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

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 

Interest rates - Proof of contractual authorization of APR and other finance charges

Effect of creditor's failure to prove contractual authorization for interest rate charges 

In Tully v Citibank (South Dakota) N.A., the Texarkana Court of Appeals found that bank had failed to prove an agreement on the interest rate(s), and therefore failed to prove its damages. The statements in the record had varying interest rates printed on them, and the cardmember agreement that was before the court as a summary judgment exhibit did not state the interest rate or rates (presumably because the APRs and other terms were included in a separate document called "card carrier", which has surfaced in other citibank cases). The Tully court also noted that there were no notices of an increase in the interest rate, and that the statements could not be construed as notice of a change of the terms because the information on statements reflected activity in the past, and the changes could not go into effect retroactively. -- > TILA and Regulation Z; Chase Bank USA N.A. v. McCoy.

Therefore, the court concluded that there would still be a fact issue as to the amount of interest owed even if the interest rate information printed on the statements were considered sufficient to give notice of a change in terms to apply in the future.

KEY HOLDINGS AND CONCLUSIONS OF THE TEXARKANA COURT OF APPEALS: 

“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.”

“Because Citibank failed to prove Tully agreed to the interest rates Citibank charged, Citibank failed to prove its amount of damages under the breach of contract theory.”

DIFFERENT TYPES OF INTEREST RATES: FIXED VS. VARIABLE APR  

With respect to interest, credit (card) accounts can be divided into two categories: a "fixed-rate accounts" and a "variable-rate accounts." A "variable-rate account" is one in which rate changes are part of the plan and are tied to an index or formula, such as the prime rate published by the Wall Street Journal, an internal interest rate that the bank charges its best customers, or LIBOR.

But it is also possible that the same account has different balance balance categories with fixed or variable rates, respectively, or variable rates that are not uniform for all balance categories. Often, the rate applicable to cash advances is higher than the rate that applies to purchases; a promotional rate may apply only to a single transaction, such as a balance transfer from an account held at a different bank, and will often be time-limited.

Additionally, the CMA may specify a penalty rate by a higher margin being added to the prime rate (and thus variable) or as a fixed penalty rate, e.g. 27.24% or 29.99% APR.

Federal law (TILA) requires the creditor to disclose interest rates both initially (when the account is opened; or a solicitation sent by mail); and subsequently, if the change in the interest rate is the result of re-pricing by the creditor, i.e. a change in terms of the existing contract, rather than a hike instituted pursuant to contingencies stated as part of the terms as they are set forth in the cardmember agreement governing the active account. The classic example of the latter is an interest rate hike to a pre-defined penalty rate (or termination of a preferred rate) upon the cardholder's default or a late monthly payment. -- > repricing of existing accounts by banks; -- > triggering events for interest rate hike; -- > adverse action pricing.
 
RELATED TOPICS AND BLOG POSTS 

Mandatory disclosures under the Truth in Lending Act (TILA)
Interest rate disclosure in mailed mass solicitations - credit card offers
Is the Truth-in-Lending Act (TILA) relevant to credit cards collection suits?
Change of Terms Notices to modify (raise) interest rates 
Case note / commentary on Tully vs. Citibank South Dakota N.A.