Unhappy Campers and Their Credit Cards

This story about the failure of a company that ships duffel bags to/from sleep-away camps has an interesting payment systems meets bankruptcy angle that got me particularly excited given that I'm teaching payment systems this fall:

Parents are disputing the Camp Trucking fees with their credit card companies, but so far there haven’t been any resolutions. “We told them they’ll probably become creditors in a liquidation and get 20 cents on the dollar in five years,” said Mr. Aboudara [a camp network director].

Credit cards offer better purchase protection than any other payment medium, but it's not absolute, and this situation seems to fall into one of TILA's crevasses. 

TILA/Reg Z provides that a cardholder can raise a "billing error" with a card issuer in a number of circumstances, including if a periodic statement reflects "an extension of credit for property or services not accepted by the consumer or the consumer's designee, or not delivered to the consumer or the consumer's designee as agreed." The consumer has 60 days from the transmittal of the billing statement to notify the card issuer. If there is timely notice, the card issuer must either undertake an investigation or recredit the consumer, and while the investigation is pending the consumer can withhold payment of the disputed amount.

The problem here is that parents likely paid for the service in advance, before their kids even set off for camp. In other words, they probably paid in May or June at the latest, so the charge would show up on a June or July statement. If the charge showed up on a statement that was from early June or prior, it might be too late to raise the billing error—the 60 day notice deadline runs from the transmittal of the statement, not from the nondelivery.  Of course, running the deadline from the transmittal of the statement makes no sense for a billing error based on non-delivery if delivery is due after the charge.  There's no error until delivery is due and doesn't occur.  In that situation, if the consumer is billed more than 60 days in advance, the billing error right is effectively forfeit. (Separately, the right to withhold the disputed amount can be lost if the consumer pays the bill in full before noticing the billing error to the card issuer. In other words, prompt payment can cost the consumer a legal right.) So depending on when the charge for the shipping showed up on the periodic statement, the campers' parents might or might not be able to raise a billing error, and depending again on timing, they might be able to withhold payment until the error is resolved.

Additionally (and this is a separate TILA rule), because the card issuer is effectively the assignee of the receivable owed to the merchant, the card issuer would normally take subject to all claims and defenses the consumer could raise--this is just common law assignee liability. TILA, however, has a sort of holder-in-due-course provision that cuts off some claims and defenses against the card issuer. The way the TILA provision is drafted, it isn't obviously a HDC provision, but it ensures that the consumer can raise any claims and defenses it could against the merchant—including nondelivery of services promised—against the card issuer, unless, among other things, the transaction occurred in a state other than the consumer's or more than 100 miles from the consumer's address. Further, the claims and defenses are limited to the amount of credit outstanding at the time the consumer first notifies the card issuer of the claim or defense. Plus, this provision is only formally applicable if the consumer litigates, which is unlikely.

This provision is painfully dated. First, it's hardly clear where a transaction occurs. That's a state law question that could have totally different results for consumers with the same problem with the same merchant. That sort of random outcome makes no sense. No consumer knows the answer to this going into a transaction. Second, out-of-state or over 100 mile transactions might well be the norm in the age of on-line commerce. And third, as with the billing error rule, the rule penalizes those who pay in full on time, because they lose their entire ability to raise defenses against the issuer. The TILA rule from the 1970s really needs an update. 

It's not clear if any consumer will be able to raise claims/defenses against the shipping company against the card issuer, both because of the distance exclusions and because of the amount of credit outstanding limitation.

So where does this all go? Someone's going to bear the loss here. The options are the consumer, the card issuer, or the merchant's bank. If the card issuer thinks it can put the loss on the merchant's bank (determined by card network—Visa or MC—rules), it will, and it will have a happy customer. But if it isn't so sure, then it might deny the consumer's claim, unless it thinks the consumer goodwill is important enough to justify taking the loss, which is unlikely. At the end of the day, it's likely to be the merchant's bank or the parents who are stuck with the loss.