Chapter

Key Points• Understand the common law protections of fraud,

innocent misrepresentation and unconscionable contracts• Understand the roles of state law, the FTC and the CPSC• Identify the laws governing the debtor/creditor

relationship including TILA, FCBA, ECOA and FDCPA• Know the basic bankruptcy provisions

15

Consumer Protection

Fraud and Innocent Misrepresentation

A victim of fraud is entitled to rescind the contract and to seek damages, including, in cases of malice, a punitive recovery. Example: Lovejoy v. AT&T (Cal. 2001)

The required elements of fraud are: A misrepresentation of a material fact (not opinion, unless it’s an

expert’s opinion), The misrepresentation was intentional, The injured party justifiably relied on the misrepresentation, and Injury resulted.

Silence may constitute fraud. Fraud can involve false conduct as well as false expression. Innocent misrepresentation differs from fraud only in that the falsehood

was unintentional. Ordinarily damages are not awarded.

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Unconscionable Contracts

Definition: A contract which is so unfair or oppressive as to demand intervention. Procedural unconscionability: Where the bargaining power of

the parties is so unequal that the agreement, as a practical matter, was not freely entered.

Substantive unconscionability: Where the clause or contract in question was so manifestly one-sided, oppressive or unfair as to “shock the conscience of the court.”

Example: East Ford v. James E. Taylor, Jr. (Miss. 2002)

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State Lemon Laws

All 50 states have laws designed to provide recourse for consumers whose new vehicles turn out to be defective such that they cannot be repaired after a reasonable effort. Typically the vehicle must have been (1) returned to the

manufacturer or dealer three or four times to repair the same defect and that defect must substantially impair the value or safety of the vehicle or (2) have been unavailable to the consumer for a total of at least 30 days in a 12-month period.

Purchaser is entitled to a replacement vehicle or full refund. Usually initial determination is done by arbitration.

Example: General Motors v. Dohmann (Conn. 1998)

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The Federal Trade Commission Act

The Federal Trade Commission (FTC) was created in 1914 to prevent “unfair methods of competition and unfair or deceptive acts or practices in and affecting commerce.” An unfair trade practice (1) must be likely to cause substantial injury to

consumers, (2) must not be reasonably avoidable by consumers themselves and (3) must not be outweighed by countervailing benefits.

Deception requires a claim that is (1) false or likely to mislead the reasonable consumer and (2) material to the consumer’s decision making.

FTC processes: Rulemaking: The FTC promulgates rules which specify those particular acts

or practices that the commission deems deceptive. Adjudication: The FTC may conduct investigations, settle matters

informally, issue formal complaints and conduct trials before an administrative law judge.

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The Consumer Product Safety Commission (CPSC)

The CPSC, created in 1972, is responsible for reducing the risks in using consumer products. Each year, about 22,000 deaths and 29.5 million injuries are associated with

consumer products. The CPSC’s duties are:

Data collection—The CPSC conducts research and collects information as a foundation for regulating product safety.

Rule making—The CPSC promulgates mandatory consumer product safety, performance and labeling standards.

Compliance—The CPSC is empowered to use a variety of strategies in securing compliance, including inspections, testing and issuing recalls.

Enforcement—In cases of severe and imminent hazards, the CPSC may seek an immediate court order to remove a product from the market. It may also seek voluntary compliance, prosecute cases before an administrative law judge, hear appeals from ALJ decisions and pursue further litigation in federal appellate court.

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Consumer Privacy Issues

These include such issues as: Identity theft (the leading consumer fraud complaint reported

to the FTC in 2001) Spam (unsolicited commercial e-mail) Online profiling and data mining (tracking consumers’

movements online) Wireless privacy (location tracking of wireless phone user) Credit card privacy in internet commerce

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Truth in Lending Act (TILA)

TILA requires conspicuous disclosure of the amount financed, the finance charge (the actual dollar sum to be paid), the annual percentage rate (APR) (the total cost of the credit expressed at an annual rate), and the number of payments. The finance charge includes not just interest but service charges, points, loan

fees, carrying charges and others. TILA disclosure requirements apply to both open-end (e.g., VISA) and

closed-end loans (those of a fixed amount for a definite time). Covered transactions are those where:

The debtor is a “natural person”, The creditor is regularly engaged in extending credit and is the person to

whom the debt is initially payable, The purpose of the credit is “primarily for personal, family, or household

purposes” not in excess of $25,000, or a “consumer real property transaction,” and

The credit is subject to a finance charge or payable in more than four installments.

