The U.S. Court of Appeals for the Third Circuit recently ruled in favor of a credit card issuer in an unauthorized charges case, holding that: (1) Section 1643 of TILA does not provide a credit card holder with a right to reimbursement; (2) because the cardholder vested his personal assistant with apparent authority, his claims under sections 1643 and 1666 of TILA against a credit card company could not stand; and (3) that Pennsylvania's economic loss doctrine barred the plaintiff's common law negligence claim against a credit card company for not detecting fraudulent charges made by the plaintiff's personal assistant. A copy of the opinion is attached.
Plaintiff, a credit card holder, disputed over $1 million in paid and unpaid charges on his Chase credit card, which he alleged were fraudulently made by his personal assistant. Plaintiff's personal assistant had been responsible for, among other things, picking up Plaintiff's bills from a P.O. Box, opening the bills, preparing and presenting checks for Plaintiff to sign and balancing Plaintiff's check book. Over a period of seven years, Plaintiff's assistant withdrew cash advances from a Chase credit card in Plaintiff's name on a daily basis, while paying the Chase bills using either forged checks or on-line payments from Plaintiff's bank account. On three occasions, these transactions triggered Chase's fraud detection service, and each time Chase made calls to Plaintiff's home phone, which were either never returned, or returned by an unknown individual, who was able to verify the account information. When Plaintiff discovered the fraud, he sent a letter to Chase disputing the paid and unpaid charges and subsequently filed this action against Chase for violation of Sections 1643 and 1666 of TILA and for common law negligence. Plaintiff sought, among other things, damages in the amount of all payments collected by Chase for money misappropriated and fraudulent purchases. The district court granted Chase's summary judgment motion on all counts and this appeal followed.
The 3rd Circuit affirmed the district court's order granting Chase's motion for summary judgment on all counts. The Court first addressed the issue of reimbursement and in doing so agreed with Chase's argument that Section 1643 of TILA does not provide a credit card holder with a right to reimbursement. The Court explained that this conclusion is consistent with the plain language of Section 1643, which places a ceiling on a card issuer's ability to sue a cardholder to recover fraudulent purchases but does not enlarge a card issuer's liability or give the cardholder a right to reimbursement.
The Court next addressed Plaintiff's claims under Sections 1643 and 1666, both of which the Court found were dependent on whether Plaintiff had vested his personal assistant with apparent authority to make charges to the Chase account. The Court looked to decisions of the Second and D.C. Circuits for guidance as to the application of the test for apparent authority, ultimately adopting the D.C. Circuit's more narrow interpretation that "[a]pparent authority is power to bind a principal which the principal has not actually granted but which he leads persons with whom his agent deals to believe that he has granted," noting that "by identifying apparent authority as a limitation on the cardholder's protections under § 1643 [of TILA], Congress recognized that the cardholder is oftentimes in the best position to identify fraud committed by its employees." As applied to this case, the Court found that Plaintiff's negligent omissions, particularly his failure to ever review his bank statement or exercise any oversight over his employee "led Chase to reasonably believe that the fraudulent charges were authorized," given that it was reasonable for Chase to believe that a prudent business person would oversee his employees and Chase reasonably relied on the continuous payment of the fraudulent charges. Accordingly, the Court held that Plaintiff had vested his assistant with apparent authority to use his Chase credit card, thus barring his Section 1643 and 1666 claims.
Finally, the Court found that Pennsylvania's economic loss doctrine, which provides that no cause of action exists for negligence that results solely in economic damages unaccompanied by physical or property damage, barred Plaintiff's negligence claim. The Court rejected Plaintiff's argument that a narrow exception to the economic loss doctrine for those who engage in supplying information to others for pecuniary gain should apply in this case, ultimately holding that the Pennsylvania Supreme Court would likely hold that the economic loss doctrine would act as a bar to Plaintiff's negligence claim, given that Plaintiff's damages were economic damages unaccompanied by physical or property damage and that Chase is not in the business of providing Plaintiff with information for pecuniary gain. In so holding, the Court noted that "Pennsylvania public policy weighs against imposing liability because cardholders, and not card issuers, are in the best position to prevent employees with access to security information from committing fraud."
Ralph T. Wutscher
Kahrl Wutscher LLP
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