Collections: Parties Liable for Credit Card Debts

     The Richmond Circuit Court, in the case of Chevy Chase Savings Bank v. Strong, ruled that a husband who was only an “authorized user” on a bank credit card issued to his wife was not liable to the bank for a $5,024 cash advance check he wrote on the credit card; only the wife was liable. 

     In Virginia Code §11-31, Virginia has codified the rule that use by an authorized agent of a cardholder shall be the equivalent of use by the cardholder. That rule, however, does not address the question of the liability of the agent. The court reasoned that while it does not appear that any Virginia Court has addressed the issue, the language used in the statute and case law from other jurisdictions led the Court to believe that the issue was governed by agency law. 

     The Court stated that it was well established in Virginia that when an agent contracts for a disclosed principal, credit is extended to the principal, and the benefits of the contract are accepted by the principal, there is no personal liability on the agent. In this case, the bank was well aware that the principal was the wife. It extended credit to her based on her application for a card. They were aware that no contract was ever made with husband individually and, therefore, they knew that he was simply an authorized agent. 

     The Court found that there was no indication in this case that husband exceeded his authority in executing the check against the account, or that he agreed to be personally liable for any debt incurred on his wife’s account. Accordingly, the court ruled that the liability for the debts belonged only to wife. The court ruled that the husband was not liable for any portion of the outstanding balance, including the amount of the check that he personally wrote.

     The lesson from Strong - do not confuse guarantors with authorized users.

Collections: Note Guarantee Upheld

     In the case of NationsBank v. Mahoney, the Fairfax County Circuit Court upheld a note and guarantee agreement, as well as the sale of collateral pursuant to the terms of these documents.

      The guarantor in Mahoney argued that the creditor acted in bad faith. The guarantor asked the Court to imply in the note and guarantee agreement additional terms from the commercial good faith provision of Virginia Code §8.1-203. The Court, however, found that the note and guarantee agreement's provisions were "within the preview of the Uniform Commercial Code as adopted in Virginia", and that each alleged act of bad faith was expressly authorized in the terms of the note and guarantee agreement. The Court ruled that it could not imply the terms requested because the result would be to negate or materially alter the explicit terms freely agreed upon by the parties.

     The lesson from Mahoney is that properly prepared notes are the key to collection should the loan become sour. Legal review of loan documents prior to execution can be more cost effective than legal representation after default.

Collections: Equal Opportunity Credit Act

     In a past blog, we began a review of The Equal Opportunity Credit Act ("the ECOA" or "the Act").
     The City of Richmond Circuit Court denied an ECOA defense pled by a wife who had signed a broad release when the loan was refinanced. The case was Richmond Lotco L.P. v. Perrowville Dev. Corp.
     In Perrowville the lender obtained a guaranty and general release of claims from four directors of a real estate development company and their wives. The release was included in the modification of an existing loan that the lender had purchased from the Resolution Trust Corp. after the original lender, a bank, went into receivership. The release stated that the borrowers and guarantors would release the note holders "from any and all claims, losses, liabilities, causes of action of any kind whatsoever, if any, whether existing or contingent, known or unknown, matured or unmatured, that the borrowers or guarantors may now have or have had in whatever capacity against the noteholder...".
     When the successor lender brought a collection suit under the modification, the wives claimed that they were not involved in the business and that their guaranties had been required solely as a result of their marital status, in violation of the ECOA. The wives argued that the ECOA gave them both a defense to the collection action and a counterclaim against the lender. The lender argued that the release was part of the consideration that the lender received for continuing to finance the development project under the modification. The Court ruled in favor of the lender, stating that the modification agreement did not constitute a violation of the ECOA and that therefore the wives could not pursue either a defense or a counterclaim.
     The litigation that has arisen gives good cause to review lending policies for ECOA compliance. Please call me at 545-6250 if you have any questions.