A ruling by Division Three of the Washington State Court of Appeals might be worth reviewing for those not only in the state but elsewhere as the opinion demonstrates an interpretation of the federal Truth in Lending Act governing credit card liability of consumers. It could also affect at least in Washington whether to charge a defendant with a financial crime or the possession of stolen property due to a Federal Reserve Board opinion that could affect charging elements resulting from the theft of a CardLock access device.
In Connell Oil, Inc. v. McConnell-Johnson, Appellants “The Marital Community of Erik and Jackie McConnell Johnson” appealed a trial court ruling favorable to plaintiff Washington Corporation “Connell Oil, Inc.” after the oil company demanded damages and attorney fees amounting to $34,649.68 resulting from the fraudulent use of the Johnson’s petroleum CardLock access card after the device was stolen from one of Mr. Johnson’s farm vehicles. Defendants claimed that they were not fully liable for the unauthorized charges under the federal Truth in Lending Act which ordinarily protects consumers from fraudulent credit card charges.
The Court “conclude[d] the trial court did not err when it ruled that the stolen cardlock was not a credit card for purposes of TILA and entered judgment in favor of Connell Oil.” Connell Oil received an award of attorney and legal fees as it was the prevailing party.
From the slip opinion:
“Since 2009, Erik Johnson has been a customer of Connell Oil. On July 27, 2014, Mr. Johnson’s wallet was stolen from his farm vehicle. The next day, Mr. Johnson began contacting issuers of his stolen credit and debit cards. On July 31, 2014, Mr. Johnson
telephoned Connell Oil. There is a factual dispute whether Mr. Johnson asked Connell
Oil to cancel his stolen petroleum card or simply ordered one or more cards. But there is
no factual dispute that the cardlock agreement required cancellation to be in writing, and
Mr. Johnson never requested in writing that his stolen petroleum card be canceled.
Around September 8, 2014, Connell Oil called Mr. Johnson and notified him that it was terminating his account because of suspicious activity. Because Mr. Johnson had kept his PIN and petroleum card together in his wallet, the thief was able to steal $34,649.68 worth of fuel during the six weeks before the card’s cancelation. Although Connell Oil had invoiced Mr. Johnson three times since his wallet was stolen, Mr. Johnson did not detect the fuel theft. Mr. Johnson explained to Connell Oil that he was too busy during harvest to open its invoices. The parties were unable to resolve the dispute.
Connell Oil served Mr. Johnson and his wife, Jackie McConnell Johnson, with a complaint alleging that the Johnsons were liable for $34,649.68 in stolen card charges, plus interest, costs, and attorney fees. The Johnsons then filed an answer with affirmative defenses, including limitations on cardholder liability for lost or stolen cards as well as counterclaims under TILA, Washington’s Consumer Protection Act, chapter 19.86 RCW, and negligence.”
…
“After discovery, the Johnsons filed a motion for partial summary judgment and
Connell Oil filed a cross-motion. The court ruled that the petroleum card issued by
Connell Oil was not a credit card as contemplated by TILA. The court held that the
Johnsons’ defenses under TILA were inapplicable, granted Connell Oil’s motion for
summary judgment, and dismissed the Johnsons’ affirmative defenses and counterclaims.
The court entered judgment in favor of Connell Oil for the unpaid petroleum charges, plus interest, costs, and reasonable attorney fees in accordance with the cardlock agreement.”
~+~
The court based much of its decision upon adopting the United States Federal Reserve Board opinions used to effectuate the purpose of the Truth in Lending Act as delegated by Congress and under Household Credit Servs., Inc. v. Pfennig, 541 U.S. 232, 238, 124 S. Ct. 1741, 158 L. Ed. 2d 450 (2004) and Ford Motor Credit Co. v. Milhollin, 444 U.S. 555, 566, 100 S. Ct. 790, 63 L. Ed. 2d 22 (1980).
The “FRB has promulgated a detailed and comprehensive set of rules known as “Regulation Z,” which is codified at 12 C.F.R. § 226.1(a). The staff of the Division of Consumer and Community Affairs to the FRB issues official interpretations of Regulation Z, referred to as commentary”. The rules in essence refer to both the familiar, and well-known consumer protection affording credit card holders a maximum liability of Fifty Dollars for unauthorized usage of stolen credit cards, yet in the case of petroleum cardlock cards, which is the heart of the Connell case, the FRB opines that such a card is not a credit card for the purpose of the Truth in Lending Act:
However, an official commentary provides:
[A] credit card does not include, for example
. . . .
