DOUGLAS P. WOODLOCK UNITED STATES DISTRICT JUDGE.
Lisa Martino brought this action on her own behalf and on behalf of a putative class challenging the practices of the American Airlines Federal Credit Union (AAFCU), which deducts funds owed on credit card bills from depository accounts held by cardholders with the credit union. Martino alleges that AAFCU's policies with respect to such accounts violate the anti-offset provisions of the Massachusetts Consumer Credit Cost Disclosure Act (MCCCDA) and the Federal Truth in Lending Act (TILA). AAFCU claims that it has a valid security interest in the depository accounts and is therefore permitted to take funds from the accounts. The parties now move for summary judgment on the question of liability.
Lisa Martino maintained three depository accounts with AAFCU. The first account, opened in the early nineties, was in Martino's name alone, while the second and third accounts, opened in 2001, were joint accounts with her children.
Martino opened a credit card account with AAFCU in 2007. She failed to pay outstanding amounts due on her credit card, and on May 23, 2012, AAFCU withdrew funds from Martino's three depository accounts to pay the credit card debt. This withdrawal was noted on Martino's monthly statements as "CC CHG OFF RECOVERY."
Martino brought this action alleging that AAFCU did not have the right to withdraw funds from the deposit accounts to pay off amounts due on the credit card. Martino filed a complaint on December 31, 2013, in the Superior Court of Suffolk County, Massachusetts, and filed an amended complaint in January 2014. AAFCU invoked the federal district court's diversity jurisdiction, 28 U.S.C. § 1332, and removed the action to this court in February 2014. Martino filed a Second Amended Class Action Complaint on January 12, 2015, alleging individual and class claims against AAFCU in three counts: (1) Violation of the MCCCDA, 209 CMR 32.12; (2) Declaratory Judgment seeking a declaration that AAFCU's practices are in violation of the MCCCDA; and (3) Violation of
In July 2014, I set a schedule for discovery and briefing on dispositive motions, directing that discovery on class certification would be taken up after summary judgment practice. Martino moved for partial summary judgment against AAFCU on liability under Counts I, II, and III, AAFCU filed an opposition and cross-moved for summary judgment establishing that it has no liability.
In its opposition to Martino's motion, AAFCU disclosed that both of the parties had been laboring under a significant misapprehension of the relevant facts. From before the commencement of litigation and throughout the discovery period, AAFCU represented that the controlling credit agreement was the "Loanliner" credit agreement, which Martino signed on November 20, 2006. The argument in support of Martino's initial Motion for Summary Judgment focused on the shortcomings of the Loanliner credit agreement, namely the fact that while it did contain some language about creating a security interest, it did not contain a sufficiently conspicuous disclosure. AAFCU claimed in its opposition that it had uncovered information that the Loanliner credit agreement, while used in connection with AAFCU's extension of various types of credit, was not used in connection with approving a member for a credit card. AAFCU stated that the new information demonstrated that the Loanliner agreement does not have any connection to the credit card account that is at issue in this case, and that a different Credit Card Agreement controlled the lending relationship between AAFCU and its credit cardholders at the time that Martino began to use the credit card at issue.
AAFCU presents this new information in the form of two affidavits, one by Susan Longley, the Vice President for Consumer Lending and Account Services, and the other by Lewis Cohen, the Vice President for Finance, concerning the procedure used and the documents that make up the credit card agreement at issue in this case. AAFCU began offering credit cards to its members in 2004. During the relevant period, AAFCU's Marketing Department in conjunction with the Lending Department developed criteria for members who might qualify for a credit card. Using this criteria, AAFCU developed a list of members who may be preapproved for a credit card. AAFCU developed a cut off for a credit score that would prequalify a member and checked that number against information from the credit bureau, resulting in a list of the names of members who qualified for preapproval. AAFCU then would send a preapproval offer letter through a vendor to each member on the list.
The two-page preapproval offer letter contained a Pre-Approved Acceptance Certificate for the member to sign and return to AAFCU if she wished to receive the credit card. The Pre-Approved Acceptance Certificate contained a certification that
If a member submitted the certificate, AAFCU's vendor would mail the credit card and the Credit Card Agreement ("the Agreement") together in the same mailing to the approved member. The Agreement stated that the member acknowledged AAFCU could charge the member accounts for outstanding credit card debt. AAFCU claims that this preapproval process was used by AAFCU in November 2007 and was the process by which Martino and others were preapproved for the credit card through AAFCU. AAFCU claims that by signing the Pre-Approved Acceptance Certificate and later using the credit card, Martino acknowledged that she received and agreed to the terms of the Agreement.
