Dismissal on the pleadings is generally not proper without affording the pleader an opportunity to amend, unless an effort to amend would be futile.
As a practical matter, it is rarely worth challenging a debt plaintiff’s pleadings for failure to set forth a theory of recovery because the obvious theory in the debt collection context is breach of contract, whether it is expressly stated in the pleadings or not.  


Generally speaking, a cause of action may have come into existence by statutory enactment (statutory cause of action) or be grounded in common law, i.e. based on published appellate opinions as legal authority.  Statutory causes of action are generally not relevant in the context of debt collection, at least not on the creditor’s side.  Counterclaims by defendants under the FDCPA , the TDCA, and the DTPA are another matter.

Because the statute of frauds only covers certain types of debts in Texas, the causes of action that creditors can and do invoke are not limited to breach of an executed contract (written and signed) or breach of promissory note. Indeed, some Texas courts of appeals have expressly taken the position and held that proof of the underlying contract (i.e., the credit card agreement) is not necessarily required if the Plaintiff meets the evidentiary requirements of an alternative cause of action. 
The most common theory of recovery nevertheless is breach of contract, or -- to be more specific -- breach of a written contract that is typically not signed by both parties. Whatever the credit card agreement may be called by a specific issuer, it almost always comes as a form contract drafted by the bank or other financial institution with no opportunity for the consumer to bargain over specific terms (cohesion contract) and no provision for his or her signature on it. 

The essential elements of a breach-of-contract claim are: (1) the existence of a valid contract; (2) the plaintiff performed or tendered performance; (3) the defendant breached the contract; and (4) the plaintiff was damaged as a result of the breach. A breach occurs when a party fails or refuses to do something it has promised to do.


Parties form a binding contract when the following elements are present: (1) an offer, (2) an acceptance in strict compliance with the terms of the offer, (3) a meeting of the minds, (4) each party's consent to the terms, and (5) execution and delivery of the contract with the intent that it be mutual and binding. "Meeting of the minds" describes the mutual understanding and assent to the agreement regarding the subject matter and the essential terms of the contract. Mutual assent, concerning material, essential terms, is a prerequisite to formation of a binding, enforceable contract.

Legally speaking the essential elements of breach of written contract and breach of oral contract are the same; and that is true of breach of signed and unsigned contract also. Mutual assent, however, is an essential requirement of all contracts. When the contract is written, but not signed, there is no signature to manifest and reflect the contracting party’s assent. Therefore, in order to prove a credit card holder’s liability under an unsigned contract, extrinsic evidence is required to establish that (1) the cardmember agreement to which the Plaintiff points as the applicable contract was offered to the consumer, and (2) that the terms so offered were found acceptable by the consumer (“meeting of the minds”), and were actually accepted by the consumer.  


Texas law recognizes that a contract need not be signed to be deemed executed unless the parties explicitly require signatures as a condition of mutual assent. Manifestations of intent through actions and words may demonstrate delivery of a contract and enable its enforcement. The relevant acts in the case of credit card accounts would be the use of the card for purchases or other account use, such as for cash advances or balance transfers.


But it follows from these alternative principles of contract-formation that the plaintiff will have to adduce evidence of such account use through billing statements. This does not always happen. Sometimes only a single account statement is attached to the creditor’s summary judgment motion and it does not contain any line items that represent purchases or advances because the account was typically closed at that point in time, or overlimit, or both.  Sometimes, the last monthly statement does not even include a line item for current interest any more.
Account Stated is a common-law theory that some Texas courts of appeals have modified and adapted so that it is now available for collection of a credit card debt also. Other courts of appeals have not yet issued decisions approving the theories' use for collection of a credit card debt. 

The reasoning expanding account-stated as a theory to collect a credit card debt is highly dubious because the allows the circumvention of the requirement that the creditor prove the terms of the underlying contract that are required to be disclosed in writing federal law (TILA), and because credit cards issued by financial institutions do not involve a sale of goods or services by the creditor to the debtor, which was historically a requirement of suit of account, even under precedental cases cited in opinions blessing the use of the theory in credit card cases, e.g. Neil v Agris


Occasionally, debt plaintiffs also invoke other theories of recovery, most notably quantum meruit.

Quantum meruit, however, is an equitable theory, and under Texas law, the availability of a legal remedy (for breach of contract) precludes resort to equitable theories because the two types of judicial relief are incompatible and mutually exclusive. See express-contract defense. The same goes for the theories of unjust enrichment  and money had and received, and the associated remedies (assumpsit, restitution).

Although the contracts at issue in credit card debt litigation may not be signed, the terms governing the extension of consumer credit must be disclosed in writing under federal law. See Truth in LendingAct (TILA). Because of this regulatory requirement, a written contract must necessarily have existed (even if the Plaintiff does not produce it so as to make it part of the record in the case), which means that the plaintiff has a legal remedy for its breach, at least in principle.

In Tully v Citibank, the court of appeals expressly held that quantum meruit was not a theory that could be used as a basis for recovery where Citibank had also moved for summary judgment on its breach of contract theory, and the contract on which that theory rested was before the court as a summary judgment exhibit. -- > Contract and quantum meruit claim are incompatible

No comments:

Post a Comment