In January 2010, the Second District Appellate Court delivered an opinion, Velocity Investments LLC v. Alston, which may change the face of debt collection litigation in Illinois. While Velocity Investments does not break new ground, it is remarkable for the clarity it brings to pleading requirements for debt collection lawsuits—especially credit card collection cases. Specifically, Velocity Investments clarifies that, in most credit card collection cases, the plaintiff must attach a copy of the signed credit card agreement to the complaint in order to survive a motion to dismiss.
Case Snapshot. Plaintiff, Velocity Investments, LLC, filed suit against defendant, Gregory Alston, alleging that the defendant had defaulted on the terms of his credit card agreement. Defendant originally entered into a credit card agreement with Household Bank, whose interest in the debt was subsequently sold to the plaintiff. The pro se defendant filed a motion to dismiss on the basis that the plaintiff had not attached the required documents establishing the existence and validity of the debt to its complaint.
The trial court denied the defendant’s motion to dismiss and entered judgment against the defendant. The Second District Appellate Court, however, vacated the judgment, holding that “Plaintiff's failure to attach a copy of the credit card contract to the complaint, failure to recite the terms of the contract within the complaint, and failure to attach an affidavit showing that the document is inaccessible is grounds for dismissal.”
Causes of Action in Collection Cases: Breach of Contract and Account Stated. Most debt collection lawsuits are based on one of two causes of action: Breach of Contract or Account Stated. The essence of a breach of contract claim is the injury resulting to plaintiff by defendant’s failure to comply with the terms of the parties’ agreement. In the case of credit card collections, the plaintiff usually alleges that the defendant breached either the cardholder agreement, or an explicit or implicit agreement to pay at the time that the defendant incurred the individual charges. Whether or not these agreements exist is often a core issue in credit card collection litigation.
An account stated claim, on the other hand, is an agreement between parties, who have previously engaged in a transaction, that the account representing the transaction is true, that the balance stated is correct, and that the debtor promises to pay the balance. To put it another way, an account stated claim is akin to saying “You agreed that you owe me money. Later, I sent you statements showing the amount that you owed, and you agreed to that amount either by telling me you agreed, or by not objecting to the statements.”
In credit card collection cases, the plaintiff usually alleges that the defendant entered into an agreement to pay credit card charges and that the credit card issuer sent account statements to the defendant, who did not object to the charges described in the statement within a reasonable time. Accordingly, the plaintiff alleges, the defendant implicitly agreed to the “account stated” in the credit card statement. In other words, two different agreements must be proved in an account stated case: first, the underlying agreement, where the defendant agreed to pay a debt and, second, the defendant’s explicit or implicit agreement to the specific amount claimed by the plaintiff.
The Common Thread: The Underlying Agreement. Both breach of contract and account stated causes of action share the requirement that the plaintiff plead and prove the existence and terms of the underlying agreement. Thus, the real question becomes: what is the “underlying agreement?”
The underlying agreement could theoretically be any agreement where the defendant agreed to be responsible for the credit card charges complained of. In most credit card cases, there are only three possible sources of such an agreement: the credit card receipt executed by the defendant at the point of sale, the credit card issuer’s terms and conditions, or the cardholder agreement. Both the cardholder agreement and the credit card issuer’s terms and conditions could theoretically apply to all charges on the credit card account, whereas a point-of-sale receipt arguably applies only to the individual transaction.
Point of Sale Receipts. In reality, point-of-sale receipts rarely form the basis for the agreement underlying a breach of contract claim or an account stated claim for several reasons. First, many credit card transactions are online. Even a decade into the 21st Century, it is still a challenge for a plaintiff to prove an on-line agreement if the defendant did not physically sign a receipt, and the defendant’s agreement to the transaction cannot be otherwise verified.
Second, credit card plaintiffs often do not have access to the credit card receipts executed by defendants at the point of sale. Merchants generally do not transfer signed credit card receipts to the credit card issuers and many do not keep signed credit card receipts longer than eighteen months.
