AT&T suing some bankrupt cardholders It claims fraud

critics contend company is at fault

Debt collection

September 04, 1997|By BLOOMBERG NEWS

NEW YORK -- AT&T Corp. is suing some bankrupt credit-card customers for fraud, the latest attempt by a big card issuer to wring payments from cash-strapped consumers.

The company is claiming that it was defrauded by cardholders who made purchases even as they prepared to file for bankruptcy. Yet AT&T does minimal background checks on debtors' credit histories before sending them unsolicited, pre-approved card offers, according to bankruptcy judges.

The cases are eliciting howls from consumer advocates, who have already come down on Sears, Roebuck & Co. and General Electric Co. for pursuing bankrupt debtors.

The AT&T cases could represent the first instance in which a member of banking networks run by Visa USA Inc. and MasterCard International Inc. has been caught up in the burgeoning controversy over creditors' strong-arm tactics.

"My hunch is it's much more pervasive and problematic than anyone has realized before and we may have hit only the tip of the iceberg," said Connecticut Attorney General Richard Blumenthal.

The AT&T cases come as a government-appointed commission is recommending limiting the use of mechanisms by which creditors squeeze consumers for payments.

That the creditors involved are among the industry's leaders suggests that it's time for broader inquiries, said New York Law School Professor Karen Gross.

"This is beyond the point of asking whether it's idiosyncratic. We have to ask whether it's prevalent," said Gross, author of a book on U.S. bankruptcy law.

AT&T, the largest U.S. long-distance telephone service provider in the U.S., is beginning to beat a retreat because it hasn't won any of the 10 lawsuits that have been decided, according to bankruptcy court statistics.

The company said it won't stop filing the suits, but said it will spend more time investigating whether its claims are valid before filing cases.

The complaints against AT&T, the nation's ninth biggest credit-card issuer, come after Sears agreed in June to pay at least $178 million to settle legal actions involving bankrupt holders of its credit cards. Sears admitted that an estimated 250,000 individuals may have paid debts to the company that were eligible for discharge. The agreement took effect yesterday.

In AT&T's case, at least 10 U.S. bankruptcy judges found that the company couldn't or didn't prove that bankrupt customers intended to defraud the company by making purchases or getting cash advances just before filing for bankruptcy protection. They lashed out at AT&T for behavior that includes offering to drop the fraud suit if the debtor agrees to pay the debt.

"These complaints were filed solely to extract a settlement from debtors," U.S. Bankruptcy Judge Arthur B. Federman wrote in a 1996 case involving Missouri debtors.

"Once AT&T realized that the cases would not settle and that it would actually be required to offer evidence to support the allegations, it moved to dismiss."

What's more, Federman wrote, AT&T acknowledged that it never had any plans to prove its allegation of fraud.

AT&T Universal Card spokesman Mitch Montagna said the company "looks for patterns that suggest fraud and then takes action." AT&T filed 2,550 such cases last year, he said.

"It's not fair to the vast majority of cardholders to not challenge a cardholder when we think a case is fraudulent," Montagna said. "I think that's a common practice in the industry."

Pub Date: 9/04/97

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