# Petition for Writ of Certiorari — Towers World Airways, Inc. v. PHH Aviation Systems, Inc.

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Petition for Writ of Certiorari
- **Published:** January 1, 1991
- **Citation:** 502 U.S. 823

## Text

~ | Supren Court us,
60-1980 FILLED
No 0. JUN 26 i899 |
SS a
IN THE

Supreme Court of the United States

OCTOBER TERM, 1990

—_ >

TOWERS WORLD AIRWAYS, INC., THE TOWERS ORGANIZA4-
TION, INC. and TOWERS FINANCIAL CORPORATION,

Petitioners,
—_V—_—
PHH AVIATION SYSTEMS, INC.
and PHH Group, INC.,

Respondents.

PETITION FOR A WRIT OF CERTIORARI TO
THE UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT

DALE A. SCHREIBER
STEPHEN P. KRAMER
Counsel of Record
for Petitoners
PROSKAUER ROSE GOETZ
& MENDELSOHN
Attorneys for Petitioners
1585 Broadway
New York, New York 10036
(212) 969-3000

June 25, 1991

a a

QUESTION PRESENTED

Does the Truth in Lending Act limit the liability of a credit
card hoider for charges made on the card by a previously
authorized user after notice to the card issuer that the card
was being used in an unauthorized manner?

il

List of Parties

1) Petitioners

2)

(Plaintiffs-Appellants
below):

—o |
(Defendants-Appellees
below):

Towers World Airways
Inc., The Towers
Organization, Inc., and
Towers Financial
Corporation.

PHH Aviation Systems Inc.
and PHH Group, Inc.

ili

TABLE OF CONTENTS

Page
QUESTION PRESENTED ......ccccscceces i
EE ee ee ll
py Fe hay 8 iy y |: Se Vv
Ce 2
EEE ee oe ee eee 2
STATUTES AND REGULATIONS INVOLVED ... 2
Daraneeeen Ge bee CASE ow ww ee eee es 6
REASONS FOR GRANTING THE WRIT ........ 8
EE eee 16

APPENDIX

Second Circuit Opinion, Towers World
Airways Inc. et al. v. PHH Aviation
Systems Inc. et al., dated May 17,
ne ee ee le sw ee es la

iV

District Court Memorandum Opinion and
Order, Towers World Airways Inc. et
al. v. PHH Aviation Systems Inc. et
al., dated May 30, 1990 ...........

Federal Trade Commission Letter, dated
Ss Baoan ea ee

Vv

TABLE OF AUTHORITIES

Cases Page

Cities Serv. Co. v. Pailet, 452 So.2d

319 (La. Ct. App. 4th Cir. 1984) ........... 14
Martin v. American Express, Inc.,

361 So.2d 597 (Ala. Civ. App. 1978) ........ 15
Matter of Shell Oil Co., 95 F.T.C. 357 (1980) ..... 14

Standard Oil Co. v. Steele, 22 Ohio Misc. 2d 27,
489 N.E.2d 842 (Mun. Ct. Akron Co. 1985) .... 15

Walker Bank & Trust Co. v. James, 672 P.2d 73
(Utah 1983), cert. denied, 466 U.S. 937 (1984) .. 15
Statutes and Regulations

Truth in Lending Act (15 U.S.C.

Sg Sf i rte, oa? passim
ae Uae. OD 2 oc ds 6 a eee 2
Be Un BE 6 0 6 6 0s bere 2

ae UB... § SI kc 8 ae ee 2

vi
Statutes and Regulations (con’t.)

Federal Reserve Board Regulation Z

by Eat FR 8 ee

Federal Rules of Appellate Procedure

Se 6s a eee ee

S. Rep. No. 259, 100th Cong., 2d Sess. 1,
reprinted in 1988 U.S. Code Cong. &

Rae, TE Be cs bee ee whee Cowsees

Act of Oct. 26, 1970, Pub. L. No. 91-508,
tit. V, 84 Stat. 1126, amending Truth in
Lending Act of 1970, 15 U.S.C. § 1601-81(t)

Other Authorities

Consumer Cred. Guide (CCH) ¢ 3302 (1996) ...

R. Rohner, F. Miller, S. Mancuso, The Law of
Truth in Lending, { 10.03 at 510-18

er ee ee ee eee

Note, Credit Cards: Distributing Fraud

Loss, 77 Yale L.J. 1418 (1968) .........

Weistart, Consumer Protection In The Credit
Card Industry: Federal Legislative Control,

70 Mich. L. Rev. 1476 (1972) ..........

IN THE
Supreme Court of the United States
OCTOBER TERM, 1990
No. 90 -

+
TOWERS WORLD AIRWAYS, INC., THE TOWERS

ORGANIZATION, INC. and TOWERS FINANCIAL
CORPORATION,

Petitioners,
— Vv. —
PHH AVIATION SYSTEMS, INC. and PHH GROUP, INC.,

Respondents.

PETITION FOR A WRIT OF CERTIORARI TO
THE UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT

Towers World Airways Inc., The Towers Organization
Inc. and Towers Financial Corporation petition for a writ of
certiorari to review the decision of the United States Court of
Appeals for the Second Circuit.

2

OPINIONS BELOW

The summary judgment Memorandum Endorsement of the
district court granting defendants’ counterclaim against
petitioners (Appendix, infra 13a) is unreported. The opinion
of the Court of Appeals affirming the judgment of the district
court (la) is not yet reported.

JURISDICTION

The opinion of the Court of Appeals (la) was rendered
on May 17, 1991. Issuance of the mandate was not stayed,
despite petitioners’ application under Rule 41(b) of the
Federal Rules of Appellate Procedure for such a stay. The
jurisdiction of this Court is invoked under 28 U.S.C.
§ 1254(1). Jurisdiction in the District Court was invoked
under 28 U.S.C. § 1332(a)(1). Jurisdiction in the Court of
Appeals was based on 28 U.S.C. § 1291.

STATUTES AND REGULATIONS INVOLVED

Section 1602(0) of the Truth in Lending Act, 15 U.S.C.
§ 1602(0), provides:

The term ‘unauthorized use’ as used in section
... [1643 of this title] ... means a use of a
credit card by a person other than the
cardholder who does not have actual, implied,
or apparent authority for such use and from
which the cardholder receives no benefit.

Section 1643 of the Truth in Lending Act, 15 U.S.C.
§ 1643, provides:

3

(a)(1) Liability of holder of credit card. A
cardholder shall be liable for the unauthorized
use of a credit card only if — (A) the card is
an accepted credit card; (B) the liability is not
in excess of $50; (C) the card issuer gives
adequate notice to the cardholder of the
potential liability; (D) the card issuer has
provided the cardholder with a description of
a means by which the card issuer may be
notified of loss or theft of the card, which
description may be provided on the face or
reverse side of the statement required by
section 127(b) or on a separate notice
accompanying such statement; (E)_ the
unauthorized use occurs before the card issuer
has been notified that an unauthorized use of
the credit card has occurred or may occur as
the result of loss, theft, or otherwise; and (F)
the card issuer has provided a method whereby
the user of such card can be identified as the
person authorized to use it.

