Tully vs Citibank: Credit card debt collection claim is breach of contract claim

Jack Tully v. Citibank (South Dakota), N.A., 173 S.W.3d 212 (Tex.App. - Texarkana 2005, no pet.)

Significance of the Tully v. Citibank case: What is is proper legal theory for collection and what must the creditor prove?  

In Tully v Citibank, a summary judgment in favor of Citibank was reversed on all three theories on which the motion was based (albeit for different reasons).

Breach of contract cause of action 

This  claim failed on the merits because there was no evidence on an agrement on interest rates; wherefore the bank could not meet the summary judgment standard on the first element of a viable breach of contract claim. Interest rates are one essential element of a contract involving the loaning of money.

Noncontract theories

Citibank's attorney, Anh Regent, had also pleaded sworn account and quantum meruit. Summary judgment on those theories was overturned for purely legal (rather than evidence-based) reasons:

A credit card claim is not viable as a sworn account claim because no good or services are sold by the creditor to the debtor; and the quantum meruit claim could not succeed because the presence of the contract (in the form of Citibank's cardmember agreement, albeit on without interest rate term) precluded recovery under an equitable theory because the latter are only available in the absence of a contract. -- > Equitable relief not available when legal remedy available for breach of contract.

Other rerversible error 

Attorney’s fees on appeal were not conditioned on unsuccessful appeal by consumer (i.e. successful defense of the judgment rendered in the bank’s favor) as required; and dismissal of Tully's conterclaim for usury was improper also because Citibank had not disproven that claim. Even though Citibank's home state, South Dakota, does not have usury limits on interest, another limitation on interest still applied: The rate or rates must be authorized by the parties' agreement that governs the account.

Disposition on appeal 

Because none of the legal theories on which Citibank had moved for summary judgment could support the judgment (account stated was not pleaded), it was reversed, and the case was sent back to the court that had entered the faulty judgment.

The appeal was taken from a summary judgment in favor of Citibank; not from a bench trial resulting in a final judgment. Therefore, upon its reversal as improperly granted, the appellate court remanded the case to the trial court for further proceedings consistent with the opinion. The court could not render judgment for Tully because he had not cross-moved for summary judgment in his favor.

CITE FOR THE OPINION ISSUED BY THE COURT OF APPEALS IN THIS CASE

Tully v. Citibank (South Dakota), N.A., 173 S.W.3d 212, 216 (Tex.App.-Texarkana 2005, no pet.)

Docket sheet for Cause No. 06-05-00027-CV on the Texarkana Court of Appeals' web site, which has link to on-line HTML version of the opinion in Tully v Citibank (South Dakota). N.A. by Justice Carter.

Tully v Citibank (South Dakota) N.A. - Appellate Docket Sheet 

173 S.W.3d 212 (2005)

Jack TULLY, Appellant,
v.
CITIBANK (SOUTH DAKOTA), N.A., Appellee.

No. 06-05-00027-CV.

Court of Appeals of Texas, Texarkana.

Submitted June 6, 2005. Decided September 9, 2005.

215*215 Ron Adkison, Welborn Houston, LLP, Henderson, for appellant.

Anh H. Regent, Regent & Associates, LLP, Houston, for appellee.

Before MORRISS, C.J., ROSS and CARTER, JJ.

OPINION

Opinion by Justice CARTER.

Jack Tully appeals the granting of Citibank (South Dakota), N.A.'s motion for summary judgment for collection on a delinquent credit card debt. Citibank issued a credit card to Tully. Tully alleged that some of the charges contained in the account statements were inaccurate and that Citibank, rather than correct its statements, charged interest on the "incorrect and disputed amounts" at rates of almost twenty-five percent.^[1] Citibank sued Tully alleging Tully had failed to make payments due, which had accelerated that maturity of the amounts due. Tully denied Citibank's allegations and filed a counterclaim alleging that Citibank was in bad faith and that the suit was brought for the purpose of harassment. Tully also alleged Citibank attempted to collect interest, fees, or expenses without authorization. The trial court granted Citibank's traditional motion for summary judgment.

Tully raises three issues on appeal: 1) Citibank is not entitled to summary judgment because it failed to plead or prove grounds to support the summary judgment and failed to prove there are no genuine issues of material fact; 2) Citibank is not entitled to summary judgment because it failed to prove Tully's counterclaim was pre-empted or disproved the counterclaim; and 3) the summary judgment erroneously makes an unconditional award of appellate attorney's fees. We reverse and remand this case to the trial court for proceedings consistent with this opinion.

1) Genuine Issues of Material Fact Exist Concerning the Amount of Damages Due to the Breach of Contract

In his first point of error, Tully argues the trial court erred in granting the summary judgment. Citibank's traditional motion for summary judgment argued it was entitled to summary judgment based on either a suit on a sworn account, quantum meruit, or breach of contract. Tully challenges all three of these theories. We 216*216 agree for the following reasons: a suit on a credit card debt cannot be recovered through a suit on a sworn account; because the summary judgment evidence conclusively established that a contract existed, Citibank could not recover under its quantum meruit theory; and a fact issue exists concerning the amount owed based on breach of contract.

The standards for reviewing a "traditional" motion for summary judgment are well settled. We will review this summary judgment based on the standards set forth in Nixon v. Mr. Property Management Co., 690 S.W.2d 546, 548-49 (Tex.1985).

First, Citibank cannot collect a credit card debt through a suit on a sworn account. A suit on a sworn account is permitted only if the claim is "founded upon an open account or other claim for goods, wares and merchandise, including any claim for a liquidated money demand based upon written contract or founded on business dealings between the parties, or is for personal service rendered, or labor done or labor or materials furnished...." TEX.R. Civ. P. 185. "A sworn account applies only to transactions between persons, in which there is a sale upon one side and a purchase upon the other, whereby title to personal property passes from one to the other, and the relation of debtor and creditor is thereby created by general course of dealing—it does not mean transactions between parties resting upon special contract." Bird v. First Deposit Nat'l Bank, 994 S.W.2d 280, 282 (Tex. App.-El Paso 1999, pet. denied). Because no title to personal property passes from the bank to the cardholder, a credit card debt is not a sworn account as contemplated by Texas Rule of Civil Procedure 185. Id. Citibank was not entitled to summary judgment based on its suit on a sworn account theory.

