Responding to the Summons

The filing of the Summons signifies that the credit card company (or its assignee) has elected to sue the account holder to recover for the debt owed on the credit card account. The Summons sets forth the name of the court in which the case has been commenced (for instance, “Civil Court of the City of New York, County of Kings”), and the Index Number and filing date. The Summons must be accompanied with (a) a Notice of the nature of the lawsuit; (b) an Endorsed Complaint (which is similar to the Notice, but is only permitted in certain courts); or (c) the Complaint. The Complaint should set forth the relevant allegations regarding the debt in order to allow for a meaningful response.

The filing of the Summons signifies that the credit card company (or its assignee) has elected to sue the account holder to recover for the debt owed on the credit card account. The Summons sets forth the name of the court in which the case has been commenced (for instance, “Civil Court of the City of New York, County of Kings”), and the Index Number and filing date. The Summons must be accompanied with (a) a Notice of the nature of the lawsuit; (b) an Endorsed Complaint (which is similar to the Notice, but is only permitted in certain courts); or (c) the Complaint. The Complaint should set forth the relevant allegations regarding the debt in order to allow for a meaningful response.

It is very important that the Summons is not ignored. If not responded to, then the credit card company may proceed to request that the court enter a “default” judgment because the defendant failed to respond. This will, obviously, have the effects of putting assets and income at risk of collection for the enforcement of the judgment, as well as adversely impacting upon one’s credit score.

A. Methods of responding to the Summons

After the Summons is served, the defendant is presented with options as to how to proceed, which typically are: (a) serving an Answer to the Complaint; (b) filing a Motion to Dismiss the case before serving an Answer; (c) contacting the plaintiff’s attorney about settling the debt; (d) considering bankruptcy options (generally, people with one credit card debt have a bunch of other credit card debts); or (e) doing nothing! (this option may result in a default judgment in favor of the plaintiff). The decision as to which option to take is part of an overall strategy, and different options may be advisable depending on the particular situation.

1. Pre-Answer Motion to Dismiss

Sometimes, the lawsuit is a “goner” from the start for various reasons. Some of the Affirmative Defenses discussed below should or may be brought before actually serving an Answer to the Complaint. For instance, if the defendant does not believe that he was properly served with the Summons by the process server, he may challenge the court’s jurisdiction over him by bringing a Motion to dismiss the case based upon lack of “personal” or “in personam” jurisdiction. Another example would be where the Complaint does not even make out the bare bones requirements to establish a breach of the alleged credit card agreement (called “failure to state of cause of action”).

Aside from the possibility of actually having the action dismissed by the court, the Motion to Dismiss may also serve to delay the formal answering of the Complaint unless and until the judge denies the Motion after consideration (be mindful, that delay without any other purpose may be sanctioned by the court if the delay was intended solely to annoy or harass the plaintiff). Many times, this extra time will help the defendant organize and “regroup” to figure out the nature and extent of outstanding debts and obligations (because, as mentioned above, “where there is smoke, there is fire!” that is, a bunch of credit card debts hitting at the same time).

2. Answer with Affirmative Defenses

If no pre-Answer Motion to Dismiss is to be made (or one was made but the court denied the Motion and determined that the action will go forward), the defendant must serve and file his Answer to the Complaint. The Answer may set forth some or all of the following:

a. admissions of facts alleged in the Complaint;

b. denials of allegations made in the Complaint;

c. denials of knowledge or information sufficient to form a belief as to the truth or falsity of allegations made in the Complaint (commonly referred to as “DKI” and typically known as “Dunno!” in Brooklynese!);

d. Affirmative Defenses;

e. Counterclaims against the plaintiff; and/or

f. Cross-Claims against other defendants.

In the typical Complaint, the plaintiff will allege, among other things: (a) its legal status (for instance, whether it is a corporation, limited liability company (LLC), etc.); (b) its state of formation; (c) whether it is licensed as a debt collection agency or does not need to be; (d) the residence of the defendant; (e) identifying the account sued upon; and (f) the nature of the breach of contract, including amounts owed and from which dates.

