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finding that FCBA is structured to facilitate withholding of payment by cardholder; if card issuer sues for payment, cardholder can use § 1666i in a defensive posture
Summary of this case from Hasan v. Chase Bank USA, N.A.Opinion
01 Civ. 3393 (DLC)
March 28, 2002
James Beaumont, New York, NY, Plaintiff, Pro Se
Christine B. Cesare, Bryan Cave L.L.P., New York, NY, Attorneys for the Defendant
OPINION AND ORDER
On April 23, 2001, plaintiff James Beaumont ("Beaumont") filed a complaint against two banks alleging violations of two sections of the Truth in Lending Act ("TILA"), 15 U.S.C. § 1666 ("Section 1666") and 1666i ("Section 1666i"), and TILA's implementing regulations ("Regulation Z"), 12 C.F.R. § 226.1 et seq. Beaumont seeks a declaration that he is not liable for certain charges the defendants have threatened to rebill. One of those defendants, Citibank, has now moved pursuant to Fed.R.Civ.P. 12(b)(6) to dismiss Beaumont's complaint. On January 11, 2002, Magistrate Judge Pitman issued a Report ("Report") recommending denial of Citibank's motion. Citibank objected to the Report and Beaumont responded to Citibank's objections. For the reasons that follow, defendant's motion to dismiss is granted without prejudice to amendment of the complaint within thirty days after the issuance of this Opinion.
BACKGROUND
In his complaint, Beaumont states that Citibank violated his rights under the TILA and Regulation Z with regard to "certain consumer credit card purchases." He alleges Citibank has "shown flagrant disregard for the unmistakable time limits for completing a dispute investigation" because Citibank threatened as recently as March 22, 2001, to rebill him for the disputed charges, even though Beaumont had "filed" his dispute with Citibank on October 20, 2000. He asserts that he has requested "tangible legal proof" of Citibank's rights to rebill him, but that he only receives "opinions" from Citibank's staff. He states that Citibank has erroneously denied him "consumer credit protection by stating that [he] was purchasing products for a business purpose." Beaumont asks that "[b]oth defendants cease harassing and threatening via phone and US mail to rebill my account."
Three additional documents submitted by Citibank may be considered on this motion to dismiss: an October 26, 2000 letter from Beaumont to Citibank, and Beaumont's August and October 1999 Citibank account statements. Generally, "[w]hen material outside the complaint is presented to and not excluded by the court, the motion shall be treated as one for summary judgment. . . ." Chambers v. Time Warner, Inc., No. 01-7010, 2002 WL 244320, 282 F.3d 147, at *3 (2d Cir. Feb. 21, 2002) (citation omitted). The court may, however, consider a document on a motion to dismiss if the complaint incorporates it by reference or "relies heavily upon its terms and effect, which renders the document integral to the complaint." Id. (citation omitted). The "plaintiff's reliance on the terms and effect of a document in drafting the complaint is a necessary prerequisite to the court's consideration of the document on a dismissal motion; mere notice or possession is not enough." Id. at *4 (emphasis in original). Because Beaumont's complaint notes that he filed his dispute with Citibank in October 2000, his letter to Citibank of October 26, 2000, notifying Citibank of his dispute with Purchase Plus Buyer's Group ("PPBG"), is incorporated into the complaint by reference. The Court may also consider Beaumont's monthly Citibank statements because such documents are integral to his TILA claim. See Schnall v. Marine Midland Banks, 225 F.3d 263, 266 (2d Cir. 2000).