Second, because Citibank proved the existence of an express contract, Citibank cannot recover under the theory of quantum meruit. "Quantum meruit is an equitable theory of recovery which is based on an implied agreement to pay for benefits received." Heldenfels Bros., Inc. v. City of Corpus Christi, 832 S.W.2d 39, 41 (Tex.1992). The doctrine of quantum meruit requires the plaintiff to establish: "1) valuable services and/or materials were furnished, 2) to the party sought to be charged, 3) which were accepted by the party sought to be charged, and 4) under such circumstances as reasonably notified the recipient that the plaintiff, in performing, expected to be paid by the recipient." Id. However, the summary judgment evidence establishes the existence of a contract between the parties. In general, recovery under quantum meruit is limited to only when there is no express contract covering the services or materials furnished. Vortt Exploration Co. v. Chevron U.S.A., Inc., 787 S.W.2d 942, 944 (Tex.1990); Academy Corp. v. Interior Buildout & Turnkey Constr., Inc., 21 S.W.3d 732, 741 (Tex.App.-Houston [14th Dist.] 2000, no pet.). Because the summary judgment evidence established the existence of a contract as a matter of law, Citibank cannot recover under the theory of quantum meruit.

Third, Citibank failed to prove the amount due based on the breach of contract argument.^[2] Although Tully's affidavit 217*217 failed to raise a fact issue,^[3] Citibank failed to prove it was entitled to summary judgment. Specifically, Citibank failed to prove that the interest rate charged was agreed on by Tully.^[4] The contract introduced into evidence does not specify the interest rate that was agreed on. Further, there were no notices of interest rate increases introduced into evidence. The only evidence concerning the rate of interest are the rates specified on the copies of the monthly statements Citibank sent to Tully.^[5] Citibank failed to prove its damages as a matter of law. Because a genuine issue of material fact issue exists concerning the interest rates agreed on, the trial court erred in granting summary judgment.

When a trial court's order granting summary judgment does not specify the ground or grounds relied on for the ruling, summary judgment will be affirmed on appeal if any of the theories advanced are meritorious. State Farm Fire & Cas. Co. v. S.S., 858 S.W.2d 374, 380 (Tex.1993). Citibank, though, failed to prove it was entitled to summary judgment concerning any of the three theories advanced in its motion for summary judgment. A credit card debt is not a sworn account. Since the summary judgment evidence proved the existence of a contract, Citibank was not entitled to collect on its quantum meruit theory. Because Citibank failed to prove Tully agreed to the interest rates Citibank charged, Citibank failed to prove 218*218 its amount of damages under the breach of contract theory. We sustain Tully's first point of error. We decline to address the remaining arguments advanced by Tully because the above arguments are dispositive.

2) Citibank Failed To Disprove Tully's Counterclaim

In his second point of error, Tully argues Citibank failed to prove that his counterclaim was pre-empted or otherwise invalid. Tully argues the interest charged was usurious under Texas law. In the alternative, Tully argues Citibank has failed to prove that the interest charged is authorized by South Dakota Law.

Tully argues that, under Texas law, a charge of interest in excess of ten percent is in most cases considered usurious.^[6] However, the National Bank Act pre-empts state usury laws. Marquette Nat'l Bank v. First Omaha Serv. Corp., 439 U.S. 299, 313, 99 S.Ct. 540, 58 L.Ed.2d 534 (1978); see Smiley v. Citibank, 517 U.S. 735, 744, 116 S.Ct. 1730, 135 L.Ed.2d 25 (1996) (holding that late fees were interest under the National Bank Act). The National Bank Act provides that national banks may charge interest "at the rate allowed by the laws of the State ... where the bank is located, or...."^[7] Assuming that Citibank is a national bank located in South Dakota,^[8] Citibank has proven as a matter of law that Texas usury law is pre-empted and that it may charge interest at the rate authorized by South Dakota.

However, merely proving that Texas usury laws are pre-empted by federal law does not establish that the charges were authorized. Tully's counterclaim was not limited to Texas usury laws; the counterclaim was that the interest rates were not authorized. If Texas usury laws are pre-empted, Tully argues Citibank has failed to prove that the interest rates are authorized under South Dakota law. Although Citibank did not respond to this argument on appeal, Citibank argued to the trial court that Section 54-3-1.1 of the South Dakota Codified Laws authorized the interest in this case. Section 54-3-1.1 of the South Dakota Codified Laws provides as follows:

Unless a maximum interest rate or charge is specifically established elsewhere in the code, there is no maximum interest rate or charge, or usury rate restriction between or among persons, corporations, limited liability companies, 219*219 estates, fiduciaries, associations, or any other entities if they establish the interest rate or charge by written agreement. A written agreement includes the contract created by § 54-11-9.

S.D. CODIFIED LAWS § 54-3-1.1 (2005). Even if no other maximum rate is established elsewhere in the laws of South Dakota, Citibank has failed to show that the interest rate is authorized. Section 54-3-1.1 only applies if the parties "establish the interest rate or charge by written agreement." Id. The summary judgment evidence lacks any evidence as to the interest rate authorized by the credit card contract. The contract introduced into evidence does not specify the interest rate that was agreed on.^[9] There were no notices of interest rate increases introduced into evidence. When no interest rate is provided in the agreement, South Dakota law limits the maximum interest rate to considerably less than the rates charged by Citibank. See S.D. CODIFIED LAWS §§ 51A-12-13, 54-3-4, 54-3-5 (2005). We note that a credit card issuer may change the terms of the card agreement on sufficient written notice to the cardholder. S.D. CODIFIED LAWS § 54-11-10 (2005). The summary judgment evidence, though, contains no written notices specifying the interest rates other than the copies of the statements. There are genuine issues of material fact concerning whether the interest rates Citibank charged Tully are authorized by South Dakota law.