(2) For purposes of this section, a card
issuer has been notified when such steps as
may be reasonably required in the ordinary
course of business to provide the card issuer
with the pertinent information have been
taken, whether or not any particular officer,
employee, or agent of the card issuer does in
fact receive such information.

(b) Burden of proof. In any action by a
card issuer to enforce liability for the use of a
credit card, the burden of proof is upon the

4

card issuer to show that the use was authorized
or, if the use was unauthorized, then the
burden of proof is upon the card issuer to
show that the conditions of liability for the
unauthorized use of a credit card, as set forth
in subsection (a), have been met.

(c) Liability imposed by other laws or by
agreement with issuer. Nothing in this section
imposes liability upon a cardholder for the
unauthorized use of a credit card in excess of
his liability for such use under other applicable
law or under any agreement with the card
issuer.

(d) Exclusiveness of liability. Except as
provided in this section, a cardholder incurs
no liability from the unauthorized use of a
credit card.

12 C.F.R. § 226.12(b), as promulgated by the Federal
Reserve Board, provides:

(1) Limitation on amount. The liability of
a cardholder for unauthorized use of a credit
card shall not exceed the lesser of $50 or the
amount of money, property, labor, or services
obtained by the unauthorized use before
notification to the card issuer under
paragraph (b)(3) of this section.

(2) Conditions of liability. A cardholder
shall be liable for unauthorized use of a credit
card only if:

(i) The credit card is an accepted credit
card;

5

(ii) The card issuer has provided adequate
notice* of the cardholder’s maximum potential
liability and of means by which the card issuer
may be notified of loss or theft of the card.
The notice shall state that the cardholder’s
liability shall not exceed $50 (or any lesser
amount) and that the cardholder may give oral
or written notification, and shall describe a
means of notification (for example, a
telephone number, an address, or both); and

(iii) The card issuer has provided a means
to identify the cardholder on the account or the
authorized user of the card.

(3) Notification to card issuer.
Notification to a card issuer is given when
steps have been taken as may be reasonably
required in the ordinary course of business to
provide the card issuer with the pertinent
information about the loss, theft, or possible
unauthorized use of a credit card, regardless of
whether any particuiar officer, employee, or
agent of the card issuer does, in fact, receive
the information. Notification may be given, at
the option of the person giving it, in person,
by telephone, or in writing. Notification in
writing is considered given at the time of
receipt or, whether or not received, at the
expiration of the time ordinarily required for
transmission, whichever is earlier.

(4) Effect of the other applicable law or
agreement. If state law or an agreement
between a cardholder and the card issuer

6

imposes lesser liability than that provided in
this paragraph, the lesser liability shall govern.

(5) Business use of credit cards. If 10 or
more credit cards are issued by one card issuer
for use by the employees of an organization,
this section does not prohibit the card issuer
and the organization from agreeing to liability
for unauthorized use without regard to this
section. However, liability for unauthorized
use may be imposed on an employee of the
organization, by either the card issuer or the
Organization, only in accordance with this
section.

* ‘Unauthorized use’ means the use of a
credit card by a person, other than the
cardholder, who does not have actual,
implied, or apparent authority for such
use, and from which the cardholder
receives no benefit.

STATEMENT OF THE CASE

This case concerns the extent of protection from liability
for unauthorized credit card use that the Truth in Lending Act
provides to cardholders who have informed card issuers that
a card is being used improperly. The Act reflects a clear
congressional intent that the risk of loss fall on the card
issuer whenever, after notification to the card issuer of the
loss, theft, or unauthorized use of a card, unauthorized use
occurs, since the issuer is in the best position to develop
technological or other means to limit credit card fraud.

7

Nevertheless, the opinion below carves out an exception to
this policy where the unauthorized use is by a formerly
authorized user, even when the card issuer has been notified
that the user is no longer authorized to use the card. This
holding dramatically alters the allocation of risk and
responsibility for fraudulent credit card use under the Act.
The opinion also precludes a cardholder from limiting its
liability by notifying the issuer that a third-party card may be
used only in a specified manner.

The card issuer in the case at bar — respondent PHH
Aviation Systems Inc. ("PHH") — issued a credit card to
petitioner Towers World Airways Inc. ("Towers") to
purchase fuel and other aircraft-related goods and services for
a corporate jet leased by Towers from PHH. Towers
designated Fred Jay Schley as the chief pilot of the leased jet
and gave him permission to make purchases with the credit
card for Towers’ use of the plane. Towers had granted
Schley authority to use the credit card for flights by Towers’
executives, but not for charters by _ third parties.
Nevertheless, Schley used the credit card to provide service
both to Towers’ executives and to third parties who chartered
flights. Towers disputed the propriety of charges in
connection with these chartered flights, and the issuer,
respondent PHH, learned of the dispute. Schley incurred
$89,025.87 in connection with third party charters prior to
the cancellation of the card in August 1988.

PHH claimed the full amount of all charges incurred on
the account both before and after it was notified that
unauthorized use may have occurred. The District Court
granted PHH summary judgment and the Court of Appeals
affirmed. The Court of Appeals held that Towers had raised
no defense to the issuer’s summary judgment motion by

8

contending that the issuer was on notice that the credit card
was being used in an unauthorized manner.

The Court of Appeals reasoned that because the third-
party card user was properly in possession of the credit card
— Towers had voluntarily entrusted the card to Schley — the
cardholder could not avail itself of any of the limitations of
liability found in the Truth in Lending Act for unauthorized
use, even for use that occurred after the issuer became aware
of the claimed unauthorized use. The Act defines
“unauthorized use” as use made without "actual, implied or
apparent authority.” The Court of Appeals reasoned that any
use of a credit card by a formerly authorized user — even use
that occurred after the cardholder informed the issuer that the
user’s authority had been limited or withdrawn — should be
deemed to be use made with the “apparent authority” of the
cardholder and thus outside the protection of the Act. The
Court of Appeals also held that the user’s “apparent
authority” could not be limited by notification of the
limitation to the card issuer.

REASONS FOR GRANTING THE WRIT

The credit card is an essential part of economic life in
modern America. In 1987, some 105.5 million people owned
801.7 million credit and charge cards. The outstanding
balances on revolving credit totalled $142 billion as of
September 30, 1987.' A great proportion of credit cards are
issued to more than one user — to spouses, to other family

1 S. Rep. No. 259;°-100th Cong., 2d Sess. 1 (Fair Credit And Charge
Card Disclosure Act of 1988), reprinted in 1988 U.S. Code Cong. &
Admin. News, 3936, 3937.