The Agreement that was sent with the credit card is four pages long. On the bottom of the second page in paragraph 10, the Agreement states in bold, with a box surrounding the text:
Shares and deposits in an Individual Retirement Account or in any other account that would lose special tax treatment under state or federal law if given as security are not subject to the security interest you are giving. You authorize the Credit Union to apply the balance in your individual or joint share accounts to pay any amounts due on your Account if you should default.
This Agreement was provided to members who were approved for this credit card simultaneously with the activated credit card itself, and it did not have any space for the cardholder to sign or otherwise endorse the agreement. A copy of the Agreement is attached to this Memorandum and Order as Appendix II.
After AAFCU presented this information about the procedure and disclosures, Martino filed an Amended Motion for Summary Judgment addressing the new credit card agreement documents and procedures. Martino argues that she is entitled to summary judgment because the newly-disclosed procedure and agreements presented by AAFCU violate the MCCCDA and the TILA. After the hearing on the partial motions for summary judgment, Martino filed an unopposed Third Amended Complaint, advancing the same general theories and identical counts but reflecting the updated information on the applicable credit card agreement that was provided by AAFCU.
The MCCCDA, Mass. Gen. Laws c. 140D, § 1 et seq., governs consumer credit transactions. The MCCCDA permits the Commissioner of Banks to "prescribe from time to time rules and regulations consistent with the Federal Fair Credit Billing Act, 15 U.S.C. § 1666-1666j and the regulations promulgated thereunder." Id. § 29.
209 CMR 32.12(4) (amended 2015).
TILA also contains prohibitions on offsets, 15 U.S.C. § 1666(h). This section is titled "Offset of cardholder's indebtedness by issuer of credit card with funds deposited with issuer by cardholder; remedies of creditors under State law not affected." The section provides:
15 U.S.C.A. § 1666h.
The TILA, including the prohibition on offsets, is implemented through regulations known as Regulation Z, codified at 12 C.F.R. § 226. The federal regulation concerning offsets, 12 CFR § 226.12(d), contains the same relevant language as 209 CMR 32.12(4)(amended 2015) of the MCCCDA.
The Official Staff Interpretation
Official Staff Commentary on Regulation Z, F.R.R.S. 6-1170.7, 2006 WL 3947402, at *1.
The Massachusetts statute and regulations are "closely modeled on the Federal Truth-in-Lending Act ... [and] Federal court decisions are instructive in construing parallel State statutes and State regulations." Mayo v. Key Financial Services, Inc., 424 Mass. 862, 678 N.E.2d 1311, 1313 (1997).
The two parties have moved for summary judgment pursuant to Rule 56 of the
The burdens of proof for an offset violation as alleged here are not apparent from the relevant statutes and regulations. The TILA prohibition on offsets is presented as an absolute bar preventing a card issuer from taking action to offset credit card debt against funds held on deposit with the card issuer. 15 U.S.C. § 1666h(a). The sole exception to the no-offset rule is when a cardholder agrees in writing to periodic deductions, id. at § 1666h(a)(1), an exception that defendants concede is not applicable in this case. The statute notes that this prohibition does not affect the right of a card issuer to attach or levy upon funds of a cardholder under state law. Id. at § 1666h(b). Regulation Z further clarifies that the prohibition on offsets "does not alter or affect the right of a card issuer acting under state or federal law to ... obtain or enforce a consensual security interest in the funds." 12 C.F.R. § 226.12(d)(2). The MCCCDA anti-offset provision has the same structure, prohibiting offsets but noting that the provision does not apply to otherwise lawfully created consensual security interests. See 209 CMR 32.12(4)(amended 2015).
Plaintiffs argue that it is Martino's burden to make an initial showing that AAFCU withdrew her funds on deposit with the credit union to pay a credit card debt, and then the burden shifts to AAFCU to prove compliance with TILA and MCCCDA. AAFCU has not briefed the question of the burden of proof at all, although a party in defendant's position might argue that proving that something is an offset necessarily involves proving that it is not something other than an offset; in that sense, proving that there is no valid consensual security interest is part of Martino's burden in showing that there is a TILA and MCCCDA violation.
