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DBI Architects, P.C. v. American Express Travel-Related Services Co.

November 9, 2004


Appeal from the United States District Court for the District of Columbia (No. 02cv01729)

Before: Randolph, Rogers and Garland, Circuit Judges.

The opinion of the court was delivered by: Rogers, Circuit Judge

Argued September 17, 2004

The Truth in Lending Act ("TILA"), 15 U.S.C. § 1601, et seq. (2000), limits the liability of a cardholder for "unauthorized use of a credit card," id. § 1643(a)(1), which is defined as use without "actual, implied, or apparent authority" that does not benefit the cardholder, id. § 1602( o ). The principal issue on appeal is what creates apparent authority to limit cardholder protection under § 1643. The district court, in granting summary judgment to American Express Travel-Related Services Co. ("AMEX"), ruled that DBI Architects, P.C. ("DBI") clothed its accounting manager with apparent authority to use its corporate AMEX account by failing to examine monthly billing statements that identified all cardholders and their charges. We hold that, while DBI did not clothe its accounting manager with apparent authority by failing to inspect its monthly billing statements, DBI did clothe its accounting manager with apparent authority by repeatedly paying after notice all charges made by the accounting manager on its corporate AMEX account, thereby misleading AMEX reasonably to believe that the accounting manager had authority to use the account. We remand DBI's § 1643 claim to the district court to determine precisely how many payments created apparent authority and thus limited DBI's protection under TILA. Otherwise, we affirm the grant of summary judgment.


DBI is a corporation with its principal place of business in the District of Columbia. It had an AMEX corporate credit card account, which it authorized certain employees to use. On March 14, 2001, DBI appointed Kathy Moore as the Accounting Manager for its District of Columbia and Virginia offices. In that position, Moore was in charge of both approval and payment functions in the cash disbursement system: she controlled accounts receivable, accounts payable, corporate checking, corporate credit cards, and all other financial aspects of DBI's business. She had authority to issue DBI corporate checks to pay bills and invoices from vendors, was "entrusted with the duty of affixing authorized signatures and approvals to checks and other documents," and was responsible for the receipt, review, and payment of DBI's AMEX invoices. Aff. of Alan L. Storm in Supp. of Pl.'s Mot. for Partial Summ. J.

On or about August 10, 2001, AMEX added Moore as a cardholder on DBI's corporate account at Moore's request and without DBI's knowledge or approval. On August 22, 2001, AMEX sent DBI an account statement identifying Moore as a corporate cardholder and itemizing her annual membership fee. From August 2001 to May 2002, Moore charged a total of $134,810.40 to DBI's corporate AMEX card, including $1,555.51 in authorized corporate charges and $133,254.79 in unauthorized charges for clothing, travel, jewelry, and other personal items. During this period, AMEX sent DBI ten monthly billing statements, each listing Moore as a corporate cardholder and itemizing her charges. Between August 2001 and June 2002, Moore paid for these charges with thirteen DBI checks made payable to AMEX. In addition, between July 2001 and March 2002, Moore paid for $162,139.04 in charges on her personal AMEX card with fourteen DBI checks made payable to AMEX. Most of these checks were signed or stamped in the name of Alan L. Storm, the president of DBI; none were signed in Moore's own name.

On May 31, 2002, DBI notified AMEX of Moore's fraudulent charges and requested a refund of $133,254.79 for the corporate account and $162,139.04 for the personal account. AMEX denied the request. DBI sued AMEX in the Superior Court for the District of Columbia, alleging, in Count One of the complaint, that AMEX had violated TILA, 15 U.S.C. § 1643, by refusing to repay DBI for the $133,254.79 in fraudulent charges made by Moore on DBI's corporate AMEX card. Count Two of the complaint alleged that AMEX was liable for conversion for using DBI's corporate funds to credit the $162,139.04 in charges on Moore's personal AMEX card. Following AMEX's removal of the case to the United States District Court for the District of Columbia, AMEX moved for summary judgment, and DBI moved for partial summary judgment on the issue of liability. The district court granted AMEX's motion for summary judgment, denying DBI recovery except for two months of charges on the corporate account, and DBI appeals. Our review of the grant of summary judgment is de novo. See Tao v. Freeh, 27 F.3d 635, 638 (D.C. Cir. 1994).


