Consumer protected from contract suit by Truth-in-Lending Act, common

St. Louis Daily Record & St. Louis Countian, Jun 19, 2004 by Donna Walter

A Missouri woman who refused to make payments on a credit card debt for items her husband ordered but never received is protected by the federal Truth-in-Lending Act, which provides a defense of nondelivery in lawsuits brought by credit card carriers.

Mary Mincks of Lamar, Mo., applied for a credit card from Citibank for personal use. Her husband, Chuck Mincks, was also authorized to use the account. Roughly five months after the couple received the card, Chuck received an advertisement to buy merchandise from Purchase Plus Buyers Group, which sold such items as mailing cards, telephone cards and the like for promoting home businesses. Chuck, who had started a home business three months earlier, ordered 4,000 postcards for a total of $7,600 and charged it to the Citibank credit card. Chuck never received the postcards. He called after four weeks and was told the postcards were on backorder. Chuck continued to call PPBG during the course of the next few months until he decided in August to cancel the order and demand a full refund. On Sept. 1, 2000, Chuck received a fax from the company stating that it had ceased operations.

The Mincks then began their attempt to have the $7,600 charge taken off their bill. But on Oct. 9, 2000, Citibank refused the Mincks' request because the letter wasn't received by the carrier within 60 days of the disputed charge. The Mincks stopped making payments on their Citibank card in February 2002; at that time the only outstanding balance on the card was the PPBG purchase. Citibank added interest, over credit limit fees and late fees to the account until July 2002; the balance was then $9,048.49. Citibank then sued for breach of contract in the Barton County Circuit Court, which found in favor of Mary Mincks.

On appeal before the Missouri Court of Appeals, Southern District, Citibank argued that the nondelivery defense in Regulation Z of the Truth-in-Lending Act cannot be used in this case because neither the regulation nor the act apply to Mary's open-end consumer plan. The purchase in question was a business purchase, and Citibank argued it was exempt from the scope of the Truth-in-Lending Act, which states in part: This subchapter [15 U.S.C. Sections 1601-1677] does not apply to the following: (1) Credit transactions involving extensions of credit primarily for business, commercial, or agricultural purposes, or to government or governmental agencies or instrumentalities, or to organizations.

But the Court of Appeals disagreed.

The plain language of 15 U.S.C. Section 1666i(a) allows cardholders to assert a defense against the card issuer arising out of any transaction in which the credit card is used as a method of payment or extension of credit, said the court.

Since we are required to liberally construe this language in Mary's favor, we interpret the phrase, 'any transaction,' to mean exactly what it says. So long as a credit card was used to make a purchase on an open end consumer credit plan, the claims and defenses rule in 15 U.S.C. Section 1666i applies to 'any transaction' meeting the other requirements set forth in the statute. Any less expansive interpretation of this phrase would constitute a strict, rather than a liberal, construction of this remedial statute. We decline Citibank's invitation that we do so, wrote Judge Jeffrey W. Bates for the unanimous panel.

In addition, the relevant transaction was the initial extension of credit - and not the PPBG purchase - because that's what created this open-end consumer credit plan, said the court, citing American Express Co. vs. Koerner, a 1981 U.S. Supreme Court decision that described three possible tests for determining when provisions of the Truth-in-Lending Act apply.

The Koerner court came up with the following possibilities: consideration of the overall purpose of the account, consideration of each transaction regardless of the overall purpose and a combination of the two approaches. But the Supreme Court did not decide which approach should be used because in the case before it there was no extension of credit under any of these tests.

The Southern District appellate court, however, said the overall purpose test should apply when an open-end consumer credit plan is involved. Under this test, the overall purpose of an account opened by a natural person must be considered. If the account was opened primarily for consumer purposes, the statutory and regulatory framework of the Truth-in-Lending-Act applies, even if the cardholder occasionally uses the card for a nonconsumer purchase, wrote Bates.

The Southern District further determined that Missouri common law and statutory principles authorize the use of the nondelivery defense in this case because Citibank sued Mary as PPBG's assignee, and, as such, it had no greater rights than the assignor had at the time of the assignment, according to Carlund Corp. vs. Crown Center Redevelopment, a 1993 Missouri appellate decision.

As a result, Citibank stands in PPBG's shoes and can occupy no better position than PPBG would if it sued Mary directly. These common law principles compel the conclusion that any defense valid against PPBG is valid against its assignee, Citibank, wrote Bates, citing Doss vs. EPIC Healthcare Management Co., a 1995 appellate decision, Carlund and Rizzo Motors Inc. vs. Central Bank of Kansas City, a 1992 appellate decision.