February 25, 2016
Statutes of limitations in credit card collection cases
When a consumer has been sued for collection of a debt that he has heard nothing about for several years, he may wonder whether the collection of that debt is barred by the statute of limitations. If the lawsuit is filed after the statutory period has run, the consumer has a solid defense in the lawsuit, and will also have the option of a cross-complaint against the plaintiff that filed the case. Filing a lawsuit to collect a “time-barred” debt is a violation of the Fair Debt Collection Practices Act and the corresponding California statute.
The following general guidelines apply for credit card and most other debts owed by California residents. (Note: although many credit card issuers send customers credit card agreements that contain “choice of law” clauses, which state that the law of another state, such as South Dakota or Delaware, will apply to any dispute, in practice it is rare for the credit card issuer or debt buyer to argue that the law of another state applies in a debt collection case.)
I. The Statute: California Code of Civil Procedure Section 337
Where the action is based on a written agreement, it must be filed within 4 years.
Code of Civil Procedure § 337:
(1) An action upon any contract, obligation or liability founded upon an instrument in writing, except as provided in Section 336a of this code…
(2) An action to recover (1) upon a book account whether consisting of one or more entries; (2) upon an account stated based upon an account in writing, but the acknowledgment of the account stated need not be in writing; (3) a balance due upon a mutual, open and current account, the items of which are in writing; provided, however, that where an account stated is based upon an account of one item, the time shall begin to run from the date of said item, and where an account stated is based upon an account of more than one item, the time shall begin to run from the date of the last item.
II. When does the time period begin to run?
Consumers are often confused about the statute of limitations because they do not know when the time period began to run. Follow these guidelines to determine the date when the statute of limitations period begins to run in various situations.
A. Breach of Contract Actions
Credit card debts are based on written agreements provided to the consumer either before or after the account is opened. For purposes of the statute of limitations, a contract is “in writing” under California law if the party accepts the offer subject to a written contract. Amen v. Merced County Title Co. (1962) 58 Cal. 2d 528, 532. In Amen, the California Supreme Court held that a contract may be “in writing” for purposes of the statute of limitations even though it was accepted orally or by an act other than signing if the party accepted the offer and agreed to the terms of a written contract.
In contract actions, the statute runs from the occurrence of the last element essential to the cause of action, when the plaintiff discovers or should discover all facts essential to his cause of action. C.C.P. § 312; April Enterprises, Inc. v. KTTV (1983) 147 Cal. App. 3d 805, 826-827; Fox v. Ethicon Endo Surgery (2005) 35 Cal. 4th 797, 806.
Although consumer loans and credit card agreements differ, they generally require the consumer to make a minimum payment by a specified due date, and provide that the entire balance may become due in the event of default. Failure to make the minimum payment when it is due is a default or breach of the agreement. If the consumer does not cure the default by paying the past-due amount, the cause of action has accrued. In that case, the statute of limitations for an action to recover the unpaid installment runs from the date the installment payment was due. White v. Moriarty (1993) 15 Cal. App. 4th 1290,1299.
A creditor cannot arbitrarily decide when the account is in default and when the statute begins to run. “Where a right has fully accrued, except for some demand to be made as a condition precedent to legal relief… the cause of action has accrued for the purpose of setting the statute of limitations running. (Citations) Otherwise… he might indefinitely prolong his right to enforce the claim or right by neglecting to make the demand until it suited his convenience to do so.” Taketa v. State Board of Equalization (1951) 104 Cal. App. 2d 455, 460.
B. Waiver (Extension) of the Statutory Period Based on Partial Payment
Although a contract cause of action accrues when a debtor misses a payment or pays less than the minimum due, the statute of limitations can be re-started by a single payment on the debt. This is based on an old common law principle that partial payment is an acknowledgement of the debt and a waiver of the period that the statute of limitations has run. Generally, the partial payment causes the statute of limitations to begin to run again from the time that the payment is made. This rule has been codified in C.C.P. § 360.
“As a general rule, part payment of a debt or obligation is sufficient to extend the bar of the statute. The theory on which this is based is that the payment is an acknowledgement of the existence of the indebtedness which raises an implied promise to continue the obligation and to pay the balance.” Martindell v. Bodrero (1967) 256 Cal. App. 2d 56, 59-60.
