Finance: CREDIT CARDS

GOT AN AT&T CREDIT CARD? DON’T GO BANKRUPT

The company is quick to charge down-and-out debtors with fraud. Too quick?

After divorcing her husband in 1994, Tanya Piovet wanted to start life all over again by moving from California to Florida. But the 35-year-old real estate manager’s plans for a better future soured when the only jobs she could land were shop clerk positions at the minimum wage. Finally, when a child’s illness racked up medical bills and her husband stopped paying alimony, Piovet found herself broke, with maxed-out credit cards—including $5,300 on her AT&T Universal Card. Last year, Piovet filed for bankruptcy. Shortly thereafter, AT&T Universal sued her for committing fraud.

Piovet is one of several thousand bankrupt consumers each year who are hit with fraud charges by AT&T Universal Card Services. The vast majority of bankrupt card holders don’t have the money or legal savvy to fight back and end up settling with AT&T, according to bankruptcy experts. Debtors who settle or admit fraud forfeit their ability to have credit card debt wiped out. But in cases that have gone to trial, recently there has been a string of stinging judgments against AT&T in courtrooms across the country, rulings that AT&T had no basis for its actions.

Piovet was among the few who challenged AT&T on the grounds that AT&T hadn’t proved that she had acted fraudulently, such as by taking cash advances before going bankrupt with no intention of paying the debts. Judge Robert A. Mark in Florida’s Southern District Court not only agreed but castigated AT&T: AT&T’s reliance on these facts is both unpersuasive and hypocritical. [and] another disturbing display of institutional hypocrisy. When you are suing people for fraud, you have to have more than a gut feeling, seat-of-the-pants idea that these people did something bad.

Piovet’s case is not isolated. Says Margaret Howard, a law professor at Vanderbilt University in Nashville who has studied the matter: Based on reported court decisions, AT&T is bringing cases without any real factual basis for them, whether they have an inkling of actual fraud or not. Piovet’s lawyer, James B. Miller, a Miami bankruptcy attorney with the firm D. Jean Ryan, adds: These judges’ opinions are just the tip of the iceberg. If you’re getting a dozen published opinions, there has to be 10 or 20 times that amount that went unpublished.

Controversy over the treatment of bankrupt debtors is growing. Last spring, Sears, Roebuck & Co. came under fire for its long-term practice of making bankrupt debtors sign so-called reaffirmation agreements, which obligates them to repay their debts. Obtaining these agreements without court approval can violate bankruptcy laws. So far, Sears has paid $165 million to redress the situation. Federated Department Stores Inc. settled a similar lawsuit for approximately $5 million on Aug. 28.

But AT&T Universal, in filing fraud charges, takes a much more aggressive approach. Judges, lawyers, and bankruptcy experts interviewed by BUSINESS WEEK say AT&T is by far the major filer of fraud suits, filing many more suits than Citibank, the biggest issuer of credit cards, says a Citibank spokeswoman. In the Southern District of New York alone, AT&T is currently suing 222 debtors, compared with 10 for American Express Co.

MARKET LEADER. Norman Gamble, a senior vice-president and counsel for AT&T, says the company has rigorous methodologies for determining fraud based on payment patterns. In 1996, he says, AT&T sued 2,700 bankruptcy debtors for fraud and expects to sue an additional 3,300 this year—which, he says, is only 3% of its customers who go bankrupt.

Gary Klein, a staff attorney for the National Consumer Law Center in Boston, a nonprofit agency that represents low-income consumers, doubts the 3% figure. When you look at this type of litigation around the country, he says, AT&T is by far and away the market leader in bringing fraud suits. AT&T uses 40 law firms to file the actions.

Gamble says about 98% of AT&T’s fraud cases are settled out of court—and that 80% to 90% are in AT&T’s favor. That’s not surprising. Very few debtors challenge AT&T. Many can’t afford to pay the costs to fight the suits, say bankruptcy experts. Others fail to respond to the suits or don’t understand their rights. Even debtors who hire lawyers are usually told to settle. Lawyers are afraid they won’t get paid, so they tell the debtors it’s cheaper to settle, says Miller.

While Gamble has statistics on how many fraud cases are settled in AT&T’s favor, he says he has no figures on how often AT&T wins in court. Debtors such as Piovet who do fight back, though, are often successful. Several judges interviewed by BUSINESS WEEK used sharp language in dismissing actions. John Peterson, a judge who ruled against AT&T in a Southern District of California case, said he was unimpressed by AT&T’s preparation, adding, The bottom line is that AT&T now confesses that it had no basis in fact or law to file the. complaint, and when trial approached with no discovery conducted, AT&T sought voluntary dismissal.

Jerome Lee Davidow, a bankruptcy attorney in New York, says that other credit-card companies suing for fraud usually have much stronger cases than AT&T’s. When I see other credit-card companies suing for fraud, like American Express or Chase, they usually have a reasonable basis to believe there was fraud. That’s opposed to AT&T, whose only basis is very often that someone incurred debts and filed for bankruptcy. Their whole approach is a disgrace—targeting people who don’t have the resources to defend themselves.

Gamble admits there have been instances where the company could have done more pretrial investigative work: I think that with regard to some of those [negative] decisions, we may bear a share of responsibility on some of the conclusions reached. We could have done a better job in building a record in those cases, which would help the judges understand our industry and our practices.

Despite the relatively small number of cases that have gone to trial, the company’s tactics are causing some local judges to reconsider the way they adjudicate AT&T’s fraud actions. In the Southern District of Florida, AT&T suits became so problematic that the court changed local rules. In 1995, AT&T brought 429 fraud cases, representing one-quarter of all bankruptcy suits filed in that district and between five and 10 times the number filed by any other credit-card company. Concerned by the number of debtors who were settling with AT&T without being represented by a lawyer, the court decided to require that both parties go before a judge. The judge then determines whether a debtor fully understands his rights and that the credit-card company has a reasonable basis for alleging fraud before any settlement is approved.

RISKY STRATEGY. After the rule change, and several additional judgments against AT&T in that district, fraud suits brought by the company slowed to a trickle. In 1996, the number of cases dropped almost by half, to 236. This year there have been only 57. Gamble said he didn’t know of any drop-off in the number of cases in Florida. We pursue cases where we believe there is a fact pattern that indicates fraud, he says.

Credit-card industry consultant Lee Spirer, a principal with Booz Allen & Hamilton in New York, says a strategy such as AT&T’s can easily backfire. With increased competition in the card industry, any publicity that can alienate consumers will have significant impact on consumers’ choice of which card they hold and use. To protect themselves, consumers may steer away from companies pursing the type of litigation AT&T uses, says Spirer. AT&T may well have to do some cost/benefit work: Are the returns from debt collections worth a possible black mark on its reputation?By Debra Sparks in New YorkReturn to top