Because Citibank failed to prove the contractual interest rate, Citibank has failed to prove it was entitled to summary judgment. We sustain Tully's second point of error. Because we find the above issue dispositive, we decline to address Tully's remaining arguments contained in his second point of error.

3) The Trial Court Erred in Awarding Unconditional Appellate Attorney's Fees

In his third point of error, Tully argues the trial court erred in not conditioning the award of attorney's fees in the event of an appeal on the success of that appeal. An award for attorney's fees should be conditioned on a successful appeal. Westech Eng'g, Inc. v. Clearwater Constructors, Inc., 835 S.W.2d 190, 205 (Tex.App.-Austin 1992, no writ). While the award of attorney's fees being conditioned on a successful appeal is probably implied in the trial court's judgment, we reform the judgment to reflect that Citibank is only eligible to receive attorney's fees if the appeal is successful. See J.C. Penney Life Ins. Co. v. Heinrich, 32 S.W.3d 280, 290 (Tex.App.-San Antonio 2000, pet. denied).

4) Conclusion

Because Citibank failed to prove the contractual amount of the interest, Citibank failed to prove there were no genuine issues of material fact concerning the amount of its damages or concerning whether the interest rates charged were authorized under South Dakota law. Therefore, the trial court erred in granting summary judgment. We reform the trial court's judgment to condition the award of attorney's fees on the success of the appeal. Because we have held that the trial court erred in granting the summary judgment, Citibank is not eligible to receive attorney's fees for this unsuccessful appeal.

220*220 We reverse and remand this case to the trial court for further proceedings consistent with this opinion.

[1] The interest rates charged vary dramatically among the statements introduced into evidence. Most of the statements reflect interest around twenty-five percent. For a couple of the statements, the interest approached seventy percent—possibly due to transaction, late, or other fees. Late fees are considered interest under South Dakota Law. S.D. CODIFIED LAWS § 51A-12-13 (2005).

[2] We note that Tully argues Citibank failed to plead breach of contract. The sufficiency of the pleadings is judged based on whether they provide the opponent with fair and adequate notice. Roark v. Allen, 633 S.W.2d 804, 809-10 (Tex.1982); see Southwestern Bell Tel. Co. v. Garza, 164 S.W.3d 607 (Tex.2004). "Fair notice" requires that "an opposing attorney of reasonable competence" can ascertain the nature and basic issues of the controversy. City of Alamo v. Casas, 960 S.W.2d 240, 251 (Tex.App.-Corpus Christi 1997, pet. denied); Daniels v. Conrad, 331 S.W.2d 411, 415 (Tex.Civ. App.-Dallas 1959, writ ref'd n.r.e.). Citibank pled in its petition that the suit was based on a credit card debt. More specifically, Citibank alleged that Tully "defaulted in making the payments required by the terms of the Card Agreement. Due to Defendant's breach of the terms of the agreement...." Liberally construed, the pleading gives fair notice that Citibank was pleading a cause of action for breach of contract.

[3] Tully contends that, at a minimum, his affidavit raises a fact issue. However, the affidavit filed by Tully was conclusory and failed to allege specific facts of a nature that could be effectively countered by Citibank. See Chhim v. Univ. of Houston, 76 S.W.3d 210, 216 (Tex. App.-Texarkana 2002, pet. denied); Haynes v. City of Beaumont, 35 S.W.3d 166, 178 (Tex. App.-Texarkana 2000, no pet.); Rizkallah v. Conner, 952 S.W.2d 580, 587 (Tex.App.-Houston [1st Dist.] 1997, no pet.).

[4] Tully argues on appeal that a genuine issue of material fact exists regarding the amount Tully owes Citibank under the contract. We note that Tully did not specifically argue that Citibank failed to prove the interest rate. However, Tully did argue to the trial court and in its second point of error that the interest was not authorized. Briefs are to be construed liberally. TEX.R.App. P. 38.9. This issue is intertwined with the second point of error concerning the counterclaim and necessarily applicable to the breach of contract claim. Further, Tully alleged a general point of error. Tully's first point of error states: Citibank cannot sue Tully for a credit card debt in a suit on a sworn account, and may not recover from Tully under any of the alternative theories it now advances. Under the Malooly rule, set out in Malooly Brothers, Inc. v. Napier, 461 S.W.2d 119 (Tex.1970), a point of error stating generally that the trial court erred by granting summary judgment authorizes review of all possible grounds of trial court error in granting the summary judgment. Plexchem Int'l, Inc. v. Harris County Appraisal Dist., 922 S.W.2d 930, 930-31 (Tex. 1996) (per curiam); see Star-Telegram, Inc. v. Doe, 915 S.W.2d 471, 473 (Tex.1995). In addition, "[t]he statement of an issue or point will be treated as covering every subsidiary question that is fairly included." TEX.R.App. P. 38(e). Because Tully raised a general point of error, the issue of the interest rate elsewhere in his brief, and the issue was raised at the trial court level, error was assigned for our review.

[5] Even if the bills could be construed as notice of a change of the terms of the card agreement, the change could not apply retroactively. Therefore, there would still be a fact issue as to the amount of interest owed.

[6] See TEX. FIN.CODE ANN. § 302.001(b) (Vernon Supp.2004-2005). We note, though, that Texas law may permit interest up to eighteen percent for revolving charge accounts. See TEX. FIN.CODE ANN. § 346.101 (Vernon Supp. 2004-2005).

