PEP Episode 047 — Countering Friendly Fraud: Legal Remedies for Chargeback Fraud | Disputed Transactions

Introduction

If you’re a merchant and you want help with chargebacks, this episode is for you!  Friendly fraud is anything but friendly for merchants. In this eye-opening discussion, expert payments attorneys Larry Haines and Bryce Van De Moere expose the growing epidemic of customers who receive goods or services, then fraudulently dispute legitimate charges with their credit card companies.  It’s chargebacks, baby – and they’re a growing problem.

Banks allocate mere minutes to review chargebacks and overwhelmingly side with cardholders—approximately 97% of the time—regardless of evidence presented. For merchants left holding the bag, this creates a seemingly impossible situation. But there’s hope in pursuing legal remedies directly against these fraudsters.

The attorneys reveal powerful strategies for merchants to fight back, including litigation that can recover up to triple damages plus attorney’s fees under California law. They explain how mechanics liens (which despite the name, aren’t just for auto repairs) provide strong protection for anyone who provides labor or materials improving real property—from contractors to plumbers to classic car restorers.

Most compelling is their insight into the psychology of these fraudsters. Many are serial offenders whose confidence grows with each successful chargeback, escalating from small disputes to brazen theft. Picture someone staying at a hotel for three weeks, paying a $10,000 bill, then disputing the entire charge despite completing their stay.

For merchants tired of being victimized, this podcast offers a roadmap to recovery. With proper documentation and legal guidance, businesses can not only recover what’s rightfully theirs but also develop a reputation that deters future fraudsters. The attorneys recommend focusing on disputes exceeding $5,000-$10,000, where the cost-benefit analysis favors legal action.

Ready to stop letting fraudsters walk away with your products and services? Learn how to turn the tables and make them pay.

Transcript

Bryce Van De Moere (00:00):

We have a lot of cases where people bring classic cars in and get all the work done, and then the client drives off in the car and then decides that they’re going to charge back when we can prove that the parts are in the car. So again, I have to believe that the majority of people that behave like this are like serial fraud surgeon because nobody is sophisticated enough I think to do this on their first try, especially with the larger chargebacks, like their hubris, their arrogance, I guess maybe just multiplies over time and they think they can get away with it.

Jeremy Stock (00:35):

Welcome to the Payments Experts podcast, a podcast of global legal law firm. We hope you enjoy this episode. Very excited. Today we have in studio joining as senior associate attorney, Larry Haines, as well as Senior Associate Attorney, Bryce Van De Moere. Gentlemen, we’re talking about friendly fraud today. We’re looking forward to this topic. Jump right in.

Bryce Van De Moere (01:03):

What we’re here to talk about today is kind of a phenomenon that I’ve been experiencing for about a year now, which is where clients are, merchants are coming to us and they have provided a service or provided a good, and they can prove that, but the customer, for whatever reason, decides to charge back. And because banks in charge back situations are nine times out of 10, always going to side with their card holder, they end up approving the chargeback and the merchant is then faced the choice of having to approach or go after the fraudster personally, which I prefer, but they want, what they come to me asking for is if I can approach the bank and ask them to reverse the chargeback, which means I can basically take the money back out of the fraudsters account. And it’s a very hard sell, especially when you are dealing with a bank who has absolutely no financial incentive to assist you at all.

Bryce Van De Moere (02:09):

And these people want their money, they deserve their money, they want a quick resolution and the banks just aren’t providing it. So more and more I’ll send one letter, two letters, and then that’s it. And I start promoting to my clients that we approach the fraudster directly. And I personally think that if I knew I did something, I knew I stole something, and then I get served with a complaint by a sheriff and I know I have no defense, I would assume that they’re going to roll right over and want to negotiate their defense going to be the one where the beams were put in the house and he charged back $300,000. Anyway, when there’s pictures of the beams in the house, it’s like

Jeremy Stock (02:59):

It’s holding up his house. It’s holding up his house.

