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Premier Cru American Express Billing Disputes and the Deceptive Nature of TILA Section 170

posted by Adam Levitin
I'm not an oenophile.  But some folks are, and some of them spend very large amounts of money on wine, even without knowing how it tastes.  Not surprisingly, this is a market vulnerable to fraud. One fraud varietal is simply to market swill as high-end wine.  But another is to sell wine before it's even been made--basically forward contracts on wine--collecting the money at time 1 and then never delivering at time 2.  It's a simple Harold Hill (The Music Man) type scam.  It can also be rolled over into a Ponzi scheme whereby later customers are funding the purchases of the initial customers.  And that seems to be what happened with an outfit called Premier Cru, which ultimately filed for bankruptcy. 
Now here's the catch.  Many of the $45 million of undelivered wine orders were charged on credit cards, with the bulk of it being on American Express.  (Think mini-Salad Oil Scandal.  Perhaps this is the Vinegar Scandal.) The question, then, is who bears the losses:  the cardholders or American Express?  A lot of cardholders have been surprised to hear that American Express is saying that the losses are on them.  Is that right?  As it turns out, it's a trickier question than it might seem.  The cardholders' dilemma was covered recently by the New York Times, with some reference to yours truly.  Below is my extended (and updated) analysis of the situation. It might seem obvious, but I'll state for the record that I have no involvement with this matter other than as an outside observer. The bottom line is that I believe that all of the Amex cardholders who never got the wine delivered have a very strong legal claim for the losses to be borne by Amex, but that it probably doesn't matter a lick because they're all going to get shunted off into arbitration, and the CFPB's proposed arbitration rulemaking won't do anything to change the situation. 
(1) Amex has apparently been telling some cardholders that they are out of luck because they didn't complain within 540 days of purchase.  That's jiggery-pokery.  There is absolutely no legal basis for a 540 day limitation on a consumer disputing credit card billing.  540 days is nowhere to be found in any federal law, nor is it to be found in any Amex cardholder agreement (all of which are available on the CFPB’s website as well as on Amex’s website).  Instead, as far as I can tell, that 540 days comes from Amex’s merchant rules, which apply to merchants, not consumers.  I write "as far as I can tell," because Amex, unlike MasterCard and Visa, does not make its merchant rules available to the public.  MasterCard and Visa rules, however, have a 540 day chargeback “statute of limitations".  (This is a recent extension of what used to be a 180 day limitation.)  That means that  merchants are liable for chargebacks for up to a year and a half.  That point is irrelevant to consumer liability, however.  It's simply a matter of loss allocation between the merchant and the card issuer (which in this case is probably Amex, but there are some third-party issued Amex cards around).  
Bottom line:  Amex has no business whatsoever telling consumers that they are liable for charges for goods not received simply because 540 days have passed since the goods were ordered.  That sort of argument would be sanctionable if made in court. Query whether there is a UDAAP problem when a card issuer attempts to avoid liability by telling consumers a legal argument that a reasonable card issuer cannot in good faith believe is correct.  Is that deception?   
(2) There's a statutory right for some cardholders to raise claims and defenses they have against the merchant against the card issuer.   Section 170(a) of the Truth in Lending Act, 15 USC 1666i, permits a cardholder raise any claims or defenses it has against the merchant against the card issuer, subject to certain restrictions, including that: 
  • the cardholder has to attempt to resolve the dispute with the merchant in good faith
  • the place where the initial transaction occurred was in the same State as the mailing address previously provided by the cardholder or was within 100 miles from such address
  • TILA section 170(b), which limits the amount of claims or defenses assert to the "amount of credit outstanding with respect to such transaction at the time the cardholder first notifies the card issuer or the person honoring the credit card of such claim or defense."  
Once a merchant has filed for bankruptcy, there's ceases to be a good faith duty to resolve the dispute.  So then we're left with the geographic and financial restriction.  It would seem at first glance that TILA 170(a) separates consumers into lucky and unlucky ones based on geography.  Those who live near "the place the initial transaction occurred" and those who don't.  Let's call those "lucky" and "unlucky" consumers.  I'm going to assume for now that the transaction occurs where the merchant, not the consumer, is located, but query how this is to be applied in an Internet or phone transaction.  
(3) For geographically "lucky" consumers, TILA 170(a) says that they can raise any claims or defenses they would have against the merchant against the card issuer.  In other words, if there is a contract defense of nondelivery or a claim for unjust enrichment, etc. against Premier Cru, that can be raised against Amex.  To the extent that the claims are based on contract, the relevant state statute of limitations should apply.  I believe that would be 4 years after the delivery due date for a sale of goods under California UCC 2-725 (there's still a choice of law question, but I'm ignoring that).   But that means that the geographically lucky cardholders should still have all of their rights preserved against Amex, subject only to the TILA 170(b) limitation.  The TILA 170(b) limitation will work to limit some of the cardholders' claims.  So for geographically lucky consumers, they can raise any claims or defenses they have against Premier Cru against Amex, limited by the amount outstanding when they first raises the dispute with either Amex or Premier Cru.  (How does one prove when one first raised the issue with Premier Cru?  This seems quite gamble...)