In answering the Complaint, the defendant needs to decide: whether to admit or deny certain allegations made in the Complaint; which Affirmative Defenses, if any, apply to the particular circumstances of the case; and if there are any Counterclaims or Cross-Claims to be asserted.

3. Counterclaims

Counterclaims are causes of action brought by a defendant in a lawsuit against the plaintiff. They may be related to the causes of action in the Complaint or wholly unrelated. They may ask for monetary damages or for injunctive relief.

There are several Counterclaims that are available to the defendant in the credit card lawsuit. Among others, the defendant may assert a Counterclaim for:

a. Frivolous conduct on the part of the plaintiff

New York Court Rules and Regulations (NYCRR) Part 130-1 permits the court, in its discretion, to award to any party or attorney in an action costs and reasonable attorney’s fees resulting from “frivolous conduct” on the part of another party. “Frivolous conduct” is defined at Part 130-1.1(c), as conduct which is: (a) completely without merit in law and cannot be supported by a reasonable argument for an extension, modification, or reversal of existing law; (b) undertaken primarily to delay or prolong the resolution of the litigation or to harass or maliciously injure another; or (c) asserting material factual statements that are false.

b. Award of attorney’s fees

General Obligations Law Section 5-327 provides that: “Whenever a consumer contract provides that the creditor, seller or lessor may recover attorney’s fees and expenses incurred as the result of a breach of any contractual obligation by the debtor, buyer or lessee, it shall be implied that the creditor, seller or lessor shall pay the attorney’s fees and expenses of the debtor, buyer or lessee incurred as the result of a breach of any contractual obligation by the creditor, seller or lessor, or in the successful defense of any action arising out of the contract commenced by the creditor, seller or lessor. Any limitations on attorney’s fees recoverable by the creditor, seller or lessor shall also be applicable to attorney’s fees recoverable by the debtor, buyer or lessee under this section. Any waiver of this section shall be void as against public policy.” A review of the subject credit card agreement will reveal if the plaintiff may recover attorney’s fees upon breach of contract (most do).

c. Violations of debt collection laws

Assuming that the plaintiff is not the direct creditor of the defendant, there may be violations of the federal Fair Debt Collection Practices Act (FDCPA) (which federal statute applies to debt collectors, including debt buyers). Those violations may entitle the defendant/debtor to statutory damages, actual damages, attorney’s fees and costs.

It is important to note that there is no counterclaim under New York’s Debt Collection Procedures Act, as set forth in General Business Law Article 29-H, as there is no private cause of action thereunder; it may only be enforced by a governmental agency. Citibank (SD), NA v. Sablic, 55 AD3d 651 [2 Dept. 2008].

There are other laws that cover violations of debt collection laws. See, Ethical Issues in Collection

4. Third Party Summons and Complaint/Cross-Claims

There may be situations where other people have potential liability for the claims brought against the defendant. Those people may be other named defendants in the lawsuit, in which situation the defendant will allege “Cross-Claims” against the other co-defendant; other times, the defendant may need to bring those other people into the lawsuit by filing a “Third Party Summons and Complaint.”

B. Affirmative Defenses

The Affirmative Defenses are the “meat” of the defense to the credit card lawsuit. The Affirmative Defenses to a lawsuit are the legal reasons why the defendant does not owe the plaintiff any money. Different defenses apply to different situations.

Some of these Affirmative Defenses must be stated prior to or upon answering the Summons and Complaint, some at a later stage of the litigation and some at any time, even after judgment has been obtained. It is recommended that the defendant review the below Affirmative Defenses to determine whether any of them apply. There may also be other defenses to the lawsuit which are not mentioned below but may apply to the particular situation.

1. Identity theft

Identity theft has been identified by the Justice Department as one of the most prevalent crimes in this country. The news is filled with stories of criminals “hacking” into consumers’ credit records to steal data. If the defendant believes that the debt was incurred by someone else pretending to be the accountholder, identity theft may have occurred. In the first instance, the defendant should file a police report, review his credit reports and file any affidavits of forgery as may be requested. Attached to this book is an informational brochure from the Federal Trade Commission (FTC), which outlines the steps to be taken if identity theft may have taken place.