Bryce Van De Moere (03:01):

Absolutely. Exactly. So what’s he going to do? And I guess we’re going to find out pretty soon, but

Larry Haines (03:08):

Well, I think it’s rather funny. You call it friendly fraud. That’s kind of like friendly fire in wartime. Well, there’s nothing friendly about your own artillery dropping rounds on you. There’s nothing friendly about these people doing fraud, but we call it friendly fraud based on the fact that it’s people that are supposed to be doing business with you. So one of the things that you can do here in California for example, there’s actually some statutory authority that says that if someone steals something from you, you can sue them. There’s a private cause of action and it’s kind of nice because statutorily you can collect up to three times however much they stole from you and you can get an attorney’s fee so that can get rather pricey. So somebody steals $10,000 worth of goods or services, doesn’t want to pay for it, they still owe it so you can sue them and you can collect up to $30,000 and attorney’s fees. And sometimes if you go the way through trial, that could be another 20, $25,000. So it is a good hammer to hit them with so that they want to settle the case and make the merchant whole,

Bryce Van De Moere (04:13):

Especially when it becomes clear that they are going to be liable or possibly going to be liable for fees and costs way beyond the amount that they took. And we understand that this is a difficult decision for a lot of merchants. Committing to a lawsuit, committing a litigation is a difficult decision, but in my mind it is the fastest way from point A to point B. And I’ve been working with Larry and we’re trying, we have, I think, devised a system or a protocol where we can approach these people and get the maximum amount of bang for the amount of buck.

Larry Haines (04:48):

And as it comes to lawsuits, these are not particularly complex because basically it’s you took it, you didn’t want to pay for it, we proved you didn’t want to pay for it because you charged it back and your chargeback reason is invalid. And basically you just think that you’re going to be able to walk away with whatever you got. You get the hotel room, you decide you want to charge it back, you’ve got the goods, you’ve consumed them. Now they’re gone. You don’t want to pay for, there’s some people that do this on a regular basis. There are professional chargeback people, and many of them, of course, one of the things we have to make sure of is, is it worth pursuing? Because when you first think about suing somebody, okay, let’s assume we win and we collect. So we actually have staff that we have here that could do background checks and financial checks to determine if somebody is worth suing. If they own a house here in California, they own other assets that can be the source of a payment for a judgment will give that advice to our clients and move forward. I say that probably 95% of the time, if we’re going to file, we are not going to try that case. It’s never going in front of a jury. They’re going to settle. Oh, absolutely.

Bryce Van De Moere (06:05):

Again, what is their defense? So anyway, and also I think we were discussing the need for a mechanic’s lien. Some of these,

Larry Haines (06:16):

If somebody, for example, if you are a subcontractor or you are a contractor and you’re doing work for someone’s house or you supplied the goods to put into the house, you sold the plywood to somebody and it went into that house, you have a mechanic’s lien right to that real property. So there are some short timeframes, I believe it’s 60 or 90 days, 90 days. So you have to make your lien. So if you come to us early and you’ve got somebody that’s done the chargeback, first thing you want to do is actually follow a lien, record, a lien, and that gives you the right then once they ever refinance or they sell, that’s a lien on the house. And that’s something that come back after a judgment. If they don’t want to pay and they have real property, that judgment can be recorded. And then again, carrying 10% interest, that starts adding up much better than you get at a bank. You can actually secure your right to recovery.

Bryce Van De Moere (07:21):

And my individual research reflects that. I think that you can extend the timeline for a mechanics lien to when the chargeback actually happens because you’ve been paid and now the bank is coming in and saying, now that they’re the charge, we’re going to put this money in an escrow account while you guys adjudicate this and find fault. And so my thought is that my suspicion is, and I put it into I want to test it, is that once that chargeback is approved against you and they take that money, I think that is when another 90 days starts running. And you can actually, so basically, like I said, you can file mechanic lien way beyond the initial 90 days. If they charge back, you had the money. And I also want to make something clear, I don’t think I did before just because, and I want to make sure merchants understand this, that just because a bank approves the chargeback, when you’ve produced copious amounts of evidence to the contrary, it doesn’t mean that the debt is not still valid. It just means that the bank does not want its credit card associated with it and you’re on your own. So I don’t want people to think that just because the chargeback, once it went against them, they’re not still entitled to those funds because they Absolutely,

Larry Haines (08:43):

Exactly.