. . . [a]ny card . . . that is used in order to obtain petroleum products for
business purposes from a wholesale distribution facility . . . and that is
required to be used without regard to payment terms.12 C.F.R. pt. 226, supp. I, subpt. A, § 226.2(a)(15)(2)(ii)(B)
We should first understand what a CardLock device is and why it was considered to not be a Credit Card as defined under the TILA.
In the Johnson’s and many others who received petroleum products through the use of this technology, generally the system began with a KeyLock device, which then evolved into an OpticalLock device–a credit card sized strip of plastic having holes punched within a matrix that indicated ownership and access numbers, to a card having a magnetic strip or chip along with a PIN code. It is more of a key than a standard credit card, yet one could argue that it is simply a different number encoding protocol that serves the same function.
The Johnson’s stated that they effectively had a credit card like agreement since as is the case with a credit card account, they charged purchases onto an account and were billed. Yet the court countered that irrespective of whatever payment agreement between Connell and their marital community, the FRB explicitly stated in its opinion that the type of CardLock system used for the purchase of petroleum products did not fall within the maximum liability protections of the TILA, as noted by Division III:
“Commentary (B) itself states it makes no difference if the card permits a business customer to accumulate a balance and pay interest on that balance.”
The opinion stated that the Johnson’s commingled their personal and business purchases when they used the CardLock. There might still remain a question if the CardLock device was only used for personal usage and not on a business account. Whether or not a personal account is offered by the petroleum merchant could be a factor in any future tests in the courts.
For the consumer this case does point out a few concerns that should give pause to any consumer of petroleum products who uses this type of device whether business or for personal use.
First, according to the Opinion, the Johnson’s made a costly error in that they wrote on the CardLock card the PIN number associate with the account. This effectively nullified any security associated with the account and facilitated its unauthorized use.
Second, Connell reportedly billed its CardLock customers twice monthly. Despite the fact that the unauthorized usages could have been quickly noticed, Mr. Johnson stated that this occurred during his busy harvest time and he did not read the invoices as they came in. Again, the failure to act using prudent oversight led to continuing losses.
Third, though there was a dispute on whether the Johnson’s had properly cancelled their card after it was discovered that fraudulent charges continued to be made, the card agreement stated that cancellations must be in writing. The Johnsons did not perform this until much later.
Lastly, if it can be held that a CardLock system does not afford the consumer the same fifty dollar maximum liability for fraudulent usage, the consumer should exercise extra caution with security and billing for this type of account.
The ruling should also cause prosecutors and law enforcers to re-evaluate how possession of stolen petroleum CardLock devices are charged in the courts. In my opinion this is something to consider:
For Washington State, traditionally possession of stolen credit cards may be prosecuted under RCW 9A.56.320(3) (Financial fraud—Unlawful possession, production of instruments of.).
“A person is guilty of unlawful possession of a personal identification device if the person possesses a personal identification device with intent to use such device to commit theft, forgery, or identity theft. “Personal identification device” includes any machine or instrument whose purpose is to manufacture or print any driver’s license or identification card issued by any state or the federal government, or any employee identification issued by any employer, public or private, including but not limited to badges and identification cards, or any credit or debit card.”
Yet if the FRB Opinion regarding petroleum CardLock devices is to be imported into the common law, the prosecution for these cases might want instead to consider RCW 9A.56.160 (Possessing stolen property in the second degree).
“(1) A person is guilty of possessing stolen property in the second degree if:
(a) He or she possesses stolen property, other than a firearm as defined in RCW 9.41.010 or a motor vehicle, which exceeds seven hundred fifty dollars in value but does not exceed five thousand dollars in value; or
(b) He or she possesses a stolen public record, writing or instrument kept, filed, or deposited according to law; or
(c) He or she possesses a stolen access device.
(2) Possessing stolen property in the second degree is a class C felony.”
I believe that a non-credit card CardLock should be considered an Access Device for the purpose of establishing the requisite crime element. Access Device is defined under RCW 9A.56.010 as:
“Access device” means any card, plate, code, account number, or other means of account access that can be used alone or in conjunction with another access device to obtain money, goods, services, or anything else of value, or that can be used to initiate a transfer of funds, other than a transfer originated solely by paper instrument.”
While my interpretations do not constitute legal advice, I believe prudence favors involved parties to consider the significance of the Division III ruling.
By Darren Smith
Source: Connell Oil v. Johnson
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