The August and October 1999 monthly statements submitted by Citibank show that Beaumont charged $3,600 to his Citibank credit card on July 16, 1999, and $6,100 on September 21, 1999. By letter of October 26, 2000, Beaumont requested a "credit/refund/ stop payment" for those charges. He listed the July 16 and September 21, 1999 charges and stated that he was "requesting a prompt credit to [his] account . . . in the amounts as shown." Beaumont explained that after he "joined" PPBG, "things seemed to be going well," but that he eventually became dissatisfied with the products and services. He stated that he had "tried to get a refund from the company without success and I cannot reach them since their telephones have been disconnected. I have tried to contact the company, but the doors have been closed by the Ohio State Attorney General's office." Beaumont emphasized that PPBG "never provided the product(s) and services that it promised and it failed to comply with it's 100% unconditional refund policy." Beaumont asserted that "to date, I have never received the product(s) advertised by Purchase Plus, in working condition." He clarified further that he
had no opportunity to know that the Purchase Plus Buyers Group was not going to provide me with the product they promised in our original agreement until they ceased to do so and in fact, ceased to exist. I had no way of stopping the charges before the company failed to provide the product.
Citibank contends that Beaumont's claim under Section 1666 should be dismissed because Beaumont failed timely to notify Citibank about the dispute and because Citibank complied with TILA's procedural requirements. Citibank argues that Beaumont's claim under Section 1666i should be dismissed because Beaumont failed to commence arbitration with PPBG. Citibank also maintains that Beaumont's claims are barred by TILA's statute of limitations. Judge Pitman recommended denial of Citibank's motion to dismiss Beaumont's claims under Sections 1666 and 1666i.
DISCUSSION
A reviewing court "may accept, reject, or modify, in whole or in part, the findings or recommendations made by the magistrate judge." 28 U.S.C. § 636(b)(1)(C). The Court reviews de novo those portions of the Report to which an objection has been made. Id.; see also United States v. Male Juvenile, 121 F.3d 34, 38 (2d Cir. 1997).
A court may dismiss an action pursuant to Rule 12(b)(6), Fed.R.Civ.P., only if "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief."Cooper v. Parsky, 140 F.3d 433, 440 (2d Cir. 1998) (citation omitted). In considering the motion, the court must "accept as true all allegations in the complaint," Hayden v. County of Nassau, 180 F.3d 42, 47 (2d Cir. 1999), and "draw all reasonable inferences in the plaintiff's favor."Jackson Nat'l Life Ins. v. Merrill Lynch Co., 32 F.3d 697, 699-700 (2d Cir. 1994). The court can dismiss the claim only if, assuming all facts alleged to be true, the plaintiff still fails to plead the basic elements of a cause of action. Where a party is proceeding pro se, the court must "construe [the] pleadings broadly, and interpret them to raise the strongest arguments they suggest." Cruz v. Gomez, 202 F.3d 593, 597 (2d Cir. 2000) (citation omitted); see also Cucco v. Moritsugu, 222 F.3d 99, 112 (2d Cir. 2000). In addition, "TILA is a remedial act intended to protect consumers, and, as such, its provisions are to be construed liberally in favor of consumers." Belmont v. Assoc's Nat. Bank (Del.), 119 F. Supp.2d 149, 159 (E.D.N.Y. 2000) (citations omitted); see also Schnall, 263 F.3d at 267.
1. Section 1666: Billing Dispute Resolution Procedures
In order to state a cause of action under TILA, a plaintiff must allege the existence of a "violation" of one or more of TILA's provisions. Section 1640(e) of TILA provides:
Any action under this section may be brought in any United States district court, or in any other court of competent jurisdiction, within one year from the date of the occurrence of the violation. This subsection does not bar a person from asserting a violation of this subchapter in an action to collect the debt which was brought more than one year from the date of the occurrence of the violation as a matter of defense by recoupment or set-off in such action, except as otherwise provided by State law.15 U.S.C. § 1640(e) (1998) (emphasis supplied). A plaintiff may maintain a cause of action under TILA if he alleges a "violation" of Section 1666's billing dispute resolution procedures. Section 1666 provides that on receipt of timely notice of a billing error, a card issuer must acknowledge the notice in writing within thirty days, 15 U.S.C. § 1666(a)(3)(A) (1998); 12 C.F.R. § 226.13(c) (2001), and, within ninety days, either correct the cardholder's account, 15 U.S.C. § 1666(a)(3)(B)(i); 12 C.F.R. § 226.13(e), or send the cardholder a written explanation of why the charges in question are correctly reflected on the statement, 15 U.S.C. § 1666(a)(3)(B)(ii); 12 C.F.R. § 226.13(f). See generally Dawkins v. Sears Roebuck Co., 109 F.3d 241, 243 (5th Cir. 1997). Thus, in order to state a claim under Section 1666, the plaintiff must allege: (1) the existence of a billing error; (2) plaintiff's timely notification of the billing error; and (3) failure of the card issuer to comply with the procedural requirements of Section 1666.
