ÆäÀÌÁö À̹ÌÁö
PDF
ePub

tion for eliminating the right to assert defenses where the card issuer is itself the seller.

Nor in our opinion is there justification for imposing the limitation in any situation in which "the transaction" is initiated by a mail solicitation to use a particular credit card specified in a mailing purportedly emanating from the card issuer. I suspect that the card issuer is getting free mailing, stuffing and postage from the person or persons whose goods or services are being offered, and perhaps a commission on sales to boot. The card issuer should stand behind the quality of the goods it permits to be thus dangled before the eyes of its cardholders, just as if the card issuer were itself the seller. It can arrange the necessary indemnities against loss with those to whom it makes its cardholder list available.

Equally, we submit, there should be no limitation on amount insulating the card issuer for transactions with authorized dealers of the card issuer or with dealers of any affiliated seller. Here, against, the card issuer or a member of its family has selected the dealer to handle the family's products or peddle a brand of services, and has permitted the dealer to operate in its name, or the name of an affiliated person so far as the public is concerned. Most modern courts would impose liability on the card issuer in these situations, as they are in essence two-party transactions both in appearance and in real substance.

Thus, the $50 limitation clearly should not be applicable to the first five of our eleven classifications. This is not to say that the limit should apply to the remaining six, it is just that the reasoning in the remainder will be different. It is in the remaining situations that we reach the real three-party transaction where there is independence between the card issuer and the merchant-provider of goods or services, and the card issuer has a less aggressive part in influencing the consumer's decision to purchase. Only in the true three-party transaction can there be any reason to permit the "waiver of defense" or "holder in due course" concepts to operate to begin with. Where there is the degree of participation in persuading the consumer to buy that exists in our first five classifications, each of the joint venturer should be responsible for the quality of all goods sold.

Where the solicitation suggests the use of only one card, we submit that here again the specification of the card sufficiently bespeaks the community of interest of vendor and card issuer so that there should be no isolation of the card issuer from the transaction at any level. A closer case, of course, is where the solocitation is not by direct mail, but is made in a news paper or magazine. Again the limitation to one card, to us, has sufficient significance to require that the $50.00 limitation be eliminated in transactions falling within this classification.

Our next classification is the home solicitation sale by a representative of an organization authorized to honor the credit card. Here, another theory of liability should, I believe, apply, namely, as between card issuer and card holder, the loss from shoddy goods should fall upon whichever of the two, with the least transaction cost, can prevent the loss. Given the potential for excessive salesmanship in the home solicitation area and the large amount of special legislation in this area, it would clearly be a disservice not to place the burden of a "trackrecord" investigation of consumer relations on the card issuer who can spread the cost of the investigation to reduce losses, and the cost of those losses it cannot charge against a reserve or charge back to the tender. Otherwise, the thrust of much state legislation in this field will be readily subverted by the growing use of credit cards.

This brings us to our last three classifications, the only ones in which something of a case can be, perhaps made for a dollar limitation. Here we are somewhat closer to the concept of the credit card as a substitute for cash or a check on which the bank has guaranteed payment. This is the argument advanced by the third-party card issuers. It seems to us that this argument ignores the basis on which credit card issuers sell their service to the merchants who agree to honor their cards. The basis on which this sale is made is that the card issuer can handle the credit sales transactions of the merchant at a lesser cost than the merchant can. It is true than the risk of loss from bad checks is also mentioned, but the greater emphasis appears to be on handling credit sales, or non-cash sales, more inexpensively than the merchant can himself. Equally, if we look at the consumer's reasonable expectations, the card transaction is one in which he does not expect to pay for about a month, at least.

If, therefore, we take the card issuer's function to be, as he describes his service in selling it to merchants, a substitute for a charge account department,

placing any limitation on the customer's right to withhold payment for consumer capital goods seems unwarranted, at least where the complaint is made before the time when payment in full should be made.

In these last three categories, the distinction that should be drawn, it seems to us, is between consumer capital goods, and consumable purchases. These last can be identified as food, drink, lodging and entertainment. It is in these areas, and these areas only, where the credit card serves as an effective substitute for cash, just as, in earlier days travellers checks were used, and often still are. But travelers checks were paid for in full before use, and so raise no reasonable expectation of a charge account relationship in the consumer.