Regardless of whether the debt is legitimate or not, if the plaintiff alleges in the Complaint (or in subsequent affidavits or exhibits) the defendant’s Social Security number or other personal, non-public identifying information, the defendant can ask the court to redact that information because it may lend itself to identity theft by others who comb through court records. See, General Business Law Section 399-dd.

2. Payment (partial or full)

Generally, the credit card agreement will provide that the indication of “payment in full” on a check paid on account will not constitute an “accord and satisfaction.” This means that the credit card company may accept the partial payment and not forfeit its rights to pursue the remainder of the debt (even where it does not indicate “without prejudice” or “with reservation of all rights” on the check). However, if the accountholder can demonstrate that there was a genuine dispute as to the debt, which was settled upon a partial payment, the receipt and deposit of the payment can be considered an accord and satisfaction of the disputed debt. Citibank (South Dakota), N.A. v. Maniaci, 23 Misc.3d 1103(A) [Dist. Ct., Nassau Co. 2009]. The defendant may also be able to prove that certain payments were not accurately reflected on the account.

3. Amount of debt in dispute

There may be the situation where an amount alleged due on the account is different than the amount actually believed to be owed. This may be for different reasons, such as (a) payments were not applied; (b) payments were not properly applied; (c) interest calculations are incorrect; (d) amount calculated from the wrong date; or (e) other charges were improperly applied.

4. Lack of standing

An “assignee” is defined as the party to which the credit card company sold or transferred the account. There may be several assignments from the original creditor to the ultimate plaintiff, in which there must be proof of the so-called “chain of title.” An assignee must prove the assignment of the debt to the plaintiff in order to establish “standing” to bring the action. The issue of whether the plaintiff lacks standing to bring the case because of there being (a) no assignment; (b) lack of proof of assignment; or (c) action was brought prior to the date of assignment to the plaintiff must be raised either pre-Answer or as Affirmative Defense in the Answer. TPZ Corporation v. Dabbs, 25 AD3d 787 [2 Dept. 2006]; Portfolio Recovery Associates, LLC v. King, 55 AD3d 1074 [3 Dept. 2008].

In CACV of Colorado LLC v. Santiago, NYLJ 10/29/2009, p. 26 [Civ. Ct. NY Co. 2009], the credit card account was first opened with Direct Merchant Bank through Banco Popular, then assigned to Metris Companies, which was then purchased by HSBC, then assigned to Worldwide Asset Purchasing, and ultimately, to CACV of Colorado. The judge decided that, based upon the evidence presented, there was an incomplete chain of title and dismissed the lawsuit.

5. Lack of license to collect a debt

The New York City Administrative Code, at Section 20-489(a), mirroring the federal statute, defines a “debt collection agency” as “a person engaged in business the principal purpose of which is to regularly collect or attempt to collect debts owed or due or asserted to be owed or due to another.” A debt collection agency is required to have a license under the New York City Administrative Code, at Section 20-490. As stated therein: “It shall be unlawful for any person to act as a debt collection agency without first having obtained a license in accordance with the provisions of this subchapter and without first being in compliance with all other applicable law, rules and regulations.”

6. Failure to allege licensure in the Complaint

CPLR 3015(e) requires that the assignee of the credit card debt must allege that it has a debt collector’s license in the Complaint. The failure to make a specific allegation of the license is a ground to dismiss the action. PRA III, LLC v. MacDowell, 841 NYS2d 822 [Civ. Ct. 2008].

7. Statute of limitations

Pursuant to CPLR 213, the statute of limitations in which the plaintiff must commence its lawsuit to recover on a credit card debt (which is a form of breach-of-contract action) is six years from the date of breach.

Under New York choice-of-law principles, contractual choice provisions (for instance, in the credit card agreement) only apply to substantive issues; New York follows its own procedural rules. In New York, statutes of limitations are generally considered procedural because they are viewed as pertaining to the remedy rather than the right. Tanges v. Heidelberg N. Amer., 93 NY2d 48 [1999]. In that vein, and very pertinent to the vast majority of credit card cases, there is a “borrowing statute” [CPLR 202] which provides that if the case accrued in another state and in favor of a nonresident party, then New York will apply the statute of limitations of that other state. Thus, it is possible to shorten the statute limitations period in which a plaintiff may sue a New York defendant. Portfolio Recovery Associates LLC v. King, 14 NY3d 310 [2010]. The court said this rule was necessary to prevent “forum shopping,” where the nonresident looks to take advantage of the State’s more favorable statute of limitations over the time period allowed in the home state or where the cause of action accrued or came into being.