Third, there is a real question about whether the credit card plaintiff could even enforce an agreement based on a point-of-sale receipt. The point-of-sale receipt is arguably an agreement between the defendant and the merchant, not the defendant and the card issuer.
Finally, a point-of-sale receipt may not form the basis for the agreement because it could, at most, constitute an agreement to be liable for a single transaction and not an agreement to be liable for other charges.
Standard Terms and Conditions. A credit card issuer’s standard terms and conditions cannot be the underlying agreement, absent proof that the defendant actually agreed to those terms and conditions. Velocity Investments specifically addressed this issue, finding that the credit card issuer’s standard terms and conditions could not form the basis for the underlying agreement because “it offers no evidence that defendant agreed to be bound by these terms or that these terms even applied to this particular account.” In other words, it is not enough for a credit card plaintiff to allege that the credit card issuer has standard terms and conditions that apply generally to all credit card accounts—the plaintiff must show that the defendant agreed to be bound by those terms and conditions and that they applied to the particular account at issue.
Cardholder Agreement. Since credit card receipts and a card issuer’s standard terms and conditions generally cannot serve as the underlying agreement in a credit card lawsuit, the only remaining possibility is the original credit card agreement signed by the defendant. In most cases, the original agreement consists of the original credit application, which contains a provision that if the application is approved, then the consumer agrees to be bound by the issuer’s standard terms and conditions. Since the application explicitly incorporates the terms and conditions, the combination of the two forms the underlying agreement and the basis for the suit.
Pleading Requirements Bar Many Credit Card Collection Suits. Velocity Investments highlights the important pleading requirements for credit card collection plaintiffs. Among those requirements are attachment of written instruments to complaints and fact-pleading. These pleading requirements guard against frivolous lawsuits and ensure that plaintiffs have colorable claims. Many credit card complaints are dismissed for failure to comply with these minimum pleading requirements because the plaintiff does not attach the written credit card agreement to the complaint or fails to plead sufficient facts in support of an alleged oral credit card agreement.
Written Instruments Must Be Attached to Complaints. Under Section 2-606 of the Illinois Code of Civil Procedure, where a complaint is founded on a written instrument, either: (a) the instrument must be attached as an exhibit to the complaint, or (b) the plaintiff must attach an affidavit stating facts showing that the instrument is inaccessible.
In a credit card collection case, Section 2-606 requires the plaintiff to attach any written instruments upon which its claims are based, such as the written credit agreement and credit card statements sent to the defendant. If the written instrument is inaccessible, then Section 2-606 requires the plaintiff to attach an affidavit stating facts regarding the inaccessibility of the instrument. The affidavit is insufficient if it merely states that the instrument is inaccessible—it must provide supporting facts “so as to excuse the failure to attach the written contract.”
Fact-Pleading Requirements Apply to Alleged Oral Agreements. Since Illinois is a fact-pleading jurisdiction, complaints must contain a plain and concise statement of the pleader’s cause of action. “[A]lthough complaints do not need to contain evidence, a complaint cannot be merely conclusory but must allege facts sufficient to bring a claim within a legally recognized cause of action.” Furthermore, plaintiffs must plead facts in support of each element of each cause of action asserted. In other words, a complaint is insufficient if it merely recites the elements of a cause of action, instead of setting out specific facts of the case that establish that each of the elements is met.
In many credit card collection cases the complaint alleges that the agreement at issue is an oral agreement, not a written agreement. A “written agreement” is a contract where the “parties are all identified and all the essential terms are in writing and easily ascertainable from the instrument itself.” On the other hand, an “oral agreement” does not necessarily mean that the agreement was entirely verbal between the parties; rather, it is an agreement that may (or may not) be partially in writing, but “resort[s] to parol evidence is necessary to identify the parties or essential terms.”