At today's prices, a food and drink check for one evening, or a hotel check for one visit, can run well over the $50.00 figure. Hence, the credit card industry's fear that cards will not become acceptable for tourism if charge backs are permitted will be equally applicable to the over- as well as the under-$50 transaction. I would think that consumers can understand that in the food, drink, lodging and entertainment field, when they have consumed the food or drink or used the lodging or entertainment, they have passed the "hold-back payment until they make it work" stage. I suspect that there are quite different reasonable expectations in the person who has purchased a rotisserie from a "Sunoco or DX Credit Card" solicitation for 3 monthly installments of $7.62 (not the $6.64 stated so prominently, as that does not include the $0.98 per month for "shipping and packaging"), or who has purchased an item on his credit card intending to pay for it in full.

Finally, I urge that serious consideration be given to reducing the $50.00 amount if, indeed, a dollar limit is to be used, to a figure more nearly at the level of the median sales ticket charged on credit cards as shown by the most recent analysis of the business.

In line 18, of page 13 of the bill the word "initial" should be deleted. I believe the concept of an "initial" as distinguished, I suppose, from a "subsequent❞ transaction does not clarify, but rather obfuscates the meaning. I suggest "disputed" be substituted.

While we are discussing the word "transaction" may I suggest that the word needs clarification. Suppose I purchase, on one credit card sales slip, or one order blank pursuant to a mail solicitation

(a) The $19.92 rotisserie ;

(b) The $39.92 "continuous clean" oven broiler; and

(c) $49.92 "14 piece stainless steel Duncan Hines Cookware"

for a total of $119.86 plus $11.26 for shipping and packaging. Have I entered into one transaction or three? For the purposes of the $50 rule, or any dollar rule you might set, do we add the fine print "shipping and packaging" charge to the "price" of the item, or is the purchase one transaction and the packaging and shipping another?

If there is to be a dollar limitation below which defenses cannot be inserted, it will obviously be to the interest of those who oppose any change in the rules of law to fractionate their larger transactions so that as many as possible fall below $50.00. Thus, in our supposed case, the thrust will be to set it up as 6 separate transactions, 3 separate sales and 3 separate shipping and packaging transactions.

All of these problems of the meaning of "transaction" and as to whether the dollar limits apply to each item purchased, or to the aggregate of the items purchased at one time can be avoided by using the capital goods-consumable items division we've suggested. Equally, troublesome questions as to whether, in fact, an offering has been fractionated to avoid the application of the act will arise, if the $50, or any other dollar item is left in the statute. If a stereo set is offered as six separate items, namely two speakers, a turn table, a tuner, an amplifier, and a tape deck, each at, say $49.95 will defenses be waivable since each item is under $50, or will the ruling be that all six items constitute one unit at $99.70 which has been improperly fractionated?

We urge the elimination of dollar limits, and the use of a division based on food, drink, lodging and entertainment as against other items.

Third. The place where the transaction occurred was in the same State as the State in which the card issuer maintained a place of business. This is puzzling. It seems to say, for example, that if Diners Club operates only out of a New York Office, then the consumers defenses can be cut off in all cases except where the transaction occurs in New York. As to an Exxon card, the coverage would be quite wide, without regard to where the card holder lives.

Where the card holder is solicited by mail by the card issuer, we presume the interpretation will be that the transaction occurs where the card issuer receives the order. However, when an independent purveyor of goods or services solicits the order, and the order is returned to the independent purveyor in its state, why should the question of whether the card holder can assert defenses depend upon whether the card issuer has a place of business in the state where the purveyor receives the order?

In the case of bank cards who, for this purpose, is the card issuer? Master Charge cards for example, carry the name of a particular bank above the word "Master Charge" and the card holder's contract is with that bank. If the bank is the issuer, and it is limited by law to having offices, for example, in Philadelphia and the five adjacent counties, why should the card holder be able to assert defenses where he purchases in Pittsburgh or Erie, many hours away, but be precluded from asserting defenses if he purchases in Camden, New Jersey just twenty minutes away across the Delaware River or in Wilmington, Delaware, scarcely an hour away. Or suppose a card holder living in Arlington, Virginia has a Bankamericard issued by a Virginia bank. Why should he be able to assert defenses in the case of purchases made in Lexington, Virginia or at Virginia Beach, but not in Washington, D.C.?

We can see a jurisdictional service of process point based on the residence of the cardholder and the location of the independent merchant. The card issuer might have a legitimate argument that it should be able, in case of dispute, to bring both the card holder and the merchant into the same court so that all parties could be bound. But even that argument lacks merit. The usual card-issuer-merchant agreement, as the October 1971 hearing shows, requires the merchant to warrant against consumer defenses. In a card holder-card issuer dispute, in which the card holder raises a defense of breach of warranty in the sales transaction, the card issuer can tender the defense of this issue to the merchant seller by mail and if the merchant seller neglects to come in and defend, he will be bound by the judgment. Tender of defense works even when made across state lines. Hence there is no real need for the artificial state line distinction.