In Gardner v. Montgomery County Teachers Federal Credit Union, 864 F.Supp.2d 410, 415-18 (D.Md.2012), Judge Bredar concluded after a lengthy analysis that the anti-offset provision of TILA is structured to prohibit offsets, and that the plaintiff has the burden of showing that an offset-type transaction has occurred. Once a plaintiff has made that showing, then the defendant bears the burden of showing that the transaction is actually a consensual security interest, not an offset. Id. at 416. He concluded that the statute follows the "general proposition that once a debtor makes a threshold showing that a TILA violation has occurred, then the burden shifts to the creditor to prove its compliance. Id. at 415 (collecting cases for this proposition).
Judge Bredar's analysis in Gardner is based in part on his conclusion that offsets and security interests are distinct legal concepts, id. at 417. By contrast, the analysis by Judge Marlar in In re Lyon, 2010 WL 3777827 (Bankr.D.Ariz. Sept. 20, 2010), implicitly conflates the two, considering a security interest to be a form of
After considering the structure and content of the statute and regulations, I conclude that a plaintiff can make a sufficient showing of an offset without disproving the existence of a security interest. The framework requires the plaintiff to make an initial showing that the transaction at issue is an offset and then the burden shifts to the defendant to show that the transaction actually involves a permitted security interest.
AAFCU does not contest that it withdrew funds from Martino's deposit accounts to pay off her outstanding credit card debt. This fact alone is sufficient to meet Martino's burden to prove a violation of TILA and MCCCDA's prohibitions on offsets by card issuers against a cardholder's funds on deposit with the issuer. See 15 U.S.C. § 1666h. It thus became AAFCU's burden to prove that there was a consensual security interest.
To determine whether AAFCU has shown that this was not an offset because a valid security interest was created in compliance with TILA and MCCCDA, I look to the documents that constitute the agreement itself. The original pre-approval letter sent to Martino, directing her to sign and return a Pre-Approved Acceptance Certificate if she wished to receive the credit card, did not contain any language at all about a security interest. While the Certificate included language that she was accepting the terms and conditions of the Agreement, the Agreement was not provided at the time that Martino signed the Certificate and therefore could not have been reviewed at the time the Certificate was signed.
The Agreement arrived later by mail, simultaneously with an activated, usable credit card. The Agreement is the only document that mentions a security interest. The Agreement did not have any space for Martino to initial or sign and did not require Martino to acknowledge in any way receipt of or agreement to the terms once she had received them. It is undisputed that Martino used the card that was issued to her after receiving the card and the disclosures.
Martino argues that the credit documents and procedure that were used in this case were inadequate to create a consensual security interest in her depository accounts. AAFCU contends that the documents in combination with each other and with Martino's use of the credit card satisfy the requirements of TILA and MCCCDA. AAFCU points to the fact that the Certificate that Martino signed stated that using the card meant accepting the terms of the not-yet-provided Agreement, and that Martino used the card after receiving the Agreement. Given the language in the Certificate, which Martino signed, AAFCU argues that her use of the credit card after receiving the terms of the Agreement constituted the manifestation of agreement required by the statutes. Martino counters that an enforceable security interest was not created because she never signed or otherwise agreed to the security interest disclosed in the Agreement and the language of the Agreement is not sufficiently conspicuous for me to
The strict requirements under TILA and MCCCDA and their accompanying regulations make clear that these consumer protection statutes go beyond the requirements of contract law. Official Staff Commentary on Regulation Z, 2006 WL 3947402 ("routinely including in agreements contract language indicating that consumers are giving a security interest in any deposit accounts maintained with the issuer...." is not sufficient to create the exception). Under Regulation Z, a valid security interest is to be distinguished from an unlawful offset, because a valid security interest must be "affirmatively agreed to by the consumer," a consumer must be aware that granting a security interest is a condition for the credit card account, and the consumer must specifically intend to grant a security interest in a deposit account. Id. The Official Staff Commentary on Regulation Z provides three indicia of a consumer's awareness and intent: (1) a separate signature or initials near the disclosure creating the security interest; (2) conspicuousness of the security agreement by placing it on another page or otherwise separating it from other provisions; and (3) and referencing a specific amount of deposited funds or a specific account number. Id. Under the Staff Commentary, at least one of the three, or a similar procedure evidencing a consumer's awareness and intent, must be met for the disclosure of a security interest to be deemed valid under TILA. Id.
