District Court (Ill.) Says Credit Card Issuer Properly Treated Plaintiff’s Purchase of Cryptocurrency as a “Cash-Advance” Rather than a “Purchase of Goods”

In Eckhardt v. State Farm Bank FSB, No. 1:18-cv-01180, 2019 U.S. Dist. LEXIS 40196 (C.D. Ill. Mar. 12, 2019), Judge McDade found that State Farm Bank properly treated a Plaintiff’s purchase of cryptocurrency on his State Farm credit card as a cash-advance subject to cash advance fees rather than as a purchase of goods. The facts were as follows:

Plaintiff Seth Eckhardt has held a credit card issued by Defendant since 2017. (Doc. 11 at 5). When he became a cardholder, he was given a copy of the standard cardholder agreement, which stated in pertinent part: “Purchases. You may use your Card to purchase or lease goods or services (‘Purchases’) from merchants who honor Visa credit cards.” (Doc. 11 at 11 (citing Doc 11-1 at 4)). The agreement further stated: “Quasi-cash transactions, described below, are deemed to be Cash Advances and not Purchases.” (Doc. 11 at 11 (citing Doc 11-1 at [*2]  4)). The agreement 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 (so-called “quasi-cash transactions”). However, your Card may not be used to obtain, and we will not honor requests for, a Cash Advance in the form of casino chips, bets or wagers, gaming transactions (including Internet gambling), lottery tickets or the like. (Doc. 11 at 12 (citing Doc 11-1 at 4)). Cash advances are treated less favorably than purchases. The annual percentage rate charged for cash advances is substantially higher than that for purchases, and a transaction fee is assessed for each cash advance while there is no corresponding fee for purchases. (Doc. 11 at 5; see also Doc 11-1 at 1). On multiple occasions prior to February 2018, Plaintiff purchased cryptocurrency using his State Farm credit card. The cryptocurrency at issue herein is created with cryptographic functions (essentially mathematical algorithms) performed using a software called “Blockchain.” (Doc. 11 at 6-7). It is described as “virtual [*3]  money” but is not legal tender for public or private debts; neither its value nor production are regulated by any government at this time. (Doc. 11 at 6). One can obtain cryptocurrency by purchasing it from another; “mining” it, i.e., creating new units of the cryptocurrency; or creating a new cryptocurrency altogether. (Doc. 11 at 6-9). Prior to February 2018, Plaintiff’s transactions acquiring cryptocurrency were treated as purchases within the meaning of the cardholder agreement and so listed in his monthly credit card statements. (Doc. 11 at 15). On February 4, 2018, Plaintiff purchased cryptocurrency using his State Farm credit card, but that time, the transaction was treated as a cash advance and so listed on his monthly statement. (Doc. 11 at 15). Plaintiff was therefore charged a transaction fee, and the transaction was subjected to the higher interest charges attributable to cash advances per the agreement. (Doc. 11 at 15, Doc 11-1 at 1). Plaintiff attempted to negotiate with State Farm to remedy the “surprise Cash Advance fees and interest charges” to no avail. (Doc. 11 at 16).

Judge McDade found no TILA violation.