[7] 12 U.S.C.A. § 85 (West 2001). Although Section 85 provides that, if the state provides no rate, then the interest is limited to the greater of seven percent or one percent in "excess of the discount rate on ninety-day commercial paper," the United States Supreme Court has held that, when a state allows any rate agreed on by the parties to the contract, a rate is still fixed by the state despite the lack of a maximum rate. Daggs v. Phoenix Nat'l Bank, 177 U.S. 549, 555, 20 S.Ct. 732, 44 L.Ed. 882 (1900); see Hiatt v. San Francisco Nat'l Bank, 361 F.2d 504, 507 (9th Cir.1966).

[8] Citibank argues it sufficiently proved that it was a national bank because it cited Smiley, 517 U.S. at 744, 116 S.Ct. 1730, which recognized Citibank as a national bank and because it identified itself as "Citibank (South Dakota), N.A." in its summary judgment affidavit. Only a national bank may use the word "National" in its title. 18 U.S.C.A. § 709 (West Supp.2005). For purposes of this analysis, we will assume that Citibank is a national bank located in South Dakota.

[9] We note that the contract does contain the amount of at least some of the fees charged. 

Modification of credit terms: interest rate hikes, higher fees, and other finance charges

Increases in Interest Rates (APR) and Fees as an Issue in Credit Card Actions 

This post discusses the issue of modification of credit terms in the context of debt collection litigation.

Federal law (TILA) requires written disclosure of initial terms of consumer credit as well as modification of such terms later. As a matter of state contract law, contract-modification has the same elements as contract-formation under state law, and as such requires proof of mutual assent. The creditor should accordingly be held to the burden of proving contractual authorization of interest rates actually shown as having been used to calculate and assess finance charges on monthly account statements or similar account history, especially when there was an interest rate hike and a very high rate was applied for an extended period of time prior to the lawsuit having been filed, with the result of augmenting the amount of the debt (damages pleaded for) considerably.

MODIFICATION OF TERMS FALLS UNDER TILA 

The federal Truth in Lending Act (TILA) requires disclosure in writing of changes in credit terms in additional to initial disclosure of terms when the consumer credit account is set up. -- > TILA Disclosures

CONTRACT LAW REGARDING MODS MIRRORS GENERAL CONTRACT-FORMATION PRINCIPLES 

State law governing modification of contracts requires the same essential elements to be satisfied that are required for valid formation of the initial contract: offer and acceptance with respect to the new terms, and a meeting of the mind on them.

The terms will typically be offered by the bank, but they will also have to be accepted by the customer. Therefore, when the bank sues to collect a debt that includes interest accrued at the modified rate, it should also be held to the burden of proving contractual assent to the modified rate, which -- at least in cases that end up in court -- is typically a higher rate, sometimes a much higher one.

REJECTION OF PROPOSED CHANGE IN TERMS (rarely seen in debt suit)

Rejection of new terms proposed by the bank - either via separate change-in-terms notices or notices included in the monthly statement ("bill stuffer") may result in the account being cancelled and not being available for future use. See sample opt-out instruction with announcement of consequences used by Capital One in 2007.



Sample Opt Out Provisions from Notice of Change in Terms
 issued by Capital One in 2007

Sample Citibank Notice of Interest Rate Increas

with opt out clause



Whether rejection will entail such adverse effect will depend on the terms of the existing contract and proposed changes, and whether the creditor follows through with the cancellation (which may not be in its economic interest in the case of a profitable customer) or lowers the credit limit to the existing balance as a functional equivalent of cancellation.

The issue of rejection of a modification of terms rarely arises in debt collection, not to mention documentary evidence thereof. What is commonly seen is evidence of an increase in the interest rates to very high levels (27.24% in the case of Amex cards or 29.99% APR in account issued by Chase Bank USA, N.A.) from a lower rate as reflected on copies of account statements produced by the bank or its assignee in support of a motion for summary judgment. The attorney for the creditor/plaintiff will typically argue that the cardholder did not complain until the lawsuit was filed, and that the finance charges are therefore legitimate. If the contractual basis is missing, however, this is a questionable argument under contract law.

IMPLICATIONS FOR LITIGATION 

If no signed modification agreement is offered, the plaintiff would have to prove offer and acceptance of the modified terms, such as an increase in the interest rate with proof that the defendant was given notice of the proposed changes, and that he/she accepted them by continuing to use account; or did not expressly utilize the out-out mechanism that may have been included in the notice of proposed changes in terms. Change-of-terms notices vary with regard to the specifics of opt-out provisions, if they contain them at all.

If the cardholder merely continued to make payments on the account, doing so should not be deemed acceptance of new terms because the cardholder would not have the option to discontinue making payments since the modification in terms would not cancel the preexisting repayment obligation as to a revolving balance. Stated differently, the card member did not have the option to cease making payments merely to express disapproval of the proposed changes. This would hardly be a viable excuse for not making payments in subsequent litigation predicated on Defendant's default. Therefore, the plaintiff should not be able to rely on that type of evidence to support the proposition that the Defendant consented to the rate hike.
   
But the caselaw regarding the effectiveness of interest rate changes, and the associated evidentiary burdens for the plaintiff to enforce finance charges accrued at a different (usually higher) rate is murky, perhaps because the argument was not clearly made in the trial court and/or on appeal. At least one case is on point in finding that account statements that did not show any card use subsequent to an interest rate hike could not furnish evidence of acceptance by the customer, and therefor could not relieve plaintiff from proving mutual agreement on altered terms.  

VARIATION OF FINANCE CHARGES OVER TIME AS SHOWN ON MONTHLY STATEMENTS

The documentary record is not consistent across debt collection cases that involve increases in the interest rate(s) applied to revolving balance(s), not to mention those that led to an opinion on appeal. In some cases, the only evidence of a change in terms are found on the account statements themselves. But differing interest rates shown at different times on monthly account statements does not prove that those interest rates were set and applied in conformity with the applicable contract.

