Peter C. Bronson: New rules for credit card firms?
Home foreclosures are not the only segment of the economy to show trouble signs. For example, consumer defaults on auto loans have reached such a high level that “repo” companies have begun advertising, at least on the Internet. In addition, credit card debt continues to rise; the Wall Street Journal has reported that borrowing from credit cards and other unsecured lines of credit increased an annualized 11.3 percent in November 2007 to $937.5 billion. There are reports that the average American household has $8,000 or more in credit card debt.
Even in the best economic times, the credit card industry has a huge impact on American consumers. The Journal quoted a 2006 U.S. Government Accountability Office study that said there were almost 700 million outstanding credit cards and that U.S. consumers had charged some $1.8 trillion on their credit cards in 2005.
Some in Congress see a need for reform. Rep. Carolyn B. Maloney (D-N.Y.), who chairs the House Financial Institutions and Consumer Credit Subcommittee, has just introduced the “Credit Cardholders’ Bill of Rights Act of 2008” (H.R. 5244). Rep. Maloney describes her bill as comprehensive credit card reform legislation, designed to curtail industry abuses while fostering free market competition. The bill was introduced with 40 co-sponsors – all Democrats.
“A credit card agreement is supposed to be a contract, but in recent years cardholders have lost the ability to say no to unfair interest rate hikes and fees,” Rep. Maloney said in a press release.
Some of the provisions of the Maloney bill include the following:
Card companies would be required to give 45 days’ notice of any interest rate increases.
Companies would be prohibited from charging interest on debt that is paid on time during a grace period (preventing the so-called “double-cycle billing” practice).
Cardholders would be permitted to set a fixed credit limit on their cards that could not be exceeded; and in turn, credit card companies would be prohibited from charging those cardholders with “over limit fees”.
Companies would be required to mail credit card billing statements at least 25 days before the due date.
Payments received by 5 p.m. Eastern time on the due date would have to be considered timely.
Card companies would be prohibited from retroactively increasing interest rates on the existing balance of a cardholder in good standing for reasons unrelated to the cardholder’s behavior with that card.
The Maloney bill has already encountered opposition. “We are concerned that the changes outlined in this legislation would unintentionally force higher costs and reduce access to the very people it intends to help,” the American Bankers Association said in a written release. In addition, the Wall Street Journal quoted Kenneth Clayton, managing director of the American Bankers Association’s Card Policy Council, who said the proposed legislation “impacts our ability to price our products, manage risk, and ultimately our ability to offer low-rate competitive products for consumers.”
It will be interesting to track the progress of the bill through Congress, especially in an election year. It seems likely that support and opposition, at least initially, will break down along Democrat/Republican lines.
If you have been either a lessor or lessee of space in a shopping center of any size, you have probably encountered lease provisions relating to who pays for maintenance of the center’s “common areas”. Typically, each tenant bears a pro rata share of maintenance costs, based on the ratio of the tenant’s square footage to the over-all square footage of the center. The lease provisions can lead to confusion, and litigation.
In a recent California case, an appellate court has allowed a commercial tenant to bring a fraud claim against a lessor, where the written lease did not accurately set forth the square footage of either the tenant’s space or the entire center.
In the case of McClain vs. Octogon Plaza, LLC, a lease provided that the tenant would be liable for her pro rata share of the over-all operating expenses of the center, based on the ratio of her square footage to the total square footage of the center. The lease stated the square footage numbers, but said that these numbers were just “an approximation which the Parties agree is reasonable and any payments based thereon are not subject to revision whether or not the actual size is more or less.” The lease also recited that the lessee “had made such investigation as it deems necessary.”
The lessee began to suspect that the square footage of her space had been overstated in the lease, and that of the shopping center understated. She brought a lawsuit against the lessor for misrepresenting the figures; and while the Superior Court, based on the lease language, threw out the case without a trial, the Court of Appeal has now reversed the decision and has given the tenant an opportunity to go forward with her suit.
As expected, the lessor argued that the lessee had had the opportunity to measure the space herself; that the lease said the numbers stated were only “an approximation”; and that by the lease terms, the tenant had agreed that the figures were reasonable. But the Court of Appeal held that those lease provisions were just an attempt to shield the lessor from liability for possible fraud. The Court said that the lessor could not escape liability for intentional misrepresentation merely by inserting language in a lease to the effect that a misrepresentation was to be deemed reasonable.
Nor was the Court impressed by the fact that the lessee had had an opportunity to measure the space herself; the Court said that by putting precise square footage numbers in the lease, the lessor may have discouraged the lessee from taking her own measurements. It will now be up to a judge or jury to decide whether there was fraud.
This decision may have an effect far beyond the relatively circumscribed world of shopping center landlords and tenants. It may encourage parties to file lawsuits when they believe they have been induced to stipulate to facts that were not true or conditions that were misrepresented, and that under those circumstances they should not be bound by unfair lease language even if that language is straightforward and unambiguous.
Peter C. Bronson, of Nevada County, is a partner in the Sacramento offices of Kelly Lytton & Vann LLP. His law practice emphasizes creditors’ rights, insolvency, commercial litigation and mediation. Write him at firstname.lastname@example.org. This column is not intended as legal advice in any specific business situation or dispute; specific strategic decisions always depend upon the specific facts.
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