9

members, and to employees. These third-party users have no
direct contractual relationship with the card issuers. This
case involves the allocation of risk for improper credit card
use by third-party credit card users who have been given
authority to use the card by the cardholder.

All credit card agreements are subject to the Truth in
Lending Act, 15 U.S.C. § 1601 et seg., and Federal Reserve
Board Regulation Z, 12 C.F.R. § 226 et seg. Congress
adopted the provisions pertaining to credit cards in 1970 in
response to widespread concern about the proliferation of
credit cards and the reported attempts of some card issuers to
hold their customers responsible for charges incurred by
thieves or others acting without the cardholder’s
authorization. One part of the legislative response was to ban
the unsolicited issuance of credit cards. Another was the
enactment of criminal sanctions for credit card fraud.’

However, the most important part of that legislative
response was to set explicit limitations on a customer’s
liability for unauthorized credit card use. Specifically, the Act
places a $50 upper limit on the cardhoider’s liability for
unauthorized use. 15 U.S.C. § 1643(a)(1).

The Court of Appeals’ decision in the case at hand
carves a major exception out of this statutory limit to
cardholder liability. It construes the Act so as to totally
eliminate the limitations of liability found in the Act for
unauthorized charges incurred by spouses, employees, or
other users who have been given a card for temporary or
limited purposes.

2 Act of Oct. 26, 1970, Pub. L. No. 91-508, tit. V, 84 Stat. 1126,
amending Truth in Lending Act, 15 U.S.C. § 1601-81(t) (1970).

10

In view of conflicting opinions among federal regulatory
agencies, state courts and federal courts, this case presents a
timely opportunity for the Court to consider and define the
limits of liability for unauthorized use of credit cards by
persons other than the cardholder.

The Act generally provides that the risk of unauthorized
use be placed on the credit card issuer, not the cardholder.
15 U.S.C. § 1643. The Court of Appeals creates a major
gap in the congressional policy of protecting the consumer
from unauthorized use. Under its opinion, a cardholder
cannot trigger the limitations of liability found in the Act by
notifying the issuer that the authority of a third-party user to
use a card has been limited or terminated.

The Court of Appeals based its limitation of the statutory
protection to cardholders in reliance on an intensely factual
(and essentially unsupportable) communication difficulty
between issuers and merchants of the limitations placed on
particular types of card use. It stated that "it is totally
unrealistic to burden the card issuer with the obligation to
convey tO numerous merchants whatever limitations the
cardholder has placed on the card user’s authority" (11a) (fn.
omitted). But most credit card issuers, with dial-in or other
on-line computer networks to their merchants, now possess
the technological ability to instantaneously convey to
merchants the fact that a card has been canceled or otherwise
restricted. Indeed Congress intended to place the risk of
credit card fraud on issuers in part to encourage the
development of this type of technology.’

3 See Note, Credit Cards: Distributing Fraud Loss, 77 Yale L.J. 1418,
1424-26 (1968).

T:\DOCS\WP51\FIRM\0400\9935.FS2 73816-0081497 (824) 06/25/91 10:06am

11

It is particularly germane that the Federal Reserve Board
and the Federal Trade Commission — each of which has
regulatory authority under 15 U.S.C. § 1607 to implement
the provisions of the Act — and various state courts have
taken positions contrary to that taken by the Court of Appeals
in this case.* As credit card use, and, in particular, third-
party credit card use, becomes even more important to the
economy, th.s conflict in interpreting the Truth in Lending
Act should be resolved.

A. The Court of Appeals restricted the limitations of
cardholder liability for unauthorized card use by third-party
users by employing reasoning that is contrary to the thrust of
the limitation of liability provisions of the Act and its
implementing regulations. In particular, the Court rejected
the defense that notice to the issuer of unauthorized use was
sufficient to make a previously authorized third-party’s use of
a card unauthorized.

The Court of Appeals reasoned that it is “totally
unrealistic to burden the card issuer with the obligation to
convey to numerous merchants whatever limitations the
cardholder has placed on the card user’s authority.” (11a).

The Court of Appeals’ analysis overlooks the fact that a
merchant’s lack of knowledge that a particular use is
unauthorized has no relevance in determining whether the
limitation of liability provisions of the Act apply. For even
if a third-party user validly possesses a card and has apparent
authority (from a merchant’s perspective) to use it, the Act
and the regulations explicitly provide that actual notice to the

4 See Appendix C and cases cited at p. 14-15, infra. Other state courts
have taken a position similar to that adopted by the Court of Appeals
below. Id.

12

issuer that the authority has been terminated precludes
imposition of liability upon the cardholder.

In particular, in allocating risk and responsibility for
unauthorized use in 15 U.S.C. § 1643(a)(1)(E), Congress has
provided that a cardholder may be held liable only if “the
unauthorized use occurs before the card issuer has been
notified that an unauthorized use of the credit card has
occurred or may occur as the result of loss, theft, or
otherwise."

Similarly, Regulation Z limits a cardholder’s liability to
no more than $50 “before notification to a card issuer" that
contains “pertinent information about the loss, theft, or
possible unauthorized use of a credit card" (emphasis added).
12 C.F.R. § 226.12(b)(1) and (3). The Federal Reserve
Board Official Staff Commentary on section 12(b)(3) of
Regulation Z states that notice to the card issuer needed to
trigger the protection of § 12(b) is “sufficient so long as it
gives the ‘pertinent information,’ which would include the
name or card number of the cardholder and an indication that
unauthorized use has or may have occurred" (emphasis
added). 1 Consumer Cred. Guide (CCH), ¢ 3302 (1990).
As one commentator has written:

It might seem self-evident that any continued
use of the card is unauthorized once the
cardholder so notifies the issuer. One could
read the regulation [12 C.F.R. § 226.12(b)(1)
and (3)] to mean that once the cardholder
notifies the issuer of ‘loss, theft, or possible
unauthorized use,’ this terminates the
cardholder’s liability for any further use of the
card (fn. omitted).

13

R. Rohner, F. Miller, J. Mancuso, The Law of Truth in
Lending, { 10.03 (Supp. 1989) at $10-8.

The Court of Appeals may have believed that it was
unrealistic to require an issuer to cancel an account (or bear
the risk of unauthorized use) once the issuer has been
informed that the card user believes a third-party user is
engaging in credit card fraud. Under the statutory scheme
adopted by Congress and as administered by the regulatory
agencies, this concern is misplaced.

