Alteration vs. Conservation Defined

benjulmag · #1 05-13-2019, 05:28 PM

Not being a slabbed card collector I am unfamiliar with the legal obligations of grading companies and don't know what if any disclaimers and/or damages limitations language is contained in their submission form.

Here's my question. I buy a PSA 8 T206 Cobb for $150k.
I subsequently CONCLUSIVELY establish through advanced forensic testing that the card was altered in such a manner that it should have been graded an "A". Am I entitled to receive damages from PSA and if so, what would they be?

It would seem to me that if PSA is on the hook for the $150k I paid for the card (and in return PSA has the right to resell the card (this time graded "A") and keep the sale proceeds), they have one huge contingent liability on their balance sheet. If I am correct in my view that the (great) majority of many types of N and T cards graded 8' and higher are altered, which alterations could be conclusively established through sophisticated forensic testing, PSA potentially could be wiped out.

Am I wrong in this assessment?

Peter_Spaeth · #2 05-13-2019, 05:38 PM

Quote:

Originally Posted by benjulmag

Not being a slabbed card collector I am unfamiliar with the legal obligations of grading companies and don't know what if any disclaimers and/or damages limitations language is contained in their submission form.

Here's my question. I buy a PSA 8 T206 Cobb for $150k.
I subsequently CONCLUSIVELY establish through advanced forensic testing that the card was altered in such a manner that it should have been graded an "A". Am I entitled to receive damages from PSA and if so, what would they be?

It would seem to me that if PSA is on the hook for the $150k I paid for the card (and in return PSA has the right to resell the card (this time graded "A") and keep the sale proceeds), they have one huge contingent liability on their balance sheet. If I am correct in my view that the (great) majority of many types of N and T cards graded 8' and higher are altered, which alterations could be conclusively established through sophisticated forensic testing, PSA potentially could be wiped out.

Am I wrong in this assessment?

Q: Do you guarantee the grades for my cards?
A: PSA guarantees that all cards submitted to it shall be graded in accordance with PSA grading standards and under the procedures of PSA. If PSA, in fact, concludes that the card in question no longer merits the PSA grade assigned or fails PSA�s authenticity standards, PSA will either: 1) Buy the card from the submitter at the current market value if the card can no longer receive a numerical grade under PSA's standards, or 2) Refund the difference in value between the original PSA grade and the current PSA grade if the grade is lowered. In this case, the card will also be returned to the customer along with the refund for the difference in value.

Peter_Spaeth · #3 05-13-2019, 05:40 PM

Corey I am sure their auditors must review and approve of their reserve for the guaranty, it will be interesting to see if recent events affect that. I've always thought it was a time bomb and expected them to someday revoke it. Of course they do have control -- they have to agree with you.

swarmee · #4 05-13-2019, 05:41 PM

Yes, it seems PSA self-insures for their Grade Guarantee rather than pays an insurance company for protection. In their most recent quarterly stockholders report, they stated they increased their reserve fund to cover a predicted increase of grade guarantee liabilities.

Quote:

Service Warranties
We generally issue an authenticity or grading warranty with every coin and trading card authenticated or graded by us. Under the terms of the warranty, in general, if a coin or trading card that was authenticated or graded by us later receives a lower grade upon resubmission to us for grading, or is found not to be authentic, based on our opinion, we are obligated under our warranty either to purchase the coin or trading card at
the current market value at the originally assigned grade or, instead, at the
customer’s option, to pay the difference in the current market value of the item between its original assigned grade and its lower grade. We accrue for estimated warranty costs based on historical claims experience, and we monitor the adequacy of the warranty reserves on an ongoing basis. If warranty claims were to increase in relation to historical trends and experience, we would increase the warranty reserves and incur additional charges that would have the effect of reducing income in those periods during which the warranty reserve is increased. See Item 7: “MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS-Critical Accounting Policies: Grading Warranty Costs”, and Item 8: Consolidated Financial Statements -Note 7 of this report for more information regarding our warranty reserves. As discussed above, before returning an authenticated or graded coin or trading card to our customer, we place the coin or trading card in a tamper-evident, clear plastic holder that encapsulates a label identifying the collectible as having been authenticated and graded by us. The warranty is voided if the plastic holder has been broken or damaged or shows signs of tampering.
We do not provide a warranty with respect to our opinions regarding the authenticity or quality of autographs or memorabilia.

Quote:

We have no insurance coverage for claims made under these warranties, and therefore we maintain reserves for such
warranty claims based on historical experience. However, there is no assurance that these warranty reserves will prove to be
adequate, and as we expand our services in overseas markets, we may incur higher warranty claims than we have experienced in
the past. If our warranty reserves prove to be inadequate, our gross margin and operating results could be harmed. As a result, we
monitor the adequacy of our warranty reserves on an ongoing basis.

