MEMO TO:
Alexsei Demo US
RESEARCH ID:
#40005693d582b8
JURISDICTION:
Federal
STATE/FORUM:
New York, United States of America
ANSWERED ON:
December 16, 2021
CLASSIFICATION:
Financial institutions

Issue:

Is a parent responsible for the expenses incurred on his credit card if he was unaware that his child had taken his card and used it without his permission?

Facts:

A 10-year-old child hopped on the wrong flight and ended up in New York City without his parents. He had his father’s credit card and began racking up expenses including the presidential suite at a fancy hotel, loads of toys, ice cream, and room service. When his father found out about the credit card bill (after securing the welfare of his child, of course), he disputed the charges.

Conclusion:

15 U.S.C. § 1643, part of the Truth-in-Lending Act ("TILA"), provides that cardholders are not liable for the "unauthorized use" of a credit card if certain conditions are met. The burden of proof is upon the card issuer to show that the use was authorized.

"Unauthorized use" 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. (15 U.S.C. § 1602)

The inquiry into "unauthorized use" focuses on whether the user acted as the cardholder's agent in incurring the debt. 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. (Minskoff v. American Express Travel Rel. Servs. Co., Inc., Towers World Airways Inc. v. PHH Aviation Systems Inc.)

Despite the fact that a cardholder's relinquishment of possession may create in another the appearance of authority to use the card, 15 U.S.C. § 1643 clearly precludes a finding of apparent authority where the transfer of the card was without the cardholder's consent, such as in cases involving theft, loss, or fraud. (Minskoff v. American Express Travel Rel. Servs. Co., Inc., Towers World Airways Inc. v. PHH Aviation Systems Inc.)

No federal court decisions were identified that specifically discussed whether a parent is responsible for expenses incurred on their credit card by their minor child if the parent was unaware that the child had physical possession of the card and used it without their permission.

However, in Grube v. Amazon.com, Inc. the plaintiff sued her credit card issuer and Amazon for violations of state law and of the TILA as a result of the refusal to reverse several charges incurred on her card by her children while using Amazon Kindle Fire devices. The plaintiff, a mother of two young children, was charged more than $2,500 on her credit card for in-app purchases on her children's devices. The plaintiff asserted that the in-app purchases were fraudulent. The Court disagreed and granted summary judgment against the plaintiff, noting that she voluntarily provided her credit card information to Amazon for purchases from these devices. She gave the devices to her children knowing that in-app purchases could be made on the devices. The Court also noted that the plaintiff did not claim that the devices were lost or stolen.

Law:

The Truth-in-Lending Act ("TILA") is codified at 15 U.S.C. 1601, et seq. 15 U.S.C. § 1643 provides that cardholders are not liable for the unauthorized use of a credit card if certain conditions are met. The burden of proof is upon the card issuer to show that the use was authorized:

(a) Limits on liability

(1) 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.

(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 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.

Subsection (p) of 15 U.S.C. § 1602 defines "unauthorized use", as used in section 1643 of the TILA, as:

(p) 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.

In Towers World Airways Inc. v. PHH Aviation Systems Inc., 933 F.2d 174 (2d Cir. 1991) ("Towers"), the United States Court of Appeals for the Second Circuit noted that 1970 amendments to the TILA were enacted in order to protect credit cardholders from unauthorized use perpetrated by those able to obtain possession of a card from its original owner. The inquiry into "unauthorized use" focuses on whether the user acted as the cardholder's agent in incurring the debt. 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 (at 176-177):

Congress enacted the 1970 Amendments to the Truth-in-Lending Act, 15 U.S.C. Secs. 1602(j)-(o ), 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. Sec. 1644 (1988), the amendments enacted a scheme for limiting the liability of cardholders for all charges by third parties made without "actual, implied or apparent authority" and "from which the cardholder receives no benefit." 15 U.S.C. Secs. 1602(o ), 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. Sec. 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. Sec. 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

Page 177

card bearers. See, e.g., Fifth Third Bank/VISA v. Gilbert, 17 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, 104 S.Ct. 1911, 80 L.Ed.2d 460 (1984); see also 12 C.F.R. Sec. 226.12 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 agent 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 Sec. 7 (1958).

