Thursday, July 4, 2013

What is a CMA? Anatomy of Credit Card Agreements

Credit Card Agreements Analyzed 

CMA is the acronym for a card member agreement in three words.

Not all credit card issuers call their form contracts card member agreements. Other term used include the following: CUSTOMER AGREEMENT (Capital One and Wells Fargo Bank), Cardmember Agreement as two words (American Express, Chase Bank, Discover Bank); CREDIT CARD AGREEMENT (Target), and ACCOUNT AGREEMENT. Some more elaborate names also appear in debt litigation. Amex agreements, for example, may identify the type of card in the title.


Not infrequently, credit card issuers amend the terms of their agreements and the exhibits filed in debt litigation reflects such changes, although that picture emerges from looking at documentation in many cases, rather than a single one. In individual cases, often only a single CMA is present as an exhibit, rather than the original one and any subsequent ones that amend or replace the original one. Many cardmember agreement
typically contain “reservations of rights” clauses with respect to future changes in terms, which may appear under various sub-titles.

Federal law (TILA) did not preclude creditors from making such changes unilaterally, but required them to notify customers of modifications in terms  in writing. Sometimes, banks would also provide card holders with an opportunity to opt out of the proposed changes, although that might entail the dire consequence of loss of credit privileges and closure of the account. -- > Modification of credit terms as an issue in litigation.

Modifications of terms can be done by notices of changes in terms that supplement the agreement currently in force in that they only address certain terms, or by a superseding agreement that is complete by itself as it restates all the terms, including those that remain unchanged.

The principal implication of the two modes of changing contract terms for litigation is that a notice of change in terms is insufficient as proof of the underlying contract because it would not encompass all of the material terms. It would typically also omit such matters as contractual choice of law or arbitration, unless the very purpose of the modification (or one of its purposes) was to make future  claims and controversies arbitrable. (--> Separate or stand-alone arbitration agreement).


In Tully v. Citibank the Texarkana court of appeals held that Citibank was not entitled to summary judgment on its breach of contract claim (or either one of the other two causes of action, which were nonviable for legal reasons) because it had not proven the defendant’s agreement to the interest rates shown on monthly statements. The court noted that the interest rate was not specified on the card agreement, that there were no notices of changes in terms announcing institution of a different interest rate; and that the variable rates appearing on monthly statements could not qualify as notices of changes of terms retroactively even there were otherwise deemed a satisfactory substitute for formal notices of changes in terms.


The CMAs that appear as summary judgment exhibits often contain a year or reference to a year in the margin either at the top or bottom of the first page, or at the end. Sometimes the reference to the  year also contains a reference to the month. Some contract documents include an effective date within the small print. For obvious reasons this is more commonly seen in change-of-terms notices and superseding agreements.
Additionally, card issuer may have different versions of cardmember agreements that are in effect at the same time, but apply to different portfolios or categories of accounts. A notable example is Discover Bank. Its cardmember agreements typically have a separate  cover page (or a column on the first page) with a title and a table of contents and a line containing year and version number at the bottom of the page.


Some CMAs are signed by a representative of the bank (e.g., Ken Stork in the case of Citibank), but they are typically not signed by the cardholder.

Some creditors (e.g., Capital One) on occasion produce an application or solicitation form with the card holder’s signature as one of their summary judgment exhibits, but a signed application is not the equivalent of an executed contract. After all, it does not impose any obligations on the bank.  Nor do credit applications typically contain all essential and material terms. Those are set forth either in the cardmember agreement, or in separate TILA disclosures,  Rate and Fee table (Chase), or “Fees Table” (Amex).  Some cardmember agreements make reference to a “card carrier” and additional terms contained therein. Occasionally, the are expressly called "TILA Disclosures" or "TIL Disclosure".
Most CMAs do not identify the cardholder by name, although there are exceptions. The more recent agreements issued by American Express consist of two Parts (Part 1 of 2 and Part 2 of 2), show the cardholder’s name (in the case of a business card both the individual’s name and the company name) in the header and the last few digits of the account number; these specimen of agreements are also dated.
Some Bank of America agreements also have names printed on the first page of the cardmember agreement. While this will generally improve chances to persuade the court that agreement is the correct one, it may also have the opposite effect.  If the name printed on the agreement does not match the name of the Defendant, that incongruity is pretty conclusive evidence that the wrong agreement was attached as an exhibit.
In most cases, it is not clear whether the correct agreement was attached, and the plaintiff's affiant typically does not specifically identify it by version code or copyright year.

Is the contract exhibit the correct agreement?