(4) Not only can these geographically lucky consumers raise these claims and defenses, but they can also withhold payment until the issue is resolved. Regulation Z, implementing TILA provides that "The cardholder may withhold payment up to the amount of credit outstanding for the property or services that gave rise to the dispute and any finance or other charges imposed on that amount."  That's different from the TILA 170(b) limitation, and it deals with temporary withholding of payment, not a limitation on the extent of the claim or defense. I assume that the withholding is limited by TILA 170(b), but I'm not entirely sure.  In any event, no credit reporting is allowed on the exercise of the withholding right. 
(5) What about those geographically unlucky cardholders?  This is the real surprise.  They're actually in a better position than the geographically lucky ones.  I didn't realize this until today.  Here's why:  what would the world look like absent TILA 170?  Would cardholders be unable to raise claims and defenses they have against the merchant against the card issuer?  Sure.  This is simple contract law.  The card issuer is the assignee of the liability to the merchant.  Blackletter contract law says assignees take subject to claims and defenses, with holders-in-due-course under negotiable instrument law being the main exception to the rule.  Here's the Restatement (Second) of Contracts, section 336:
(2) The right of an assignee is subject to any defense or claim of the obligor which accrues before the obligor receives notification of the assignment, but not to defenses or claims which accrue thereafter except as stated in this Section or as provided by statute.
What this means is that without TILA section 170 cardholders could always raise the claims and defenses they have against the merchant against the card issuer absent a waiver of those claims and defenses.  The legislative history of TILA's 1974 amendments indicates that prior to TILA 170 being adopted, cardholder agreements typically contained such waivers.  TILA 170 was an override of those contractual waivers, but only for local-ish commerce, out of fear that merchants would refuse to accept non-local cards rather than risk out-of-state disputes.  Once one understands that TILA section 170 is not creating, so much as restoring a right that it reads quite differently.  It means that the TILA section 170 geographic limitations are only limitations to the extent that the consumer waived his or her rights in the cardholder agreement.  Otherwise, the consumer still has those rights and TILA section 170 is superfluous.  To state it again, absent a waiver clause, the cardholder is, even in the absence of TILA 170, able to raise all claims and defenses against the card issuer that it could against the merchant.  
From a payments perspective, this makes sense.  The card issuer is purchasing the merchant's receivable (hence the merchant's "discount fee") indirectly through the merchant's acquirer bank.  The card issuer, then is simply an assignee of the merchant's claim for payment.  The credit card receivable is not a negotiable instrument, under UCC 3-104, so the card issuer cannot claim holder-in-due-course status, which would give it freedom from claims to the instrument and certain defenses.  As Ronald Mann observed in Searching for Negotiability in Credit and Payment Systems that there’s nothing that prevents credit card receipts from being negotiable, but the industry doesn’t value the negotiability so they don’t bother meeting the requirements of UCC 3-104.  
The Amex cardholder agreements do not contain a waiver of claims and defenses.  My read, then is that absent such a waiver clause, all cardholders can actually raise claims and defenses.  The geographic limitation in TILA section 170(a) only comes into play if there is a waiver clause in the cardholder agreement.  That also means that no cardholders are subject to the TILA section 170(b) limitation, as that too would only come into play if there were a waiver clause and the right to raise claims and defenses only existed by virtue of section 170(a).  Put another way, TILA section 170 is actually very deceptive.  Without a knowledge of the legislative history and underlying commercial law background, one would assume that TILA 170 were creating a right where none existed, and that TILA 170 limitations always apply to that right.  In fact, it is merely a limited restoration of a right to the extent it has been waived, but without a waiver that right still exists and TILA section 170 is irrelevant. 
What this all means is that the consumers who never received delivery of their wine should get a complete refund from Amex, and Amex should be left to pursue recovery from Premier Cru (and might find itself bound by its own 540 days chargeback rule!). 
(6) An academic aside:  notice how absent regulation, card issuers would insist on waiver clauses?   On the other hand, notice how once Congress acted, card issuers got rid of waiver clauses even when they would still apply.  Hmmm.  
(7) Notably none of this fits with the TILA/Reg Z billing error resolution rules.  TILA/Reg Z billing error resolution rules aren't especially useful.  They are a right to a process, not a resolution.  Still, it's interesting to see how things don't fit here.  A bill for goods not received is a billing error user TILA/Reg Z, 12 CFR 1026.13(a)(3), but a billing error must be notified no later than 60 days after the issuer transmits the periodic billing statement. 12 CFR 1026.13(b)(1).  So there’s a billing error here, but no way to address it under the billing error resolution rules, which allow withholding of the entire disputed amount (not subject to the TILA 170(b) limitation).  
What troubles me here is that the consumers’ cards were being charged by the merchant at the time of the order, rather than at the time of shipping.  Standard practice is to charge only at the time of shipping.  This is probably familiar to many consumers through the practice of Amazon.com.--you might order a bunch of books, but if they get shipped in batches you get billed separately for each batch when it ships.  Visa, for example, calls this is a "delayed delivery transaction," for which the transaction date is the date of shipping unless the goods are shipped within 30 days of the charge authorization. (See Visa Rule Again, Amex's rules are not public, but one assumes they are substantially similar on this point. If that's correct, then the 540 days is even worse than jiggery-pokery because the transaction date would not have yet occurred, so the consumers should never have billed in the first place.  