Specifically, in credit card collection cases, it is not uncommon for a complaint to attach a standard “terms and conditions” document as part of the agreement, and then allege that other essential terms were made orally; however, there is no exception to the fact-pleading requirement where a plaintiff’s cause of action is based on an alleged oral agreement. The plaintiff must plead facts to establish the prima facie formation of a valid and enforceable oral contract, which include “offer and acceptance, consideration, and definite and certain terms.” A credit card plaintiff’s failure to plead facts establishing the existence of a valid contract, or merely pleading conclusory allegations, should be grounds for dismissal of the claim. Not surprisingly, Velocity Investments found the complaint in that case to be deficient both for failing to attach the written agreement, and for failing to recite all of the relevant terms of the contract.
The Achilles Heel: The Credit Agreement is Unavailable. A credit card plaintiff’s lawsuit is in trouble if it cannot obtain a copy of the credit agreement prior to filing suit. As detailed in Velocity Investments, and in this article, most credit card lawsuits will not survive a motion to dismiss if the original credit agreement is not attached to the complaint.
There are three major reasons why a credit card plaintiff may be unable to obtain a copy of the agreement. First, the card issuer may be unable to locate the agreement because the account is old, has changed hands through merger of financial institutions, or the issuer has simply lost track of it.
Second, the consumer may have never signed an actual credit card agreement. For example, if the consumer applied for the account online, it will be much more difficult, although not necessarily impossible, for the plaintiff to plead and prove the existence and terms of an underlying agreement.
Finally, the plaintiff may be a third-party debt collector that purchased the debt from the original creditor, or from another third-party debt collector, and does not have access to the original agreement.
It is a common practice in the consumer credit industry for credit card issuers to sell delinquent accounts to debt buyers for pennies on the dollar; the debt buyers can turn around and attempt to collect the full face value of the debt for their own account, including additional fees and interest as they accrue. Indeed, business is booming in the debt collection industry: the industry employed over 400,000 people in 2008, and jobs are expected to grow by 19 percent over the next ten years.
It may come as a surprise that few debt collectors receive full documentation of the debt that they are purchasing. Often, the documents that are necessary for the debt collector to properly plead its claim, such as the credit card agreement or copies of account statements, are not provided in connection with the sale of the debt. So, why do debt collectors continue to buy billions of dollars of defaulted accounts without sufficient documentation? The answer is that they often succeed in litigation because the vast majority of consumers are unaware of their rights and do not adequately defend themselves.
But What About Portfolio Acquisitions? Readers are strongly encouraged to review the First District’s 2009 opinion Portfolio Acquisitions, L.L.C. v. Feltman (“Portfolio Acquisitions”). While not directly on point with the subject matter of this article, Portfolio Acquisitions is nonetheless a crucial opinion for understanding how Illinois courts view liability for credit card transactions.
Importantly, Portfolio Acquisitions reaffirmed the long-standing principle that “each time a credit card is used, a separate contract is formed between the cardholder and bank.”
Even so, Velocity Investments holds credit card collection plaintiffs to minimum pleading standards. If a credit card plaintiff alleges that an individual credit card transaction forms the basis for the existence of a contract, then the plaintiff must either attach a copy of any documents that it alleges forms the basis for the contract, or allege sufficient facts to establish the existence of a valid and enforceable oral agreement. Indeed, Velocity Investments cites Portfolio Acquisitions with approval for the proposition that a credit card issuer’s standard terms and conditions cannot generally provide the foundation for a credit card lawsuit.
The Effect on Future Debt Collection Litigation. Velocity Investments has the potential to profoundly affect debt collection litigation in Illinois. A large number of credit card and other debt collection lawsuits—especially suits by third party debt collectors—could be thrown out of court under the pleading standards elucidated by the Second District’s opinion. This may result in greater due diligence by third-party debt collectors in obtaining the documentation that they need to ultimately prove their claims at trial, in connection with the purchase of defaulted accounts.
In reality, however, credit card debt collectors are keenly aware that very few consumers adequately defend themselves against credit card lawsuits, and even fewer retain an attorney to help them take full advantage of all of their potential defenses and counterclaims. As a result, credit card plaintiffs will likely continue to succeed at a very high rate in obtaining judgments, even where their complaints could have been thrown out for failure to meet the minimum pleading requirements described in Velocity Investments.