Once the issuer receives notice, the Act enjoins the issuer
to act promptly and responsibly. If the issuer determines that
cancellation of the card is the only feasible means of
protecting itself, the issuer may condition continuation of the
card’s use upon the cardholder’s express assumption of the
risk of unauthorized use. If the issuer considers that it is too
draconian to cancel an entire account in the situation of
improper third-party card use, issuers can take technological
steps to code individual cards so that only the problematic
cards, and not the entire account, are canceled upon
notification of improper use. What the issuer cannot do, as
PHH did here, is absolutely nothing and then attempt to hold
the cardholder liable.

B. The two regulatory agencies with authority to
implement the provisions of the Act have taken a position
contrary to that of the Court of Appeals — a divergence of
view not acknowledged by the Court of Appeals. The
Federal Trade Commission, with the concurrence of the staff
of the Federal Reserve Board, has explicitly stated that the
limitations on cardholder liability found in the Act do extend
to use by third-party card users after the issuer has been
notified of unauthorized use.

14

In Matter of Shell Oil Co., 95 F.T.C. 357 (1980), the
Commission entered a consent decree requiring a card issuer
to limit the liability of a cardholder to $50.00 after receiving
notice that the authorized use of the card by a third-party user
had been revoked. The proposed consent decree was widely
published and commented on by the credit card industry
whose views were considered and rejected by the Federal
Trade Commission. In a letter from the Commission to the
president of the Consumer Bankers Association (18a), the
Commission, with the concurrence of the staff of the Federal
Reserve Board, wrote:

With respect to the definition of ‘unauthorized
use’ in Regulation Z, the Commission believes
that previously authorized use by a third
person becomes ‘unauthorized’ when the
cardholder revokes the authorization and so
notifies the card issuer. This position is
consistent with the definition of ‘unauthorized
use’ because the third person no longer has
apparent authority to use the card after
notification of revocation. Notification to the
card issuer is sufficient, not only to terminate
the third person’s apparent authority with
respect to the card issuer, but also with respect
to merchants that are the agents of the issuer
in the use and acceptance of the issuer’s credit
cards.

C. Various state courts have taken the same position to
that adopted by the Federal Trade Commission. For
example, in Cities Serv. Co. v. Pailet, 452 So.2d 319 (La.
Ct. App. 1984), the Louisiana Court of Appeals held that a
cardholder was not liable for uses that occurred after the

15

issuer was notified of possible unauthorized use by the
cardholder’s employee, even though the employee’s prior use
had been authorized. Accord, Standard Oil Co. v. Steele, 22
Ohio Misc. 2d 27, 489 N.E.2d 842 (Mun. Ct. Akron Co.
1985). Other state courts have taken the opposite view.
Walker Bank & Trust Co. v. Jones, 672 P.2d 73 (Utah 1983),
cert. denied, 466 U.S. 937 (1984); Martin v. American
Express, Inc., 361 So.2d 597 (Ala. Civ. App. 1978).

D. The Court of Appeals’ decision will adversely effect
a wide array of consumer interests. For example, the
congressional policy of limiting consumer liability for
unauthorized use is particularly important to separated and
divorced spouses. Frequently the non-cardholder spouse
incurs charges on a card after divorce or separation with no
intent of paying the cardholder, issuer or merchant for the
merchandise or services procured. The card issuer, upon
notice, can take precautions preventing this type of fraud
from occurring.

The congressional policy limiting cardholder liability for
unauthorized use is also important to small businesses, which
have cards issued for their employees’ use. The Court of
Appeals’ decision affords the employer no protection for an
employee’s improper card use. There is no policy or other
reason to place the responsibility for unauthorized charges on
the employer once it has notified the issuer that card use
should be limited or terminated.

The explicit policy of Congress was to place the risk of
fraudulent and unauthorized credit card use upon the issuer
since it is the issuer that is most likely to take efficient steps

16

to minimize fraud and unauthorized use.* The industry has
responded and taken many such steps. The industry’s
incentive to make innovations should not be reduced by
carving out a wholesale exception to the protection from
credit card fraud for usage by once-authorized third party
card users.

CONCLUSION

The petition for a writ of certiorari should be granted.

Respectfully submitted,

8 k coxalert ~

“Wd. Pf ? hh Lee (=

DALE A. SCHREIBER

STEPHEN P. KRAMER
Counsel of Record for
Petitioners

PROSKAUER ROSE GOETZ

& MENDELSOHN

1585 BROADWAY

NEW YORK, NEW YORK 10036

212 969-3000

June 25, 1991

5 See also, Weistart, Consumer Protection In The Credit Card Industry:
Federal Legislative Control, 70 Mich. L. Rev. 1476 1509-13 (1972).

APPENDIX

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UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT

+
No. 1041—August Term 1990
Argued: February 7, 1991 Decided: May 17, 1991
Docket No. 90-7909

TOWERS WORLD AIRWAYS, INC., THE TOWERS
ORGANIZATION, INC. and TOWERS FINANCIAL
CORPORATION,

Plaintiffs-Appellants,
aaa ke
PHH AVIATION SYSTEMS, INC. and PHH GROUP, INC.,
Defendants-Appellees.

4

Before:
LUMBARD, NEWMAN, and ALTIMARI,
Circuit Judges.

*

Appeal from the June 19, 1990, judgment of the District
Court for the Southern District of New York (Kevin Thomas
Duffy, Judge) requiring credit cardholder to pay credit card
issuer for charges incurred by person given credit card,
despite defense that use of card was "unauthorized" within

acta iia eit ati nai teat

2a
meaning of Truth in Lending Act, 15 U.S.C. § 1643(a)
(1988).
Affirmed.
%

JAY D. FISCHER, New York, N.Y. (Jeffrey
D. Marks, Alexander H. Schmidt,
Proskauer Rose Goetz & Mendelsohn,
New York, N.Y., on the brief), for
plaintiffs-appellants.

JAMES P. O’NEILL, New York, N.Y.
(Stephenie J. Lannigan, Victor Rivera,
Townley & Updike, New York, N.Y., on
the brief), for defendants-appellees.

s

JON O. NEWMAN, Circuit Judge:

The Truth-in-Lending Act, 15 U.S.C. § 1643(a) (1988),
places a limit of $50 on the liability of a credit cardholder for
charges incurred by an “unauthorized” user. This appeal
concerns the applicability of this provision to a card bearer
who was given permission by the cardholder to make a
limited range of purchases but who subsequently made
substantial additional charges on the card. The appeal is
brought by Towers World Airways, Inc. ("Towers"), a credit
cardholder, and two related corporations from the June 19,
1990, judgment of the District Court for the Southern District
of New York (Kevin Thomas Duffy, Judge) denying their
request for a declaratory judgment to absolve them of liability

' |

3a

for the sums charged and granting judgment for the card
issuer, PHH Aviations Systems ("PHH"), on its counterclaim
for the amounts charged. We conclude that the person
incurring the charges was not an “unauthorized” user within
the meaning of section 1643(a) and therefore affirm.

