Banking and Finance Law Daily Reclassifying cryptocurrency purchases as ‘cash advances’ does not violate TILA
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Thursday, March 14, 2019

Reclassifying cryptocurrency purchases as ‘cash advances’ does not violate TILA

By Nicole D. Prysby, J.D.

A consumer’s claim that a bank violated TILA and Regulation Z when it reclassified his cryptocurrency acquisitions as "cash advances," instead of "purchases," fails because the bank did not change the definitions of cash advances or purchases—merely how it classified certain transactions. His claim that the definitions were unclear goes forward, based on a fact dispute as to whether cryptocurrency is cash-like.

A consumer’s claim that a bank violated the Truth in Lending Act and Regulation Z by reclassifying credit card transactions acquiring cryptocurrency as "cash advances," rather than as "purchases," fails, held a federal district court in Illinois. The definitions of "cash advance" and "purchase" were not literally changed, and a change in how one particular transaction is classified within the enumerated types of transactions is not a significant change in account terms. Therefore, the bank was not required to provide notice of the change. However, the consumer’s claim that the bank failed to abide by the "clear and conspicuous" disclosure requirement in credit card terms, because the definition of a "quasi-cash transaction" was unclear and ambiguous goes forward. The claim goes forward because of a fact dispute as to whether crypto-currency is cash-like. In addition, the fact that the bank treated transactions acquiring cryptocurrency as purchases until February 2018 plausibly indicates the definitions are unclear. The consumer’s breach of contract and declaratory judgment claims also go forward (Eckhardt v. State Farm Bank FSBMarch 13, 2019, McDade, J.).

Background. The consumer holds a credit card issued by the bank defendant. The cardholder agreement stated that quasi-cash transactions would be treated as cash advances and defined quasi-cash transactions as "[I]tems that are convertible to cash or similar cash-like transactions that we may designate from time to time, including wire transfer money orders, other money orders, travelers checks, or foreign currency or tax payments." Prior to February 2018, the consumer’s transactions acquiring cryptocurrency were treated as purchases within the meaning of the cardholder agreement. Beginning on Feb. 4, 2018, the bank treated those transactions as a cash advance. The consumer was charged a transaction fee, and the transaction was subjected to the higher interest charges attributable to cash advances per the agreement.

The consumer brought claims under TILA and Regulation Z, as well as a claim for breach of the cardholder agreement and a request for a declaratory judgment.

TILA, Reg. Z claims go forward in part. The consumer alleged that the bank failed to provide notice of its intent to classify transactions acquiring cryptocurrency as cash advances rather than purchases. The bank argued that no change-in-terms notice was required because the account terms never changed. Regulation Z requires written notice of a significant change in account terms. Those account terms include the definitions of "cash advance" and "purchase." But the terms were not literally changed; the question is whether a change in application of the unchanged cardholder agreement—specifically, a change in how one particular transaction is classified within the enumerated types of transactions—is a significant change in account terms per Regulation Z. The court held that it is not. The bank first classified transactions acquiring cryptocurrency as purchases and then as cash advances. This amounts to no more than a change in how the definitions of "purchase" and "quasi-cash transaction" were interpreted and applied to transactions acquiring cryptocurrency. A change in how the terms of the agreement are interpreted or applied cannot reasonably be equated to an actual change to those terms. The inconsistent classification of one particular transaction—here, first classifying transactions acquiring cryptocurrency as purchases and then later as cash advances—does not change the broader types of transactions enumerated in the agreement or alter the fees and rates applied to those types of transactions. The bank did not add transactions acquiring cryptocurrency as a separate type of transaction to which cash advance rates and fees apply, but merely reclassified such transactions as quasi-cash transactions, an existing type of transaction. No account or cardholder agreement term was changed.

The consumer also alleged that the bank failed to abide by the "clear and conspicuous" disclosure requirement, because the definition of "quasi-cash transaction" was unclear and ambiguous. The bank asserted that cryptocurrency is cash-like and the disclosures were thus sufficiently clear to allow an ordinary consumer to conclude transactions acquiring cryptocurrency are cash advances. The court concluded that whether crypto-currency is cash-like is a fact question. This claim goes forward to resolve the fact question and because the consumer presented evidence that cryptocurrency is unlike the dictionary definition of "cash" ("money in the form of coins or bank-notes, esp[ecially] that issued by a government"). In addition, the fact that the bank treated transactions acquiring cryptocurrency as purchases until February 2018 also reasonably and plausibly indicates the definitions are unclear.

The consumer argued in the alternative that if advanced notice was not required and transactions acquiring cryptocurrency are, in fact, quasi-cash transactions, the bank violated TILA and Regulation Z by not providing accurate periodic account statements. The bank argued that the claim should fail because (1) the consumer failed to identify a violation of any specific disclosure requirement and (2) the inaccuracy resulted in a windfall for the consumer rather than damages. The court sided with the bank, finding that the consumer failed to state a claim because even if the statements at issue inaccurately classified transactions acquiring cryptocurrency as purchases rather than cash advances, the statements nevertheless accurately reflected how the transactions were treated and what was actually applied to the consumer’s account.

Other claims, issues. The consumer’s breach-of-contract claim was based on allegations that the bank breached the cardholder agreement by classifying transactions acquiring cryptocurrency as cash advances. This claim goes forward, because there is a fact question as to whether cryptocurrency is cash-like or is a good. In the alternative, the consumer argued that the bank breached the cardholder agreement by delegating to a third party its right to designate transactions as cash advances. This claim goes forward because the bank failed to properly brief the basis for its motion to dismiss.

He also sought a declaratory judgment that the terms of the cardholder agreement do not permit the bank to impose cash advance fees or interest charges for buying virtual currencies from third-party credit card merchants. This claim also goes forward, based on the fact question of how to classify cryptocurrency.

The case is No. 1:18-cv-01180-JBM-TSH.

Attorneys: David J. Harris, Jr. (Finkelstein & Krinsk LLP) for Seth Eckhardt. David C. Blickenstaff (Schiff Hardin LLP) for State Farm Bank FSB.

Companies: State Farm Bank FSB

MainStory: TopStory BankingOperations Blockchain ChecksElectronicTransfers CreditDebitGiftCards TruthInLending

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