The Ostrich Defense:
Internet Scams in Consumer Credit Collection
by Michael D. Johnson
One of unfortunate outcomes of increased communication via the Internet has been an increase in the dissemination of tax protestor and consumer credit scams. The tax protestor movement has been characterized by outlandish arguments put forth by individuals who deny an obligation to pay taxes. For example, members of this movement claim that a person is exempt from federal income taxes if they are a citizen of a state, United States v. Sloan, 939 F.2d 499, 501 (7th Cir.1991) (Mr. Sloans proposition that he is not subject to the jurisdiction of United States [because he is a free born, natural citizen of Indiana] is simply wrong); or that a states department of revenue may only accept gold or silver for taxation. Peth v. Breitzmann, 611 F.Supp. 50 (The short answer to this silly argument is that Article I, §10, does not limit Congresss power under Article I, §8, to declare what shall be legal tender for all debts). Internet scams that purport to entitle a consumer to not pay a creditor on grounds similar to those cited by the tax protestors are increasingly being made in consumer credit collection matters and are a growing burden to creditors. The intent of this article is to outline several of the Internet scams commonly used in consumer credit collection cases and demonstrate their fraudulent nature.
The credit industry has various names for individuals and groups who use these Internet scams: Posse Comitatus, Freeman, Monetary Protestor, and Militia, among others. As used in this article, the term Internet scam denotes consumer credit scams promoted by these groups and individuals over the Internet. Internet scam arguments come in many different forms and embrace various theories. These arguments usually cut and paste elements of various laws and common law theories to conclude that a person is magically freed from debt and does not have to pay their creditors. These scam arguments are intended to delay collection action as long as possible.
Many Internet sites and chat groups have been created to advise people on how to avoid payment of debt. These operations usually charge a fee for the legal pleadings they provide and should be investigated for the unlicenced practice of law. The domain names of these organizations give insight into their intent: www.eliminatecreditcarddebt.cc; www.debtaid.org; www.debtdispute.com; and www.dlkconsultants.org/D_E_P_Debt_Elimination.html. The Anti-Discrimination League has a watchdog website that tracks similar organizations that have a political message.1
No Money Lent
The flavor of the month in Internet scam circles is the No Money Lent argument. The short version of this argument is that because the bank lent credit to the debtor, and not money, the debtor can repay the creditor in credit. By executing an alleged promissory note, via the credit application, the debtor has paid the creditor and thus is not indebted. The argument is widely disseminated over the Internet and is typified by the passage below:
The passage below is taken from a typical Internet scam answer to a summons and complaint.
Internet scams often rephrase the No Money Lent argument by stating there was no consideration given by the credit grantor to create a contract. The argument is that if only credit was lent to the debtor via the debtors promissory note, then the credit grantor did not risk any of its own funds and there was no consideration to form a contract. The absurdity of the no consideration argument is obvious. Federal law defines a loan and extension of credit as all direct or indirect advances of funds to a person made on the basis of any obligation of that person to repay the funds.4 The fact a creditor lent credit and not money directly to the consumer does not affect the liability of the debtor. By paying merchants for purchases made by a cardholder, creditors provide the necessary consideration to create an enforceable contract.
Truth in Lending
The over-achieving members of the Internet scam movement have spun the No Money Lent argument into a Truth in Lending Act violation or a violation of other consumer protection laws. According to this argument, if the No Money Lent argument is held as the truth, then the creditor has failed to disclose a material fact. The material fact being that the creditor risked none of its own assets because it lent credit via the borrowers note. This argument is gibberish on top of gibberish. A creditor does not have to lend money directly to a debtor in order to create a liability. The issuance and use of credit are sufficient to create the liability. Under Regulation Z, 12 C.F.R. 226.12, footnote 1, a contract and binding obligation are formed through the use of the credit. By using the credit, the debtor agreed to the terms and conditions of the credit agreement.
An effective technique, when a debtor alleges a Truth in Lending Act violation, is to demand the person state specifically what portion of the act has been violated. Debtors using these Internet scams claim broad sweeping allegations of fraud and misrepresentation in order to create doubt as to their liability. Once these individuals are forced to lay out the specifics of their arguments, the baseless nature of their ludicrous claims becomes obvious.
The FCBA Scam
Another Internet scam is to claim a violation of the Fair Credit Billing Act (FCBA).5 This scam involves sending a billing dispute letter to the creditor claiming a billing error on grounds that the creditor failed to disclose the No Money Lent argument and various other frivolous claims. Under the FCBA, a creditor has a duty to investigate a billing complaint and is prohibited from moving forward with legal action until the dispute has been investigated. Scam artists use this provision in a fraudulent attempt to halt collection by claiming that the creditor violated the FCBA in failing to respond to their complaints.