Background

In February 1988, PHH issued a credit card to Towers to
purchase fuel and other aircraft-related goods and services for
a corporate jet leased by Towers from PHH. World Jet
Corporation, a subsidiary of United Air Fleet, was
responsible for maintaining the aircraft. An officer of
Towers designated Fred Jay Schley, an employee of World
Jet, as the chief pilot of the leased jet and gave him
permission to make purchases with the PHH credit card at
least in connection with non-charter flights, which were used
exclusively by Towers executives. Notwithstanding United
Air Fleet’s agreement to pay the cost of fuel on chartered
flights, which provided service for other clients, Schley used
the credit card to charge $89,025.87 to Towers in connection
with such flights, prior to the cancellation of the card in
August 1988.

Towers filed a complaint in state court seeking a
declaratory judgment (i) absolving it of liability for any
charges incurred in connection with fuel purchases for
chartered flights, (ii) holding PHH responsible for knowingly
permitting these purchases and consequently for breaching the
credit agreement issued in connection with the PHH credit
card, and (iii) requiring an accounting and disgorgement of
all improperly charged amounts. After removing to federal
court, PHH moved for summary judgment on _ its
counterclaims seeking recovery for the $89,025.97 in unpaid
charges.

4a

The District Court granted PHH’s motion, denied
Towers’ prayer for declaratory relief, and entered judgment
for the full amount in dispute. Judge Duffy held Towers
liable under the terms of the credit agreement between
Towers and PHH, which provided that “[the] Aircraft
Operator shall be responsible for all purchases made with a
Card from the date of its issuance until the Aircraft Operator
reports that a card is lost, stolen, misplaced or cancelled by
calling PHH.” Judge Duffy further held that the Truth-in-
Lending Act, which limits a cardholder’s liability for
“unauthorized” uses, was inapplicable to charges incurred by
one to whom the cardholder has "voluntarily and knowingly
allow[ed]" access for another, limited purpose.

On appeal, Towers concedes liability under its credit
agreement with PHH but contends that summary judgment
was improperly granted on the question of whether the Truth-
in-Lending Act limits its liability to $50. The issues on
appeal are whether Schley’s use of the card to incur the
$89,025.97 in connection with chartered flights was
"unauthorized" within the meaning of the Truth-in-Lending
Act and whether that question was properly decided on
summary judgment.

Discussion

Congress enacted the 1970 Amendments to the Truth-in-
Lending Act, 15 U.S.C. §§ 1602(j)-(0), 1642-44 (1988), in
large measure to protect credit cardholders from unauthorized
use perpetrated by those able to obtain possession of a card
from its original owner. In addition to imposing criminal
sanctions for the most egregious cases, those involving fraud,
15 U.S.C. § 1644 (1988), the amendments enacted a scheme
for limiting the liability of cardholders for all charges by

ee

Sa

third parties made without “actual, implied or apparent
authority" and “from which the cardholder receives no
benefit." 15 U.S.C. §§ 1602(0), 1643 (1988). Where an
unauthorized use has occurred, the cardholder can be held
liable only up to a limit of $50 for the amount charged on the
card, if certain conditions are satisfied.' 15 U.S.C.
§ 1643(a)(1)(B) (1988); Credit Card Service Corp. v. FTC,
495 F.2d 1004, 1006 (D.C. Cir. 1974). Except as provided
in section 1643, "a cardholder incurs no liability from the
unauthorized use of a credit card.” 15 U.S.C. § 1643(d).

By defining “unauthorized use” as that lacking in “actual,
implied, or apparent authority,” Congress apparently
contemplated, and courts have accepted, primary reliance on
background principles of agency law in determining the
liability of cardholders for charges incurred by third-party
card bearers. See, e.g., Fifth Third Bank/VISA v. Gilbert, 17

1 15 U.S.C. § 1643(a)(1) (1988) provides:

A cardholder shall be liable for the unauthorized use of a credit card
only if —

(A) the card is an accepted credit card;

(B) the liability is not in excess of $50;

(C) the card issuer gives adequate notice to the cardholder of the
potential liability;

(D) the card issuer has provided the cardholder with a description of
a means by which the card issuer may be notified of loss or theft of
the card, which description may be provided on the face or reverse
side of the statement required by section 1637(b) of this title or on a
separate notice accompanying such statement;

(E) the unauthorized use occurs before the card issuer has been
notified that an unauthorized use of the credit card has occurred or
may occur as the result of loss, theft, or otherwise; and

(F) the card issuer has provided a method whereby the user of such
card can be identified as the person authorized to use it.

6a

Ohio Misc. 2d 14, 478 N.E.2d 1324, 1326 (1984); Walker
Bank & Trust Co. v. Jones, 672 P.2d 73, 75-76 (Utah 1983),
cert. denied, 466 U.S. 937 (1984); see also 12 C.F.R.
§ 266.12 n.22 (1990). Under the parameters established by
Congress, the inquiry into “unauthorized use” properly
focuses on whether the user acted as the cardholder’s agert
in incurring the debt in dispute. A cardholder, as principal,
can create express and implied authority only through
manifestations to the user of consent to the particular
transactions into which the user has entered. See Restatement
(Second) of Agency § 7 (1958).

In the pending case, there remains an unresolved issue of
fact as to whether Steven Hoffenberg, the Towers officer who
dealt with Schley, expressly or impliedly authorized Schley
to purchase fuel on chartered flights. Hoffenberg’s testimony
that he instructed Schley to limit his use of the card to
purchases “benefit[ting] . . . Towers’ use of the airplance”
supports the inference that Schley lacked both express and
implied authority to make the disputed purchases. Whether
Schley’s testimony to the contrary should be credited can be
resolved only by a factfinder. Accordingly, we cannot affirm
the grant of summary judgment on the theory that Schley
possessed express or implied authority.