There could, perhaps, be a practical argument based on the feeling that merchants will reject cards domiciled some distance away if subjected to the possibility of having to appear in distant courts to defend their goods when the card issuer charges back the amount thereof. Again, this problem relates to the residence of the card holder, not the locus of the card issuer. We submit that the suggested division between food, drink, lodging and entertainment on the one hand, and other goods or services on the other hand will largely take care of this problem.

As to the other goods or services, border areas create a problem. People living in New Jersey often shop for capital goods in Philadelphia or New York, as do the commuters from Connecticut to New York. When their homes are this close, acceptance of the card from an out of state card holder should not create the problems of a California purchase by a Philadelphia resident.

A territorial limitation which would exclude purchases in foreign countries from the right of charge back has much to commend it. The average consumer's reasonable expectation or concept of the situation there clearly is not that of a merchants charge account taken over by the card issuer, but rather that of traveller's checks or a loan of money. This could be added to our food, drink, lodging and entertainment exclusion without objection.

The charge-account versus the loan of money concept could lead to a geographic limitation based upon the distance of the consumer's residence from the place of business of the merchant. But here again state lines make no real amount of sense. We could see a rule which would limit a card holder's right of charge back if he lived in Texarkana, Texas, and the merchant vendor was in El Paso, but from Darien, Connecticut to New York City does not seem necessary, as to my mind the charge account analogy is, in this instance the closer analogy.

Fourth, Limitation is placed on the amount assertable as a claim or defense depending upon when the defect surfaces and notice is given. The division seems to be between notice given within three months of the date of the "transaction" when the full amount financed can be recovered and notice given after three months when the remaining unpaid balance limits the recovery.

The limitation to the amount paid out by the card issuer seems not improper. But with this limitation, the distinction drawn between tort claims and other

claims seems unwarranted. Naturally card issuers fear the spectacular recovery in a wrongful death, or other personal injury suit, and should be protected with the possible and perhaps far fetched exception of liability in negligence at common law. The law has not yet developed in the personal property field a concept of recovery against a finance agency for negligent personal injury based on a joint-venture theory. Yet, in Canada a common law holder in due course status has been denied to a financial institution on the ground that it was engaged in a joint venture to produce consumer paper. With the limitations on total sums recoverable, the exclusion of tort claims seems unnecessary, especially in view of the fact that a warranty claim, or a rescision claim based ' on fraudulent misrepresentation sounds in tort. The section changes the common law and one worries about overly strict construction, especially when, in view of the limitation, the only tort claim that can be covered is one for the amount financed.

It is not clear why the limitation is on the amount of the claim or defense that can be asserted, instead of on the amount recoverable. If the purpose of the limitation is to protect the card issuer against a liability, the purpose will be served by limiting recovery, not the assertable claim.

The second limitation, namely to the amount unpaid at the time notice is given, if notice is given after three months from the date of the transaction, is puzzling. In the first place, the card issuer will have paid the full amount to the vendor by that time, and must rely on his right of indemnity for reimbursement, unless a drastic change is made in the method of operation. The reason apparently lies in what many of us learned in law school about the finality of a payment. But like many a broad statement, it never was completely true. If the card issuer must look to the vendor for reimbursement, it is not significant to require him to seek reimbursement in full where, at most two payments have been made, but only reimbursement for a part, if three, four or five out of twelve or more payments have been made.

From the card holder's point of view, the objective should be to permit full recovery in one action, if any retroactive recovery is allowed at all. If the doctrine of finality is a mercantile doctrine, it should operate in favor of a merchant-vendor as well as a card issuer, yet we know that certain liabilities, as for fraud, misrepresentation, breach of warranty and the like, survive payment and recovery is only barred by statutes of limitation, provided, of course, notice has been given after discovery of the facts.

Interestingly, the section does not require that prompt notice after discovery of the facts be given. The limitations on recovery will have that effect, however, since when the rules of the section pass into consumer consciousness as a part of the "lore" of transaction, notices will be given at the earliest date to avoid cutting down the amount for which suit can be brought.

Limiting, not the amount of recovery or defense, but the amount assertable has another potential disadvantage. If the three months has gone by, and the card holder has a complete defense or claim for the full amount, a technical court could rule that the consumer would still have to pay for the claim or defense he is asserting is larger than the language of the section would permit to be asserted at the particular time. Again we suggest that the limit should be on the amount of the recovery or of the card-issuer's liability, not on the amount of the claim.

