On September 8, 2004, the Cleveland Municipal Court found Discover Bank’s business practices to be unjust, unreasonable and unconscionable, ruling in favor of a defendant cardholder in a breach of contract action. Discover Bank v. Owens, No. 2003 CVF 20195 (Muni. Cleveland, Ohio Sept. 8, 2004). Discover Card sued a cardholder for breach of contract, claiming that the cardholder failed to make the minimum monthly payments required by her cardholder agreement. The cardholder, who represented herself in the lawsuit, did not dispute this claim, but rather indicated that she was on Social Security Disability benefits and did not have the money to make payments.

During trial it was revealed that the cardholder’s account balance was $1,895.53 after she used her card for the last time. Over the next six years the cardholder made payments totaling $3,492 on her account; however, some of her payments were below the required minimum monthly payment and others were not made by the payment due date. Accordingly, late payment charges and monthly finance charges were imposed. The monthly finance charges caused the cardholder’s account balance to exceed her $1900 credit limit, and so overlimit fees also were imposed. During this six year period, the cardholder was assessed a total of $1,518 in overlimit fees and $1,160 in late payment fees. At the time of suit, the cardholder owed $5,564.28 on the original $1,895.53 debt.

The court recognized that the cardholder had some responsibility for the situation. While the court observed that it might have been “unfair” for a creditor to extend easy credit at stiff terms to someone who was clearly in a difficult financial predicament in the first place (as Ms. Owens had a limited income on Social Security Disability and was unemployed), no one forced Ms. Owens to open the account or use it and she could have sought financial or legal counsel to work out a payment arrangement with Discover. Nevertheless, the court indicated that Discover also bore some responsibility. According to the court, it was “unreasonable” and “unjust” for Discover to allow the cardholder’s debt to continue to accumulate well after it had become clear that the defendant was unable to pay. Thus, the court indicated that Discover would be “unjustly enriched” if the court were to rule in its favor, citing legal precedent and an injured party’s duty to mitigate damages. In addition, the court found the repeated, six-year accumulation of overlimit fees was “manifestly unconscionable” because (i) the cardholder did not use her card to purchase items beyond the agreed-upon credit limit, (ii) the cardholder did not use her card again after Discover imposed the fees and finance charges that put her balance over the credit limit and (iii) Discover continued to charge the overlimit fee monthly even though the cardholder had made payments that nearly doubled the amount of the original debt. The court also questioned the appropriateness of a “CreditSafe” product billed monthly to Ms. Owen’s account where the only limited potential benefit apparently still available to her was hospitalization benefits (already being unemployed and on disability and apparently not covered).

Finally, the court indicated that the repeated overlimit and late fees were arbitrarily fixed sums of money that were imposed as penalties for failing to perform a condition of a contract and thus illegal.

For these reasons the court held in favor of the cardholder and crafted an equitable remedy.

While the facts of the case appear egregious, the case is a reminder that equitable principles can be applied to override even well-written legal contracts where the facts are deemed to merit such action.

Michael C. Tomkies and Charles V. Gall