David and Two Goliaths

A Sebastopol boot maker takes on Citibank and the U.S. government over the legalities of credit card debt


On a warm October morning, Michael Carnacchi stands respectfully in the Sonoma County Civil Court as his case, Carnacchi v. Citibank, is called. A boot maker by trade, on this day he sports a black suit and tie, and his hair is neatly kept back into a waist-length ponytail. The presiding judge, the Honorable Mark Tansil, also wears black as he sits behind an imposing desk decorated with a tiny pumpkin. A uniformed deputy sits nearby, watching the proceedings attentively. Carnacchi is petitioning to change his civil suit to a federal case. The judge asks him if he has a lawyer and when told “no,” asks if Carnacchi is a lawyer or has ever studied law.

“I’m representing myself, your honor,” Carnacchi replies. “I’ve spent thousands of hours studying the subject.”

Judge Tansil smiles. “Thousands of hours?” “Yes, your honor,” Carnacchi replies. “Thousands of hours?” the judge repeats.

“OK, hundreds of hours,” Carnacchi admits, to smiles all around.

In representing himself, Michael Carnacchi must have a sense of humor, the ability to adapt quickly and an obsession for his cause. His case is one of many that are repeatedly reported in the daily papers—credit card debt and credit card companies’ egregious mismanagement of their clients’ accounts. But his case differs dramatically in one major aspect: Carnacchi is actively fighting these injustices.

“Michael is pushing a big boulder up a steep hill,” says Alan Cone, a civil practice attorney who finds Carnacchi’s case fascinating. “He’s bright as hell, reads tons and prepares his documents well. He has passion, intelligence and a supportable, ingenious argument. And he’s defending himself in court, which is incredibly difficult to do.”

And what’s more, there’s every indication that he might actually have a case.

For five years, Carnacchi had a faultless record with his Citibank credit card account. He had a perfect payment history and was never late with his minimum monthly payment of $213 on a balance of $14,233.54. In December ’07, however, his payment was four days late. When Carnacchi’s January ’08 statement arrived, it showed a new balance almost $600 higher than December had, totaling $14,851.03. Most shockingly, his minimum monthly payment had been increased by 575 percent to $1,224.52 per month, and his interest rate went from 2.99 to 31.24 percent.

He called Citibank, and citing his previous unsullied record, asked them to reverse the charges. He was refused and told that the interest rate could not be adjusted. When Carnacchi pointed out that increasing it was an adjustment, the representative answered that they could increase it but couldn’t decrease it. After a multitude of phone calls trying to negotiate an affordable payment plan, Carnacchi told Citibank that he would make no further payments until they reversed the rates and charges. Three months later, his monthly payment had increased to $3,132.12, almost 15 times the amount of his original payments. He contacted a lawyer, and together they concluded that his options were to declare himself insolvent or fight.

“I could declare bankruptcy and still keep my business and walk away clean with a brand-new start, but I see an injustice that’s happening to thousands of people,” Carnacchi says. “I need to fight first before I just lie down and take the easy road. It’s cost me almost everything I have because it takes so much of my time. But if I end up losing, at least I can say I didn’t go down without a fight.”

Carnacchi started exploring the very core of U.S. law, the Constitution and the Bill of Rights. A section of the Eighth Amendment prohibits the federal government from imposing excessive fines, and this clause caught his interest. He noted the connection between the U.S. Treasury purchasing $45 billion of preferred stock in Citigroup and using it as collateral for the bank’s bailout money. Citibank accepted the bailout under the Trouble Assets Relief Program, and the sale of the stock effectively made the federal government part owner of the bank.

“The 575 percent increase in my payments and the fact that the bank made it impossible for me to recover by denying me a workable payment program is a penalty grossly disproportionate to my misdeed,” Carnacchi says. “It is an obvious violation of the Eighth Amendment.”

Carnacchi cites a second argument against the bank’s lending practices, the Racketeer Influenced and Corruption Organizations, or RICO, Act. The RICO Act was initially enacted to stop Mafia racketeering, but has spread widely through the courts by applying to other forms of corrupt moneylending practices. The RICO Act states that “a debt incurred in connection with lending money with a usurious rate at least twice the rate of the interest owed is against the law.” Citibank is headquartered in South Dakota where 15 percent interest is the highest allowed by law. In charging Carnacchi 31.24 percent interest, Citibank is dunning him over twice the allotted interest rate and, he reasons, is therefore as unlawful as a mobster.

Carnacchi has yet to reach an agreement with Citibank, which has since sold the debt at pennies on the dollar to LVNV Funding LLC, a debt buyer. LVNV is now seeking almost $20,000 from Carnacchi plus penalties and fees. The collection agency has threatened to post a sheriff’s keeper, a government employed enforcement officer, at his shop’s door and, “for months, if necessary,” seize all the business’ income.

While fully acknowledging that he borrowed money from the bank and that he is not trying to avoid payment, Carnacchi maintains his stance. “What I am fighting is the ability of the bank to add all these excessive fines to the point that it’s impossible for me to recover my good standing with them and for me to pay them back,” he says. Carnacchi counted almost 2,000 collection law-firm cases filed in 77 days on the Sonoma County court website alone, and notes that most go to default.

“What’s happening is appalling. It’s wrong morally, socially and financially,” attorney Cone declares. “Michael’s basic grievance is a flesh-and-blood example shared by thousands of people. This represents an event worth talking about.” Carnacchi wants to publicize his case in hopes that others in the same financial position recognize that by banding together and filing a class-action lawsuit, changes can be made to banks’ control of moneylending practices and, ultimately, people’s lives.

A new credit card act goes into effect in January 2010, but it is of little help to Carnacchi, since it doesn’t put a cap on interest rates. There is a series of hurdles to overcome, even for lawyers. “I am struck by the depth of Michael’s research and impressed that he referred back to the Bill of Rights,” Cone says. “He’s got a passion, and it will rub off. You can see the fire in his eyes.” Carnacchi has said that some people think he’s crazy for attempting to take on the government and the banking business, likening it to David taking on two Goliaths. “I wouldn’t use the word ‘crazy,'” Cone says, “but even if it applies, what difference does it make? He’s not the first crazy man to try something of merit. It’s a toughie and, crazy or not, I really feel for him. All the people who are less crazy and are having the same experience don’t feel empowered to do anything about it.

“Michael’s the right guy at the right place at the right time.”