Collections: Liability for Charges above the Credit Limit

Last month we looked at two fact patterns involving 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. In those situations, we found that a court will likely hold a customer liable for charges that exceed the originally agreed upon credit limit. The credit terms require the customer to pay any and all sums that become payable because of the express terms of the contract and the intentions of the contracting parties. The next two fact patterns present new issues.

 

Fact Pattern Three: 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 sends one of his employees to retailer to make a purchase, with customer knowing what the cost of the purchase will be. Retailer allows the purchase 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 addition to the contract issue discussed in the previous patterns, this fact pattern presents an agency law issue. The Circuit Court of the City of Richmond dealt with a similar issue in Chevy Chase Savings Bank v. Strong. In this case, the bank issued a credit card. A card user then incurred charges on the credit card but the card user was the card owner’s husband. The court held that the wife was liable for the charges because she gave her husband authority to use the card. The husband was an agent, and was therefore only liable if the wife was able to prove that her husband exceeded his authority or that he agreed to become personally liable.

In this fact pattern, the customer has given his employee authority to act on his behalf so the employee is his agent and the customer is the principal. As principal, the customer is liable for all charges. The credit was given to the customer, so he is liable for the charges, unless he is able to prove that the employee exceeded his authority or agree to become personally liable. In this case, the employee did not act outside of his authority and did not agree to become personally liable, so the customer will be liable for a balance incurred.

Fact Pattern Four: 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, one of customer’s employees goes to retailer to make a purchase, without customer’s knowing what the cost of the purchase will be. Retailer allows the purchase 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?

Although there was not express authority to spend a specific amount like the previous situation, the same rule applies. The employee acted as an agent for the customer. The customer is liable for the debt unless the customer is able to prove that the employee acted outside the authority given. However, similar to Chevy Chase Savings Bank v. Strong¸ evidence that the customer did not specify an amount to spend is not likely to be sufficient evidence to prove that the agent acted beyond to scope of authority given.

Foreclosure: Foreclosure Basics

While foreclosure may not be a topic that debtors (or even creditors) want to discuss, like all other aspects of proper business planning, you should.

With more creditors engaging in loans secured by real estate (which I strongly advocate), be that first deeds of trust, second or subsequent deeds of trust, refinances or credit lines, a certain amount of default is to be expected. Being prepared to react to default is imperative.

At the law firm of Lafayette, Ayers & Whitlock, PLC, we represent creditors - from start to finish. We are a full-service creditor’s rights firm. While many attorneys do “collections”, few attorneys have the trained expertise and staff to represent creditors in all four areas of Creditor’s Rights—Collections, Bankruptcy, Real Estate and Foreclosure. WE DO FORECLOSURES. We will handle foreclosure proceedings from demand to final accounting.

Bankruptcy: Dischargeability of Student Loans

Student loans generally are non-dischargeable debts and pass through the bankruptcy process unaffected. Congress has provided that government-guaranteed student loans are nondischargeable in bankruptcy unless the debtor can demonstrate that the repayment of such student loans would constitute an undue hardship under Bankruptcy Code 523(a)(8). However, there are exceptions that allow for dischargeability. In the next edition of Creditor News we will review three cases to examine the application of Bankruptcy Code §523(a)(8) concerning the dischargeability of student loans.

The first case is Murphy v. CEO/Manager, Sallie Mae, heard by the United States Bankruptcy Court at Norfolk, Virginia. In Murphy the court found as fact that the debtor’s nine year old daughter was permanently disabled, as she suffered from Pfeiffer syndrome. This disability caused the debtor to discontinue her medical education. It also impeded the debtor’s ability to work. The loans in question totaled $58,000.00, on which no payments were ever made. However, the debtor’s husband earned $82,000.00 annually. Further, the debtor’s evidence illustrated a monthly family disposable income of $400.00. The debtor argued that the family’s net disposable income was not available to repay her student loans because she and her husband had a savings account in the event that he was laid off. At the time of the bankruptcy, the account had $2,500.00. The court further noted that based upon the debtor’s testimony that her son was changing from private school to public school, it was logical to presume that there was an additional $507.00 per month available from the savings in private school tuition plus an extra $109.00 per month paid on an automobile that would be available for student loans. Eliminating these household expenses and adding these to the $400.00 already noted as per month disposable net income to pay toward the student loan debt.

The Court stated that it was doubtless that the debtor’s burden of caring for her disabled child was immeasurable, and her disappointment in her inability to complete her medical education immense. However, discharge of a student loan must be founded on more than notions of fairness or sympathy. Because of the debtor’s husband’s successful employment, the debtor and her dependents enjoyed an income well in excess of nearly all who seek undue hardship discharge, and a substantially more comfortable lifestyle than the minimal one contemplated by the criteria for a hardship discharge. Accordingly, the court found that the student loans were non-dischargeable, and thus denied the debtor’s motion to discharge her student loans due to hardship under Bankruptcy Code §523(a)(8).

Real Estate: Using Homeowner Association Liens to Secure an Interest in Real Estate

In recent editions of Creditor News we have been discussing the benefits of using real estate to improve creditors’ positions. As I have emphasized, properly securing debts through real estate could make the difference between collecting the funds and incurring a loss. In this edition, we will review the benefits of using homeowner association liens to aid in the collection of your debt.

Virginia Code §55-516 provides for special procedures for the collection of homeowners association dues. This code section allows associations to place a lien on the land for unpaid assessments, as well as give associations a priority over certain other debts. To perfect the lien, however, it must be filed before the expiration of twelve months from the time the first such assessment became due and payable. This filing must be by a memorandum filed in the circuit court of the county or city where the development is located. The memorandum must contain the information specified in the statute. Before filing the lien, written notice must be sent to the property owner by certified mail giving at least ten days prior notice that a lien will be filed. Suit to foreclose on the lien must be brought within thirty six months of filing. We will review foreclosure suit procedures in the next issue.

We have experienced attorneys and staff who can examine title, file homeowner association liens, and litigate to enforce the same.

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 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.

Next month’s issue of Creditor News will address the next two fact patterns.