Shortening the Limitations Period on Credit Card Collection Lawsuits

With the growth of the debt buying industry, the statute of limitations has become a particularly important defense in credit card collection lawsuits. Not only do debt buyers purchase credit card debt six months or more after the consumer stops paying, but the consumer’s debt may then be sold from one debt buyer to another to yet another. Years may elapse from default to when the last debt buyer in the chain of ownership purchases the account, and then that debt buyer may take additional time after purchasing the debt to actually filing suit.

Computing when the statute of limitations on a credit card collection lawsuit has expired is a surprisingly complicated matter, offering consumer defendants a number of opportunities to challenge the collector’s calculation of the time period. This article examines recent and not-so-recent case law considering:

• Which of a state’s statute of limitations applies—one for written contracts or one for non-written contracts;
• Which state’s statute of limitations applies—the forum state, the state listed in the contractual choice of law, or the card issuer’s home state;
• When does the limitations period begin—from when the consumer stopped making payments or when the card issuer later claims it has demanded full payment;
• Under what circumstances has the running of the limitations period tolled (i.e., stopped counting for a time) or revived (i.e., started counting all over again).

A debt buyer bringing a collection lawsuit is unlikely to consider all of these issues and the consumer attorney may be able to dismiss a suit based on a superior analysis of the applicable limitations period. This article summarizes the law as set out in more detail in NCLC’s Collection Actions § 3.6.

Which Statute of Limitations in a State Applies to Credit Card Collection Lawsuits

Analyzing which statute of limitations in a state applies to a credit card collection case can often significantly shorten the applicable limitations period. While in some states the limitations period is the same for written and non-written contracts, in many states the non-written limitations period is far shorter. For example, the limitations period might be six years for a claim based upon a written contract, but only three for one based upon a non-written contract. For a listing of each state’s limitations periods for written and non-written contracts, see NCLC’s Collection Actions § 3.6.4.2.

Moreover, as explained in the next subsection, the consumer can often rely on the shortest limitations period among three different states—the forum state, the state chosen in the contract, and the card issuer’s home state. If the limitations period for non-written contracts applies, then the applicable period may be the shortest limitations period for non-written contracts among three states, which often will be only three years.

Clearly a limitations period for breach of a written contract does not apply where the card issuer’s claims are based on an account stated, quantum meruit, or some other theory not relying on breach of a written contract. Even if one of the card issuer’s claims is for breach of contract, the limitations period for non-written contracts would apply to the other claims in the suit. See id. § 3.6.6.3.2.

In addition, most decisions find that a credit card agreement does not qualify as a written agreement for purposes of the statute of limitations. Credit card agreements are subject to change unilaterally, are generally not signed by either party, and there often is not a “complete writing,” but an initial writing plus a series of standard form amendments whose enforceability is contingent on the consumer’s continued use of the credit card.

Credit card obligations are open-ended, and the amount owed is not fixed in the contract but is instead determined by a series of charges and payments. The interest rate may not be shown in the writing, and it will be subject to change in any event. See generally id. § 3.6.6.3.3.

Which State’s Statute of Limitations Applies

Which state’s statute of limitations applies is a surprisingly important issue for consumer litigants—the forum state (the state where the action is brought and where the consumer resides), the law chosen in the credit card agreement (e.g., Delaware and its three year limitations period), or where the action arose (which may be the card issuer’s home state). Often the limitations period will be very different among these three. Court decisions and statutes may provide that the applicable limitations period should be the shortest of the three.

The consumer attorney should investigate the limitations periods in three different states, if applicable, to see which is shortest. As described in the prior section, the analysis typically will be based on which state has the shortest limitations period for non-written contracts.

In considering between the forum state’s limitations period and that of the state listed in the contract’s choice of law provision, courts view two competing interests. The parties to a contract, by selecting the state’s law that applies to the contract, including its limitations period, have decided between themselves how long they need to keep records of the transaction. The other competing interest is of the forum state to set its own rules as to when the courts will refuse to hear stale evidence. Private parties should not be able to override the state’s interest in what matters its courts will hear.

The balancing of these interests leads most courts to find that private parties through a contractual choice of law can shorten the forum state’s limitations period, but not lengthen it. Between the forum state and the state selected in the choice of law provision, the shortest limitations periods should apply. The United States Supreme Court has termed this the more “modern” view in Sun Oil Co. v. Wortman, 486 U.S. 717 (1988), and this is the view taken by the 1988 version of the Restatement (Second) of Conflict of Laws. See generally NCLC’s Collection Actions § 3.6.3.1.3.

Another complication though is that over half the states have enacted “borrowing” statutes. These statutes require that when an action arose elsewhere than the forum state, the action must be brought within the limitations period of the state where the action arose. See id. § 3.6.3.2.1 (listing of these statutes). Typically, by court decision or explicitly in the borrowing statute, the cause of action must be brought within the shorter of the two limitations periods—where the action arose or the limitations period that would otherwise apply. See id. § 3.6.3.2.2.

Significantly, courts that have ruled on the issue—the states’ highest courts in New York and Ohio and federal courts in Kentucky and Pennsylvania—all hold that a claim relating to collection of a credit card obligation arose in the state where the card issuer is based. The card issuer suffers the economic injury in its home state and the breach occurs in the card issuer’s home state. That is the place where payment was to be received and was the location of the final event that allowed the cause of action to accrue and that caused the damages. See generally id. § 3.6.3.2.3.