The Court noted that despite the fact that a cardholder's 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, such as in cases involving theft, loss, or fraud. The description in 15 U.S.C. § 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 (at 177):

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 Secs. 8, 27 (1958). Though a cardholder's 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(o ) 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. Sec. 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. Sec. 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. Sec. 1644 (1988).

In Minskoff v. American Express Travel Rel. Servs. Co., Inc., Inc., 98 F.3d 703 (2d Cir. 1996), the United States Court of Appeals for the Second Circuit, citing Towers, noted that in determining whether a use is unauthorized, courts rely on the principles of agency law. A cardholder's voluntary relinquishment of possession may create in another the appearance of authority to use the card. However, a finding of apparent authority is clearly precluded where the transfer of the card was without the cardholder's consent, such as in cases involving theft, loss, or fraud. The language of the 1970 Amendments to the TILA 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 section 1602(o) and section 1643 of the TILA (at 708):

Plaintiffs-appellants contend that because Blumenfeld obtained the platinum and corporate credit cards through forgery and fraud, her use of the cards is per se unauthorized under section 1643, see supra note 1, and plaintiffs-appellants' liability is therefore limited to $50 by section 1643(a)(1)(B). Section 1643 applies, however, only in the case of an "unauthorized use" of a credit card. See § 1643(a)(1), (d). The term "unauthorized use" is defined as "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." 15 U.S.C. § 1602(o). In determining whether a use is unauthorized, "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." Towers World Airways v. PHH Aviation Systems, 933 F.2d 174, 176-77 (2d Cir.), cert. denied, 502 U.S. 823, 112 S.Ct. 87, 116 L.Ed.2d 59 (1991).

Under general principles of agency, the authority of an agent "is the power of the agent to do an act or to conduct a transaction on account of the principal which, with respect to the principal, he is privileged to do because of the principal's manifestations to him." Restatement (Second) of Agency (the "Restatement ") § 7 cmt. a (1958). Such authority may be express or implied, but in either case it exists only where the agent may reasonably infer from the words or conduct of the principal that the principal has consented to the agent's performance of a particular act. See id. cmt. b.

Apparent authority is "entirely distinct from authority, either express or implied," id. § 8 cmt. a, and arises from the "written or spoken words or any other conduct of the principal which, reasonably interpreted, causes [a] third person to believe that the principal consents to have [an] act done on his behalf by the person purporting to act for him," id. § 27; see also Fennell v. TLB Kent Co., 865 F.2d 498, 502 (2d Cir.1989). Apparent authority, then, is normally created through the words and conduct of the principal as they are interpreted by a third party, and cannot be established by the actions or representations of the agent. See Fennell, 865 F.2d at 502 (collecting cases).

The existence of apparent authority is normally a question of fact, and therefore inappropriate for resolution on a motion for summary judgment. See, e.g., Herbert Constr. Co. v. Continental Ins. Co., 931 F.2d 989, 994 (2d Cir.1991) (citing Stanford v. Kuwait Airways Corp., 648 F.Supp. 1158, 1162 (S.D.N.Y.1986)). However, a principal may be estopped from denying apparent authority if (1) the principal's intentional or negligent acts, including acts of omission, created an appearance of authority in the agent, (2) on which a third party reasonably and in good faith relied, and (3) such reliance resulted in a detrimental change in position on the part of the third party. See Restatement § 8B; Masuda v. Kawasaki Dockyard Co., 328 F.2d 662, 665 (2d Cir.1964).

[...]

Though a cardholder's [voluntary] relinquishment of possession may create in another the appearance of authority to use the card, [15 U.S.C. §§ 1602(o) and 1643] clearly preclude[ ] 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 [to the TILA] 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(o) and 1643.

No federal court decisions were identified that specifically discussed whether a parent is responsible for expenses incurred on their credit card by their minor child if the parent was unaware that the child had physical possession of the card and used it without their permission.

