In re Bryan Carr PT Sample Answer

[On Letterhead]

July 28, 2015

Dear Bryan:*

This letter analyzes whether you have liability under the Truth in Lending Act (TILA) as a
cardholder for three groups of credit card purchases made by your father, Henry Carr. This letter
analyzes whether Henry had actual, implied, or apparent authority for each of the purchases, and
if not, whether the purchases were “unauthorized” within the meaning of § 1602(o) of the TILA.

Analysis

1. Are you responsible for the Schmidt Auto Repair charge?

Short Answer: Yes, we think you most likely are responsible for the entire $1850 charge from
Schmidt Auto Repair. You created actual authority for Henry to use your credit card for the first
$1500, and created implied authority—which is part of actual authority—for the additional $350.

Congress apparently contemplated, and courts have accepted, primary reliance on principles of
agency law in determining the liability of cardholders for charges incurred by third-party card
bearers. Under the parameters established by Congress, the inquiry into “unauthorized use”
properly focuses on whether the user acted as the cardholder’s agent in incurring the debt in
dispute. BAK Aviation Systems, Inc.

Actual authority “is created by a principal’s manifestation to an agent that, as reasonably

understood by the agent, expresses the principal’s assent that the agent may take action on the
principal’s behalf.” Restatement (Third) of Agency § 3.01. Here, you physically gave Henry
your credit card, gave him oral permission to use it, and also provided a signed letter stating, “I,
Bryan Carr, give my father, Henry Carr, permission to use my Acme State Bank credit card . . .”
These actions would allow Henry to believe reasonably that you wished for him to take action on
your behalf. Additionally, as stated in BAK Aviation Systems, a cardholder, as principal, can
create actual authority through manifestations to the user of consent to the particular transactions
into which the user has entered. Here, you provided consent to a particular transaction—namely,
the Schmidt Auto Repair transaction. As a result, you probably created actual authority for
Henry to act on your behalf.

Even though Henry told you that the original estimate was for $1,500, you most likely are
responsible for the additional $350 under the concept of implied authority. In addition to giving
oral permission to Henry to use your card, you also told him that you would pay “whatever it
cost” to repair the van. “Implied authority” often is used to mean “actual authority either (1) to
do what is necessary, usual, and proper to accomplish or perform an agent’s express
responsibilities or (2) to act in a manner in which an agent believes the principal wishes the agent
to act based on the agent’s reasonable interpretation of the principal’s manifestations in light of

Note: Using either “Bryan” or “Mr. Carr” here would be fine. Using a client’s first name typically is not 1
appropriate in a PT, but you were directed to prepare this letter for Miles Anders’ signature, and he already
has a personal relationship with Bryan Carr.
the principal’s objectives and other facts known to the agent.” BAK Aviation Systems. Both uses
of the term “implied” fall within the definition of actual authority. See BAK Aviation Systems.
Here, Henry (as agent) acted in a manner in which he believed that you (as principal) wished him
to act based on his reasonable interpretation of your statement that you would pay for the total
repair costs.

Therefore you most likely are responsible for the $1850 Schmidt Auto Repair charge.

2. Are you responsible for the charges at Friendly Gas Station, the Corner Market, and
Rendell’s Book Store?

Short Answer: Yes, we think you most likely are responsible for the gas, grocery, and book
transactions because you probably created apparent authority in Henry to use his credit card
during the period in which these charges were made.

Apparent authority is created when one manifests “that another has authority to act with legal
consequences for the person who makes the manifestation, when a third party reasonably
believes the actor to be authorized.” Restatement (Third) of Agency § 3.03. As stated in BAK
Aviation, a cardholder (principal) creates apparent authority by using words or actions that
indicate that another has the principal’s consent to act, provided that this interpretation by a third
party selling items to the purchaser is reasonable.

In your case, the merchants (as third parties) reasonably could have assumed that you created
apparent authority in Henry by giving him your credit card along with the signed note providing
your consent for him to use the it. The written statement did not limit the card’s use to a specific
transaction or a specific merchant, so it would be reasonable for these merchants to assume that
Henry had your authority to use your card.

Because it was reasonable to believe that Henry had apparent authority, unfortunately you
probably are bound by Henry’s actions. The court in Transmutual Insurance Co. (citing
Farmers Bank) made this clear when it held that if a principal (here, you) acts, either
intentionally negligently, or does not approve of the agent’s (here, Henry’s) actions, so that the
public reasonably believes that the agent has authority to act in the principal’s name, then the
principal is bound by the agent’s acts with regard to transactions with third parties who deal with
the agent in good faith.