A. Did the Card User Have Apparent Authority?

Unlike express or implied authority, however, apparent
authority exists entirely apart from the principal’s
manifestations of consent to the agent. Rather, the
cardholder, as principal, creates apparent authority through
words or conduct that, reasonably interpreted by a third party
from whom the card bearer makes purchases, indicate that the
card user acts with the cardholder’s consent. See Restatement
(Second) of Agency §§ 8, 27 (1958). Though a cardholder’s

Ta

relinquishment of possession may create in another the
appearance of authority to use the card, the statute clearly
precludes a finding of apparent authority where the transfer
of the card was without the cardholder’s consent, as in cases
involving theft, loss, or fraud. However elastic the principle
of apparent authority may be in theory, the language of the
1970 Amendments demonstrates Congress’s intent that the
category of cases involving charges incurred as a result of
involuntary card transfers are to be regarded as unauthorized
under sections 1602(0) and 1643. The description in section
1643 of the conditions precedent to an issuer’s recovery of up
to $50 from the cardholder for unauthorized uses clearly
assumes that cases of loss or theft fall within the definition of
unauthorized uses, see 15 U.S.C. § 1643(a)(1)(D) (1988)
(requiring that "the card issuer has provided the cardholder
with a description of a means by which the card issuer may
be notified of loss or theft of the card"); id. § 1643(a)(1)(E)
(unauthorized use must occur before the “card issuer has been
notified that an unauthorized use of the credit card has
occurred or may occur as the result of loss, theft, or
otherwise"), while section 1644’s imposition of criminal
penalties for "[f]raudulent use of credit cards" makes a
similar assumption with respect to fraudulently induced
transfers, id. § 1644 (1988).

Because the statute provides no guidance as to uses
arising from the voluntary transfer of credit cards, the general
principles of agency law, incorporated by reference in section
1602(0), govern disputes over whether a resulting use was
unauthorized. These disputes frequently involve, as in this
case, a cardholder’s claim that the card bearer was given
permission to use a card for only a limited purpose and that
subsequent charges exceeded the consent originally given by
the cardholder. Acknowledging the absence of express or

8a

implied authority for the additional charges, several state
courts have adopted the analysis of the Court of Civil
Appeals of Alabama in Martin vy. American Express, Inc..,
361 So. 2d 597, 600 (Ala. Civ. App. 1978), and declined to
apply the Truth-in-Lending Act to limit the cardholder’s
liability, reasoning that the cardholder’s voluntary relin-
quishment of the card for one purpose gives the bearer
apparent authority to make additional charges. See Cities
Service Co. v. Pallet, 452 So. 2d 319, 321-22 (La. Ct. App.
1984); Standard Oil Co. v. Steele, 22 Ohio Misc. 2d 27, 489
N.E.2d 842, 843-44 (1985); Michigan National Bank v.
Olson, 44 Wash. App. 898, 723 P.2d 438, 441 (1986);
Mastercard v. Town of Newport, 133 Wis. 2d 328, 396
N.W.2d 345, 348 (Wis. App. 1986).

Though we agree that a cardholder, in lending or giving
his card for one purpose, acts in a way that significantly
contributes to the appearance of authority, at least as
perceived by the third-party merchant, to make other
purchases, we need not decide whether voluntary
relinquishment for one purpose creates in every case apparent
authority to incur other charges. In the pending case, the
appearance of authority for Schley to purchase fuel on
chartered flights was established not only by Towers’ consent
to Schley’s unrestricted access to the PHH card but by other
conduct and circumstances as well.

Nothing about the PHH card or the circumstances
surrounding the purchases gave fuel sellers reason to dis-
tinguish the clearly .authorized fuel purchases made in
connection with non-charter flights from the purchases for
chartered flights. It was the industry custom to entrust credit
cards used to make airplane-related purchases to the pilot of
the plane. By designating Schley as the pilot and
subsequently giving him the card, Towers thereby imbued

9a

him with more apparent authority than might arise from
voluntary relinquishment of a credit card in other contexts.
In addition, with Towers’ blessing Schley had used the card,
which was inscribed with the registration number of the
Gulfstream jet, to purchase fuel on non-charter flights for the
seme plane. The only difference between these uses
expressly authorized and those now claimed to be
unauthorized—the identity of the passengers—was insufficient
to provide notice to those who sold the fuel that Schley
lacked authority for the charter flight purchases.

B. Was Apparent Authority Limited by Notice to the Card
Issuer?

Towers contends that, despite its own failure to have the
card cancelled, once PHH, as the card issuer, learned, either
through Towers or a third party, that Schley lacked authority
to make certain charges, any such transaction that Schley
entered into becomes an unauthorized use even if fuel sellers
reasonably perceived that Schley had apparent authority to
charge fuel purchases. Whether notifying the card issuer that
some uses (or users) of a card are unauthorized makes them
so has divided those courts that have considered the issue.
Compare Cities Service Co., 452 So. 2d at 320-22 (authority
terminated), and Standard Oil Co., 489 N.E.2d at 844
(same), with Martin, 361 So. 2d at 600-01 (notice to card
issuer ineffective), and Walker Bank, 672 P.2d at 75 (same).

With respect to this claim as well, the agency principles
incorporated in section 1602(0) remains Congress’s chosen
vehicle for establishing a card bearer’s authority, and whether
a cardholder can limit a card bearer’s authority by notifying
the card issuer must be resolved by looking first to these
principles and then to other indicia of Congressional intent
that might qualify the application of agency principles to

10a

credit card transactions. Under well-established principles of
agency law, codified in Restatement (Second) of Agency
§ 166 (1958), notice to a third party of limitations on an
agent’s authority qualifies the agent’s apparent authority to
act on the principal’s behalf. See Warner v. Central Trust
Co., 798 F.2d 167, 171 (6th Cir. 1986); Cox v. Pabst
Brewing Co., 128 F.2d 468, 472 (10th Cir. 1942);
H. Reuschlein & W. Gregory, Agency and Partnership 164
(1979). However, in making a purchase with a third-party
credit card, where the card issuer and the selling merchant
are distinct entities, a card bearer not only reaches an
agreement with one third party, the merchant, but also
indirectly deals with a different third party, the card issuer.
Use of a third-party credit card by its bearer is made possible
by arrangements, previously entered into by both the
merchant and the card issuer, that simultaneously obligate the
cardholder and the issuer to the merchant and the cardholder
to the card issuer each time the card is used to charge pur-
chases.”

The rule of agency law contained in section 166 of the
Restatement would permit the principal to qualify the
authority of an agent to make purchases from a merchant by
giving the merchant notice of the limitation. The limitation
would surely be effective in an ordinary three-party
arrangement in which an agent charges purchases on a

2 As compared to the other set of third parties, the selling merchants,
PHH would have been aware of different facts bearing on Schley’s
authority, not all of which could be attributed to Towers as the princi-
pal. Towers has not questioned and we therefore need not decide
whether an issuer seeking recovery for credit card charges under a
theory of apparent authority must establish that it, as well as the mer-
chant, reasonably believed the agent to have apparent authority.

lla

principal’s running account with a merchant. It is more
doubtful whether a principal can similarly avoid liability by
notifying the merchant of limitations on an agent’s authority
when an agent makes purchases using a credit card. Both
cardholders and merchants normally regard anyone
voluntarily entrusted with a credit card as having the right to
make any purchases within the card’s contractually specified
limits. But to whatever extent a cardholder can limit the
authority of a card user by giving notice to a merchant, we
do not believe he can accomplish a similar limitation by
giving notice to a card issuer. In four-party arrangements of
this sort, it is totally unrealistic to burden the card issuer with
the obligation to convey to numerous merchants whatever
limitations the cardholder has placed on the card user’s
authority.’