In most cases the CMA attached as a summary judgment exhibit or offered as an exhibit at trial does not have the Defendant’s name printed on it. Therefore, it is not clear that it is the agreement under which the defendant is liable. This is event true if the CMA is admitted as a business record for the truth of the recitations contained therein. After all, those recitations do not include recitation of the name of the Defendant as a contracting party. Competent extrinsic evidence of contract-formation would be required to establish the Defendant’s liability unless the Defendant judicially admits the copy of the CMA is the correct one, or there are deemed admissions to that effect. A plaintiff’s failure to offer an affidavit that adduces contract-formation facts pertaining to the attached copy of a card agreement should at least doom its motion for summary judgment, which faces a higher standard of proof than what is required at a trial.

Additionally, if the CMA that the Plaintiff files as a summary judgment exhibit is dated, the year could create a fact issue if it is inconsistent with the affidavit testimony regarding the date the account was opened or the account statements.

If the CMA has a later date than the default date either attested to by the Plaintiff’s affiant, or shown on the series of monthly account statements, the Plaintiff’s argument that the CMA was accepted by account use (the argument typically made by plaintiffs to overcome the problem of the missing signature as sign of assent) falls flat. Nor could it be convincingly argued that the Defendant breached the terms of an agreement that were not yet even announced by the creditor. If, one the other hand, the CMA is much older than the account, or predates the oldest account statement in the record by several years, the Defendant’s counsel may argue that the Plaintiff’s has failed to prove that it is the agreement in force at the time of the alleged breach, particularly if the agreement contains a clause or paragraph providing for unilateral modification by the card issuer.

DEFUNCT ORIGINAL CREDITOR (bank that no longer exits, went out of business)

Another scenario appears in suits brought by assignees of Chase Bank USA, N.A.. Many such suits involve accounts that originated with Washington Mutual Bank or Providian Bank.  Chase acquired WaMu accounts from the FDIC when WaMu failed in 2008 and was liquidated. As a result, Chase issued superseding agreements on the WaMu accounts it had purchased to reflect the new creditor and its own home state (Delaware) as the choice of law.  But often, the summary judgment record in debt suits on such accounts would not include the applicable Cardmember Agreement from Chase, but one from WaMu or Providian Bank. If the default on the account occurred after the acquisition of WaMu assets by Chase, it would have been under the terms of the contract substituted by Chase, not that from WaMu, which no longer even existed as a legal entity. The same applies to accounts originated by Providian that were acquired by WaMu prior to its demise and became Washington Mutual accounts.


Most cardmember agreements contain arbitration provision, which are normally set forth as part of contract language in their entirety. There are a few exceptions: In the case of Capital One CUSTOMER AGREEMENTS, the arbitration agreement is either omitted altogether, or takes the form of a separate document titled “ARBITRATION AGREEMENT”, which is referenced in the last paragraph of the CUSTOMER AGREEMENT.

Agreements of Target National Bank ("Target NB")  do not contain arbitration clauses at all.

Arbitration clauses may provide a defense to a debt collection suit. By filing such a suit, of course, the Plaintiff has already made a choice in favor of litigation. Therefore, the burden will be on the Defendant to demonstrate to the satisfaction of the court that the debt claim is subject to arbitration. This will generally require proof of the contract containing the arbitration clause binds both parties. Therefore, if the Defendant wishes to enforce the right to arbitrate, he or she will be admitting liability under the unsigned contract produced by the Plaintiff, and will thus waive any argument that the version submitted by the Plaintiff is not or may not be the correct one.  In the unlikely event that the debtor kept the cardmember agreement that the bank mailed to him or her, it can take the place of the Plaintiff’s contract exhibit, but the Defendant will likewise admit contractual liability on that version of a form contract. If the motion to arbitrate is denied, liability on the CMA that is before the court will no longer be an issue, and the Plaintiff will only have to prove damages (unless there is some other viable defense, such as the statute of limitations).


In Texas, most credit card debt suits are litigated under Texas law even though they are typically predicated upon a credit card agreement that contain a choice-of-law clause specifying that the law of another state governs the agreement. The reason for this is that typically neither party requests that the Court apply foreign law. The same is true of arbitration clauses, which provide for a different forum.  Just as the choice-of-law provisions, they are typically ignored, although there are exceptions.

Discover Bank, Chase, and Bank of America card agreement contain Delaware choice of clauses; Capital One CUSTOMER AGREEMENTs say that credit is extended from the bank’s offices in Virginia and that Virginia law governs the agreement. Citibank set up its credit card arm in South Dakota and its Cardmember Agreement reflect that choice of jurisdiction. Wells Fargo Bank, N.A. also relocated there, from San Francisco. Target card agreements also have South Dakota as the contractual choice of law. American Express cardmember agreements provide for application of Utah law, regardless of whether the card was issued by American Express Centurion Bank or American Express Bank, FSB.