Quote:

Due to the higher level of warranty payment in fiscal 2018, warranty expense recognized was $764,000 in fiscal 2018 as
compared to $302,000, and ($145,000) in fiscals, 2017 and 2016, respectively. Our warranty reserves were $862,000 and $834,000
at June 30, 2018 and 2017, respectively.

http://investors.collectors.com/stat...3-6a45441cf111

Will it bankrupt the company? Probably not. But it may hurt their stock price and increase costs of grading in the future to cover the losses.

benjulmag · #5 05-13-2019, 06:21 PM

It's an interesting issue. Continuing with the same example, suppose I waited 15 years before submitting the card for forensic testing, during which time the spread between an 8 Cobb and an "A" Cobb increased from, say, $20k to $125k. Could PSA argue I had a duty to undertake the testing years earlier (assuming the forensic testing method was commercially available during the entire 15-year period) and accordingly their exposure should be limited to $20k? By this line of reasoning, could they argue the statute of limitations has expired such that I am barred from collecting damages altogether?

Peter_Spaeth · #6 05-13-2019, 06:58 PM

Quote:

Originally Posted by benjulmag

It's an interesting issue. Continuing with the same example, suppose I waited 15 years before submitting the card for forensic testing, during which time the spread between an 8 Cobb and an "A" Cobb increased from, say, $20k to $125k. Could PSA argue I had a duty to undertake the testing years earlier (assuming the forensic testing method was commercially was available during the entire 15-year period) and accordingly their exposure should be limited to $20k. By this line of reasoning, could they argue the statute of limitations has expired such that I am barred from collecting damages altogether?

They really should have promised to reimburse for out of pocket cost, not current market value. The buyer gets a huge windfall this way in a rising market. As to your question, who knows, it would depend on what the cause of action is and what triggers the statute of limitations I guess. I'd have to think about that. But as it's likely to run from when you did or could have discovered your claim in the exercise of reasonable diligence, you likely would be out.

irv · #7 05-13-2019, 07:06 PM

Quote:

Originally Posted by benjulmag

It's an interesting issue. Continuing with the same example, suppose I waited 15 years before submitting the card for forensic testing, during which time the spread between an 8 Cobb and an "A" Cobb increased from, say, $20k to $125k. Could PSA argue I had a duty to undertake the testing years earlier (assuming the forensic testing method was commercially was available during the entire 15-year period) and accordingly their exposure should be limited to $20k. By this line of reasoning, could they argue the statute of limitations has expired such that I am barred from collecting damages altogether?

Quote:

Originally Posted by Peter_Spaeth

They really should have promised to reimburse for out of pocket cost, not current market value. The buyer gets a huge windfall this way in a rising market. As to your question, who knows, it would depend on what the cause of action is and what triggers the statute of limitations I guess. I'd have to think about that. But as it's likely to run from when you did or could have discovered your claim in the exercise of reasonable diligence, you likely would be out.

Is a statute of limitations something that a seller can declare or is it the law that dictates what that period of time is?

barrysloate · #8 05-13-2019, 07:24 PM

In Corey's example, what if PSA refused to agree with the forensic determination? What if they responded that they've reviewed the card several times and that in their opinion their grade of an 8 was completely justified. After all, it's an opinion, not a fact. It might be really hard to prove that they got it wrong.

Peter_Spaeth · #9 05-13-2019, 07:41 PM

Quote:

Originally Posted by barrysloate

In Corey's example, what if PSA refused to agree with the forensic determination? What if they responded that they've reviewed the card several times and that in their opinion their grade of an 8 was completely justified. After all, it's an opinion, not a fact. It might be really hard to prove that they got it wrong.

That's the problem. Think David Hall and Wagner. Then you litigate, I guess.

benjulmag · #10 05-13-2019, 07:43 PM

Quote:

Originally Posted by barrysloate

In Corey's example, what if PSA refused to agree with the forensic determination? What if they responded that they've reviewed the card several times and that in their opinion their grade of an 8 was completely justified. After all, it's an opinion, not a fact. It might be really hard to prove that they got it wrong.

Good question. However...certain kinds of forensic testing can be legally conclusive (e.g., color was added by a substance not commercially available at the time the issue came out).

benjulmag · #11 05-13-2019, 07:22 PM

Quote:

Originally Posted by Peter_Spaeth

They really should have promised to reimburse for out of pocket cost, not current market value. The buyer gets a huge windfall this way in a rising market. As to your question, who knows, it would depend on what the cause of action is and what triggers the statute of limitations I guess. I'd have to think about that. But as it's likely to run from when you did or could have discovered your claim in the exercise of reasonable diligence, you likely would be out.