If interest rates vary on different statements over time, the interest rate must have been defined as a variable interest rate (pegged on the prime rate or similar index), or there must have been a change in terms of the original interest rate. Either way, proof of the underlying contract provisions is needed.

What complicates the matter is that the underlying contract, or some supplement, may have defined contingencies that would trigger an interest rate hike (penalty or default rate). Another scenario is that the bank offered a lower interest rate for a limited time (lower relative to the regular rate).

The same applies, analogously, to fees. If, for example, different amounts of late fees appear on monthly statements at different times, this suggests are change in terms, unless the underlying contract set different monthly flat fees based on the amount of the revolving balance, or the amount required to be paid as a minimum monthly payment amount.

But variations in interest rates and fees over a series of monthly statements merely supplies evidence that different finance charges were imposed as a matter of fact; it does not prove that the applicable contract authorized them. But such proof forms part of the Plaintiff's burden of proof.

PROOF OF CONTRACTUAL AUTHORIZATION FOR HIGHER FEES AND APR 

To establish that the finance charges were correctly assessed based on the underlying TILA disclosures/contract terms, the plaintiff would have to prove up the underlying contract and its term AND the modifications in such terms by change notice(s) or by a superseding agreement.

In the case of an expiration of a special (low) rate offer, written evidence of the terms of the offer would have to be adduced, including the duration of the preferential rate and/or definition of events that precipitate a reversion to the normal rate (regardless of whether the special rate offer falls under TILA).  

Although the law would seem to be clear in requiring a showing of contractual authorization for the interest actually charged as evidenced by monthly statements, courts do not always hold the Plaintiff to this component of its burden of proof, but instead want to know if the Defendant disputed the rate, or if there is any evidence that the rate was incorrect (i.e., not authorized), thus shifting the burden of proof to the defendant.

Additionally, creditors and their attorneys may attempt to circumvent the proof requirements as it relates to contractual authorization of finance charges by resorting to the alternative theory of account stated. The account stated theory as a vehicle to avoid having to prove up the terms of the contract is addressed in another post. Also see -- > account stated and contractual choice of law.

EXAMPLES OF CHANGE IN TERMS NOTICES BY CREDIT CARD ISSUERS 

US Bank Reservation of Right to Change Credit Terms:

[more forthcoming]

LACK OF PROOF OF ORIGINAL APR AND/OR CHANGES IN RATES OVER TIME

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 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 cardmember agreement; that there were no notices of changes in terms announcing an increase in the interest rate; and that the variable APRs appearing on monthly statements could not qualify as notices in change of terms retroactively even if they were otherwise deemed a satisfactory substitute for formal notices of changes in terms.

RELATED TOPICS AND BLOG POSTS 

Elements of contract formation involving a written contract without both parties' signatures
Contractual authorization of APR and account fees (finance charges)
Requirement of proof of the terms of a loan contract under Texas law
The relevance of the Truth in Lending Act (TILA) to debt collection litigation
Interest rate hikes

Capital One Credit Card Accounts in Court

CAPITAL ONE CREDIT CARD DEBT SUITS 

Capital One Bank USA, N.A. (“Capital One”) is a national bank as indicated by the “N.A.” suffix in its name.  It typically brings its own debt-collection lawsuits, rather than selling charged-off accounts to debt buyers (hough there is some of that too, e.g. debt collection suits by Cach, LLC, and Midland Funding, LLC). 

Capital One (i.e., the two-word version of the name) is not the bank’s legal name. It is a federally registered service mark.  

The Comptroller of the Currency’s web site indicates that there are actually two different Capital One banks, with separate charter numbers: Capital One Bank (USA), National Association and Capital One, National Association, with different location. 

Both entities’ names appear in debt collection lawsuits, sometimes within the same suit. 

Suing in its own legal name puts the bank in a better position to prove its case than the assignee. 

In 2012, Capital One (both banks) acquired the credit card portfolio of HSBC Bank Nevada, National Association, Las Vegas, Nevada (“HSBC Nevada”), which subsequently went out of business as a bank by merging into is non-bank parent. 

Transaction summary for HSBC-Capital One Deal
for Acquisition of Credit Card Portfolio
 

LAW FIRMS SUING ON CAPITAL ONE CARD DEBT  

Debt collection suits based on Capital One cards are filed by several leading law firms engaged in debt collection in Texas: JENKINS WAGNON & YOUNG, P.C.; RAUSCH, STURM, ISRAEL, ENERSON & HORNIK, LLC; MICHAEL J. SCOTT, PC (Michael Joseph Scott).  

RAUSCH has also brought suits on debt owed on Capital One credit cards that was sold to Cach, LLC. 

VOLUME OF CAPITAL ONE LITIGATION (IN HARRIS COUNTY) 
  
Over the course of a one-year period ending August 19, 2013, Capital One filed 246 lawsuits in county courts at law in Harris County. This is the total for lawsuits by several Capital One entities (or filed under different name versions of the same entity): CAPITAL ONE USA, NA / CAPITAL ONE (USA) NA; CAPITAL ONE NA / CAPITAL ONE NATIONAL ASSOCIATION;  CAPITAL ONE AUTO FINANCE; and CAPITAL ONE AUTO FINANCE INC. The electronic docketing system and search function allows for parentheses in a name, but does not provide for use of punctuation. 

Capital One rarely files suits in Harris County District Courts. The number in those courts is insignificant. 

  

CAPITAL ONE CARD AGREEMENTS 
– OLD VERSIONS VS. NEW ONES  

TITLE OF CONTRACT DOCUMENT 

Capital One’s standard account agreements are titled “CUSTOMER AGREEMENT”. The older ones typically consist to two pages, with an “ARBITRATION AGREEMENT” as a separate page. The last paragraph of the CUSTOMER AGREEMENT addresses arbitration, and incorporates the separate one-page arb agreement by reference.  The newer versions (2010 forward) are comprised of multiple pages, each with two columns, with text that is printed in larger font than was the case with older ones (which can be hard to decipher if the reproduction is bad).  Version codes and copyright years typically appear on the bottom of the last page of the agreement.  