Finally, there is no substance to the argument that our
construction of the 1970 Amendments inadequately protects
cardholders against liability for charges made without their
consent. Admittedly, third-party credit cards ordinarily
permit the bearer to charge purchases made from a vast
number of merchants, and cardholders, who typically do not
know which merchants have contracted to accept the card,
cannot contact each merchant to selectively revoke a card
bearer’s authority. However, a cardholder need not do so to
prevent unauthorized use by one entrusted with the card. In
many cases, the cardholder can avoid unwanted charges

3 As framed by the Restatement, the notice rule is subject to certain
restrictions, such as the requirement that the principal’s communica-
tion of the limits on the agent’s authority must be clear. But the exist-
ence of these restrictions does not necessarily mean that the notive
rule itself is applicable in all contexts where those restrictions are
satisfied. See Restatement of Agency (Second) at § 166, comment e.

12a

simply by repossessing the card. Where a card issuer permits
a cardholder to cancel the card, and thereby any contractual
obligation to pay, a cardholder can limit his liability even if
unable to regain possession by cancelling his card. Even
where the card issuer also requires return of the card prior to
cancellation of the agreement, a cardholder who has tried and
failed to recover a card from an “estranged spouse, a
dishonest employee, or a disappeared ‘friend,’” R.J. Rohner,
F.H. Miller, J.H. Mancuso, The Law of Truth-in-Lending
{ 10.03[2][a], at S10-9 (Supp. 1989), likely can prevail on
the claim that the card user has stolen the card and that any
subsequent charges are for that reason unauthorized. Finally,
we note that by foreclosing card issuers from recovering
unauthorized charges from cardholders, section 1643(a)(1)
undoubtedly encourages card issuers to facilitate the
cancellation of cards once a possible unauthorized use has
been reported.

Because the disputed charges were not unauthorized
within the meaning of 15 U.S.C. §§ 160Z(0) and 1643(a)(1),
PHH was entitled to recover their full value from Towers
under their credit agreement.

The judgment of the District Court is affirmed.

13a
ENDORSEMENT

Towers World Airways, Inc., The Towers
Organization, Inc. and Towers Financial
Corporation, Plaintiffs, v. PHH Aviation Systems,
Inc., Defendants, and PHH Group, Inc. 88 Civ.
7303 (S.D.N.Y.)

Defendants PHH Aviation Systems, Inc. ("AvSystems”")
and PHH Group, Inc. ("PHH") bring this motion for
summary judgment on their counterclaim, pursuant to Fed. R.
Civ. P. 56(c), against plaintiffs Towers Financial Corporation
("Towers Financial") and Towers World Airways, Inc.
("Towers Airways"), (or together ("Towers"), alleging
Towers failed to repay credit extended by PHH to Towers.
PHH seeks repayment in the amount of $89,025.87 plus
interest. Towers also seeks a declaratory judgment that no
monies are owed and that PHH was unjustly enriched in
amounts Towers already paid PHH.

In 1988, Towers leased an Aircraft from PHH. Sometime
thereafter, AvSystems, PHH’s credit account managers,
issued a PHH credit card jointly to Towers Airways and
Towers Financial for the purchase of aviation fuel and other
goods and maintenance services in connection with the
Aircraft. LaRosa Affid. 44 4-7. The PHH credit card was
then sent to World Jet Corporation ("World Jet"), a
subsidiary of United Air Fleet, Inc. ("UAF"), a company
designated to maintain and oversee the Aircraft. World Jet
then presented the PHH credit card to Fred Jay Schley, its
employee, who had been designated as Chief pilot for the
Aircraft by Steven Hoffenberg, Towers Financial’s President
and Chairman of the Board. Schley Depo. at 11.
Authorization was extended by Hoffenberg to Schléy, on

l4a

behalf of World Jet and UAF, for use of the PHH credit card
in connection with and for the benefit of the Aircraft on non-
charter flights, pursuant to a Towers-UAF agreement.

Specifically, the Towers’ management agreement with
UAF permitted UAF to charter the Aircraft for use by third
persons when the plane was not being used for the
transportation of Towers’. executives. The agreement
provided that the Aircraft was to be chartered "dry," which
apparently meant that fuel costs for charter flights were to be
borne by UAF rather than Towers. Hoffenberg Depo. at
22-23, 27-28. Schley, a UAF pilot, evidently used the PHH
credit card to purchase fuel and other services for the Aircraft
on chartered flights, in direct contravention of the Towers’
management agreement with UAF. By August 1988, before
the PHH credit line with Towers was terminated, Schley
charged $89,025.87 in unauthorized fuel costs. Hoffenberg
Depo. at 47-49; O’Neil Affid. 4 3. Towers claims that it
cannot be held accountable for Schley’s charges because such
charges were prohibited by Towers’ internal company policy
and Schley knew that use of the PHH card in connection with
charter flights was unauthorized. Because Schley purportedly
used the credit card while outside the scope of his
employment with Towers, Towers argues that it is thus not
liable for amounts still due and owing, traceable to Schley’s
allegedly private use.

I find otherwise. Towers knew or should have known of
the express conditions and terms for use of the PHH credit
card. In order to use the credit card, Towers, and by
extension its employees, agreed to be bound by certain terms
and conditions including that:

[the] Aircraft Operator shall be responsible for
all purchases made with a Card from the date

15a

of its issuance until the Aircraft Operator
reports that a Card is lost, stolen, misplaced or
cancelled by calling PHH.

LaRosa Affid., Exh. A.

Schley, as the Aircraft’s pilot, was given by Towers
unfettered access and use of the PHH credit card. Absent
Hoffenberg having reported either that the card was stolen or
used in contravention of the agreement, PHH is not
chargeable with knowledge of any unauthorized use of its
card. Furthermore, by the clear language of the agreement,
Towers agreed to be responsible for fuel charged to PHH by
one of its authorized employees, unless the card was reported
lost, stolen, misplaced, or cancelled.