(8) Ah, but what about arbitration?  That's the real question here.  It's great and glorious to have a statute like TILA, but it's totally worthless if arbitrators completely disregard it, which they are allowed to do.  Yes, arbitrators can completely disregard the law under the Federal Arbitration Act and that's OK. Hard to believe, it's f'ing ridiculous.  That doesn't mean that arbitrators actually do disregard the law, but I'd be surprised if many of them would understand the operation of TILA 170, namely that it is not creating a right, but restoring it to a limited degree if it has been waived.  As a result, geographically unlucky consumers are likely to have TILA 170 thrown against them, even when it is irrelevant.  And we'll never know because the arbitration is all private and confidential.  The aggrieved Amex customers are likely to end up in individual arbitrations, hoping for a good arbitration panel. Some of them might get lucky, but I wouldn't bet on it.  

(9) The CFPB has proposed a rulemaking that would place limits on binding pre-dispute arbitration clauses, namely class action waivers wouldn't be allowed.  But even if the CFPB's arbitration rule goes through, these Amex cardholders are still SOL because they would be proceeding individually, not as a class (although perhaps they have grounds to sue as a class).  These are consumers who have been cheated by a merchant and then treated badly by their card issuer, but when you're buying $50,000 cases of wine, don't expect tremendous public sympathy. 


Is the cite to 9 U.S. Code § 10 to show that failure to follow the law is not a listed reason for the court to vacate the arbitration decision?

Mason--Yes. I should have had a "See" before it in Bluebook style with a parenthetical explanation.

Does the common-law right to raise claims and defenses against the card issuer (as assignee of the merchant) allow for a clawback of amounts already paid by the cardholder? This could be the main advantage of pursuing this theory as an alternative to relying upon section 170, even for geographically lucky cardholders.

Of course, if you're right about this, we may see Amex and other issuers scrambling to add waiver clauses to their cardholder agreements.

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