NEWER AGREEMENTS VS. OLDER ONES  

There are also substantive differences: The older customer agreements include arbitration provisions while the more recent ones do not. 

This raises an interesting issue for accounts that predate the arrival of the new customer agreements. If the original contract encompassed an irrevocable arbitration agreement, can the arbitration agreement nevertheless be superseded by a modification agreement that deletes any reference to arbitration? 

Of course the issue is only of import when the defendant in a debt collection suit (or the attorney for the defendant) sees an advantage in having the claim arbitrated. After all, the right to arbitrate is contractual, and can be waived. 

CHOICE OF LAW AND STATUTE OF LIMITATIONS   

Whether or not arbitration provisions are included in customer agreements drafted by Capital One, all versions have a choice of law clause that provides for application of Virginia law. Some time ago, Capital One lost on the statute-of-limitations issue in Florida, when a court there ruled that the shorter statute of limitations applied to a debt collection suit filed by Capital One against a debtor in that state.  So Capital One then modified the choice of law clause in its standard CUSTOMER AGREEMENTS to assure for itself the benefit of the longer limitations period. The typical choice of law language now reads like this: 

“We make decisions to grant credit and issue you a Card from our offices in Virginia. This Agreement will be interpreted using Virginia law. Federal law will be used when it applies. You waive any applicable statute of limitations as the law allows. Otherwise, the applicable statute of limitations period for all provisions and purposes under this Agreement (including the right to collect debt) will be the longer period provided by Virginia or the jurisdiction where you live. If any part of this Agreement is found to be unenforceable, the remaining parts will remain in effect.” 

ADDITIONAL CONTRACT DOCUMENTS - SEPARATE TILA DISCLOSURES   

The newer, multi-page CAPITAL ONE CUSTOMER AGREEMENTS, contain an enumeration of other documents that are defined as being part of the contract in addition to “this agreement”, which is numbered (1). The list includes Truth in Lending Disclosures regardless when issued, “all other documents and disclosures relating to your Account including those provided online”, and “any future changes we make to any of the above things” [sic].  

Enumeration of documents in 2013 version of Capital One Customer Agreement

This raises an interesting question also: Does the presence of the list in the document Capital One presents as the applicable contract elevate the proof requirements for the bank as movant for summary judgment?

After all, the incorporation of additional documents by reference indicates that the CUSTOMER AGREEMENT, standing by itself, is not complete.  Even if an examination of all of the contract language contained in the CUSTOMER AGREEMENT were to reveal that it covers each of the essential elements of a contract for an open-end credit account, the list expressly contemplates that those terms may be changed by the bank in the future. So, arguably, when Capital One sues, it would have to adduce competent testimony to the effect that no changes were subsequently made, or testimony to the effect that some terms were indeed modified. In the latter case, the modification document(s) would have to be attached because the summary judgment rules require attachment of referenced documents. 

SUMMARY JUDGMENT AFFIDAVITS FILED BY CAPITAL ONE BANK 
   
Typically, however, the affidavits filed by Capital One are not very elaborate. Titled “BUSINESS RECORDS AFFIDAVIT” rather than Summary Judgment Affidavit, they are limited in purpose (authentication of account records) and consist only of a few paragraphs. They typically contain only one fact above and beyond the predicate verbiage for the admission of account records: the date of account creation, with reference to what the records show. Capital One usually includes a document rarely seen in the summary judgment submissions of other debt plaintiffs: a copy of the account application. This exhibit is normally incomplete (typically only the front page is included) and is often of poor reproductive quality, which makes it illegible in part).  

HISTORY OF DECEPTIVE PRACTICES IN LURING NEW CUSTOMERS WITH LOW-RATE OFFERS, THEN HIKING THE APR

According to a class action complaint filed in California, Capital One mass-mailed credit cards offers that promised a low fixed APR of 6.99% that would change only under three specified conditions.The rate would apply to purchases and balance transfers. Capital One would then hike the rate on consumers that open accounts under the offered rate even though they had complied with their payment obligations. Capital One did so for "market-based" reasons, i.e. to maximize its own profiles, rather then any act or omission on the part of cardholders. The solicitations had specifically stated  THIS IS NOT AN INTRODUCTORY RATE.. Rubio v. Capital One Bank. 

Misleading solicitation material promised a low "fixed" rate  

Rubio was a recipient of the direct-mail offer and opened an account, but had her rate subsequently raised to 15.9% even though she did not do anything to trigger the three conditions under which the rate could be hiked. The cardmember agreement that Capital One mailed after the consumer had accepted the offer contained a reservation of rights clause as to future changes of terms, but the solicitation did not do so in the box in which the “fixed” interest rate was displayed. Outside the so-called “Schumer Box”, but farther down on the same page, there was a heading that read "Terms of Offer." Under that heading, in fine print, the solicitation provided, as part of the terms: "I will receive the Capital One Customer Agreement and am bound by its terms and future revisions thereof. My Agreement terms (for example, rates and fees) are subject to change."

When the consumer eventually sued Capital One for deceptive practices in advertising its low-rate credit card, she sued as a cardholder who had never submitted a late payment, exceeded her credit limit, or had her payment returned. She nevertheless received written notification from Capital One that her "fixed" APR of 6.99% would increase to 15.9%. The only way for her to avoid the increase was by closing her credit card account and paying off the balance.

The federal district court dismissed the consumer’s complaint about the increase in the “fixed” rate, but the Ninth Court of Appeals reversed the dismissal and revived the lawsuit, finding that the consumer had stated a claim under TILA that deserved to go forward because the disclosure in the solicitation did not meet the TILA requirement for clarity and conspicuousness. In reaching this conclusion, the federal court of appeals referenced the findings of a study commissioned by the FED that concluded that consumers interpret the term “fixed” rate as a rate that would not change. 

