Bankruptcy Newsletter

FACTA Didn't Bar Printing Digit From Card Number
The Fair and Accurate Credit Transaction Act did not prohibit a merchant from printing the first digit of a cardholder's credit card number on the cardholder's receipt, a Michigan district court has held as a matter of first impression.

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The provision of the Fair and Accurate Credit Transaction Act (FACTA) indicating that "no person that accepts credit cards or debit cards for the transaction of business shall print more than the last 5 digits of the card number or the expiration date upon any receipt provided to the cardholder at the point of the sale or transaction," did not prohibit a merchant from printing the first digit of a cardholder's credit card number on a receipt, a Michigan district court held as a matter of first impression. Congress's concern in passing FACTA was to limit identity-sensitive information that could appear on a credit card receipt, and the first digit of a credit card number did not reveal any sensitive information, but rather simply revealed the same credit card brand information that was permissible and already present elsewhere on the receipt.

A hotel patron was provided with a check-out receipt following his stay, and that receipt contained information regarding the manner in which the patron paid for his room. The receipt indicated that payment was made using a credit card, and revealed the brand of that credit card both through an abbreviation and the full brand name. By revealing the first digit of the patron's credit card number, the receipt made a third identification of the credit card brand, since the first digit of every credit card number is the numerical designation of the card brand.

The patron brought a putative class action against the hotel operator and related defendants, alleging that they violated the Fair and Accurate Credit Transaction Act (FACTA) by printing the first digit of his credit card number on his check-out receipt. The patron sought statutory and punitive damages for himself and a nationwide class of similarly situated persons. The defendants and a third-party defendant moved for summary judgment. Because the parties agreed that the first digit of any credit card number was a numeric representation of the card's name brand and that merchants could lawfully print, in word form, a card's brand name on a credit card receipt, the issue raised in the patron's case was whether FACTA was properly construed to impose potential classwide liability for printing in numeric form on a receipt information that could be printed in word form without liability.

FACTA was enacted to prevent identity theft, improve the resolution of consumer disputes and accuracy of consumer records, and make improvements in the use of and access to credit information, the district court explained. One means adopted by Congress to accomplish these goals was a provision restricting the information that could be printed on any receipt provided to the cardholder at the point of sale or transaction. The parties disputed whether this provision, 15 U.S.C.A. § 1681c(g)(1), prohibited the printing, in numeric form, of the credit card brand by printing the first digit of a credit card number, which provided no more information than what lawfully appeared in word form on the face of a receipt. According to the patron, the statute's plain language barred printing a credit card's brand identity in the form of the card number's first digit, even if, by doing so, a merchant revealed no information that was not already displayed on the face of the receipt in word form.

The district court first considered the rules of statutory construction, noting that the words of a statute are not read in isolation, but in the context of the whole statutory text and the statute's purpose. After considering the statute's language, grammar, context, and other intrinsic evidence, it found that congressional intent was clear, making resort to legislative history unnecessary.

Looking at the statute, which stated that "no person that accepts credit cards or debit cards for the transaction of business shall print more than the last 5 digits of the card number or the expiration date upon any receipt provided to the cardholder at the point of the sale or transaction," the court noted that it was "not a model of grammatical clarity." Although the subject, "no person," and the verb, "shall print," were sufficiently clear, the direct object of the sentence, identifying what "no person...shall print" was not clear. Rather, the court identified two possible grammatical constructions of the statute that hinged on the function of the word "more."

One such construction treated the word "more" as a noun. Under this approach, "more" would become the direct object of the sentence, and the subsequent prepositional phrase, "than the last 5 digits of the card or the expiration date," would modify and limit "more." This construction, the court noted, accounted for each word in the sentence and satisfied rules of grammar, but had the "seemingly bizarre effect of permitting merchants to print on the receipt only the last five digits of the card number and the expiration date of the card." This prohibition would apply to the first digit of the credit card number, but would also bar printing the card's brand name in word form, as well as other information necessary to make the receipt useful, such as a description of the item purchased, the purchase amount, the location of the transaction and the name of the merchant, and a signature line for the customer. "The absurdity of this grammatically legitimate reading of [§ 1681c(g)(1)] highlights the importance of putting words into context when interpreting federal regulatory schemes," the court said. Congress could not have intended for a provision of FACTA to vitiate all receipts for credit card purchases, and neither party advocated for this reading of the statute.

The second construction of the statute identified by the court treated the word "more" as an adjective. This raised the question, however, of what noun "more" modified. "The statute prohibits printing 'more' of something other than the specified items," the court said, "but it does not explicitly say under this construction what information is subject to its prohibition." The patron's proposed reading treated card number digits as the missing term, whereas the defendants argued for reading the missing term to be "personally identifying information," so that the statute would be interpreted to mean that "no person...shall print more [personally identifying information] than the last five digits of the card number or the expiration date." The court concluded that the intrinsic evidence of the statutory scheme demonstrated that the defendants' proposed construction was the one comporting with actual congressional intent.

