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United States District Court for Maryland finds that Credit Union Unlawfully Offset Consumers’ Credit Card Debt with Deposited Funds
Gardner v. Montgomery County Teachers Federal Credit Union
In Gardner v. Montgomery County Teachers Federal Credit Union, Judge Bredar of the United States District Court for Maryland found that Kevin and Joanne Gardner were entitled to actual damages when their bank, the Montgomery County Teachers Federal Credit Union (“Credit Union”), used funds from the Gardners’ checking and savings accounts to offset their delinquent credit card balance. Interpreting the Truth in Lending Act (TILA), 15 U.S.C. § 1666h, and “Regulation Z,” 12 C.F.R. § 226.12, the Court determined that the Credit Union’s actions were prohibited, unless the Credit Union could affirmatively demonstrate a security interest in the Gardners’ funds. The Court found that the parties’ credit card agreement was “plainly inadequate” to provide the Credit Union with a security interest in the Gardners’ funds. With no other instrument to entitle the Credit Union to the Gardners’ funds, the Court awarded the Gardners actual damages in the amount of the money withdrawn from their deposited accounts.
The Gardners were Maryland consumers, who conducted their banking with the Credit Union. The Gardners had both a checking and savings account with the Credit Union, along with a credit card. On October 27, 2009, the Credit Union used automatic computer software to withdraw $145.00 from the Gardners’ deposit accounts to satisfy a delinquent balance on their credit card. The Gardners sued the Credit Union on October 7, 2010, alleging violations of TILA and the Maryland Consumer Protection Act (MCPA). The Gardners sought actual damages for the money withdrawn by the Credit Union, along with declaratory and injunctive relief. The Gardners sought to certify a plaintiff class consisting of all those similarly situated consumers who had banked with the Credit Union. The Court deferred the issue of class certification until pre-trial motions on the substance of the Gardners’ claims could be resolved.
On January 14, 2012, the Court granted the Credit Union’s Motion for Summary Judgment on the Gardners’ MCPA claim, rejecting the Gardners’ theory that a TILA violation served as a per se MCPA violation. The Court invited the parties to brief arguments on the remaining claims, and address the issues of (1) which party bore the burden of proof as to whether the Credit Union had a valid security interest in the Gardners’ deposited funds, and (2) whether the Credit Union’s actions constituted a TILA violation.
The Court found the Credit Union bore the burden in proving that it held a valid security interest in the Gardners’ funds. Judge Bredar observed a general rule that once a debtor makes a threshold showing of a TILA violation, the burden is upon the creditor to demonstrate its compliance. The Court found that Regulation Z served as a general repudiation of the common law practice of offsetting a debtor’s defaulted loan against his deposited funds, with respect to credit card issuers. In order for the Credit Union to have lawfully offset the Gardners’ credit card debt with their deposited funds, the Credit Union must prove that it held some independent entitlement to the Gardners’ funds. Therefore, the Credit Union had the burden of demonstrating that it possessed a consensual security interest in the Gardners’ deposited funds.
The Court found that the Credit Union violated both TILA and Regulation Z because the bank did not hold a security interest in the Gardners’ funds. The Credit Union argued that its VISA agreement with the Gardners served to provide the bank with a security interest in the Gardners’ funds. The Credit Union also pointed to the fact that it sends disclosures to its new members upon being granted a credit card, explaining the cardholders’ account. The Court found the agreement to be inadequate to establish a security interest in the Gardners’ funds, observing that there was no place in the entire document for the borrower to sign or initial. The Court also observed that the Credit Union’s disclosures were sent only after their customers were given an account. Therefore, the Credit Union’s agreement and documentation failed to establish a security interest in the Gardners’ deposited accounts.
Ultimately, the Court awarded the Gardners actual damages for the funds withdrawn by the Credit Union because the bank failed to show that it offset the Gardners’ debt by any means other than common law offsetting practices. Given that the Gardners never responded to the Credit Union’s arguments against declaratory judgment and injunctive relief, the Court granted the bank’s Motion for Summary Judgment on those two claims.
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