The circumstances of the partial payment may be such that it does not reflect the debtor’s unequivocal agreement that the debt is owed and unconditional intention to pay the debt. In that case, it can be argued that the statute of limitations was not waived and continued to run.
Credits applied without the debtor’s knowledge or consent do not constitute acknowledgement of the debt and do not toll or extend the statute. Martindell at 59-60, citing Bullock v. Simon (1955) 132 Cal. App. 2d Supp. 881.
Acknowledgement of the debt must be “a direct, unqualified and unconditional admission of a debt which a party is liable and is willing to pay. The most positive acknowledgment of a preexisting debt is insufficient if accompanied by a declaration which is inconsistent with an intention to pay.” Heiser v. McAlpine (1937) 20 Cal. App. 2d 467, 471.
C. Common Counts Actions: “Book Account” and “Account Stated”
“Common counts” are causes of action (legal claims) that are used to collect a debt. Debt buyers frequently use these causes of action. However, the law that applies to common counts is different than the law that applies to breach of contract cases. The differences may be helpful to consumers who have been sued for defaulted credit card debt.
1. Book Account
Collection complaints often contain allegations that money is owed on a book account. The four-year period for actions on a book account begins to run from the date of the last entry in the account. C.C.P. § 337(2); Egan v. Bishop (1935) 8 Cal. App. 2d 119, 123; Bloom v Bender (1957) 48 Cal. 2d 793, 799.
However, whether a book account existed is a fact to be established. “The mere recording in a book of transactions or the incidental keeping of accounts under an express contract does not of itself create a book account… Such memoranda cannot be utilized under the guise of a book account as a device to extend the statute of limitations beyond the time it would run on the contractual obligation.” Warda v. Schmidt (1956) 146 Cal. App. 2d 234, 237; Tsmetzin v. Coast Federal Savings & Loan Association (1997) 57 Cal. App 4th 1334, 1343. See also: Lee v. DeForest (1937) 22 Cal. App. 2d 351.
C.C.P. § 337a defines a book account and states that such an account can arise from a contract. If there is a contract, the language of the contract and contract principles should determine when the cause of action has accrued.
If a book account is established, the next question is whether the account was open or closed when the action was filed. If the creditor sues after the account was closed, then the point when the account was closed determines the date of the last relevant entry and when the statute begins to run.
Action to collect balance on open account
If the action seeks to collect an amount due on an open account, the last relevant entry is the last payment. Gardner v. Rutherford (1943) 57 Cal. App. 2d 874, 883; County of Santa Clara v. Vargas (1977) 71 Cal. App. 3d 510, 517.
Action to collection balance on closed account
Where the parties have ended their business relationship and no further charges can be made on the account, the date on which the account is closed determines the running of the statute.
“While an ‘open’ book account has been defined as ‘an account with one or more items unsettled,’ it also includes ‘an account with dealings still continuing.’ (Citations) By contrast, a ‘closed’ account is… one to which no further additions can be made on either side… Thus, it is clear that the ‘open’ or ‘closed’ nature of a book account turns not on the account balance per se, but on the parties’ expectations of possible future transactions between them [on that account].” R.N.C., Inc. v. Tsegeletos (1991) 221 Cal. App. 3d 967.
In R.N.C., the closure of the account and defendant’s failure to pay the amount demanded started the running of the statute; a partial payment made after that point was not a “pertinent entry” for purposes of calculating the expiration of the statutory period. Id. This rule differs from the rule regarding debts based on a promissory note (C.C.P. § 360), where a payment made towards principal or interest may waive the period that has already run in favor of the debtor.
2. Account Stated
Account stated claims in debt collection cases often allege that a “final statement” was sent to the consumer, showing the balance due and demanding payment in full. However, the mailing of the “final statement” may have no bearing on the statute of limitations. By the time of that statement is sent, most likely the account is already delinquent and the statutory period has already started running.
C.C.P. § 337(2) states: “Where an account stated is based upon an account of one item, the time shall begin to run from the date of said item, and where an account stated is based upon an account of more than one item, the time shall begin to run from the date of the last item.”
California law does not define “item” as used in this section. As applied to credit cards, the most logical interpretation of this section is that the statutory period begins to run from the date of the last purchase/charge or the last payment on the account, whichever is later. After four years, the debt is time-barred (uncollectible).