Edward J. Minskoff Edward J. Minskoff Equities, Inc. v. American Express Travel Related Services Company, Inc.
Docket: 1536
Court: Court of Appeals for the Second Circuit; October 23, 1996; Federal Appellate Court
Plaintiffs Edward J. Minskoff and Edward J. Minskoff Equities, Inc. appealed a final judgment from the U.S. District Court for the Southern District of New York, which granted summary judgment in favor of defendant American Express Travel Related Services Company, Inc. The plaintiffs' complaint, filed under the Truth in Lending Act (15 U.S.C. 1643) and New York General Business Law 5122, sought recovery of $276,334.06 due to checks forged by an employee, Susan Schrader Blumenfeld, to cover unauthorized charges on American Express credit cards fraudulently obtained by her. The district court also ruled against the plaintiffs on a counterclaim from American Express for $51,657.71, which was the outstanding balance on the unauthorized charges.
Minskoff, as president of Equities, had opened a Corporate Account with American Express, which initially included a charge card in his name. Following Blumenfeld's hiring in 1991, she became responsible for handling Minskoff's financial affairs, including reviewing credit card statements. In March 1992, Blumenfeld applied for an additional card from the Corporate Account without Minskoff's consent, leading to $28,213.88 in charges from April 1992 to March 1993. The appellate court vacated the district court’s judgment and remanded for further proceedings.
American Express issued twelve monthly billing statements for a Corporate Account to Equities, listing Blumenfeld and Minskoff as cardholders. Charges totaled $51,313.25, with Blumenfeld responsible for $28,213.88 and Minskoff for $23,099.37. Payments were made via twelve checks from Minskoff or Equities' accounts at Manufacturers Hanover Trust (MHT), payable to American Express. Minskoff did not review any statements or checks during 1992-1993.
In July 1992, American Express invited Minskoff to apply for a platinum card, which Blumenfeld accepted without his or Equities' consent. Blumenfeld also requested a supplemental card, which she later presented to Minskoff as an upgrade. Between July 1992 and November 1993, Blumenfeld charged approximately $300,000 to the Platinum Account, while Minskoff made minor purchases. American Express mailed sixteen monthly statements for the Platinum Account to Equities, showing $260,891.75 in total charges, with Blumenfeld responsible for $250,394.44 and Minskoff for $10,497.31. Payments for these charges were also made through checks from MHT accounts.
In November 1993, Equities' controller notified Minskoff about a check for around $41,000 to American Express that led to an internal investigation uncovering Blumenfeld's fraudulent activities. Blumenfeld admitted to forging around sixty checks, including payments to American Express, resulting in total losses of $412,684.06 attributed to her theft. In January 1994, Blumenfeld agreed to repay $250,000 to Minskoff and Equities to avoid legal action.
On February 15, 1994, plaintiffs-appellants filed a lawsuit in the U.S. District Court for the Southern District of New York, seeking to recover $276,334.06 paid to American Express for unauthorized charges and a declaration of non-liability for the Platinum Account's outstanding balance. The district court dismissed their complaint and awarded American Express $51,657.71 on its counterclaim, reasoning that the $50 liability limit for unauthorized credit card use did not apply due to the plaintiffs' negligence in failing to monitor statements, which created an appearance of authority for Blumenfeld’s use of the cards.
The appeal concerns the district court's summary judgment, which is reviewed de novo. Summary judgment is appropriate only if there are no genuine issues of material fact, and all inferences must be drawn in favor of the opposing party. The plaintiffs argue that Blumenfeld's use of credit cards obtained through forgery renders her actions per se unauthorized under 15 U.S.C. § 1643, limiting their liability to $50. However, § 1643 applies solely in cases of "unauthorized use," defined as use by someone without actual, implied, or apparent authority, from which the cardholder receives no benefit.