The timing of the disclosures made to Martino is significant and provides context for addressing awareness and intent. There is no dispute that AAFCU provided the Agreement, which was the first document to disclose the purported security interest, contemporaneously with the activated, usable, credit card, meaning that the account had already been approved and opened. Martino argues that it was improper of AAFCU to fail to provide the disclosure about the security interest before AAFCU provided Martino with the credit card. Given that the card was provided simultaneously with the disclosure, Martino argues that a consumer would not know that she was granting a security interest "as a condition for the credit card account" as required by the Official Staff Commentary. She notes that, given the simultaneous provision of the activated credit card, "it is difficult to see how a card-holder would understand that granting Defendant the security interest was a condition of [her] getting the account in the first place." Gardner, 864 F.Supp.2d at 420.
Providing the disclosures at the same time as the card itself is not necessarily fatal. The existence of a security interest in connection with an open-end unsecured credit plan is the type of disclosure that, under TILA, need not be made at the time of solicitation or an application to open a credit card account, see 12 C.F.R. § 226.5a (listing disclosures that must be made at the time of solicitation or application), but rather may be made "before the first transaction is made under the plan," see 12 C.F.R. § 226.5 (stating the "general rule" for disclosures required by § 226.6, which include security interests, see 12 C.F.R. § 226.6(b)(5)(ii)).
Martino does not argue that the actual language of the Agreement in paragraph 10, which purports to create the grant of a security interest, is inadequate. Cf. In re Clark, 161 B.R. 290, 292 (Bankr.N.D.Fla.1993)(language claiming the ability to enforce a statutory lien does not create a consensual security interest). The initial question is whether the location and presentation of that language is sufficiently conspicuous to meet any of the three indicia outlined in the Staff Commentary.
The first of the indicia, "separate signature or initials on the agreement indicating that a security interest is being given" is clearly not met. There was no space for signing or initialing anywhere on the Agreement, let alone specifically near the security interest provision. While the regulations do not explicitly require a document creating a security interest be signed, the fact that the staff instructions reference a "separate signature" suggests an underlying assumption that it would be in addition to a more generalized signature on the agreement.
The second of the indicia, "placement of the security agreement on a separate page, or otherwise separating the security interest provisions from other contract and disclosure provisions," is a closer question. The security interest provision is plainly not on its own page and not separated by space or difference in font size, but it is distinguished from other text on the second of four pages of the Agreement through the use of bolded text surrounded by a box.
In each of these cases, the conspicuousness of the placement and design of the security interest language was affected by its appearance, its location within the document, and its proximity to a signature. The placement of the language in this case is not particularly separate; it is located as one among twenty-six numbered paragraphs of similar size. Its location on the second of four pages, rather than buried deeper in a longer text, is not altogether obscured but could not on its own be considered to be "separated." However, the bolded text and the box around the text do effectively draw more attention to this provision and the one other boxed provision than to the other provisions of the agreement. Given that there is no signature anywhere on the Agreement, there is no nearby signature to draw additional attention to this text as there was in Lyon. On this second of the three indicia, I conclude
Courts are split about whether the third of the indicia, reference to a specific amount of deposited funds or to a specific deposit account number, is met where the text contains language such as "all individual and joint accounts you have with the Credit Union now and in the future," as the text states in this case. In Lyon, Judge Marlar found that this was met where the language "specifically references any and all of Debtors accounts with [the credit union]." 2010 WL 3777827, at *4. In contrast, in Gardner, Judge Bredar found that this was not met where "the provision simply refers to `any' and `all' accounts with Defendant." 864 F.Supp.2d at 420. Given the purpose of these indicia, to provide evidence of a consumer's awareness and specific intent to grant a security interest, I hold that the language in this Agreement referring to "all" accounts is insufficient. Referring to a specific account number belonging to a consumer or highlighting the full amount that is currently in such an account that could be taken if the security interest were executed draws attention to the nature of the agreement, and particularly the potential stakes for the cardholder, in a significantly more pointed manner than simply referring in an undifferentiated fashion to "any" or "all" accounts.
