Authorized User

Sometimes, one spouse will open an individual account and name the other spouse—or a child or parent or another party—as an authorized user. This can be good way to help a child get started as a credit user. But it can also be a dangerous deal.

With a credit card, the authorized user will receive his own card with his name on it. He can use it to his heart’s content (or at least up to the card’s credit limit). The account also will appear on the user’s credit report; however, only the person who opened the account will be liable for paying off the debt.

You should be very careful whom you name as a user on your accounts, since there’s considerable potential for financial pain.

The May 2001 Connecticut Appeals Court decision Citibank (South Dakota) v. Mark Gifesman offers one wretched example of how bad things can get with authorized users on credit cards.

In April 1995, Gifesman requested from Citibank a secondary card in the name of Alexei Popov, a Russian national living in Russia.

Gifesman didn’t actually know Popov. He requested the card as a favor to Vladislav Kharkover, a friend who was a Russian national living in the U.S. Kharkover agreed to pay for charges arising out of the use of the Popov card and, in addition to that, to pay Gifesman a $25 monthly fee.

The Popov card was used extensively in Germany during July 1995, resulting in charges totalling over $36,000.

On July 20, 1995, Citibank notified Gifesman of the attempted use of the Popov card for cash advances, the only activity associated with the Popov card of which Gifesman was then aware. The following day, Citibank again contacted Gifesman to ask—again—whether he wanted to block further use of the Popov card. Gifesman asked Citibank not to cancel or block the card.

The day after that, Citibank listed the Popov card as possibly lost or stolen and shut it down.

Gifesman didn’t pay the two bills—totalling nearly $50,000—related to the Popov card. He argued that he wasn’t responsible for the charges because Popov didn’t know who’d made them. Citibank didn’t believe this story and sued Gifesman.

Gifesman filed a countersuit, charging Citibank with breach of fiduciary duty and bad faith.

The court dismissed Gifesman’s arguments. It ruled that he had “conferred apparent authority on Popov to use the credit card.” And it noted that Citibank wasn’t responsible for “obtaining information about the ultimate users of a secondary card.” That responsibility rested with the main cardholder.

The court found that, more likely than not, the user who obtained the cash advances was Popov. It found that a third person reasonably could believe that the user in question had the power to act on the authority of the main cardholder.

Gifesman also argued that the Truth In Lending Act states that unauthorized uses can’t be charged against a cardholder. But the court noted that the definition of “unauthorized use” excludes any transaction in which the cardholder receives any “benefit.” And the $25 a month—though small relative to $50,000 in charges—was a benefit.

Moreover, the court wrote:

…we are struck by how little has been disclosed about the transactions underlying this litigation. The record reveals nothing about the nature of the relationship between [Gifesman], Popov and Kharkover or of the intended use of the card [and] nothing about how the card came to be used in Germany rather than in Russia. In short, the record raises more questions than it answers.

The court concluded that Citibank didn’t violate the TILA by shutting down the secondary card and holding Gifesman responsible for the charges.

It rejected Gifesman’s claim of breach of fiduciary duty because “the parties were not in the kind of relationship in which a fiduciary duty is automatic, such as a partnership or trusteeship.” Credit card agreements don’t make that kind of relationship.

And it rejected Gifesman’s claim of breach of the implied covenant of good faith because

The credit card agreement makes a person who requests and receives a secondary credit card unconditionally responsible…for claims arising out of authorized uses of the secondary card.

Gifesman appealed. The appeals court affirmed the trial court’s conclusions.

Next: Marriage as a Reckoning