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." Towers World Airways Inc. v. PHH Aviation Sys. Inc., 933 F.2d 174, 176 (2d Cir. 1991); see S. REP. NO. 91-739, at 1 (1970); 116 CONG. REC. 11,827-29 (1970). Responding to concerns about the abuse of uninformed cardholders by a growing credit card industry, see generally John C. Weistart, Consumer Protection in the Credit Card Industry: Federal Legislative Controls, 70 MICH. L. REV. 1475 (1972), Congress strictly limited the cardholder's liability for "unauthorized" charges, see 15 U.S.C. § 1643(a)(1), placed the burden of establishing cardholder liability on the card issuer, see id. § 1643(b), and imposed criminal sanctions for the fraudulent use of credit cards, see id. § 1644. Specifically, § 1643*fn1 provides that a cardholder is not liable for the unauthorized use of a card unless the issuer previously provided the cardholder with information about potential liability, a means of reporting a lost or stolen card, and a means of identifying the authorized user. Id. § 1643(a)(1)(C), (D), (F). Even then, the cardholder's maximum liability is $50, id. at § 1643(a)(1)(B), and in any event, the cardholder is not liable for unauthorized charges incurred after the cardholder notifies the issuer of the fraud. Id. § 1643(a)(1)(E).

The protections under § 1643, however, apply only to "unauthorized use," which Congress 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." Id. § 1602( o ); see Regulation Z, 12 C.F.R. § 226.12(b)(1) n.22. Because the parties agree that Moore had neither actual nor implied authority to use DBI's corporate AMEX card, the question is whether Moore's charges were "authorized" as a result of her apparent authority to use the card and thus fall outside the protections available to DBI under § 1643. Cf. Credit Card Serv. Corp. v. FTC, 495 F.2d 1004, 1007 (D.C. Cir. 1974).

The Federal Reserve Board's official staff interpretation of Regulation Z, 12 C.F.R. § 226.12(b)(1), states that "whether [apparent] authority exists must be determined under state or other applicable law." 12 C.F.R. pt. 226, Supp. I, at 418. The Second Circuit observed in Towers World Airways, 933 F.2d at 176-77, that "[b]y 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 thirdparty card bearers." The common law rule provides that apparent authority 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." RESTATEMENT (SECOND) OF AGENCY § 27, at 103 (1958). The District of Columbia has adopted a similar definition: "apparent authority of an agent arises when the principal places the agent in such a position as to mislead third persons into believing that the agent is clothed with authority which in fact he does not possess." Stieger v. Chevy Chase Sav. Bank, 666 A.2d 479, 482 (D.C. 1995) (quoting Jack Pry, Inc. v. Harry Drazin, 173 A.2d 222, 223 (D.C. 1961)). The existence of apparent authority is a question of fact that should normally be left to the jury. See, e.g., Herbert Constr. Co. v. Continental Ins. Co., 931 F.2d 989, 994 (2d Cir. 1991). However, a principal may be estopped from denying apparent authority if the principal intentionally or negligently created an appearance of authority in the agent, on which a third party relied in changing its position. See RESTATEMENT (SECOND) OF AGENCY § 8B, at 38-40. We need not decide whether District of Columbia law or the common law of agency provides the rule of decision, as we discern no difference between them for the purposes of this case.

The district court ruled that Moore did not have apparent authority to become a cardholder on DBI's corporate AMEX account. But distinguishing between the acquisition and use of a credit card, the court ruled that DBI's negligent failure to examine its monthly billing statements from AMEX created apparent authority for Moore's use of the corporate card. The court relied on an analogy to District of Columbia banking law, under which depositors are required to "exercise reasonable promptness in examining the statement ... to determine whether any payment was not authorized," D.C. Code § 28:4-406(c), and embraced the analysis of the Second Circuit in Minskoff v. American Express Travel Related Services Co., 98 F.3d 703 (2d Cir. 1996), which involved a nearly identical fact situation. There, as here, an employee of a corporation fraudulently acquired a corporate credit card from AMEX, charged personal expenses to the card, and paid for the charges with corporate checks. AMEX sent monthly statements listing the employee as a cardholder and itemizing the employee's charges, but the corporation failed to review the statements, continued to make payments, and demanded a refund upon discovering the fraud. See id. at 706-07.

The Second Circuit held in Minskoff that TILA "clearly preclude[s] 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." Id. at 708 (quoting Towers World Airways, 933 F.2d at 177). Regarding the employee's use of the card, however, the court drew an analogy from New York banking law, under which depositors are obligated to "exercise reasonable care and promptness" in examining their bank statements and reporting unauthorized charges, id. at 709 (quoting N.Y. U.C.C. ยง 4-406(1)), and held that a "cardholder's failure to examine credit card statements that would reveal fraudulent use of the card constitutes a negligent omission that creates apparent authority for charges that would otherwise be considered unauthorized under the TILA." Id. at 709-10. The court noted that the corporation's negligence "enabled [the employee] to pay all of the American Express statements with forged checks, thereby fortifying American Express' continuing impression that nothing was amiss." Id. at 710. The court reasoned that, as a policy matter, cardholders are in a better position than card issuers to discover fraudulent charges, and that "[n]othing in the TILA suggests that Congress intended to sanction intentional or negligent conduct by the cardholder that furthers the fraud or theft of an unauthorized card user." Id. at 709. Accordingly, ...

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