Plaintiff alleges Defendant violated TILA and Regulation Z by failing to provide adequate notice of a significant change in account terms when it decided to begin treating transactions acquiring cryptocurrency as cash advances rather than purchases. (Doc. 11 at 20-22; Doc. 14 at 15-19). Defendant argues no change-in-terms notice was required because the account terms never changed. (Doc. 13 at 7-10). Regulation Z requires written notice of “a significant change in account terms” be given to “each consumer who may be affected” “at least 45 days prior to  the effective date of the change[.]” 12 C.F.R. § 1026.9(c)(2)(i)(A); see also TILA, 15 U.S.C. § 1637(i)(2) (“In the case of any credit card account under an open end consumer credit plan, a creditor shall provide a written notice of any significant change, as determined by rule of the Bureau, in the terms (including an increase in any fee or finance charge . . .) of the cardholder agreement between the creditor and the obligor, not later than 45 days prior to the effective date of the change.”). Regulation Z defines “significant change to an account term” as “a change to a term required to be disclosed under § 1026.6(b)(1) and (b)(2), an increase in the required minimum periodic payment, a change to a term required to be disclosed under § 1026.6(b)(4), or the acquisition of a security interest.” 12 C.F.R. § 1026.9(c)(2)(ii). Section 1026.6(b) sets forth the requisite account-opening disclosures; among other things, the credit card issuer must disclose the various rates, fees, and charges authorized by the cardholder agreement as well as the types of transactions to which each of the various rates, fees, and charges apply. Regulation Z, 12 C.F.R. § 1026.6(b)(1), (2), (4). There appears no dispute that the definitions of “cash advance” and “purchase” are subject to Regulation Z’s account-opening disclosure requirements, meaning the parties agree cardholders would be entitled to advance notice of any change to the definitions of those terms. Additionally, Plaintiff does not appear to allege the relevant provisions of the cardholder agreement were amended in the literal sense; thus, it appears no relevant term of the cardholder agreement was expressly changed or amended. The operative question is thus 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, which ultimately determines the applicable interest rate and transaction fee—is a significant change in account terms per Regulation Z. The Court is aware of no case answering this question or a similar one, and the parties have not directed the Court’s attention to any such case. To resolve the issue at bar, the Court must begin with the text of Regulation Z. As stated, Regulation Z requires advance notice of a “significant change in account terms,” which is a “change to a term required to be disclosed under § 1026.6(b)(1) and (b)(2), an increase in the required minimum periodic payment, a change to a term required [*11]  to be disclosed under § 1026.6(b)(4), or the acquisition of a security interest.” 12 C.F.R. § 1026.9(c)(2)(i), (ii). This definition clearly and unambiguously contemplates an actual change to a written term in the cardholder agreement—specifically, a term that must be disclosed pursuant to Regulation Z, 12 C.F.R. § 1026.6(b). However, Plaintiff has not alleged an actual change to any term of the cardholder agreement. At all relevant times, the cardholder agreement identified and defined three types of transactions (purchases, quasi-cash transactions/cash advances, and balance transfers) and set forth the specific interest rate and transaction fee associated with each type of transaction. (See Doc. 11-1 at 5). The only change alleged is how Defendant classified transactions acquiring cryptocurrency among those enumerated types of transactions; Defendant first classified them 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. But a change in how the terms of the agreement are interpreted or applied cannot reasonably be equated to an actual change to those terms. Plaintiff has thus failed to allege a significant change in account terms, which is necessary to trigger the disclosure requirement set forth in Regulation Z, 12 C.F.R. § 1026.9(c)(2)(i). The Court is not persuaded by Plaintiff’s arguments otherwise. To start, Plaintiff argues: “Regulation Z requires advance notice to cardholders where the issuer changes ‘the type of transaction to which [an unchanged] rate applies, if different rates apply to different types of transactions.'” (Doc. 14 at 18 (quoting Regulation Z, 12 C.F.R. § 1026.6(b)(4)(i)(C)). Plaintiff seemingly equates the change in how transactions acquiring cryptocurrency are classified to an actual change to the contract terms enumerating and defining the broad categories, or types, of transactions. Underlying is the flawed assumption that any change in how the terms of the agreement are interpreted and applied constitutes an actual change to those terms. In support, Plaintiff attempts to distinguish between “credit terms” and the written “contractual terms” by arguing credit terms may be changed without changing the contractual terms. (Doc. 14 at 18). But the Supreme Court has explicitly rejected this analysis, Chase Bank USA, N.A. v. McCoy, 562 U.S. 195, 206 n.5 (2011), which directly undermines Plaintiff’s position. Plaintiff’s logical fallacy is illustrated by [*13]  the very facts of this case. TILA and Regulation Z require creditors to disclose, among other things, the applicable schedule of interest rates and fees and identify the types of transactions to which each rate and fee apply. Regulation Z, 12 C.F.R. § 1026.6(b); TILA, 15 U.S.C. § 1637. 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. Defendant did not add transactions acquiring cryptocurrency as a separate type of transaction to which cash advance rates and fees apply; Defendant instead reclassified such transactions as quasi-cash transactions, an existing type of transaction. Thus, Defendant did not change the “‘types of transactions’ to which Defendant’s unchanged Purchase rates or unchanged Cash Advance rates apply,” as Plaintiff argues. Plaintiff’s reliance on 12 C.F.R. § 1026.5(e) does not alter the outcome. Section 1026.5(e) states § 1026.9(c) disclosures may be required when an event renders the initial, account-opening disclosures inaccurate. Regulation Z, 12 C.F.R. § 1026.5(e). No disclosure expressly stated transactions [*14]  acquiring cryptocurrency are purchases and not quasi-cash transactions, so Defendant’s decision in early 2018 to begin classifying such transactions as cash advances as opposed to purchases did not render the requisite disclosure of the types of transactions to which the various rates and fees apply or the definitions thereof inaccurate per se. . . .Again, no account or cardholder agreement term was changed here. Notably, this line of cases supports the Court’s reading of Regulation Z to require advanced notice only when an actual change occurs. In fact, McCoy phrased the issue as: “whether the [interest rate] increase actually changed a ‘term’ of the Agreement that was required to be disclosed under [Regulation Z, 12 C.F.R. § 1026.6(b)].'” McCoy, 562 U.S. at 205. The Supreme Court went on to state: “If not, [Regulation Z, 12 C.F.R. § 1026.9(c)(2)]’s subsequent notice requirement with respect to a ‘change in terms’ does not apply.” Id. Thus, the Supreme Court has interpreted § 1026.9(c)(2) to require an actual change to a term of the cardholder agreement. In sum, underpinning Plaintiff’s entire argument is the fundamentally flawed assumption that a change in how the terms of the cardholder agreement are interpreted and applied equates to an actual change to the terms of the agreement. (See Doc. 14 at 15-19). To the contrary, a change in interpretation and application is not an actual change to the terms being interpreted and applied. The change here—Defendant’s decision to begin classifying transactions acquiring cryptocurrency as cash advances—did not change any account term outlined in the cardholder agreement. Consequently, Plaintiff was not entitled to advanced notice per Regulation  Z, 12 C.F.R. § 1026.9(c)(2). Count I is therefore dismissed pursuant to Rule 12(b)(6).