The defendant should be aware that there may be certain circumstances in which the period for computing the statute of limitations can be “tolled” or suspended, such as the period in which the defendant is (a) in military service; (b) in bankruptcy (without having received a discharge of the debt); or (c) absent from the state. See CPLR 207.

The statute of limitations period can also be “revived” in two circumstances, where the defendant (a) makes a part payment on the particular account; or (b) provides a written acknowledgment of the account. In these circumstances, the clock is reset from either of those circumstances for a fresh period of time.

8. Debt has been previously discharged in bankruptcy

If the debt upon which suit is brought was previously included in a bankruptcy petition, and the debt was “discharged” pursuant to Bankruptcy Code Sections 727, 1141, 1228, or 1328, then the plaintiff cannot sue for the debt any longer. Once the plaintiff becomes aware of the discharge, then it must discontinue the lawsuit, or it can face its own lawsuit for violation of the discharge.

9. Claim Preclusion or Issue Preclusion (also known as res judicata and collateral estoppel)

These terms refer to the circumstances where either the same plaintiff is suing for the same debt or where a different plaintiff is suing for the same debt, and a prior court has already made a determination regarding that matter. The general concept is that everyone gets their day in court — but only one day! If a prior court already decided that the defendant cannot be liable for the debt or that one of the issues in the lawsuit has already been decided, then it cannot revisit the matter.

The First Department noted, in In re Abady, 22 AD3d 71 [1st Dept. 2005], the requirements for the application of collateral estoppel: (a) the identical issue necessarily was decided in a prior action and be decisive in the present action; and (b) the party to be precluded must have had a full and fair opportunity to contest the prior determination. Under New York law, “collateral estoppel effect will only be given to matters actually litigated and determined in the prior action.” Kaufman v. Eli Lilly & Co., 65 NY2d 449 [1985].

10. General denial

Aside from all of the other defenses that a defendant may have to the action, the defendant may simply deny the plaintiff’s claim — essentially, the “Prove It!” defense.

In Bobby D. Associates v. Ohlson, NYLJ 7/9/2009 p. 26 [Civ. Ct. NY Co. 2009], the defendant simply stated in his defense, “I do not recall opening the account.” The judge considered that as “honest a denial as a person could make.” This defense essentially puts the plaintiff to its proof, to prove the existence of the defendant’s debt (by showing that there is an absence of evidence on the plaintiff’s part).

11. Minor or incapacity at time of making contract

Where the person who entered into the contract was a minor (in New York, someone under the age of 18 years) or declared mentally incompetent, the contract may be voidable by the person. If voided by the person, then the debt resulting from the contract becomes unenforceable. The burden of proving mental incompetence is on the party asserting it. Smith v. Comas, 173 AD2d 535 [1991].

12. Failure to state a cause of action

It is essential to any lawsuit that the Complaint makes out a valid “cause of action” against the defendant. The Complaint should set forth, with particularity, the allegations of the nature and facts of the case and why it is alleged that the defendant is liable to the plaintiff. In the credit card case, the plaintiff must prove, at a minimum:

i. Evidence of (a) existence of an agreement to extend credit to the defendant; (b) the issuance of credit cards at the defendant’s address; (c) his use of the credit card; (d) his retention of account statements; and (e) payments on account, if any. PRA III, LLC v. Gonzalez, 54 AD3d 917 [2 Dept. 2008];

ii. Proof itemizing the various purchases or transactions allegedly made with the credit card. Adverlight Collections Inc. v. Naydensky, Slip Copy 25 Misc.2d 126(A), 2009 WL 3297494 [App. Term, 2, 11, and 13 Jud. Dists. 2009]; Discover Bank v. Williamson, 14 Misc.3d 136(A) [App. Term, 9 and 10 Jud. Dists. 2007].