Unlike the patron's proposed reading, the court explained, the defendants' approach accounted for both objects of the statute's prepositional phrase, card number digits and expiration date. Moreover, the defendants' approach was consistent with the stated purpose of FACTA of preventing identity theft, while the patron's reading was inconsistent with that purpose since it prohibited more than was necessary to protect the private information that FACTA sought to shield. The court emphasized that the first digit of the card number at issue in the case was simply a numeric representation of a card's brand name, and thus provided information that already was lawfully on a receipt in word form. "Indeed," the court said, "once the receipt reveals the brand name, 'MasterCard,' the potential thief knows the first digit is '5.'" In addition, the court reasoned, the patron's statutory construction was actually contrary to congressional intent since it permitted merchants to print sensitive information, such as the three-digit card verification code found on the reverse side of a credit card or the cardholder's personal identification number for a debit card. That information was not part of the credit card number or expiration date. Such information was, however, obviously intended by Congress to be protected.

The defendants' proposed construction, the court indicated, avoided both the over-inclusive and under-inclusive problems of the patron's proposed construction and comported with congressional intent. Although it permitted the printing of the numerical equivalent of a card brand name, doing so did not increase the actual risk of identity theft, and truly sensitive information could not be printed, regardless of whether it was part of the credit card number or expiration date. In addition, the court found, other FACTA provisions, and the broad regulatory scheme, further supported this reading. "Reading the statute as a whole," the court said, "the importance of protecting consumers from exposure to actual, legitimate risks of identity theft becomes even more pronounced." The patron's proposed construction, which would impose liability on a merchant for printing the numeric representation of a card brand name, even though printing such information presented no additional risk of disclosing private information, was contrary to this statutory context.

The court pointed out that Congress's concern with the actual, legitimate risks of identity theft, rather the particular form of disclosing information lawfully on a credit card receipt, was reflected by the Credit and Debit Receipt Clarification Act, which amended the willfulness provision of 15 U.S.C.A. § 1681n to except merchants who printed the credit card's expiration date on a receipt but otherwise complied with FACTA. Congress expressly noted that the purpose of this legislation was to provide protection to consumers who suffered actual harm to their credit or identity while limiting abusive lawsuits which did not protect consumers. The district court concluded that the Credit and Debit Receipt Clarification Act was "strong evidence of a Congressional intent to protect consumers from actual threats of identify theft, and not to create potentially crippling cost and liability for merchants whose conduct does not in any way increase the actual risk of credit fraud or identity theft."

The Michigan district court concluded that, pursuant to FACTA, "Congress intended to limit the identity-sensitive information that could appear on a credit card receipt." Given that the first digit of a credit card number did not provide identity-sensitive information, but information that lawfully could appear on a receipt in word form, Congress did not intend to prohibit the printing of the first digit of a credit card number on a receipt. The court therefore granted summary judgment for the defendants. Broderick v. 119TCbay, LLC, 2009 WL 2878531 (W.D.Mich., Judge Jonker).

Although it had the appearance of "gaming the system," a transaction whereby a law firm with a substantial claim, in the amount of $662,843.93, against Chapter 11 debtors for its prepetition legal services sold this claim to an affiliated nondebtor entity which wanted to construct a real estate development across the street from the debtors' residential, retail, and entertainment complex, and which believed that the debtors' successful reorganization would impact positively on its own development, served to remove the firm as a creditor of the estate and to allow its employment as counsel to the debtors. This related entity had sufficient equity in its real estate holdings to pay the law firm and was not dependent on receiving any distribution from the debtors to pay the purchase price for this fee claim. In re 7677 East Berry Ave. Associates, L.P., 2009 WL 4186743 (Bkrtcy.D.Colo., Judge Romero).

An assignment of a default judgment against a bankrupt loan broker, on which the assignee relied as the basis for its proof of claim, was unenforceable under the Illinois Joint Tortfeasor Contribution Act, so as to require that the claim be disallowed. The debtor was a non-settling defendant in the underlying fraud action, which a lender had brought against those who allegedly conspired to defraud it into making a residential mortgage loan. The assignee was a settling defendant in that action, and the assignment was an explicit requirement of the settlement, by which the assignee sought to circumvent a state law prohibition on a settling defendant's ability to pursue a contribution claim against nonsettling defendants whose liability has not been extinguished by the settlement. C & R Mortg. Corp. v. Ulz, 2009 WL 4043357 (N.D.Ill., Judge Andersen).

The provision of the will of a Chapter 13 debtor's deceased mother that conditioned the inheritance rights of the debtor and his siblings on their repayment of loans obtained from their mother was unenforceable as to the debtor. Requiring the debtor to repay the mother's probate estate $47,683.46 as a condition to receiving any inheritance distributions would allow the probate estate to receive more than the debtor's other general unsecured creditors and violate the fundamental bankruptcy principle of equal distribution to creditors. In re McKay, 2009 WL 4668424 (Bkrtcy.M.D.Fla., Judge Briskman).

A limited liability company (LLC) that wired $10,000,000 to a broker-dealer's bank account demonstrated that it had some notion of the securities in which it sought to invest the deposited funds. Thus, despite the LLC's assertion that the lack of a specific authorization to trade specific securities precluded its designation as a "customer," the LLC qualified under the Securities Investor Protection Act (SIPA) as the broker-dealer's "customer," which was defined to include a person who deposited cash with the debtor for the purpose of purchasing securities The LLC made the transfer after its managing member spoke by telephone with the broker-dealer's sole owner concerning the LLC's potential investment in the broker-dealer's investment advisory fund and was advised that the fund was closed but that it could wire the money to the broker-dealer's account to be held until the fund opened. Rosenman Family, LLC v. Picard, 2009 WL 4402891 (S.D.N.Y., Judge Buchwald).