Compliance with one of the three indicia is necessary but not sufficient to establish that the security interest was affirmatively agreed to and specifically intended to be granted. Ultimately, my analysis of the various indicia and other indications of awareness and intent must be in service of these framing requirements. The lack of any signature or other acknowledgment of receipt of the Agreement is a significant obstacle to the validity of this security agreement. AAFCU argues that the earlier signed Certificate acknowledging that use of the credit card meant Martino accepted the not-yet-provided Agreement, the separated language of the Agreement, and Martino's use of the credit card combine to make out Martino's affirmative agreement to the security interest. AAFCU emphasizes that Martino's use of the credit card was an affirmative act, and even though she had been approved for the credit card and provided with an activated card, if she had chosen not to use the card, she would never have been subject to the conditions of the Agreement and the security interest at issue here.
AAFCU relies upon cases standing for the proposition that use of a credit card constitutes agreement to be bound by the terms of the credit card agreement. See, e.g., Ineman v. Kohl's Corp., 2015 WL 1399052, at *4 (W.D.Wis. Mar. 26, 2015) (holding that an arbitration clause in a credit card agreement is valid because the cardholder used the credit card even if the cardholder did not sign, read, or receive the credit card agreement); Brown v. Federated Capital Corp., 991 F.Supp.2d 857, 861 (S.D.Tex.2014)("In the context of a credit card, a party is bound by the terms of a credit card agreement if the party uses the credit card, even if the party does not sign the credit card agreement and even if the credit card agreement is not delivered to the party."); Heiges v. JP Morgan Chase Bank, N.A., 521 F.Supp.2d 641, 647 (N.D.Ohio 2007)("under Ohio law credit card agreements are contracts whereby the issuance and use of a credit card creates a legally binding agreement.") (internal quotation marks omitted); Karmolinski v. Equifax Info. Servs., LLC, 2005 WL 7213289, at *2 (D.Or. Oct. 31, 2005) ("Once plaintiff was issued the card and proceeded to use it to obtain goods or
Each of the cases cited by AAFCU concern whether a valid contract exists where a party may not have signed an agreement but did use a card. None of the cases prove persuasive on the issue in this case — whether use of a card can constitute "affirmative agreement" that is sufficient to meet any heightened requirement under TILA or a state consumer protection statute. TILA and the MCCCDA specifically require the level of intent and agreement for a valid security interest to exceed that required for a standard contract. See Official Staff Commentary on Regulation Z, 2006 WL 3947402 (routine contract language is insufficient).
Similarly, although a duty to read can sometimes be the foundation for finding a contract, see, e.g., Rivera v. Centro Medico de Turabo, Inc., 575 F.3d 10, 20 (1st Cir. 2009)("A party is deemed to know the contents of a contract to which he assents," concerning an arbitration clause in a signed contract), that principle is not helpful here. While deeming a party to have knowledge or finding constructive knowledge may be sufficient for a standard contract, see Consol. Edison Co. of New York v. United States, 221 F.3d 364, 371 (2d Cir.2000)("In general, individuals are charged with knowledge of the contents of documents they sign — that is, they have `constructive knowledge' of those contents."), it is plainly insufficient here, where the regulations include requirements above and beyond those necessary to create a contract, including affirmative agreement.
AAFCU has not directed me to, nor have I found, any cases in which courts have granted a valid security interest based on disclosures contained in an unsigned document provided only once a credit card has been provided to the consumer. The only case to address similar facts is Gardner, 864 F.Supp.2d 410. The loan application in Gardner contained language that read, "by signing below, using, or permitting another to use the credit card(s), you agree that you will be bound by the VISA agreement accompanying the credit card(s)." Id. at 418. The defendant later sent disclosures that included language about the security interest at the time the credit card account was granted and then annually thereafter. Id. at 418-19. The defendants in Gardner did not produce a signed loan application, but they argued that it is reasonable to assume that the plaintiffs signed the loan application since the plaintiffs were ultimately provided with a credit card. Id. at 418. The claims in Gardner parallel those made by Martino here. While AAFCU attempts to distinguish Gardner because the loan application
In Gardner, Judge Bredar found none of the three indicia applicable, and noted that the timing of the disclosures — only after the consumer was granted the credit card — was inconsistent with the requirement that the card-holder understand that granting a security interest is a condition of getting the account in the first place. Id. at 420. While the timing of the disclosure contemporaneously with the provision of an activated card is not necessarily problematic, see 12 C.F.R. § 226.5(requiring a security interest disclosure in § 226.6 to occur before the first transaction), timing is still important because affirmative agreement has to take place after possible knowledge of the terms. Although not made explicit, the holding in Gardner necessarily assumes that an earlier affirmation that use of the credit card would constitute acceptance of terms of a not-yet-provided agreement was insufficient.