TILA REGULATES CONTENT OF SOLICITATIONS AND MANDATES CLARITY IN THE REQUIRED DISCLOSURES  

TILA and Regulation Z require a Schumer Box to disclose credit card APRs. 15 U.S.C. § 1637(c)(1)(A)(i)(I); 12 C.F.R. § 226.5a(b)(1). This disclosure must be clear and conspicuous, 15 U.S.C. § 1632(a); 12 C.F.R. § 226.5(a)(1), which, for purposes of credit card solicitations, is defined in the official staff commentary to Regulation Z as "in a reasonably understandable form and readily noticeable to the consumer." 12 C.F.R. pt. 226 supp. I, para. 5a(a)(2), cmt. 1. Thus, Regulation Z prohibits a Schumer Box from making "misleading" APR disclosures, where "misleading" means a disclosure that a reasonable consumer will either not understand or not readily notice under the "reasonable cardholder" standard”. Put differently, an APR disclosure that is not "clear and conspicuous" is ipso facto "misleading."

OTHER MAJOR CREDIT CARD ISSUERS THAT SUE CARDHOLDERS 

American Express sues very soon after cardmember stops making monthly payments
Bank of America sues card holders through FIA Card Services N.A.
Capital One collection suits on defaulted accounts
Citibank as debt suit plaintiff in Texas courts
Collection suits on Target cards by TD Bank
Discover Bank credit card debt suits
Wells Fargo debt suits on defaulted consumer accounts 

TILA's implications for defending debt collection suits (Truth in Lending Act)

THE FEDERAL TRUTH IN LENDING ACT (TILA) 

TILA is an acronym for the federal Truth in Lending Act. This is a law passed by the U.S. Congress that requires, among other things, that the bank disclose the interest rate(s) or method of determining the interest rate(s) (such as a margin added to an index or prime rate) and other financial terms in writing when consumers open credit accounts. It applies to consumer credit, not to business accounts.

While the TILA also provides a statutory cause of action for violations, its relevance in debt collection litigation consists primarily in the fact that the written terms are a federal regulatory requirement, and that a debt claims based on accounts subject to this law are necessarily predicated on written contract terms.

The federal law mandates disclosure so as to put the consumer in a position to accept or reject those terms, and to shop around for the best offer, and the best deal, based on meaningful comparisons. This regulatory requirement tracks the elements of contract formation under state law: first the offer, then the acceptance, assuming there is an agreement (“meeting of the minds”) on the terms. (See  -- >  contract formation).

TILA does not require a signed contract; what it requires is written disclosures of credit terms. Thus, when a creditor sues, the best evidence of the contract terms are the TILA disclosures, whether embedded in the cardmember agreement or in the form of a separate document (such as a Rates and Fees Table or Schedule) or a combination of both. If the terms changed (as shown on credit card statements), there must have been a notice of change in terms pursuant to TILA.

Arguably, the required disclosures under TILA should limit the creditor to breach of contract as a theory of recovery of consumer debt, but this issue has yet to be litigated in the courts of appeal. In the meantime, some courts of appeals in Texas have approved the use of alternative theories for debt collection, even if they do not require proof of the underlying contract/TILA disclosures. Under the state-law theory of Account Stated, as modified by some Texas courts of appeals, the creditor can seek a judgment for damages in the form of accrued interest (either as part of the account balance or claimed as a separate item of damages), without proving the credit terms that were offered and allegedly accepted by the consumer. Arguably, this is inconsistent with, and undermines, federal law, but it is not a violation that gives rise to the kind claim authorized by TILA itself.

For violations actionable under TILA, i.e. the creditor’s failure to make required disclosures to the consumer, the applicable statute of limitations is quite short: one year.

TILA’S LEGISLATIVE RATIONALE (CONGRESSIONAL PURPOSES AND INTENT) 

TILA's purpose is to promote the informed use of consumer credit by requiring disclosures about its terms and costs, and regulations give consumers the right to cancel certain credit transactions that involve a lien on a consumer's principal dwelling." A person is a TILA consumer if the party to whom credit is offered or extended is a natural person, and the money, property, or services which are the subject of the transaction are primarily for personal, family, or household purposes. 15 U.S.C. § 1602(h)

The TILA requires creditors to disclose all of the credit terms to the consumer before the extension of credit is made, which allows the consumer to make an informed decision about the credit options that are available as well as serves as a way in which to prevent the consumer from being obligated to pay possible hidden and unreasonable charges unknowingly. 15 U.S.C. § 1601.

The TILA also requires lenders to issue new disclosures within a specified amount of time in the event that an interest rate adjustment occurs. 12 C.F.R. § 226.20(c)(1)-(5).

The purpose of TILA is to promote the informed use of credit by mandating a meaningful disclosure of credit terms to consumers.

The Federal Reserve Board (commonly known as "The FED") is charged with implementing and interpreting TILA. 15 U.S.C. § 1604; see also 12 C.F.R. Pt. 26 ("Regulation Z").

STATUTORY CAUSE OF ACTION UNDER TILA AND STATUTE OF LIMITATIONS

TILA is a federal consumer protection statute that provides consumers with a cause of action against creditors that fail to make required disclosures.

TILA requires a borrower who does not receive certain material disclosures to initiate an action for damages within one year of the violation. 15 U.S.C. § 1640(e).

Further, any claim under TILA for rescission of the loan transaction must be brought within three years of the violation. 15 U.S.C. § 1635(f). A failure to provide the required disclosures under TILA occurs at the time the contractual relationship between the lender and the borrower is consummated, i.e., at the time the loan documents are executed. Nondisclosure is not a continuing violation for purposes of the statute of limitations.