13. Failure to satisfy a condition precedent

Having title to the credit card debt would be a condition precedent to the right to sue on that debt. Deutsche Bank National Trust Company v. Abbate, Slip Copy 25 Misc.3d 1216(A) [Sup.Ct. Richmond Co. 2009]. In other words, if the plaintiff suing does not have proof that it owns the debt, it cannot bring the lawsuit.

If there is an assignment of the debt from the original creditor, there has to be proof that notice of the assignment was given to the debtor. Chase Bank USA, NA v. Cardello, NYLJ 3/15/10 [Civ. Ct., Richmond Co. 2010].

Dove-tailing with the requirement that there be particularity in pleadings in general, the plaintiff must allege that it is either a domestic organization organized under New York State law (such as a corporation, limited liability company (LLC), or partnership) or an out-of-state entity duly authorized to do business in New York State. If the plaintiff is not registered with New York State, then it has not satisfied a “condition precedent” before suing the defendant. See, Business Corporation Law Section 1312.

14. No account stated, as proper objection was made

That there was an account between the parties and that a specified balance was found to be due. Citibank (SD), NA v. Jones, 272 AD2d 815 [2 Dept. 2000].

There must be proof regarding (a) the specific monthly statements allegedly mailed to the defendant-account holder; and (b) that the account holder retained the alleged stated account for an unreasonable period of time without objecting thereto. Citibank (SD), NA v. Goldberg, 2009 WL 2447833 [App. Term, 2, 11, and 13 Jud. Dists. 2009].

By federal law, a consumer in a credit card transaction has the obligation to send a written notice indicating that he believes there is a billing error within 60 days after receiving the account. The credit card company is then required to acknowledge receipt of the notice and investigate the claim. 15 USC 1666(a).

15. Arbitration

In order for an award from an arbitration to be “confirmed” or approved by a court for entry of a judgment against a person, it must be proven that: (a) the case to confirm the award (known as a special proceeding) was timely commenced (within one year of the delivery of the award); (b) there existed a written agreement to submit to arbitration; (c) proof that the respondent agreed to arbitration in writing or by conduct; and (d) there was proper service of the notices of the arbitration hearing and award. MBNA America Bank, NA v. Straub, 12 Misc.3d 963 [Civ. Ct., NY Co. 2006].

If the matter was already submitted to arbitration and an award was made, then there are very limited occasions that there will be judicial review of the award. Those circumstances are generally where there is an allegation of corruption, fraud, misconduct in procuring the award, or partiality of the arbitrator that “so prejudiced the rights or the integrity of the arbitration process.” MBNA America Bank, NA v. Karathanos, 65 AD3d 688 [2 Dept. 2009].

16. Improper venue

The term “venue” refers to the county in which the action is brought against the defendant. In a credit card case, the action may only be brought in one of two counties: (1) the county in which the defendant resides; or (2) the county in which the transaction took place. 15 USC Section 1692i. According to CPLR 305, the Summons in an action arising out of a consumer credit  transaction  shall  prominently  display   at   the  top  of  the  summons  the  words  “consumer  credit  transaction” and, where a purchaser, borrower or debtor is a  defendant,  shall  specify  the  county  of residence of a defendant, if one resides  within the state, and the county where the consumer  credit  transaction  took  place,  if it is within the state.

17. Lack of personal jurisdiction

This Affirmative Defense calls into question two different aspects concerning the jurisdiction of the court over the defendant: (a) whether the Summons itself is defective on its face; and (b) whether the Summons was improperly served upon the defendant. (The methods of service authorized by CPLR 308 upon a natural person are set forth in the Relevant Statutes section of this book.)

18. Lack of subject matter jurisdiction

If the plaintiff cannot show that it had title to the subject matter of the controversy (that is, the debt itself), the court may lack jurisdiction over the “subject matter.” Deutsche Bank National Trust Company v. Abbate, Slip Copy 25 Misc.3d 1216(A) [Sup.Ct. Richmond Co. 2009]. If a case is brought in a court of limited jurisdiction, and exceeds the court’s limits, the court lacks subject matter jurisdiction (for instance, suing for $30,000 in Civil Court, where the limit is $25,000).