The fact that you voluntarily gave your credit card to Henry, even if only for one purpose, gave
Henry the apparent authority to make the additional charges. This is supported by BAK Aviation,
in which the court wrote, “[T]he cardholder’s voluntary relinquishment of the card for one
purpose gives the bearer apparent authority to make additional charges.”

You might be able to argue that your payment was inadvertent because you and your father shop
at the same stores and you pay your bill in full every month, but this argument may not succeed.
The court has held that “[a] cardholder has a duty to examine his credit card statement promptly,
using reasonable care to discover unauthorized signatures or alterations. If the card issuer uses
reasonable care in generating the statement and if the cardholder fails to examine his statement,

2
the cardholder is precluded from asserting his unauthorized signature against the card issuer after
a certain time.” Transmutual Insurance. Here, the gas, grocery, and book transactions appear on
the second and third of the four credit card statements, and these were the only transactions on
each statement. Since you paid the statement balances for April and May in full, without
alleging any unauthorized use, this could lead one to conclude that you did not use reasonable
care in examining your statements to discover the unauthorized charges.

TILA § 1643(a) provides a $50 limit for unauthorized charges on a credit card, but unfortunately,
as noted above, the gas station, market, and book store charges all appear to have been
authorized. Therefore this limitation would not apply.

Therefore you most likely are responsible for the gas station, market, and bookstore charges.

3. Are you responsible for the Franklin Hardware Store charge?

Short Answer: We think that you only will be liable for the first $50 of the Franklin Hardware
Store transaction, because under the TILA, this most likely qualifies as an unauthorized
purchase. It does not appear that Henry had actual, implied, or apparent authority to buy the
power tools with your credit card information.

When he bought the power tools, Henry was in possession of only your credit card number and
expiration date, which he had copied by hand on a sheet of paper. He did not possess the card
itself, nor did he have your authorization letter anymore. These circumstances should not create
apparent authority, because it would be unreasonable for a third party to infer that you sanctioned
Henry’s actions. As noted above, the court in BAK Aviation specifically held that a reasonable
belief on the part of the merchant that the card bearer acts with the cardholder’s consent is
required. Therefore, under § 3.11 of the Restatement (Third) of Agency, Henry’s apparent
authority to use your credit card had been terminated when he purchased the power tools.

Furthermore, the court in Transmutual Insurance made it clear that a principal would not be held
responsible for the actions of an agent if the third party were negligent. “[The principal] is
bound by [the agent’s] acts under apparent authority only to third persons who have incurred a
liability in good faith and without ordinary negligence.” Transmutual Insurance. Here, it was
unreasonable for the Franklin Hardware Store clerk to allow Henry to charge a purchase to your
credit card account when he did not have possession of your card or authorization letter any
longer. Therefore a court probably would find that Franklin Hardware Store did not make the
sale “without ordinary negligence.”

As a result of Henry not having apparent authority to use your credit card when buying the
power tools, and because no facts suggest that you gave Henry actual authority or implied
authority for this transaction—to the contrary, you told Henry that the card was to be used only
for getting the van repaired—this probably was an unauthorized use of your credit card. The
term “unauthorized use” is defined in § 1602(o) of the TILA 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.”

3
Because this is considered an unauthorized use, according to § 1643(a)(1)(B) of TILA, you are
responsible for only the first $50 of the unauthorized use of your credit card.

Conclusion

In sum, you most likely are responsible for the $1850 van repair charge and all gasoline, grocery,
and book charges, because you created actual and/or apparent authority in Henry to make those
purchases on your account. However, you did not appear to create actual or apparent authority in
Henry for the $1200 charge at Franklin Hardware Store for the power tools; therefore it was an
“unauthorized use” of your account. At most, you probably will be responsible for $50 of that
$1200 charge.

You may want to get the purchase price of the power tools refunded to your credit card.
Alternatively, you might consider paying for the tools even if not legally obligated to do so, and
then working out repayment with your father. This would avoid any potential claim against
Henry, and it seems in line with your desire to support him in difficult times. I did not research
or address potential liability Henry might have to you for these purchases, but if you would like
me to do so, please let me know.

If you have any questions, please do not hesitate to contact me or our office.

Sincerely,

Miles Anders