Washington Mutual Bank folded in 2008, but WaMu card agreements still appear in debt litigation. The choice of law in WaMu agreements is Nevada, although that may seem counterintuitive given the name of the erstwhile bank.

Texas law is typically not specified as contractual choice of law unless the card was issued by a Texas financial institution, such as a credit union. None of the major credit card issuers is a Texas bank, or Texas-based bank. That said, some banks, such as JPMorgan Chase Bank, N.A., may use loan contracts (with associated cards) that either expressly provide for application of Texas law, or reference the LPO state for choice of law purposes. LPO refers to Loan Production Office. So the LPO state is the state in which the loan is originated.But these loans are different from credit card accounts, and are often litigated as a breach of promissory note.


For the court to apply the law of the jurisdiction specified in a choice-of-law clause, a motion for judicial notice (and application) of such law is generally required. Because choice-of-law is not a jurisdictional matter for the court (i.e. it does not deprive the local court of jurisdiction) and arises from the contract, it can be waived and ignored.

The obvious import of choice of law is with respect to differences between Texas law and the law of the jurisdiction specified in the choice-of-law provision.

There are not too many difference of consequence. The most important one (potentially) are interest rates. Texas has usury laws and interest rate limitations while other states do not.  But this is an issue worth litigating only if the credit card statements reflect application of a very high rate, such as 29.24% or 29.99%, and the Plaintiff (whether the original creditor or its assignee) seeks to collect interest assessed at such rate as part of the alleged damages.

But even under Texas law, the plaintiff can avoid usury liability by dropping the demand for interest deemed excessive under Texas interest rate limits. Additionally, the Finance Code provides for notice and safe harbor provision, which allows the creditor to avoid liability under the usury statute.

The principal defense to a usury claim is federal preemption under the National Banking Act. This defense to a state usury claim is available to national banks, which are permitted to export the interest rate regime of their home states to other states in which they do business.  A corresponding federal law provision for FDIC-insured state banks provides effectively the same benefit. This is the reason why major banks chose to set up their credit card arms in Delaware and South Dakota.

But a usury counterclaim is not the only option to deal with excessive interest claims on the defense side. First, even if the interest rate is not illegal under the applicable law, it must be contractually authorized. The absence of the underlying contract should therefore nix the claim. Second, if the plaintiff claims federal preemption under the National Bank Act and invokes the law of its home state, this should also preclude it from relying on non-contract theories under Texas law. At least this would be an argument worth making.
Some Texas courts of appeals have held that a credit card debt plaintiff may recover under the theory of “account stated” without producing the underlying credit card agreement. But if Texas law does not govern the Plaintiff’s claim, those precedents should be precluded as legal authority.  In that scenario, the Defendant’s counsel has reason to concur that the Plaintiff’s claim is governed by the law of the other state, even if the complaint about excessive interest rates (under Texas law) thus evaporates.


States also differ with respect to limitations. In Texas, the limitations period for debt suits is four years, but in other states, which includes Delaware, the statute of limitations provides for three years. It follows that a debt claim could be barred under Delaware law, but not under Texas law. But that depends on whether the statute of limitations is deemed substantive or procedural in character. If it is regarded as procedural, the Texas statute of limitations would apply in debt litigation in Texas courts even if a motion for judicial notice of Delaware law is filed. By the same token, however, the procedural rules of Texas courts should not apply if the claim were arbitrated because arbitration is not conducted under the Texas rules of judicial procedure.


Some states have laws that impact credit card debt litigation in more unique ways. A case in point is Utah, which has a general statute of frauds applicable to loan contracts. Although among the leading card issuers only the cardmember agreements from American Express have Utah choice of law clauses, the large number of Amex suits, and the fact that -- on average -- they involve higher balances -- makes this a potentially interesting issue.  The Utah statute of frauds contains an exception for credit cards, but even the exception elevates the proof requirements for the credit card debt plaintiff under Utah law. It would also appear to preclude debt recovery on any theory other than breach of contract because the credit card exception to the statute of frauds requires written contract (though not a signed one), in addition to requiring evidence of acceptance of terms by account use, and thus formation of a contract by conduct in lieu of a signature. Loans that do not fall within the scope of the credit card exception must on a contract that is signed by the party to be charged as a condition of enforceability.


Almost all credit card agreements that surface in debt litigation in Texas courts have choice-of-law provisions that specify another state as supplying the substantive law for the contract and its interpretation (and, by implication, its enforcement). But few debt plaintiffs even acknowledge this, and few file motions for judicial notice of foreign law. But it does happen.

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