However, in Grube v. Amazon.com, Inc., 2017 DNH 179 (D.N.H. 2017) the plaintiff sued her credit card issuer and Amazon for violations of state law and of the TILA as a result of the refusal to reverse several charges incurred on her card by her children while using Amazon Kindle Fire devices. The plaintiff, a mother of two young children, had purchased and registered the two devices to her Amazon account. The plaintiff had linked her credit card as the method of payment for her Amazon account and given the devices to her children. The plaintiff later discovered that she had been charged more than $2,500 for in-app purchases on the two devices and asserted that the in-app purchases were fraudulent. However, she did not claim that the devices were lost or stolen. The United States District Court for the District of New Hampshire held that no rational jury could find that the defendants' argument, that the in-app purchases were made by someone with the authority to do so, was anything but reasonable. The Court granted summary judgment against the plaintiff, noting that she voluntarily provided her credit card information to Amazon for purchases from these devices. She gave the devices to her children knowing that in-app purchases could be made on the devices. The Court also noted that the plaintiff did not claim that the devices were lost or stolen (at 14-19):

In Count I, Grube brings a claim under TILA, 15 U.S.C. § 1643, alleging that Synchrony impermissibly denied her fraud claim. Grube contends that she is not liable for the in-app

Page 15

credit card purchases because she did not authorize the purchases and does not know who made them. "Congress enacted the credit card provisions of the Truth in Lending Act 'in large measure to protect credit cardholders from unauthorized use perpetrated by those able to obtain possession of a card from its original owner.'" DBI Architects, P.C. v. Am. Express Travel-Related Servs. Co., Inc., 388 F.3d 886, 889 (D.C. Cir. 2004) (quoting Towers World Airways Inc. v. PHH Aviation Sys. Inc., 933 F.2d 174, 176 (2d Cir. 1991)). Except as otherwise provided in § 1643, "a cardholder incurs no liability from the unauthorized use of a credit card." 15 U.S.C. § 1643(d). "The protections under § 1643, however, apply only to 'unauthorized use,' . . . ." DBI Architects, 388 F.3d at 889.

Page 16

[...]

Congress defined "unauthorized use" as "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." 15 U.S.C. § 1602(p).

Courts have concluded that Congress intended agency law to govern whether use by someone other than the cardholder was authorized, DBI Architects, 388 F.3d at 890; Towers World Airways Inc. v. PHH Aviation Sys. Inc., 933 F.2d 174, 176-77 (2d Cir. 1991), and in its commentary to Regulation Z, the Federal Reserve Board has made explicit that "whether authority exists must be determined under state or other applicable law," Federal Reserve Board Truth in Lending Official Staff Commentary to Regulation Z, 12 C.F.R. pt. 226, Supp. I § 226.12(b)(1).

Page 17

[...]

Here, Synchrony concluded that the in-app purchases on Grube's Kindles were made by someone who was authorized to do so. That is, the actions of the principal (Grube) demonstrated that the agent (the person who made the in-app purchases on the Kindle devices) had the authority to act on behalf of the

Page 18

principal (Grube). Thus, to determine if apparent authority existed here, the court must decide whether, construing all facts in the light most favorable to Grube, Synchrony's conclusion was reasonable.

The record evidence shows that Synchrony conducted multiple investigations of the facts underlying Grube's claims of fraud. Each investigation yielded the same result: the charges appeared authorized by Grube. Synchrony determined that the disputed charges were all in-app purchases made from and downloaded to Grube's own Kindle devices. Grube voluntarily provided her credit card information to Amazon for purchases from these Kindles, and linked these devices to her Amazon account. In other words, Grube voluntarily provided her credit card information to Amazon for purchases from these Kindles. Knowing that in-app purchases could be made on the devices, Grube then voluntarily gave the Kindles to her children. Although Grube asserted that the in-app purchases were fraudulent, she did not claim that the Kindles were lost or stolen. Cf. Towers, 933 F.2d at 177 (TILA "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").

Viewing those facts in the light most favorable to Grube, no rational jury could find that Synchrony's conclusion (i.e., that the in-app purchases were made by someone with the

Page 19

authority do so) was anything but reasonable. Thus, the undisputed facts show that the in-app purchaser had apparent authority to purchase the apps.

Accordingly, Synchrony is entitled to summary judgment on Grube's TILA claim.

Authorities:
15 U.S.C. § 1643
15 U.S.C. § 1602
Towers World Airways Inc. v. PHH Aviation Systems Inc., 933 F.2d 174 (2d Cir. 1991)
Minskoff v. American Express Travel Rel. Servs. Co., Inc., Inc., 98 F.3d 703 (2d Cir. 1996)
Grube v. Amazon.com, Inc., 2017 DNH 179 (D.N.H. 2017)