Section 1640(e) explicitly applies to suits brought under "part D or E of this subchapter," which include violations of Section 1666. 15 U.S.C. § 1640(a).
The complaint does not allege any of these elements. Its most fatal deficiency, however, is the failure to allege the existence of a "billing error." Billing errors include the failure to send a statement, the appearance of an error (i.e., presence of charge, absence of credit, miscalculation) on a statement, and the receipt of a statement reflecting a charge about which the cardholder requests additional information. TILA defines billing errors as:
(1) A reflection on a statement of an extension of credit which was not made to the obligor or, if made, was not in the amount reflected on such statement.
(2) A reflection on a statement of an extension of credit for which the obligor requests additional clarification including documentary evidence thereof.
(3) A reflection on a statement of goods or services not accepted by the obligor or his designee or not delivered to the obligor or his designee in accordance with the agreement made at the time of the transaction.
(4) A creditor's failure to reflect properly on a statement a payment made by the obligor or a credit issued to the obligor.
(5) A computation error or similar error of an accounting nature of the creditor on a statement.
(6) Failure to transmit the statement required under section 1637(b) of this title to the last address of the obligor which has been disclosed to the creditor, unless that address was furnished less than twenty days before the end of the billing cycle for which the statement is required.
(7) Any other error described in regulations of the Board.15 U.S.C. § 1666(b) (emphasis supplied). Regulation Z identifies an additional billing error as "a reflection on or with a periodic statement of an extension of credit that is not identified in accordance with the requirements of §§ 226.7(b) [referencing Section 226.8] and 226.8 [describing the detail with which individual charges on a statement must be identified]." 12 C.F.R. § 226.13(a)(2).
If the billing error is that identified in Section 1666(b)(3), that is, "a reflection on a statement of goods or services not accepted . . . or not delivered . . .," 15 U.S.C. § 1666(a)(3), then there is an additional restriction imposed on any claim. A billing error under Section 1666(b)(3) does not include "dispute[s] relating to the quality of property or services that the consumer accepts." 12 C.F.R. § 226.13(a)(3) Supp. I subpt. B, at 378; cf. Greisz v. Household Bank (Ill.), 8 F. Supp.2d 1031, 1042 (N.D. Ill. 1998), aff'd, 176 F.3d 1012 (7th Cir. 1999).
Although Beaumont has alleged that Citibank failed to comply with Section 1666's procedural requirements, he has not alleged a billing error. In the documents before the Court that are properly considered on a motion to dismiss, Beaumont has alleged the following:
• In August and October 1999, he received statements reflecting charges for products and services purchased from PPBG.
• Beaumont did not receive the products he ordered or did not receive them in working condition.
• He unsuccessfully attempted to obtain a refund from PPBG.
• On October 26, 2000, Beaumont asked Citibank to credit the amounts charged to his account in July and September 1999.
• As recently as March 22, 2001, Citibank threatened to rebill him for the disputed charges.
Beaumont has not stated that he failed to receive a statement, received a statement that contained an error (such as the presence or absence of a particular charge or a miscalculation), or received a statement reflecting a charge about which he requested additional information. Because he has not alleged the existence of a "billing error," Beaumont has not stated a claim under Section 1666. Cf. Pinner v. Schmidt, 805 F.2d 1258, 1264 (5th Cir. 1986); Lifschitz v. American Express Co., 560 F. Supp. 458, 466 (E.D. Penn. 1983).