We also suggest that applying the first-charged, first-paid application of payments rule in a revolving credit account is not proper, and does not comport with many card-issuer practices. Many card-issuers have a dual system of billing. For example if either of us were to buy one of the larger items recommended by Sunoco in their catalogue of offerings. I presume the full amount owed would appear as a debit entry in the "account" even though the billing statement contained only the amount of one agreed installment. Indeed the supporting card enclosed in respect of the transaction will state that the bill contains an installment of say $7.50 and that the remaining balance is $60.00 on a total purchase of $90.000 payment in 19 installments. Thus four installments had previously been paid.

Presumably the "account" showed a balance owed of $90.00 when the "transaction" occurred. Assume that the total billings each month were $28.50 and all such changes were incurred after the "transaction". We shall also assume that each monthly bill was promptly paid in full. Under the application of payments rule proposed by the section the purchase would be deemed to have paid in full, although on the card-issuers books $60.00 would still be owing. This seems an unfortunate result, and one that ought not to be mandated by

the statute. Where the billing practice is as we have described it, the unpaid balance shown by the billing system should be used whenever the unpaid balance of an item becomes significant. In the true revolving credit account, quite different problems are presented. Here a very low minimum payment is required, based on the total debit balance at the end of the billing cycle, but the customer can pay more, and often does. This may be because, as in the gasoline card billing, the card-holder, mentally is deferring payment only on the big item and fixes the amount of his payment so as to pay all other items in full, and to pay something on the big item each month. In active accounts, after the third month, there would seldom be any unpaid balance to worry about.

We suggest that, for the purposes of this computation, the disputed item be deemed paid by the application to the amount of the transaction of the minimum payment that would have had to be made if the disputed transaction were the only item on the bill. Such a formula, coupled with provision for the case where stated installments are provided in the billing system would be much more in line with the reasonable expectations of the card holder. It would be subject, of course, to the limitation that if, at any time, the actual balance in the account was lower than the unpaid balance on the transaction resulting from the computation, the lower balance would control for further computation.

In summary, we believe that Section 172 in S-914 needs revision along the following lines:

(a) There should be a definition of card-issuer to make it clear in the case of bank credit cards where the liability is to rest, on the card-holders bank, the card franchise or corporation or the bank with which the vendor deals. We believe that liability for the claims or defenses should rest on the bank to which the card holder pays, and that the banks can by contract within their franchise arrangements shift the charge to the bank with which the merchant vendor discounted is paper. Thus, if the amount of the claim or defense is not recoverable from the merchant, the loss will fall on the bank with whom the merchant dealt, the only best able to evaluate his track record of customer complaints.

(b) The several limitations on when the card holder may assert defenses create more problems than they solve. Most problems would be eliminated by eliminating the right to assert defenses as to food, drink, lodging and entertainment wherever purchased, and as to all purchases made in foreign countries.

(c) In view of the careful limitation to a card-issuer who is not the seller in Sections 168 and 169, Section 172 seems overly broad. We suggest that Section 172 be clarified to apply without any limitation except the period of the statute of limitations to sales by the card issuer or any affiliated seller, or any seller directly soliciting the card holder to use the particular card.

(d) If a dollar amount limitation is to be used, it should not be applicable to sales by the card issuer or any seller directly soliciting the card holder to use his particular card.

(e) The amount of the recovery not the amount of the claim, should be limited to the amount financed, at all times, until the item in dispute has been fully paid determined not by the first charged first paid rule, but by a formula more nearly approximately the card-holders reasonable expectations.

(f) The rules of the section should apply to consumer credit. Cards issued to business organizations should be excluded.

Attached as Exhibit B is a suggested re-draft of Section 172 of S-914 to accomplish these ends.

Will making the card-issuer subject to claims or defenses arising out of the sales transaction change the amount of credit available to consumers? I believe not. In recent years there has been much legislation affecting terms, remedies and collection practices in consumer transactions. Yet in the 21 months ended March 31, 1973, consumer installment credit held by banks increased in total amount by 40% while total consumer installment credit rose by only 27%. The bank's share of the market increased from 42.1% to 47.9%. Check credit increased by 52% and Credit Card Credit at banks increased by 68%. There must be some profit in credit-card operations.

If the elimination of the rules of law by which a bank isolates itself from the underlying transaction would have a dramatic effect on financing, we could expect this to be reflected first in automobile financing in a shift from "Purchased Paper" to "Direct Loans." As Appendix C to our statement shows the shift from the early years of consumer credit has been the other way, and the share of total bank held automobile paper is higher now than in 1950 and before. From 1960 to the present time there has been some shift back in favor of direct loans. 96-687-73——11

« ÀÌÀü°è¼Ó »