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Thoughts on Credit Card Chargebacks Affecting Auctioneers

· Auction,Chargeback,Escrow

Credit card chargebacks can pose real risks, and real problems, for auctioneers. Basically, a chargeback occurs when a buyer advises his or her credit card company that – because of some irregularity in the transaction or because of the character or quality of the goods purchased – the buyer did not get his or her money’s worth. The credit card company, then, backs the payment out of the auctioneer’s attached credit card processing account. A significant problem in this process relates to timing. This is because a chargeback will typically occur after the auctioneer has paid the seller. As such, when the money comes out of the auctioneer’s account, the seller has his money, the buyer has the property, the money pulled for the chargeback is likely from a subsequent auction, and the auctioneer is stuck in the middle. Simply put, it is more likely than not that the money pulled out of the auctioneer’s account has no relationship to the transaction giving rise to the chargeback.

While the volume of chargebacks may vary, it brings to mind a statement made years ago by United States Senator Everett Dirkson (R. Ill.), who said, in an unrelated context, "[a] billion here, a billion there, pretty soon, you’re talking real money." While we may not be talking about billions of dollars in this context, it is fair to paraphrase Senator Dirkson that – a chargeback here, a chargeback there, pretty soon you’re talking about real money.

As an initial thought, it is important to recognize that, while chargebacks are inconvenient and time consuming, a chargeback does not ultimately determine the rights of the parties in the underlying transaction. In particular, a successful chargeback does not mean that the buyer is not obligated to pay for the property, it only affects how he or she pays. Issues of liability are determined in court or through some other dispute resolution process. In other words, even if a buyer is successful with a chargeback, an auctioneer may still proceed against the buyer to recover what he or she owes for purchases made at the auction. In this regard, an auctioneer’s bidder terms and conditions are very important, and should provide that auction transactions are governed by the law of the state in which the auctioneer is located. The bidder terms and conditions should also provide that all bidders and buyers agree to be subject to jurisdiction in the auctioneer’s home county and state, which will be the exclusive venue for dispute resolution. The auctioneer may also consider including an attorneys’ fees clause in the bidder terms and conditions providing that the auctioneer will be entitled to attorneys’ fees incurred in collecting monies owed. In this way, notwithstanding the chargeback, the auctioneer may be able to get a judgment locally that can, potentially, be transferred to the buyer’s jurisdiction.

With respect to the chargeback itself, the auctioneer’s bidder terms and conditions constitute a meaningful tool by which risks are identified and allocated. Assuming the absence of misrepresentation, and assuming, further, that neither the auctioneer nor seller is warranting the character, quality, authenticity, or other attributes of property sold at auction, the bidder terms and conditions can – and should – put the burden of inspection on the bidders who are afforded the opportunity to either inspect or waive inspection prior to bidding. In this regard, when properly used, "AS IS, WHERE IS" should provide a strong foundation for avoiding and/or reversing a chargeback. The auctioneer may also want to include a statement on credit card receipts that says "ALL SALES FINAL. NO REFUNDS OR RETURNS."

In an effort to avoid chargebacks in the first instance, however, the auctioneer’s bidder terms and conditions should have a No Chargebacks provision. As a condition to registration and bidding, bidders should be required to (i) agree that they will not, under any circumstances, initiate a chargeback, and (ii) agree that they are waiving any chargeback rights that may exist under the agreement between the bidder and the bidder’s credit card company. This statement should be identified as an "inducement" for the auctioneer to allow the bidder to register and bid. The auctioneer may also want to include a statement in the bidder terms and conditions to the effect that the bidders agree that, should a chargeback be initiated, the bidder terms and conditions will be conclusive evidence of the bidder’s waiver of any chargeback rights. Finally, the auctioneer should reiterate, in the bidder terms and conditions, that, even if a chargeback is successful, the buyer remains liable for the purchase price (including any buyer’s premium), plus costs of collection and attorneys’ fees. Chargebacks should also be addressed in the auctioneer’s contract with the seller, which may include a statement to the effect that the seller bears the risk of any chargebacks. Whether the auctioneer ultimately passes that cost onto the seller, taking credit card payments is for the seller’s benefit, and, as such, it doesn’t seem inappropriate to allocate the risk that way.

An additional consideration relates to risk that a chargeback might draw on funds belonging to other sellers. If the auctioneer uses his or her escrow account as the deposit account for credit card purchases, then, it is entirely possible that when a chargeback hits the money pulled out of the auctioneer’s account represents the proceeds from a subsequent auction involving the sale of property belonging to different seller(s). This can produce real problems for the auctioneer who may, then, be unable to timely pay the subsequent sellers. This is a further rationale for disallowing chargebacks, but also suggests that (consistent with applicable licensing requirements and ethical responsibilities) the use of a buffer account might be appropriate to protect escrow monies belonging to others.

This is for information and discussion purposes only and does not constitute legal advice. No attorney-client relationship is created, intended, or implied with any reader.