19. Fraud, duress or mutual mistake

In proving fraud, a party must prove (a) a misrepresentation or a material omission of act which was false and known to be false by defendant; (b) made for the purposing of inducing the other party to rely upon it; (c) justifiable reliance of the other party on the misrepresentation or material omission; and (d) injury. Lama Holding Co. v. Smith Barney Inc., 88 NY2d 413. It is possible that the credit card issuer defrauded the borrower into entering into the agreement or into taking some sort of action.

Duress would be an extremely rare defense to the credit card case, but it would be where the person was forced into entering into the agreement. It may be a defense to a post-dispute settlement, where the person was forced into making the settlement by the creditor.

If one side to a contract makes a mistake, it is not the problem of the other side; however, if both sides make a mistake about the contract, then it may be an “oops,” and the agreement may be voided because there was no “meeting of the minds.”

20. Failure to comply with agreement or law

The credit card agreement may have particular provisions which either require the credit card issuer to do something or not do something. A law may require the same thing. For example, recently-enacted federal legislation called the Credit Card Accountability, Responsibility and Disclosure Act of 2009 (Credit CARD Act) put in place a laundry-list of changes to how credit cards may be marketed, rates computed and charges imposed.

A credit card agreement typically set forth a “choice of law” provision, which allows the credit card company to select, among other things, the interest provisions of another state to be applied towards any balances due on the account. Generally, courts enforce these agreements, except where (a) the chosen state has no substantial relationship to the parties; or (b) the application of the law of the chosen state would be contrary to a fundamental policy of the state which has a materially greater interest than the chosen state. American Equities Group, Inc. v. Ahava Dairy Products Corp., 2004 WL 870260 [SDNY 2004]. New York courts have held that New York State has a strong public policy against enforcing excessive, usurious interest rates. American Express Travel Related Services Co., Inc. v. Assih, NYLJ 1/11/2010 [Civ. Ct., Richmond Co. 2009].

21. Active military status

If the defendant is in the military, there may be a stay of proceedings until the defendant is no longer on active duty. See, Federal Servicemembers Civil Relief Act and New York State Soldiers’ and Sailors’ Civil Relief Act — Military Law, Article 13.

22. Payment protection insurance

Sometimes, an account will be opened by a consumer with an added benefit, a payment protection plan. This type of insurance plan is an extra cost for the consumer but will provide coverage for the possibility that the accountholder becomes incapacitated; the plan will cover finance charges and other fees, resulting in no fees being due on the account. Discover Bank v. Washington, 31 Misc.3d 1239(A) [Civ.Ct., Richmond Co. 2011].

23. Usury

Usury is the term for an interest rate charged by a creditor above the highest rate permitted by law. New York State’s highest interest rate for loans to individuals is 16% per annum. Credit card issuers that are either a national bank or a bank insured by the FDIC may impose interest rates higher than this State’s because of federal preemption laws, which essentially permits use of the lawful rates of a bank’s home state. See, Marquette National Bank of Minneapolis v. First of Omaha Service, 439 US 299 [1978].

While Personal Property Law Section 413 allows for an award of attorney’s fees, there are some circumstances where they will not be awarded. Those exceptions would include: (1) fee award cannot be based upon a cause of action for an account stated, HSBC Bank USA v. Schulze, 9 Misc.3d 128(A) [App.Term 9&10 J.D. 2005]; and (2) no award for mere collection efforts prior to litigation, Broadstreets Inc. v. Parlin, 75 Misc.2d 662 [Civ.Ct. NY Co. 1973].

25. Unconscionability

The doctrine of unconscionability contains both substantive and procedural aspects, and whether a contract is unconscionable or grossly unreasonable is measured by the court from looking at the commercial setting, purpose and effect. Sablosky v. Gordon Co., 73 NY2d 133 [1989].

As a corollary of unconscionability, there are also requirements that a printed contract involving a consumer transaction be legible and of sufficient type size (CPLR 4544) and written in a clear and coherent manner using common, every-day meanings of words (General Obligations Law Section 5-702).

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