Jeremy Stock (08:44):

So I’m so sorry, Larry, go ahead.

Larry Haines (08:45):

Okay. If you have a chargeback on a credit card, that’s no different really than somebody borrowing you a bad check or somebody who gives you a counterfeit money. Once you determine that it’s not being paid, then your right of recovery exists.

Jeremy Stock (08:59):

It’s a very important point. We’ve had on this very podcast, former clients of ours, chargeback gurus, and their entire business model is chargebacks. That’s all they do day in, day out. They told us on pretty good authority that they think maybe five minutes at most is spent reviewing these chargeback disputes five minutes. And on top of that, something like 97% of the time they’re siding with the card holder no matter what the facts are showing.

Bryce Van De Moere (09:31):

Of course. And they’re going to still collect their $25 chargeback fee on you even though they’re responsible.

Larry Haines (09:41):

Yeah, I mean it’s the path of least resistance. And frankly, the credit card company or the bank who’s their customer, who do they want to make happy, it’s going to be the person making the chargeback.

Bryce Van De Moere (09:51):

Yeah, absolutely. So that’s where we’re at, and this is an area that we would really like to explore. This is something that Larry and I are really interested in. So if you are interested in it and you have been denied a chargeback and you have all the documentation proving and you’re sitting there scratching your head about how this could happen, please give us a call.

Jeremy Stock (10:11):

That’s super important. This is great, guys. This is great information. Can we once again, just kind of in a recap, this mechanic’s lean first I’ve ever heard of this sounds like an awesome mechanism. Can you maybe talk to us a little bit more? How is it done? How easy, how come this hasn’t come up before you guys talk a little bit about that.

Larry Haines (10:32):

Well, outside the context of credit card chargebacks, a mechanic’s lien is available to anybody who provides labor or material to real property. And what that does is it basically puts a lien on the real property because you’ve improved that real property through your labor or your materials, and that gives you an opportunity to get paid.

Bryce Van De Moere (10:54):

Yeah. Did you know that mechanics lien does not just apply to mechanics? Yeah, it’s a term of art. A term of art. So yeah, I mean, if you provide a good, you provide a service, you provide the material for the service.

Jeremy Stock (11:06):

So just to be clear, this is not going to help necessarily our e-commerce friends who are selling services or let’s just say goods that are drop shipped from China, not it’s going to be really, if there’s an actual mechanical

Larry Haines (11:25):

Physical, if the transaction has to do with real property and the improvement of real property, that is one avenue of, if you will, securitizing your debt

Bryce Van De Moere (11:37):

Like plumbers, electricians, contractors, laborers, landscape professionals, anybody that provides a service where they can show that it was, we had another one, tutors, remember Star ed? Yeah, I do. Yeah. I mean maybe it doesn’t apply, but come and talk to us first and we’ll find out for

Jeremy Stock (12:03):

You. We can figure it out.

Bryce Van De Moere (12:03):

Yeah.

Jeremy Stock (12:05):

I’m thinking of auto guys, guys that sell custom auto parts that go into cars.

Bryce Van De Moere (12:13):

Absolutely. So again, falling under the rubric of mechanics lien, it actually does apply. We have a lot of cases where people bring classic cars in and get all the work done, and then the client drives off in the car and then decides that they’re going to charge back when we can prove that the parts are in the car. So again, I have to believe that the majority of people that behave like this are serial fraud surgeon because nobody is sophisticated enough, I think, to do this on their first try, especially with the larger chargebacks, like they’re hubris or arrogance, I guess, maybe just multiplies over time and they think they can get away with it. You guys, nine times out of 10, it’s starting to look like they can.

