Collections: Liability for Charges above the Credit Limit - Part I

     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 week's Blog will address the next two fact patterns.

Bankruptcy: Finance Company Lien - Mobile Home

      In the case of American General Finance Co. v. Hoss, the United States District Court at Abingdon, Virginia, overruled a Bankruptcy Court decision avoiding a creditor’s lien on the debtor’s mobile home. While all agreed that the creditor’s lien was a nonpossessory, non-purchase money security interest, there was a dispute as to whether Bankruptcy Code §522(f)(1) allowed for the avoidance of the lien. The Bankruptcy Court concluded that the lien on the mobile home could be avoided as the Bankruptcy Code permits the avoidance of certain liens which would impair an exemption to which a debtor is entitled to pursuant to Bankruptcy Code §522(b). Virginia Code §34-4 permits a debtor householder to exempt up to $5,000 of property as a homestead exemption. The $4,000 homestead deed filed by debtor qualified for this exemption in the instant case. Property claimed as exempt pursuant to Bankruptcy Code Bankruptcy Code §522(b) is not liable for any debt of debtor which arose before the commencement of a bankruptcy case, but an exception under §522 (c)(2)(A)(I) allowed such exempted property to remain liable for the preexisting debts of a debtor if the debt is secured by a lien which could not be avoided under Bankruptcy Code §522(f).
     The Bankruptcy Court found that Bankruptcy Code §522(f)(1)(B)(i) provides for avoidance of nonpossessory, non-purchase money security interests on household furnishings or households goods that are held primarily for the personal, family or household use of the debtor or a dependent of the debtor.
     Citing its prior decision in the case of In re: Goad the Bankruptcy Court implicitly found that a mobile home is either a household furnishing or good under Bankruptcy Code §522(f)(1)(B)(i).
     The District Court, on appeal, decided that a mobile home was in no manner a household good or furnishing, as required under that subsection. Neither of those terms is defined by the Bankruptcy Code. The 4th Circuit Court of Appeals has explained that household goods under this subsection are those items of personal property that are typically found in or around the home and are used by debtor or his dependents to support and facilitate day-to-day living within the house. The District Court stated that it was clear that a mobile home is virtually incapable of itself being contained within a home. In addition, a mobile home was not the type of thing used “around the home” which facilitates … living within the home.”
     The District Court examined several cases from across the country dealing with this same issue and discovered only one other court which had agreed with the Bankruptcy Court that a mobile home is a household good. Thus, the District Court concluded that the Bankruptcy Court improperly applied Bankruptcy Code §522(f) and that a proper application of that subsection resulted in the lien in question being unavoidable. The Goad case was overruled in that district and is no longer good law before that District Court.
     In summary, the debtor was not entitled to avoid the lien on her mobile home held by the finance company.