Official Publication of the Minnesota State Bar Association

Vol. 61, No. 3 | March 2004
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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. Sloan’s 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 state’s 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 Congress’s 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: “”; “”; “”; and “”. 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:

Consumers with the right information can force creditors and debt collectors into “non-payment” settlement agreements. Why? Because it can be proven by the bank’s own accounting records that it lent nothing to the customer, but created money from the customer’s promise to pay. This makes the customer the lender, according to the Federal Reserve Bank of Chicago, and entitled to have his “unpaid debt” reduced by the value of the greatest credit limit.

The best-kept secret in the banking and credit card business is that banks do not lend anything. When interviewed, several certified public accountants agreed that, “In a typical checking account, the check writer’s account is debited and the seller’s account is credited, but in a loan or credit account, no accounts are debited but the customer’s account is credited in the amount of the approved credit limit. The bank creates the money from nothing, making the customer the lender.” 2

According to the “No Money Lent” argument, when a debtor defaults on credit, the debtor does not owe any money. In addition, the debtor is entitled to the largest amount of credit extended by the creditor, because the debtor executed a promissory note for this amount. For example, in the dreamland in which these fraudulent people live, if you have a credit card with a $5,000 credit limit, and you default owing $4,000, you not only do not owe the $4,000, you are actually entitled to $5,000. The intention of this mind-boggling argument is to delay collection action by confusing creditors and courts.

The passage below is taken from a typical Internet scam answer to a summons and complaint.

The credit card company accepted the alleged credit card application as money and deposited the money/credit card application into an account with the respondent’s name on the account. This means that the credit card company recorded the credit card application as a loan from the respondent to the credit card company and the credit card company became the borrower. The credit card company never lent one penny to purchase the credit. When the credit card company deposited the funds of newly issued credit into an account, the credit card company credited new money. The credit card company received funds from the respondent. And, GAAP requires that the credit card company record a liability account, crediting the respondent’s account, showing that the credit card company owes the respondent the deposited funds just as if the respondent had deposited cash or a payroll check into the respondent’s account.

The “No Money Lent” argument was used by debtors in the case of Alcorn and Allen v. Washington Mutual Bank, F.A., 2003 Tex. App. Lexis 5656, (Texas Court of Appeals, 6th District). In its decision, the court stated, “Alcorn and Allen take the position that, when they executed and delivered the home equity note to Long Beach Mortgage Company, the note did not evidence a debt from them to the mortgage company, but instead ‘created’ money belonging to them that they do not owe to anyone. This is a legally erroneous concept ... .” Internet scams frequently cite Federal Reserve publications entitled, “Modern Money Mechanics” and “The Two Faces of Debt.”3 Both articles were published by the Chicago branch of the Federal Reserve Bank years ago and are no longer in publication. Internet scams reach ridiculous conclusions from these publications by misinterpreting the articles and ignoring other relevant laws.

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 debtor’s 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 borrower’s 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:

1. That Big Bank Credit Lender does not follow Generally Accepted Accounting Principles.
2. That Big Bank Credit Lender does not follow the Federal Reserve Bank policies and procedures.
3. That Big Bank Credit Lender prohibits the party that funds the loan or extension of credit to be repaid.
4. That Big Bank Credit Lender disclosed to me that they would create new money based on my note or similar instrument and that I am not entitled to those credits or money.

When dealing with these frivolous and fraudulent letters, creditors should respond in writing, stating that the alleged billing error is fraudulent and that its investigation is complete. The billing error dispute letters claim a billing dispute exists because no money was lent and the debtor was not told that new money would be created. Such arguments not only are ludicrous, but also do not constitute a billing error dispute under the FCBA because the dispute does not relate to a specific charge on a billing statement. Because these dispute letters do not comply with the requirements of the FCBA, no response may be necessary. However, creditors should still send a response in order to eliminate any future argument.

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 debtor’s 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

Suppose that “Mary Jane,” an average consumer, opens a mail box at any mail box service or even the post office. In her form 1583, she will instruct the mail box service provider or the post office to accept mail addressed to the “Consumer Arbitration Forum” a name she invented that sounds like another established arbitration service. Mary Jane will accept arbitration claims for a $39.00 filing fee, payable by blank money order. The defendant must also pay a $39.00 filing fee. Upon receipt of the filing fee and claim, she will send a notice to the claimant and all other parties stating that a final arbitration award will be given on a specific date exactly 90 days from the date of the notice and that all evidence and arguments must be filed at least ten days before that time. In about two and a half months, Mary Jane contacts several local consumers to review the evidence in the case file and to vote on a decision. That decision is then recorded into the file and dated and mailed to every party. The party in whose favor the award is given can then apply to the local court for an order confirming the arbitration award and an entry of judgment against the losing party.

In response to these arbitration claims, major creditors have obtained injunctions against several arbitration forums ordering the forums to stop issuing the false arbitration claims. Unfortunately, fighting fraudulent arbitration forums is much like trying to stop music piracy on the Internet. Even if creditors are successful in obtaining injunctions against one forum, new arbitration forums spring up to replace the ones that have been shut down. Fighting such groups is a costly and burdensome exercise in dealing with these scam operations.

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 In a letter dated January 28, 2004, the director of the Federal Reserve’s 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 anyone’s debt obligations.”

3 These articles are available at

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.