The applicable state where the claim arose is the card issuer’s home state and not that of a debt buyer who only purchased the debt after the claim arose. As a result, in states with a borrowing statute, the law may be that a card issuer or debt buyer suit on a credit card debt must be brought within the limitations period for non-written contracts which is the shortest among the forum state, the state whose law is chosen in the contract, or the card issuer’s home state.

When Does the Statute of Limitations Begin to Run

The standard rule is that a limitations period begins to run from the date of default. How this applies to a credit card transaction is not always clear. If the claim is based on an account stated, the limitations period should run from the last transaction listed on the account stated. See id. § 3.6.7.2.

When the claim is based on a breach of contract, state law or the credit card agreement may have language related to when the card account is in default. If the card agreement states default is based on a failure to make a minimum payment, then the limitations period should run from that missed payment.

Other card agreements provide that upon a missed payment, the card issuer may declare the balance immediately due and payable. Card issuers or debt buyers in that case may claim that the declaration that the balance is due immediately was not made until the collection lawsuit was initiated. Of course, this argument fails if the card issuer did in fact demand payment in full at an earlier date.

Moreover, the Arizona Supreme Court, confronted with this language in a credit card agreement, has just ruled that the limitations period should run from the first missed payment. See Mertola, L.L.C. v. Santos, 2018 WL 3595915, at ¶ 18 (Ariz. July 27, 2018). The Arizona Supreme Court stated:

Under credit-card contracts like the one at issue here, however, the date when the entire debt will become due is uncertain and may not occur until far in the future. To hold that a cause of action on the debt does not accrue until the creditor exercises his right to accelerate would vest the creditor with unilateral power to extend the statutory limitation period and permit interest to continue to accrue, long after it is clear that no further payments will be made, subject only to a standard of reasonableness and other equitable doctrines. This would functionally eliminate the protection provided to defendants by the statute of limitations. We decline to extend such power to the creditor.

Determining the Date of the Consumer’s First Missed Payment

To determine the date the consumer first missed a payment, start with the collector’s own pleadings and any attached documents. Even if the collector is claiming a later date of default, its own pleadings, affidavits, and other documents may indicate an earlier date of default. Never underestimate the sloppiness of debt buyer documentation.

The date on which a consumer stopped payments on a credit card account can also be inferred from the charge-off date, if the collector provides that date in any of its documents—something collectors do surprisingly often. The charge-off date, under federal standards, is 180 days after the account becomes delinquent. Thus, a reasonable assumption of a delinquency date is 180 days before the charge-off date.

Another approach is to look at the consumer’s credit report to determine the last payment on the account reflected in the report. Do not confuse the charge-off date, which may be indicated there as well, with the date when the consumer stopped paying. Be alert to certain collectors seeking to “re-age” a debt by reporting an incorrect date of first delinquency, which is a potential violation of the FCRA (albeit without a federal private right of action unless first disputed with the credit reporting agency), as well as the Fair Debt Collection Practices Act.

See generally NCLC’s Collection Actions § 3.6.7.3 on proving the date of default.

When Is the Limitations Period Tolled or Revived

In counting the limitations period, do not count the period of a servicemember’s active duty military service. But the limitations period of a spouse continues to run during the servicemember’s active duty. Id. § 3.6.8.2.1.

There is much confusion over whether time spent out of state tolls the limitations period. The collector bears the burden of identifying the times the consumer was out of state. Some courts also provide that time out of state is not tolled if service of process is available out of state. Courts have also found the provision tolling the limitations period for time out of state violates the Constitution’s Commerce Clause where it discriminates against someone leaving a state for employment purposes or to change residences. Id. § 3.6.8.2.3.

A few courts are confused about the relationship between tolling for out-of-state residence and a limitations period governed by the law of the non-forum state. They find that since the consumer had never lived in the non-forum state, the consumer was always out of that state, and the limitations period is tolled forever. Virtually all courts reject this approach as contrary to reason and the intent of the legislature. Id. § 3.6.8.2.4.

A limitations period should not be tolled during the pendency of a first collection action that is voluntarily dismissed or dismissed for lack of prosecution, but state law may differ on this point. Id. § 3.6.8.2.5.

It is often said that a consumer making a partial payment revives the limitations period so it starts running all over again from the date of the partial payment. Connecticut, Maine, Maryland, and Minnesota legislation limits this. In addition, the partial payment must be directed at the debt in question, the consumer must acknowledge that the remainder is due, and there must be proof of the payment.

Payment by a co-debtor does not revive the limitations period for the other co-debtor. A repossession sale is not a partial payment by a consumer. An insurance refund or other payment by a third party to the creditor may not be a partial payment that revives the limitations period. For more on partial payments, see id. § 3.6.8.3.1.

Finally, a consumer’s acknowledgment of the debt may revive the limitations period. But some states require that the acknowledgment be in writing and signed. Other states require that the consumer do more than acknowledge the debt; the consumer must promise to pay the remainder of the debt. See generally id. § 3.6.8.3.2.