It is of no moment that Schley was not actually authorized
to charge fuel on chartered flights. Schley’s daily trip sheets
did or should have provided ample notification to Towers that
Schley was inappropriately charging charter flights to
Towers’ PHH credit line and that Hoffenberg was obligated
to sever Schley’s use of the card. Neither Hoffenberg nor
Towers notified PHH of Schley’s unauthorized credit card use
before Schley incurred, over several months, almost $90,000
in fuel charges. Indeed, Schley’s unauthorized use was
brought to light in August, 1988, well after Schiey charged
significant amounts on the PHH credit card. Allied Stores of
New York, Inc. v. Funderburke, 52 Misc. 2d 872, 277
N.Y.S.2d 8 (N.Y. Civ. Ct. 1967) (authorizing agent of the
credit card assumes risk of loss for theft or unauthorized use
after receipt of notice of the theft or unauthorized use). And
although Hoffenberg claims to have paid the charges "with
reservation,” purportedly indicating concern over Schley’s
possible unauthorized use of the PHH credit card, I find that

16a

such did not provide notice to PHH that Schley was abusing
his privileged use of the PHH credit card.

In business and commerce, holders and issuers of credit
cards are protected from sustaining losses occasioned by
improper use of such cards. Assumption of liability,
however, is on the cardholder who, voluntarily and
knowingly allowing another to abuse the privileges attendant
to its use, was in the best position to have foreseen losses
sustained the cardholder by foreseen misuses by the agent.
Id.; see Martin v. American Express, Inc., 361 So.2d 597
(Ala. Civ. App. 1978); see also TransAmerica Ins. Co. v.
Standard Oil Co., 325 N.W.2d 210 (N.D. 1982) (cardholder
is charged with its own negligence in paying for charges
while failing to adequately examine statements such that it
could rectify a fraudulent misuse of employer’s credit by an
employee entrusted with the card). Because the PHH credit
card was entrusted to Schley by Towers, the cardholder,
Schley overused the PHH card for six months, and Towers
paid Schley’s charges during a six-month period that Schley
was alleged to have abused his privilege in overusing the
PHH credit card, Towers was in the best position to have
discovered the misuse. Losses sustained pursuant to Schley’s
overuse of the PHH credit card must therefore be sustained
by Towers. See Compania Anomima Venezolana De
Navegacion yv. American Express International Banking
Corp., No. 84 Civ. 2047 (S.D.N.Y. July 12, 1985)(damages
for loss must be borne by bank customer who was in “best
position to prevent such losses, by avoiding last minute
transfers, by confirming receipt of the intended funds or by
purchasing insurance) (citing Kerr Steamship Co. v. Radio
Corp. of America, 245 N.Y. 284, 291-92, cert. denied, 275
U.S. 557 (1927) (Cardozo, J.).

17a

For the foregoing reasons, summary judgment is granted
the defendants, plaintiffs prayer for declaratory relief is
denied, and the complaint is dismissed. Defendants are
hereby directed to submit judgment on 5 days notice within
10 days of the date of this order.

SO ORDERED.
DATED: New York, New York
May 30, 1990

/signed/
Kevin Thomas Duffy, U.S.D.J.

18a
[Letterhead of Federal Trade Commission]

March 19, 1980

Mr. Leslie R. Butler, President
The Consumer Bankers Association
1725 K Street, N.W.

Washington, D.C. 20006

Re: Shell Oil Company
File No.: 792-3260

Dear Mr. Butler:

Thank you for your recent letter commenting on the
Federal Trade Commission’s consent order in the Shell Oil
proceeding. Your letter was placed on the public record
pursuant to Section 2.34 of the Commission’s Rules and was
given serious consideration. After carefully evaluating all the
comments received, including yours, the Commission has
decided to issue the order contained in the agreement. The
following is a reply to the points you raised in your letter.

With respect to the definition of “unauthorized use" in
Regulation Z, the Commission believes that previously
authorized use by a third person becomes “unauthorized"

19a

when the cardholder revokes the authorization and so notifies
the card issuer. This position is consistent with the definition
of “unauthorized use" because the third person no longer has
apparent authority to use the card after notification of
revocation. Notification to the card issuer is sufficient, not
only to terminate the third-person’s apparent authority with
respect to the card issuer, but also with respect to merchants
that are the agents of the issuer in the use and acceptance of
the issuer’s credit cards. This position is consistent with the
statutory theory of Regulation Z, as shown by § 226.13(e),
that notice to the issuer is also notice to the issuer’s agents
for purposes of the safeguards set forth in § 226.13.

The case of Martin v. American Express, Inc., 361 So.2d
597 (Ala. Civ. App. 1978), cited in your comment, involved
a different factual situation from the facts alleged in the Shell
complaint. In Martin there was not an absolute revocation
but instead an attempt by the cardholder to set a maximum
limit on the holder’s liability for third-party use. Without
either implying concurrence or disagreement with the Martin
holding, the Commission notes that the facts in that case are
different from the unconditional and complete revocation as
alleged in Shell.

Your letter states that this order, if generally followed in
the credit card industry, would place too great a burden on
the credit card issuer as opposed to the cardholder. Congress
through the Truth in Lending Act and Regulation Z has made
a public policy determination that, after notification to the
issuer of loss, theft, or other unauthorized use, the risk of
loss for the third-party use is placed on the issuer. After
notification it is the responsibility of the issuer to take
whatever steps it deems appropriate to minimize or eliminate
any loss. As shown by this order, The Commission
interprets Regulation Z to place this burden after notification

20a

on the credit card company rather than on the cardholder
regardless of whether the unauthorized use was a result of
loss, theft, or revocation of previously-authorized use.

It is in the public interest that the cardholder be relieved
of liability for third-party use after notification to the issuer
of revocation of previously-authorized use rather than to
continue to hold the cardholder liable until the card is
returned to the issuer. In many instances, as with lost or
stolen cards, it may be impractical or impossible for the
holder to retrieve the card and return it to the issuer, and
continuing to hold the cardholder liable would subject the
holder to possibly unlimited charges by the third person that
the holder is powerless to control. The card issuer, on the
other hand, can protect itself through merchant notification
and other loss-prevention measures. Further, the order
specifically does not aid the cardholder if the cardholder has
committed fraud or received benefit from the third-person
use, thus protecting the card issuer from unscrupulous
holders. Finally, nothing in this order prohibits the issuer
from attempting to hold the third party liable for these
charges.

Finally, you suggest that consideration of this order be
deferred until a formal Federal Reserve Board interpretation
can be obtained. However, this matter was referred to the
Commission from the Board staff, and the Commission has
been informed by Board staff that the Commission’s legal
interpretations of this matter is correct. Thus, the
Commission believes that nothing would be gained by such
a delay for formal interpretation.

Your other points raised in your comment have been
considered. However, for the reasons stated in this letter, the

2la
Commission believes this order is appropriate and is based
upon a correct interpretation of Regulation Z.

In sum, the Commission has decided that it is in the
public interest to issue the agreed-upon order.

Your interest in bringing your comments to the attention
of the Commission is appreciated.

By direction of the Commission.

/signed/
Carol M. Thomas
Secretary

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385009_2293%3A1. Public record. Not legal advice.