 Velocity Investments LLC v. Alston, 397 Ill. App. 3d 296, 922 N.E.2d 538 (2d Dist. 2010).
 Velocity Investments LLC v. Alston, 397 Ill. App. 3d 296, 922 N.E.2d 538, 541 (2d Dist. 2010).
 Akinyemi v. JP Morgan Chase Bank, N.A., 391 Ill. App. 3d 334, 908 N.E.2d 163, 169 (1st Dist. 2009) (affirming dismissal of plaintiff’s breach of contract complaint where plaintiff failed to plead that it had fulfilled all of its obligations under the alleged contract).
 Dreyer Medical Clinic, S.C. v. Corral, 227 Ill.App.3d 221, 591 N.E.2d 111, 114 (2d Dist. 1992).
 Akinyemi v. JP Morgan Chase Bank, N.A., 391 Ill. App. 3d 334, 908 N.E.2d 163, 169 (1st Dist. 2009) (“To properly plead a breach of contract claim, plaintiff must allege the existence of a valid contract. . . .”).
 Velocity Investments, 397 Ill. App. 3d 296, 922 N.E.2d at 541.
 Velocity Investments, 397 Ill. App. 3d 296, 922 N.E.2d at 541.
 Velocity Investments, 397 Ill. App. 3d 296, 922 N.E.2d at 540.
 735 ILCS 5/2-603(a).
 Redelmann v. Claire Sprayway, Inc., 375 Ill. App. 3d 912, 874 N.E.2d 230, 239 (1st Dist. 2007) (citations omitted).
 Rodriguez v. Illinois Prisoner Review Bd., 376 Ill.App.3d 429, 876 N.E.2d 659, 664 (5th Dist. 2007), citing Beahringer v. Page, 204 Ill.2d 363, 369, 789 N.E.2d 1216, 1221 (2003).
 Portfolio Acquisitions, L.L.C. v. Feltman, 391 Ill.App.3d 642, 909 N.E.2d 876, 880 (1st Dist. 2009) (this decision distinguished written and oral contracts for the purpose of statute of limitations only).
 Portfolio Acquisitions, L.L.C. v. Feltman, 391 Ill.App.3d 642, 909 N.E.2d 876, 880 (1st Dist. 2009).
 Van Der Molen v. Washington Mut. Finance, 359 Ill. App. 3d 813, 835 N.E.2d 61, 69 (1st Dist. 2005).
 Velocity Investments, 397 Ill. App. 3d 296, 922 N.E.2d at 540.
 U.S. Bureau of Labor Statistics, U.S. Department of Labor, Occupational Outlook Handbook, 2010-11
Library Edition, Bulletin 2800, 561-63 (Jan. 2010), available at
http://www.bls.gov/oco/reprints/2010-11OOH.zip (last visited Aug. 16, 2010).
 Portfolio Acquisitions, L.L.C. v. Feltman, 391 Ill.App.3d 642, 909 N.E.2d 876 (2009).
 The primary question addressed in the Portfolio Acquisitions opinion is whether the credit card contract at issue was written or oral, which impacted whether the 10-year or 5-year statute of limitations applied to the plaintiff’s claims. The court concluded that the contract was oral, rather than written; accordingly, the 5-year statute of limitations applied under 735 ILCS 5/13-205 to bar plaintiff’s claims. 391 Ill.App.3d 642, 909 N.E.2d at 884.
 Portfolio Acquisitions, 391 Ill.App.3d 642, 909 N.E.2d at 881, citing Garber v. Harris Trust & Savings Bank, 104 Ill. App. 3d 675, 678, 432 N.E.2d 1309 (1st Dist. 1982).
 Velocity Investments, 397 Ill. App. 3d 296, 922 N.E.2d at 541, citing Portfolio Acquisitions, 391 Ill.App.3d 642, 651, 909 N.E.2d 876.
David M. Madden is the President of David M. Madden Law Offices, P.C., Lisle, Illinois, where his practice is concentrated in business and consumer bankruptcy, creditors’ rights, business litigation, business services, and estate planning. He received his BA from Michigan State University and his J.D. DePaul University College of Law.