Nearly identical FCBA dispute letters are received by my firm everyday. The identical wording of the letters and the corresponding motion to dismiss that is usually filed by the debtor leads me to believe that one Internet site is promoting this scam. The letters allege various acts of misrepresentation and include the same four claims:
Under the FCRA (Fair Credit Reporting Act), a consumer reporting agency may terminate an investigation of a complaint if it determines that the dispute is frivolous or irrelevant.6 One such example is where a consumer disputes all information in their file without providing any details concerning the specific items in dispute. The reporting agency is still required to send a letter within five business days, but the provision helps creditors deal with the increasing problem of fraud. Such a provision in the FCRA would help creditors avoid many of the problems created by Internet scams.
The Arbitration Scam
An increasingly common Internet scam is to claim that the debt was resolved through arbitration. Conveniently for the debtors using this Internet scam, the arbitrations are usually sited in states far away from Minnesota, such as Florida, Alabama, and Texas. The arbitration forums, if they even exist, are scam operations that have professional-sounding names. Their names are usually slight deviations from those of reputable arbitration forums. Debtors using this scam usually send a notice of arbitration that claims to bind the creditor to the scam arbitration. These attempts to force a creditor into arbitration violate not only the terms of the credit agreement, but also the Federal Arbitration Act.7
Debtors using the false arbitration scam claim the fictitious promissory notes as their basis for claiming an arbitration award. The scam alleges that because the bank used the debtors promissory note (the credit application) to fund the loan, the debtor is entitled to a cash payment for the full amount of the promissory note. This is a continuation of the No Money Lent argument. The arbitration award is usually in the same amount of the credit default or the highest credit limit. While courts have recognized these fraudulent arbitrations for what they are, the arbitrations present a hassle for creditors and are another attempt to delay collection actions.
False arbitrations are widely available over the Internet as a means to defraud creditors. The fraudulent nature of these arbitrations is shown by the posting below, which outlines how a debtor can create a false arbitration forum.8
The Ostrich Defense
One of the more unusual Internet scams is to write Refusal For Cause Without Dishonor on everything sent to the debtor by a creditor and then returning it to the creditor. This includes the summons and complaint, summary judgment paperwork, and any other piece of paper sent to the debtor by the creditor. I like to call this the ostrich defense. Those advocating this Internet scam argue that if documents from the creditor are refused for cause in this manner, the debtor cannot be held liable for the debt.
Section 3-501 of the Uniform Commercial Code (UCC) governs presentment of negotiable instruments. Without dishonoring the instrument, the party to whom the presentment is made may return the instrument for lack of endorsement or refuse to accept the payment for failure of the presentment of the instrument to comply with the terms or agreement of the parties or other applicable rule. UCC 3-501 (1994). Because a court pleading is not a financial instrument that can be dishonored, writing Refusal For Cause Without Dishonor is meaningless. While UCC 3-501 is relevant in many circumstances, including when a person fails to endorse a check, it is wholly inapplicable to a consumer credit collection case.
An effective way of dealing with Internet scams is to demand specifics. For example: which purchase is the debtor disputing? which interest charge is the debtor disputing? which billing statement was inaccurate and why? what action by the creditor violated the FDCPA and when exactly did the violation occur? The intent of Internet scams is to delay collection actions by making broad, all-encompassing arguments. Judges may initially take these arguments seriously because the debtor, by alleging a Truth in Lending Act violation or FDCPA violation, adds a bit of legitimacy to an argument. However, by demanding the debtor state specifics, you can force the debtor to discuss the No Money Lent argument and other irrational arguments. If a judge does not initially see the frivolous nature of these claims, once the debtor starts to explain the specifics, the true nature of the argument becomes obvious.
The main goal of these scams is to delay collection action as long as possible. The arguments are so outlandish that no reasonable person can believe they are making a substantive legal argument in good faith. By refusing to work with their creditors and submitting specious answers when served with a complaint, these fraudulent individuals are successful in delaying their creditors. However, once a matter goes to summary judgment, the debtors always lose and end up incurring increased court costs, liens against their property, and the unpleasant consequences of post-judgment collection activities. Even an ostrich can anticipate a preferable fate.
2 This passage was taken from the website http://www.prweb.com/releases/2002/1/prweb31209.php In a letter dated January 28, 2004, the director of the Federal Reserves Division of Banking Supervision and Regulation expressly disclaimed Federal Reserve endorsement of this argument: Debt elimination programs that claim Federal Reserve approval or acquiescence and the satisfaction of legitimate debts through the presentation of suspicious documents are totally bogus. The Federal Reserve does not approve and is in no way involved in any program aimed at eliminating anyones debt obligations.
3 These articles are available at http://www.debtdispute.com/html/info.asp
4 12 U.S.C. §24.
5 15 U.S.C. §1637
6 15 U.S.C. §1681(i)(a)(2)(B)
7 9 U.S.C. §1-14
MICHAEL D. JOHNSON is an associate with Balogh Becker,
Ltd. He represents consumer credit grantors in collection actions in
Minnesota and several Indian reservations within Minnesota.