Judge Pitman construed Beaumont's claim to be that Citibank had failed to post a credit from PPBG. This, if pleaded, could constitute a billing error under Section 1666(b)(4). Even construing the plaintiff's complaint broadly and after considering all the documents integral to it, it does not appear that Beaumont has pleaded the existence of a billing error under Section 1666(b)(4). Instead, the gravamen of his complaint appears to be a concern that he may, in the future, be rebilled for the PPBG purchase.
Judge Pitman noted, however, that should it be determined that PPBG did not issue a credit, Citibank's failure to post such credit would not be a billing error under Section 1666(b)(4). The regulations note that "[i]f the periodic statement fails to reflect a credit to the account, the 60-day period runs from the transmittal of the statement on which the credit should have appeared." 12 C.F.R. § 226.13(b)(1) Supp. I subpt. B, at 379 (2001).
Beaumont is granted thirty days to amend his complaint to add an allegation, if he can do so in good faith, that he received a statement from Citibank that contained a billing error such as — but not limited to — a failure to post a credit. Any amended pleading must identify the billing error and allege other facts sufficient to satisfy each of the three elements of a Section 1666 claim, as described above. Because plaintiff's claim under Section 1666 is dismissed, it is unnecessary to address the defendant's arguments that Citibank complied with Section 1666's procedural requirements or that Beaumont's Section 1666 claim should be dismissed as untimely.
2. Section 1666i: Asserting Claims Against Issuer
Beaumont also asserts claims against Citibank under 15 U.S.C. § 1666i. Section 1666i allows a cardholder to assert any non-tort claims or defenses arising out of the underlying credit card transaction against a credit card issuer. Subsection (a) places certain conditions on the cardholders's ability to assert the claims and defenses, and subsection (b) limits the amount of the claims or defenses that can be asserted to the amount of credit outstanding at the time the cardholder first notifies the issuer of the claim or defense. Section 1666i(a) provides that
a card issuer who has issued a credit card to a cardholder pursuant to an open end consumer credit plan shall be subject to all claims (other than tort claims) and defenses arising out of any transaction in which the credit card is used as a method of payment or extension of credit if (1) the obligor has made a good faith attempt to obtain satisfactory resolution of a disagreement or problem relative to the transaction from the person honoring the credit card . . . .15 U.S.C. § 1666i(a) (1998) (emphasis supplied) . Section 1666i(b) provides that
[t]he amount of claims or defenses asserted by the cardholder may not exceed the amount of credit outstanding with respect to such transaction at the time the cardholder first notifies the card issuer or the Person honoring the credit card of such claim or defense.15 U.S.C. § 1666i(b) (emphasis supplied).
The implementing regulation for Section 1666i provides that the claims and defenses defined in that Section allow a cardholder to withhold payment from the issuer when the merchant has failed to resolve a dispute satisfactorily. Section 226.12(c)(1) of the Code of Federal Regulations provides:
When a person who honors a credit card fails to resolve satisfactorily a dispute as to property or services purchased with the credit card in a consumer credit transaction, the cardholder may assert against the card issuer all other claims (other than tort claims) and defenses arising out of the transaction and relating to the failure to resolve the dispute. The cardholder may withhold payment up to the amount of credit outstanding for the property or services that gave rise to the dispute and any finance or other charges imposed on that amount.
15 C.F.R. § 226.12(c)(1) (2001) (emphasis supplied).
When read with Section 1640, these provisions appear to allow a cardholder to assert certain claims or defenses from the underlying transaction in three circumstances: (1) as a justification for withholding payment, or (2) in any lawsuit filed by the issuer to collect on the account, or, if appropriate, (3) in connection with a lawsuit brought by the cardholder under Section 1640(e) for a violation of the TILA. Consequently, unless the plaintiff can also assert a claim for a violation of the TILA, he cannot in this lawsuit assert claims or defenses authorized by Section 1666i.