In evaluating unauthorized use, courts rely on agency law principles. An agent's authority, whether express or implied, arises from the principal's manifestations, allowing the agent to perform acts consented to by the principal. Apparent authority differs from express or implied authority, as it stems from the principal's conduct leading a third party to reasonably believe the agent is authorized to act on their behalf. This apparent authority is generally a factual issue, unsuitable for summary judgment. A principal may be estopped from denying apparent authority if their conduct creates an appearance of authority that a third party reasonably relies upon to their detriment.
Blumenfeld acted without actual or implied authority when she forged the platinum card acceptance form and supplemental applications, meaning plaintiffs-appellants are not liable for her initial possession of corporate and platinum cards. Under 15 U.S.C. §§ 1602(o) and 1643, apparent authority cannot be established when a card is transferred without the cardholder's consent, such as in cases of theft or fraud. The 1970 Amendments to the TILA reflect Congress's intent to classify unauthorized charges from involuntary card transfers as unauthorized. This policy aims to protect credit card holders from losses due to theft or fraud, placing the responsibility on card issuers. The district court's decision to hold plaintiffs-appellants fully responsible for Blumenfeld's unauthorized charges is rejected. However, while obtaining a card through fraud or theft does not imply apparent authority for subsequent use, cardholders may still face liability if their negligence creates apparent authority for fraudulent use. Thus, negligent acts by a cardholder can confer apparent authority for charges made after those acts, but do not retroactively authorize prior unauthorized charges.
The district court determined that the plaintiffs-appellants were negligent in failing to review credit card and bank statements, which created an appearance of authority for Blumenfeld to use the credit card. Under New York law, consumers must exercise reasonable care to examine bank statements for unauthorized transactions. This obligation stems from common law principles and applies equally to credit card holders. Once a credit card account is established, the cardholder is in a better position than the issuer to identify legitimate charges, and neglecting to review statements that could reveal fraud constitutes negligence, thereby granting apparent authority for unauthorized charges.
From April 1992 to November 1993, American Express sent twenty-eight billing statements to Equities, clearly listing Blumenfeld as a cardholder and detailing the charges. Concurrently, MHT sent bank statements indicating payments made to American Express from Equities' and Minskoff's personal accounts. Minskoff admitted to not reviewing these statements until November 1993, and no other Equities employee noticed the disputed payments prior to Bankers Trust's inquiry in November 1993. This lack of oversight allowed Blumenfeld to continue using the cards and perpetuated the belief that the accounts were in good standing.
The plaintiffs-appellants argued against summary judgment by stating they had taken reasonable steps in hiring and supervising Blumenfeld, as well as implementing internal controls to prevent fraud. However, the court noted that the inadequate execution of these procedures from April 1992 to November 1993 facilitated Blumenfeld's unauthorized acquisition of credit cards, leading to over $300,000 in fraudulent charges paid with forged checks without detection.
A review of American Express statements would have revealed unauthorized charges made by Blumenfeld. MHT statements indicated payments to American Express that significantly exceeded Minskoff's typical charges, suggesting fraudulent activity. Once a cardholder receives a statement that alerts them to fraudulent charges, they cannot later claim ignorance. The district court's conclusion that no reasonable jury could find otherwise justified summary judgment in favor of American Express. The ruling suggests that American Express is liable for Blumenfeld's fraudulent purchases from the card's issuance until the plaintiffs received their first statement showing the fraudulent charges, plus a reasonable time to review it. After this period, the plaintiffs would be liable for any remaining fraudulent charges. The district court's judgment is vacated, and the case is remanded for further proceedings, allowing the court to determine if any issues need to be submitted to a jury. Additionally, relevant legal provisions are cited regarding cardholder liability for unauthorized use of credit cards, emphasizing that liability is limited under certain conditions. The record lacks clarity on whether the invitation for the platinum card was directed to Minskoff personally or in his official capacity. Lastly, requirements for creditor statements under the Truth in Lending Act are outlined.
