Chargeback Fraud

Chargeback fraud
The tentative states that the motion does not explain why a cause of action for
promissory fraud based on the credit card chargeback should be permitted. The Unlimited
court sustained defendant’s demurrer as to a fraud cause of action in its Minute Order from
August 8, 2022. It made two points. First, that Defendants’ lies to the credit card company
cannot be the basis for Plaintiff’s fraud claim. And second, that Plaintiff’s fraud claim is simply a
breach of contract claim called by another name. What’s at stake, of course, is whether
defendant’s actions rise to the level of a tort and warrant treble damages.
In its motion for leave to amend Plaintiff asks the court to include a more specific type of
fraud cause, of fraud in the inducement. In order to prevail, the court must find that, in this
case, under these circumstances, Defendant’s promise to pay rent is not “simply the contractual
promise to do so.” And, why, therefore, Defendant’s false credit card disputes constitute a
fraudulent act that warrant tort damages by constituting fraudulent inducement.
A particular kind of fraud, fraud in the inducement, occurred here because of the timing
of the payment, and its role in consummating this contract. Envitae required that Defendant
pay for his stay at the time of booking, well prior to arrival. If Defendant had not made that
payment in advance, Envitae would not have accepted the booking, and there would be no
contract. The advance payment was precedent to the establishment of the contractual
relationship.
Now, if payment had been made by cash, or wire transfer, or venmo or paypal, or even
Bitcoin, Defendant would have needed to take his contractual claim to a court of law and make
an argument that he is entitled to his money back. Credit cards are different, though. Payment
made through a card is not indelible. Payors generally have the option to dispute a charge, and
card issuing banks have the right, based on such disputes, to decide, retroactively, to not
“support” a payment and reverse the transaction. This, of course, is a big risk for merchants,
and a big cost of doing business. The reason why credit cards, nonetheless, are ubiquitous is
that merchants can and do rely on their customers, having made a payment, not to later dispute
that payment by lying about the reason for the chargeback. Envitae as a merchant is forced to
make this claim in court is a direct result of its reliance on Mr. Carr’s payment having been made
in advance and its reliance on Mr. Carr not to lie to get that money back.
Had his payment been made by some method other than credit card, Mr. Carr would
have been forced to seek restitution in court. Having paid by credit card, he still had this option
available. Nonetheless, he took a much easier and more direct way out, and simply lied to his
card issuer. The lies made to his card issue are certainly fraud, most likely of a criminal nature,
and he should be prosecuted for it, but that is not the particular fraud I am stating here, and it
does not change the fact that he also committed fraud, in the inducement, against Envitae.
It could be counter-argued here that there is a timing problem. Fraud requires intent,
and we tend to expect to see fraudulent intent as something that was in place before the
payment was made, i.e. Plaintiff would need to prove that Defendant was planning, in advance,
to dispute the charges at the time he was making the payment. Looking closer, though, I don’t
think timing is of the essence. The fraudulent intent towards Envitae occurred when Mr. Carr
lied to his credit card company and took his money back, knowing full well that Envitae had
relied on his advance payment, with its implied promise of not clawing it back under false
pretenses. Whether that intent occurred before the payment was made, or after, is not
important. Regardless of the timing, there was intent to defraud, and there was induced and
justifiable reliance, which is sufficient to meet the elements of tort fraud.
Chargeback fraud costs merchants in the US $20BB a year. A big reason is that cases are
often unclear and difficult to prove. Even in this case, where the facts are clear and undisputed,
Plaintiff struggles even to have a chance to plead the cause of action. This is certainly not as it
should be. Defendant clearly committed chargeback fraud, and in the interest of justice,
Plaintiff should at least be given the chance to try him for it. There appears to be no case law
regarding chargeback fraud in civil cases. Because of its very clear fact pattern, this case is a
good candidate to start to establish it.
The contract between parties was, in its simplest form, Defendant stays at Plaintiff’s
apartment for a period of time, and in exchange, makes a payment. Mr. Carr promised to pay,
he did pay, and Envitae accepted his booking and later handed over the keys to the apartment.
Later, Mr. Carr promised to pay more, he did pay more, and Envitae extended his booking.
Following his stay of early two months, Mr. Carr asked his credit card company to give him his
money back. His credit card company did give him back his money, taking that money back
from Envitae.

Chargeback Fraud

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Chargeback fraud

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