Collections: Liability for Charges above the Credit Limit

     A client recently asked me to write about situations where a customer makes retail purchases for products in an amount greater than the customer’s established credit limit – specifically, if the customer later fails to pay for the product, can he be successfully sued for payment.

     I will review this situation with four varying fact patterns in two separate issues.
     Fact Pattern One: When the retail account was originally opened, the credit limit (stated in a letter to the customer) was set at $4,000. The credit terms in the credit application state the applicant agrees "to pay any and all sums that may become payable under this account". During the next several years the credit limit was increased to $6,000. Normally no notification is sent of the increase, but in this case a letter was sent to the customer notifying the customer of the credit limit increase. Customer makes charges up to $6,000, but fails to make full payment. Retailer sues customer for the amount owed, let us say that it is $6,000. Customer raises the defense that charges above the credit limit should not have been allowed. Customer’s attorney does not have a copy of the letter increasing the credit limit, but produces the original letter opening the account with a $4,000 credit limit. Customer’s attorney argues that the retailer was the one who set the credit limit at $4,000, and by not exercising due diligence of his business, allowed the credit limit to be exceeded. Customer’s attorney argues that his client's liability should not exceed $4,000, while the retailer argues that the liability should be $6,000. In what amount should the retailer be able to judgment against the customer?
     In an actual case in Seattle, Washington, the trial judge was ready to grant the request for a reduction in liability to $4,000. However, since the retailer had his customer's file folder with him and found the letter increasing the credit limit to $6,000, the judge granted the retailer judgment in the amount of $6,000.
     Fact Pattern Two: When the retail account was originally opened, the credit limit (stated in a letter to the customer) was set at $4,000. The credit terms in the credit application state the applicant agrees "to pay any and all sums that may become payable under this account". Despite the credit limit, customer is allowed to makes charges over the $4,000 limit. Later customer fails to make full payment. Retailer sues customer for the amount owed, let us say that it is $6,000. Customer raises the defense that charges above the credit limit should not have been allowed. In what amount should the retailer be able to judgment against the customer?
     In Ingram Micro Inc. v. ABC Management Technology Solutions, LLC, the United States District Court for the Eastern District of Virginia held that a creditor was entitled to recover payment of an unpaid debt because the debt was within the scope of the continuing guaranty agreement. The agreement clearly included a guaranty of all debts. Further, the court reiterated a contractual principal that when an agreement is complete, clear, and unambiguous on its face, it must be enforced according to the plain meaning of its terms and the intent of the contracting parties.
     In this fact pattern, the original agreement stated that the applicant agrees “to pay any and all sums that may become payable under this account”. This agreement was intended to cover credit up to $4,000. However, the agreement is also likely to cover any and all other debts over the original credit limit if it can be shown that the intent of the contracting parties as expressed through the contractual language was to include any debts incurred after the credit application was accepted.
     A future blog will address the next two fact patterns.

Foreclosure: Substitute Trustees

     Question: What happens if the trustee under your deed of trust is either unavailable, or, is no longer the person you desire to serve as trustee? Answer: You can appoint a substitute trustee. Under Virginia Code Section 55-59(9), the noteholder, or, the holders of greater than fifty percent of the monetary obligation secured by the deed of trust, have the right and the power to appoint a substitute trustee or trustees for any reason, regardless of whether such right is expressly granted in the deed of trust. The timing of your action is important. The trustee must be empowered before taking action – this occurs when the instrument of appointment has been executed. You do not have to wait for recording. However, as Virginia Code Section 55-59(9) states that the appointment of a substitute trustee shall be recorded before, or at the time of, the recording of the deed conveying the property (such as after a foreclosure).

     Question: Can a lender appoint their counsel as trustee? Answer: Yes. Virginia Code Section 26-58 holds that a trustee is not disqualified merely because he is a stockholder, member, employee, officer or director or counsel to the lender.

Real Estate: Criminal Liability for Misuse of Construction Funds

     Virginia Code §43-13 provides that funds paid to a general contractor or subcontractor must be used to pay persons performing labor or furnishing material. Any contractor or subcontractor or any officer, director or employee of such contractor or subcontractor who, with intent to defraud, retain or use the funds, or any part thereof, paid by the owner or his agent, shall be guilty of larceny in appropriating such funds for any other use while any amount for which the contractor or subcontractor may be liable or become liable under his contract for such labor or materials remains unpaid, and may be prosecuted upon complaint of any person or persons who have not been fully paid any amount due them.

     The use by any such contractor or subcontractor or any officer, director or employee of such contractor or subcontractor of any moneys paid under the contract, before paying all amounts due or to become due for labor performed or material furnished for such building or structure, for any other purpose than paying such amounts, shall be prima facie evidence of intent to defraud.

Bankruptcy: Discharged Debt Collection - Violation of Bankruptcy Injunction

     The United States Bankruptcy Court at Alexandria, in the case of In Re Billy Ray Evans, ruled that a bank and its attorney violated 11 U.S.C. §524 by attempting to collect a discharged debt. As a result of this the Court ordered both the bank and the attorney to pay to the debtor damages in the amount of $1,000.00, as well as attorney’s fees in the amount of $24,954.00, costs in the amount of $1,159.00 and punitive damages in the amount of $2,500.00.
     In Evans the Court found that the bank had filed a lawsuit in state court seeking to recover possession of the vehicle leased to debtor, or, in the alternative, to recover the value of the vehicle. The Court, however, found that the lawsuit was a mere subterfuge for the bank’s actual intention to enforce a pre-petition debt in violation of the bankruptcy discharge injunction. Cited by the Court in making this finding was the Court’s feeling that the bank made only minimal effort to determine whether the debtor actually had possession of the vehicle prior to filing its lawsuit. It twice referred the matter to repossession services after the bankruptcy case was closed, but the vehicle could not be located. The Court stated that the referrals, rather than confirming that the debtor had possession of the vehicle, raised questions about the bank’s motives. The Court found that the bank used minimal effort, simply to give the appearance that it was interested in recovering the vehicle. The Court stated that if the bank was truly interested in recovering the vehicle (rather than the debt) that there were many things that it could have done that it did not do. The bank made no effort to confirm that it had an immediate right of possession to the vehicle and that it was a proper party to bring the lawsuit.
     Without all of the facts of a particular case I am always reluctant to criticize a court’s decision. However, this decision seems very harsh to me. The lesson for Evans, though, is that creditors must be more aggressive while the debtor is still in bankruptcy court. Creditors must seek non dischargeability motions based upon conversion of property, damage of property, and the like. Also, if post bankruptcy lawsuits for recovery of property become necessary, and, undoubtedly they will, creditors must be certain to use best efforts to reclaim the property, but if unsuccessful in doing so, then to accurately value the property - not simply value the property at the balance due on the debt.