The "Account Stated" theory and the lowering of proof requirements in credit card debt actions

Account stated in credit card debt suit

Account stated is a judge-made (common-law) theory of recovery with a long pedigree in reported decisions. Under this theory, merchants could obtain a judgment for the value of unpaid goods they had sold to customers if there was a history of business dealings and a final bill stating the combined balance, but no formal contract between the parties stating all terms, including price of all items sold and delivered. Under the older published appellate opinions, the customer had to have agreed that the final bill accurately "stated" the amount owed as a result of multiple prior transaction. Hence, the name for the theory:  Account Stated (or “Stated Account”, which is used interchangeably for the same theory).

This common-law theory has been adapted by some courts of appeals in Texas to permit credit card companies or their assignees (debt buyers) to prove a credit card debt claim without having to actually produce the underlying contract (whether called card agreement, cardmember agreement, account agreement or customer agreement).

Additionally, these courts do not find it inappropriate to apply the theory in a creditor-debtor relationship between a bank and customer, even though the bank does not actually sell the goods or services for which the credit card is used.

Interestingly, and inconsistently, given the common origin of suit on account and account stated, such a debt claim by a financial institution cannot be brought as a sworn account claim (under Rule 185) because the bank is not a party to a sales transaction, but instead finances the purchase of goods or services from third-party merchants. The courts of appeals are in agreement that "sworn account" is not a proper theory for collection of a credit card debt.

But account stated is a different matter.

Instead of requiring the creditor/plaintiff to prove under which terms credit was extended, and that the Defendant agreed to those terms, these courts of appeals are satisfied if the proof submitted by the creditor includes a series of credit card statements showing transactions and Defendant’s address on them, and if there is no evidence that the address was wrong or that the Defendant disputed any of these billing statements. Under the revised theory of account stated, the court essentially imputes on the consumer/card-holder an agreement and promise to pay whatever amount appears on the last statement as long as he or she received it and did not complain about it. The customer does not actually have to do anything to communicate such agreement. He or she is simply deemed to have agreed to the correctness of what the bill from the credit card company said by acquiescence.

The courts of appeals that have blessed the account-stated theory (including the Houston and Dallas Courts of Appeals) have thus lowered the proof requirements for mass debt collection litigation by providing creditors with an alternative theory that is easier to prove than a breach of contract claim (particularly when the relevant card agreement, or change-in-terms notice(s) modifying interest rate and other terms, went missing).

While the Fort Worth Court of Appeal in 2008 ruled against the creditor in one case in which the proof of actual receipt of the credit card statements was an issue (Morrison v. Citibank), the Dallas Court has taken a different position in several of its own cases, and expressly declined to follow the contrary case from the Fort Worth appeals court in Evans v Citibank (2013).

Citing an earlier decision of the same court, the Dallas court concluded as follows:

The facts of Compton and Dulong v. Citibank  are nearly identical to the facts of this case. Summary judgment based on Citibank's account stated claim was proper if the evidence showed the account statements were sent to Evans, charges and payments were made on the account, fees and interest were charged on the account, and there is no evidence Evans ever disputed the fees or charges reflected on the statements. Compton, 364 S.W.3d at 418; Dulong v. Citibank , 261 S.W.3d at 894. On this record, given the more than two years of credit card billing statements submitted by Citibank, the cancelled checks, and the payment stubs, we conclude Citibank established as a matter of law that Citibank and Evans had an implied agreement fixing an amount due and that Evans impliedly promised to pay Citibank that amount due. Moreover, Evans's assertion in his affidavit that "the statements were not delivered to me or my home" does nothing to raise an issue of fact because that affidavit was struck by the trial court, and we have concluded the court's ruling was not an abuse of discretion. We overrule Evans's fourth issue.

Interestingly, other institutions of governments have moved to tighten proof requirements in debt cases. The Texas Supreme Court recently raised and formalized the pleading and proof requirements for debt suit (in Justice Courts), and the Texas Attorney General took enforcement action against a major debt collection outfit (Midland Funding LLC and its servicer, Midland Credit Management Inc.) and the corporate parent (Encore Capital Group, Inc.) for violating the Texas Debt Collection Act and DTPA because of the shoddy proof they routinely submitted in countless cases filed across the state, many of which resulted in default judgments. This consumer protection action resulted in an agreed judgment in December 2011, in which Midland committed itself, among other things (including payment of damages), to improve its practices regarding account documentation and production of affidavits.