Although a dispute may constitute a billing error and also give rise to claims or defenses under Section 1666i, the cardholder has a right to "assert" Section 1666i claims by withholding payment even if he has not pursued remedies under Section 1666. 12 C.F.R. § 226.13(c) Supp. I subpt. B, at 375.
Indeed, the structure of the TILA indicates that Section 1666i does not create an independent cause of action for the cardholder. TILA places the burden of bringing a lawsuit to collect a debt, after the cardholder has attempted and has failed to obtain satisfactory resolution of the dispute, on the issuer. For instance, under Regulation Z, if the "cardholder withholds payment of the amount of credit outstanding for the disputed transaction, the card issuer shall not report that amount as delinquent until the dispute is settled or judgment is rendered." 12 C.F.R. § 226.12(c)(2) (emphasis supplied). Thus, the reporting of the cardholder's account as delinquent when the cardholder has withheld payment under Section 1666i would constitute a violation of Regulation Z, and would appear to give rise to a cause of action under Section 1640(e). Absent a violation of TILA, however, a cardholder may only "assert" a claim or defense to payment on the underlying contract with the merchant against the cardholder "by withholding payment on the credit card account up to the amount of credit outstanding for the property or services that gave rise to the dispute, plus any finance or other charge imposed on that amount." 20 Am. Jur. 2d Credit Cards Charge Accounts § 62 (2001); see also McGarvey v. Citibank (South Dakota) N.A., 95 Civ. 123, 1995 WL 404866, at *5 (N.D. Ill. 1995).
By protecting cardholders from the negative consequences of non-payment and placing the burden of disputing the cardholder's right to withhold on the card issuer, Section 1666i essentially provides cardholders who (1) meet the criteria of Section 1666i(a), and (2) possess a valid non-tort claim or defense against a merchant, with the right to chargeback certain outstanding amounts. See, e.g., In re Standard Financial Mgmt. Corp., 94 B.R. 231, 237-38 (D. Mass. 1988), abrogation on other grounds recognized by Moratzka v. Visa U.S.A.(In re Calstar, Inc.), 159 B.R. 247, 254 (D. Minn. 1993); see also Robert D. Cooter Edward L. Rubin, A Theory of Loss Allocation for Consumer Payments, 66 Tex. L. Rev. 63, 119 (1987). A card issuer who disputes, for example, the validity or scope of the cardholder's claim or defense against the merchant, or the cardholder's satisfaction of the criteria listed in Section 1666i(a), must bring suit to contest the cardholder's reversal right and recover the disputed amounts.
In the instant dispute, Beaumont is seeking affirmatively to assert Section 1666i rights. Because Section 1666i does not, by itself, create a cause of action, Beaumont may not assert a claim or defense in this action unless he can also assert a violation of the TILA under Section 1640(e). Construing the plaintiff's complaint broadly and considering all of the documents integral to the complaint, Beaumont has not pleaded the existence of a "violation" of TILA. Further, should Beaumont allege a violation of TILA and also seek to assert a claim or defense under Section 1666i, his recovery under Section 1666i would necessarily be limited to the assertion of a claim with respect to an "amount of credit outstanding." Beaumont has not alleged that there was any amount of credit outstanding at the time he first notified Citibank or PPBG of his claim or defense, or that any amount remained outstanding when he filed suit.
If Beaumont amends his complaint to allege a violation of a provision of TILA, such as Section 1666 or Regulation Z, then he may also allege a violation of Section 1666i if, in good faith, he can allege that (1) there is an amount of credit outstanding on a transaction, and (2) he possesses a non-tort claim or defense concerning that amount. Because plaintiff's claim under Section 1666i is dismissed, it is unnecessary to address the defendant's arguments that Beaumont failed to make a good faith effort to resolve his dispute with PPBG or that Beaumont's Section 1666i claim should be dismissed as untimely.
CONCLUSION
For the reasons stated above, Citibank's motion to dismiss is granted without prejudice to the filing of an amended complaint in conformance with this Opinion within thirty days from the date of this Opinion.
SO ORDERED.