Larry Haines (13:00):

Yeah, I mean, you go to a hotel, you are there for three weeks, you have a $10,000 bill, you pay it with a credit card, and then as soon as you get home, you charge your back. Just say, I had a horrible time, or

Bryce Van De Moere (13:13):

It was dusty, but I still stayed the whole week, but I still stayed in the property. I didn’t leave, but I wanted my money back. That’s just not right.

Larry Haines (13:22):

Absolutely not right. So there’s really no reason just to take that one and consider it a loss. If you talk to us, we might be able to recover for you.

Bryce Van De Moere (13:31):

And believe me, this is not something that I really, I don’t sit in my office every day wondering how can I drag more people into litigation? But these banks just will not refuse to get involved because there’s no money in it for, and that is what’s in it for them, and there’s just no incentive. And so this is a way that we think to actually get the power back in the hands of, and maybe if these people get hit a couple times, they’ll stop doing it,

Larry Haines (14:07):

Or people start finding out that there are people that are doing this and they’re getting whacked for larger amounts than they actually stole.

Bryce Van De Moere (14:16):

Yeah. And hell, I mean, we’ll be happy to document our success on the website as you can. You see how it’s going?

Jeremy Stock (14:25):

Absolutely. And I think that you make a great point. You can have merchants too. Word gets around in some of these small niche markets for these merchants. Word gets around, Hey, if you charge back against this merchant, they’re coming after you.

Larry Haines (14:36):

Yeah. One of the areas that I’ve seen a lot of chargebacks, and it always seems unfortunate for the merchants, are Airbnb people that have Airbnb, they’re small business people, and somebody’s there for a week and they’ve charged $2,000, and then next thing you know, they turn around and just say, Nope, didn’t enjoy this day. Too much dust. I saw a mouse outside. There was a funny smell. And that’s not right.

Bryce Van De Moere (15:07):

And here’s kind of a warning on Airbnb, because I didn’t realize this because I don’t use it, but if you decide to do Airbnb, take a very good look at your agreement and make sure that if whoever’s running your property decides that they’re going to try to skip out on the charges, that you have a right to go after them because Airbnb is not going to get in the way.

Larry Haines (15:29):

Yeah. Unfortunately, Airbnb will unilaterally just yank money back saying, oh, they didn’t have a good time. It’s not my fault. Yeah. They got a roof over their head, everything was fine. And next thing you know, they just don’t want it.

Jeremy Stock (15:44):

Sorry.

Bryce Van De Moere (15:45):

Yeah.

Jeremy Stock (15:46):

Well guys, this is super interesting and very excited to see where this goes. As you heard, please, if you have a merchant and you’ve had a chargeback, what would you say, gentlemen, in terms of might be a minimum amount of the chargeback that you think would maybe make this worth it? Is there a certain dollar ballpark you think we could mention?

Larry Haines (16:07):

Probably five to $10,000 would be the minimum, because that gets people’s attention. That could be anywhere from 15 to $30,000 and then you start adding the attorney’s fees at the end and it gets nasty,

Bryce Van De Moere (16:20):

And it’s not a complex complaint, it’s not going to take a lot of time. And I think we just drafting a complaint and the filing fee and service by the sheriff is going to cost what,

Jeremy Stock (16:33):

150 bucks? It’s not much.

Bryce Van De Moere (16:35):

Right. Yeah.

Jeremy Stock (16:36):

Well, for one defendant, maybe even 75 to a hundred bucks, not much.

Bryce Van De Moere (16:40):

That’s for the service, by the way. Service of process is that for the complaint. And the thing is, we’re going to be out of business tomorrow. I’d like to, but we would be out of business tomorrow. So there we’re at where we’re at right now, and we’ll be happy to come back in a future podcast and let our listeners know how things are going.

Jeremy Stock (17:00):

Great. Very grateful. Gentlemen. We’ve had today in studio senior Associate attorney Larry Haines, as well as Senior Associate attorney Bryce Van De Moere. Gentlemen, this was great. We look forward to the next one. And thanks again for joining us. Thank you. Thank you. Thank you for listening to this episode of The Payments Experts Podcast, a podcast of global legal law firm. Visit us online today at global legal law firm.com.