Given AAFCU's composite theory that the various documents and Martino's use of the credit card combine to reach the level of specific intent and affirmative agreement required to establish the security interest, I must look beyond the Agreement itself. AAFCU claims that Martino's signature on the Certificate established that her use of the credit card would constitute acceptance of the terms of the Agreement. Therefore, just as the security interest provision of the Agreement had to be sufficiently conspicuous, the Certificate that Martino signed must also be sufficiently clear and conspicuous in order for me to be able to draw the inference that Martino knowingly and intentionally intended her use of the card to function as acceptance of the Agreement. The text on the Certificate, however, is extremely small and the text about acceptance of the Agreement is not separated from the other text in any way. The relevant text has the quality of prototypical contract boilerplate language. More importantly, the Agreement itself was not provided at the time that Martino signed the Certificate, so it is impossible that Martino could have understood the full import of what she was signing. AAFCU's argument that the Certificate provides a hook for treating the subsequent use of the card as an affirmative agreement in the context of the facts of this case would be to permit AAFCU to structure the transaction in precisely the type of confusing and misleading "disclosure" that TILA and MCCCDA were designed to prevent.
The purpose of TILA is "to promote the `informed use of credit,' which TILA explicitly says results from `an awareness of the cost thereof by consumers ...'" Shaner v. Chase Bank USA, N.A., 587 F.3d 488, 492 (1st Cir.2009)(quoting 15 U.S.C. § 1601(a)). TILA is "intended to balance scales thought to be weighed in favor of lenders and is thus to be liberally construed in favor of borrowers." Bizier v. Globe Fin. Servs., Inc., 654 F.2d 1, 3 (1st Cir.1981). The provisions of TILA and MCCCDA at issue here preventing offsets and adding elements necessary to establish a consensual security interest are directed to ensuring that consumers' decisions about granting such an interest be made knowingly and intentionally. The manner in which AAFCU attempted to establish the security interest in this case falls short of those requirements.
Taking the three indicia of specific intent laid out in the Official Staff Commentary together as a starting point, and focusing on the nature of the awareness required — awareness that the security interest is a condition of receiving the credit
MCCCDA is codified in Chapter 140D of the Massachusetts General Laws. Section 34 of this statute provides, "A violation of this chapter, or any rule or regulation issued hereunder, shall constitute a violation of chapter ninety-three A." Mass. Gen. Laws c. 140D § 34. Given that I have found above that the AAFCU's disclosures were inadequate to create a consensual security interest and that the AAFCU's removal of funds from Martino's depository accounts was therefore an unlawful offset under 209 C.M.R. 32.12, I also must conclude that such removal is a violation of Mass. Gen. Laws c. 93A.
For these reasons, it is hereby ORDERED that:
1. Plaintiff's initial Motion for Partial Summary Judgment (Doc. No. 21) is deemed MOOT;
2. Plaintiff's Amended Motion for Summary Judgment (Doc. No. 44) is GRANTED;
3. Defendant's Cross-Motion for Summary Judgment (Doc. No. 37) is DENIED, and it is FURTHER ORDERED that:
The parties, on or before September 16, 2015, shall submit a proposal for bringing this case to final judgment, including resolution of the question of class certification, now that liability is established.
209 CMR 32.12(4)(c) (capitalization in original).
The initial motion for summary judgment and opposition focused in part on the text of paragraph (c), but at the summary judgment hearing, counsel for AAFCU confirmed that it was not claiming an exception to the offset prohibition through a plan as specified under paragraph (c). In response, counsel for Martino stated that, in the absence of AAFCU's reliance on a plan under subsection (c), Martino was not pressing arguments under subsection (c) such as those related to the absence of the capitalized language.