Example: Bell v. May Department Stores (Mo. 1999)

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Consumer Credit Reports

The Fair Credit Reporting Act (FCRA) affords consumers the following protections: Anyone using information from a credit reporting agency (CRA) to take an

“adverse action” must notify the consumer and identify where it secured the information.

On request, a CRA must give a consumer the information filed on them and a list of all who have recently sought information about the consumer.

The CRA must investigate any complaints of inaccurate information and make a written report. Consumers can have a brief statement included in their files which normally must accompany future reports.

All inaccurate information must be corrected or removed from the file, usually within 30 days.

In most cases, negative information more than seven years old must not be reported.

A consumer must provide written consent before a CRA can provide information to the consumer’s employer or prospective employer.

Consumers can sue for damages if their rights are violated

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Other Federal Credit Laws

Fair Credit Billing Act (FCBA): Provides a mechanism to deal with billing errors that accompany credit card and certain other “open-end” credit transactions.

Electronic Fund Transfer Act (EFTA): Provides remedies for consumers confronting electronic banking problems such as liability for lost or stolen cards and billing errors.

Equal Credit Opportunity Act (ECOA): Requires credit to be extended to all creditworthy applicants regardless of sex, marital status, age, race, color, religion, national origin, good faith exercise of rights under the Consumer Credit Protection Act and receipt of public assistance (e.g., food stamps). Example: Lucas Rosa v. Park West Bank & Trust (1st Cir. 2000)

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Fair Debt Collection Practices Act (FDCPA)

The FDCPA is designed to shield debtors from unfair debt collection tactics by debt collection agencies and attorneys who routinely operate as debt collectors. The Act does not extend to creditors who are themselves trying to recover money owed to them. It forbids the following: Use of obscene language Contact with third parties other than to locate the debtor Use of or threats to use physical force Contact with the debtor during “inconvenient” hours Repeated phone calls with the intent to harass Contacting the debtor in an unfair, abusive or deceptive manner

Example: Armstrong v. Rose Law Firm (Minn. D.C. 2002)

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Bankruptcy—Liquidation

In Chapter 7 liquidations, all assets except exemptions are distributed to creditors.

It can be voluntary or involuntary (started by creditors). The court will enter an order for relief if it finds the debtor has not been

paying his or her debts when due. Creditors then hold a meeting. A bankruptcy trustee is elected. The trustee collects the debtor’s property, converts it into money and

ultimately distributes the estate proceeds to the creditors. Secured creditors are paid first; then “priority” claims, such as

employees’ wages and alimony/child support; then general creditors are paid. Any remaining funds will be returned to the debtor.

When distribution is complete, the bankruptcy judge may issue an order discharging (relieving) debtor of any remaining debts except for certain statutorily specified claims, such as taxes and educational loans.

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Bankruptcy—Reorganization

The purpose of Chapter 11 is to allow financially troubled enterprises to continue in operation while debtor adjustments are arranged. Both debtor and creditors may ultimately benefit more than from a straight liquidation.

Typically, the debtor continues to operate the business, although the court may appoint a trustee if required because of dishonesty, fraud or extreme mismanagement.

The company, its bankers and suppliers will meet to work out a method for continuing operations. The plan must satisfy the creditors that their interests are being served by the reorganization.

The plan must be approved by the creditors and confirmed by the court. The company is then required to carry out the plan.

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Bankruptcy—Adjustment of Debts

Under Chapter 13, individuals can seek the protection of the court to arrange a debt adjustment plan.

This is only a voluntary process. It is restricted to those with steady incomes and somewhat

limited debts. The debtor develops a repayment plan. If creditors’

interests are sufficiently satisfied by the plan, the court may confirm it and appoint a trustee to oversee the plan.

The debtor may then have three to five years to make the necessary payments.

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