Different branches in the separation-of-powers system in Texas thus seem to be pulling in different directions, and even the courts of appeals are not in agreement about the standards to apply to those that that bring debt suits on a massive scale in the many courts across this state.

Account Stated Theory as an alternative to Breach of Contract as a cause of action in debt collection

The theory of "Account Stated" as an alternative to "Breach of Contract" as a cause of action in credit card debt suits 

Account stated is a common-law theory that some Texas courts of appeals have modified and adapted so that it is now available for collection of a credit card debt also.

A party is entitled to relief under the common law cause of action for account stated when (1) transactions between the parties give rise to indebtedness of one to the other; (2) an agreement, express or implied, between the parties fixes an amount due; and (3) the one to be charged makes a promise, express or implied, to pay the indebtedness.

Suits on account (including suits on sworn account) have their origin in sales transactions whereby goods or services were provided on credit by the merchant/seller followed by the purchaser‘s failure to make payment as promised.  The principal significance of the extension of one variety of suits of account (account stated) to the credit card business is that the bank or its assignee need not prove the terms of the underlying contract because proof of an underlying contract is not an element of the account-stated cause of action. What the claimant must show is the Defendant’s agreement to pay a certain amount that represents the final balance of prior transactions (hence “stated”), but courts have held that the agreement can be imputed on the recipient of a billing statement that he or she did not dispute.

The fact that credit card issuers do not sell goods is no longer material under the newer line of appellate cases (although it still precludes financial institutions and credit card debt buyers from bringing sworn account suits under Rule 185 of the TRCP). Not all Texas courts of appeals have signed on the revamped theory of account stated, but that could be due to a mere absence of a case that presented that issue.   

Open account suit: a dubious basis for credit card debt collection

Can a credit card debt suit be brought as an open account?

Some courts of appeal in Texas, but not all, have held that a credit card debt suit can be brought as an open account suit. One court reasoned that “a credit card debt may be considered an open account because, under a credit card agreement, the terms of repayment remain subject to modification, and the parties exchange credits and debits until either party settles the balance and closes the account.”

The treatment of a credit card debt claim as an “open account” claim is, however, controversial, and is subject to serious disagreement because traditionally suits on account involved sales transactions. Additionally, there are numerous recent appellate opinions that expressly say that a credit card debt claim cannot be brought as a sworn account claim.

But a sworn account suit is merely a special form of common-law suit on account.  Numerous appellate opinions from various courts around Texas hold that a sworn account suit is not proper for the collection of a credit card (bank) debt because the creditor did not sell goods or services to the customer. That applies to credit card banks generally.

It is also well-established that a suit on sworn account under Rule 185 is not an independent cause of action, but merely a different way to plead a suit on account. Therefore, the substantive elements of a sworn account suit (which include underlying sales transactions) cannot logically be distinguished from a common-law suit on account. The difference is procedural and involves the form of the evidence necessary to establish the plaintiff's right to judgment.

Additionally, if the defendant in a sworn account suit files a sworn denial, the plaintiff loses the procedural and evidentiary benefits of bringing the suit under Rule 185 (sworn account rule), and must prove the essential elements of the suit on account in the traditional manner. One of those elements is the sale of goods or services.

Until the split of appellate authorities is resolved, the validity and viability of the open account theory is questionable.  Whether or not an open account suit will succeed independent of a breach-of-contract claim may well depend in which appellate district the lawsuit is filed, and whether the defendant challenges the theory in the trial court and on appeal, if there is one.

Courts of appeals often decline to consider an otherwise worthy legal argument (or basis for reversal) if it is not properly briefed. Even one of the appellate courts that approved the open account theory noted that the consumer had not argued that “open account” is the equivalent of “sworn account”, which the court recognized as being prohibited for credit card debt collection.