RECOUPMENT COUNTER-CLAIM MAY BE BROUGHT IN RESPONSE TO DEBT SUIT MORE THAN ONE YEAR AFTER TILA VIOLATION

 "A one-year statute of limitations governs claims brought under the Act, running from the date of each violation." Id. (citing 15 U.S.C.A. § 1640(e)). However, section 1640(e),

does not bar a person from asserting a violation of this subchapter in an action to collect the debt which was brought more than one year from the date of the occurrence of the violation as a matter of defense by recoupment or setoff in such action, except as otherwise provided by State law.
15 U.S.C.A. § 1640(e); see Seidner v. Citibank (S. Dak.) N.A., 201 S.W.3d 332, 336-37 (Tex. App.-Houston [14th Dist.] 2006, pet. denied) (stating that "the thrust of subsection (e) is that a violation of the [TILA] can be raised as a defense by recoupment or set-off even after the one-year statute of limitations has expired on an affirmative claim for damages or penalties") (citing Beach, 523 U.S. at 412, 417-18) (discussing meaning of subsection (e))). In Garza v. Allied Finance Co., we defined "recoupment" as a form of counterclaim that is "a demand arising from the same transaction as the plaintiff's claim." 566 S.W.2d 57, 62 (Tex. Civ. App.-Corpus Christi 1978, no writ); see Seidner, 201 S.W.3d at 337 (explaining that the defense of recoupment allows a defendant to deduct any amounts accruing to him as a result of the same transaction that forms the basis of the action against him). "Although application of the recoupment defense will decrease the plaintiff's recovery, and may even wholly defeat any recovery, it does not act as an affirmative bar to the action." Seidner, 201 S.W.3d at 337. In Garza, we also distinguished "recoupment" from "offset," which we explained as a demand arising from "a transaction different than the one forming the basis of plaintiff's claim." 566 S.W.2d at 63.

CASELAW SNIPPETS - TILA IN TEXAS COURTS 

TILA protects consumers - business loans not covered 

One year SoL for TILA violations, but exception for recoupement claims 

Recoupement claim under the Truth in Lending Act (TILA) is similar to off-set and can thereby reduce amount of damages
awardeded to the creditor in a debt collections suit 

What is a CMA? Anatomy of Credit Card Agreements

Credit Card Agreements Analyzed 

Credit card issuers do not all call their contract documents by the same name. Terms other than Credit Card Agreement include the following: CUSTOMER AGREEMENT (Capital One and Wells Fargo Bank), CARDMEMBER AGREEMENT (CA) as two words (American Express, Chase Bank, Discover Bank); CREDIT CARD AGREEMENT (Target), and ACCOUNT AGREEMENT. Some more elaborate names have also appeared in debt litigation. Amex agreements, for example used to have very long-winded captions in years past, before the two banks adopted the practice of issuing customized agreements to cardholders on a regular cycle, which have the name and account ending digits in addition to card/account type printed on the them on page 1.

On this website, the acronym CMA is used generically, short for Card Member Agreement written out in three words.

CHANGE IN TERMS NOTICES AND SUPERSEDING AGREEMENTS 

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. Sometimes change notices are printed on a multi-page credit card billing statement.

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).

MONTHLY ACCOUNT STATEMENT NOT A VALID SUBSTITUTE FOR NOTICES OF CHANGES IN TERMS

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.

DIFFERENT VERSIONS OF CMAs FROM THE SAME BANK 

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 customer segments 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.

UNSIGNED FORM CONTRACTS aka "BOILERPLATE" AGREEMENTS 

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), The Important Terms of Your Credit Card Account (Wells Fargo). 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 happened to be attached as an exhibit (unless there is a valid explanation and proof thereof, such as a name change as a result of marriage or divorce, or the defendant's admission to that effect).
 
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. One exception is Discover Bank. As of 2018, the affidavit signers of its servicer identify the version by "terms level".

Is the contract exhibit the correct agreement?

DISCREPANCIES IN YEARS AND VERSIONS

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 even 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, on 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.

ARBITRATION PROVISIONS

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).

CHOICE OF LAW

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 occasional exceptions, such as in collection suit involving Amex business credit cards, which sometimes carry much higher balances that typically seen with consumer accounts.

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, presumably to take advantage of the favorable business climate there (no usury caps on interest). 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 agreement kept surfacing in debt litigation for years later. 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 stands for 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 suit on a promissory note, often combined with a suit against individuals as guarantors when the loan was extended to a business entity such as an Inc. or an LLC.

APPLICATION OF THE LAW OF THE ISSUER'S HOME STATE 

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 differences of significance. 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 creditors will invoke against 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, which do not limit interest rates (except to require an agreement as a basis for charging them).

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 have been 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 would have 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.

INTERSTATE DIFFERENCES IN STATUTES OF LIMITATION: SHORTER VS. LONGER

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. In any event, that would be the argument in arbitration in an appropriate case where default and claim accrual happened sometime between 3 and 4 years ago. 

Note that some promissory notes are subject to the six-year statute of limitations in the Texas version of the UCC. In order to qualify however, the not must meet the definition of a negotiable instrument. This issue of negotiability is occasionally litigated when the claim would be barred under the 4-year SOL, but not under the 6-year SOL.

INTERSTATE DIFFERENCES IN THE STATUTE OF FRAUDS : THE CASE OF UTAH

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 creditor 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 -- as a condition of enforceability -- be based on a contract that is signed by the party that is to be held liable as .

JUDICIAL NOTICE OF OTHER STATE'S LAW 

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). They typically also reference federal law, which applies in any event to federally regulated banks. But few debt plaintiffs even acknowledge this, and few file motions for judicial notice of the other state's law. But it does happen, and when the amount in controversy is much higher than average, some Creditors attorneys will exert themselves much more than they would on a garden-variety collection case in JP court or county court. This is occasionally the case in American Express collection suits on high-balance accounts.




Last revised: 5/4/2019