I agree with your point about exercise of reasonable diligence, unless I could fashion an argument that it was only recently that I was reasonably put on notice about the likelihood of alteration. I would think the action would be breach of contract, though there could be a lack of privity problem if I was not the person who submitted the card for grading. If I bought it from an auction house, they probably had a disclaimer that they are not responsible for the accuracy of graded cards. So they would be protected. However, they probably would have a duty to reveal the consignor, and that would be the person I would have to go after. That person in turn would assign me his right to sue the grading company (assuming he was the person who had the card graded). If he in turn bought it from someone else and it was that other person who had the card graded, then he would have to go after that person. This potentially could go on down the chain until I reached the person who had the card graded.

What a mess.

Peter_Spaeth · #12 05-13-2019, 07:34 PM

Quote:

Originally Posted by benjulmag

I agree with your point about exercise of reasonable diligence, unless I could fashion an argument that it was only recently that I was reasonably put on notice about the likelihood of alteration. I would think the action would be breach of contract, though there could be a lack of privity problem if I was not the person who submitted the card for grading. If I bought it from an auction house, they probably had a disclaimer that they are not responsible for the accuracy of graded cards. So they would be protected. However, they probably would have a duty to reveal the consignor, and that would be the person I would have to go after. That person in turn would assign me his right to sue the grading company (assuming he was the person who had the card graded). If he in turn bought it from someone else and it was that other person who had the card graded, then he would have to go after that person. This potentially could go on down the chain until I reached the person who had the card graded.

What a mess.

It's probably like claiming on a manufacturer's warranty I would think off the top of my head.

benjulmag · #13 05-13-2019, 07:46 PM

Quote:

Originally Posted by Peter_Spaeth

It's probably like claiming on a manufacturer's warranty I would think off the top of my head.

Makes sense.

Kenny Cole · #14 05-13-2019, 11:09 PM

Quote:

Originally Posted by benjulmag

I agree with your point about exercise of reasonable diligence, unless I could fashion an argument that it was only recently that I was reasonably put on notice about the likelihood of alteration. I would think the action would be breach of contract, though there could be a lack of privity problem if I was not the person who submitted the card for grading. If I bought it from an auction house, they probably had a disclaimer that they are not responsible for the accuracy of graded cards. So they would be protected. However, they probably would have a duty to reveal the consignor, and that would be the person I would have to go after. That person in turn would assign me his right to sue the grading company (assuming he was the person who had the card graded). If he in turn bought it from someone else and it was that other person who had the card graded, then he would have to go after that person. This potentially could go on down the chain until I reached the person who had the card graded.

What a mess.

I wonder if a fraud/deceit claim could possibly be asserted. At least here, the elements are:

1. That [Defendant] made a material representation (that the card met the requirements necessary to receive the assigned grade);

2. That it was false (that the grade is inaccurate due to alterations);

3. That [Defendant] made it when [he/she] knew it was false, or made it as a positive assertion recklessly, without any knowledge of its truth (that during the grading process, the grader should have or did have information indicating that the assigned grade was incorrect);

4. That [Defendant] made it with the intention that it should be acted upon by [Plaintiff] (by far the most problematic element IMO, although intent can sometimes be inferred from the circumstances surrounding the transaction);

5. That [Plaintiff] acted in reliance upon it (they purchased the card for the going price in reliance upon the assigned grade); and

6. That [Plaintiff] thereby suffered injury (because the condition of the card was not that portrayed by the assigned grade, the purchaser lost money).

That might possibly work against the grader, assuming you can satisfy the discovery rule for statute of limitations purposes. It would admittedly be difficult. At least here, the discovery rule doesn't generally apply to contract actions so you would likely be out of luck on a contract claim after the statute ran.

A fraud/deceit claim is probably not great against a buyer who then resells it, since the knowing/reckless element will almost never be there. I would guess that's more a breach of contract/warranty issue, with that seller then having a potential indemnity claim against whoever he/she/it got the card from back up the line, subject to any applicable SOL. Yes, what a mess.

benjulmag · #15 05-14-2019, 05:37 AM

Quote:

Originally Posted by Kenny Cole

I wonder if a fraud/deceit claim could possibly be asserted. At least here, the elements are:

1. That [Defendant] made a material representation (that the card met the requirements necessary to receive the assigned grade);

2. That it was false (that the grade is inaccurate due to alterations);

3. That [Defendant] made it when [he/she] knew it was false, or made it as a positive assertion recklessly, without any knowledge of its truth (that during the grading process, the grader should have or did have information indicating that the assigned grade was incorrect);

4. That [Defendant] made it with the intention that it should be acted upon by [Plaintiff] (by far the most problematic element IMO, although intent can sometimes be inferred from the circumstances surrounding the transaction);

5. That [Plaintiff] acted in reliance upon it (they purchased the card for the going price in reliance upon the assigned grade); and

6. That [Plaintiff] thereby suffered injury (because the condition of the card was not that portrayed by the assigned grade, the purchaser lost money).

That might possibly work against the grader, assuming you can satisfy the discovery rule for statute of limitations purposes. It would admittedly be difficult. At least here, the discovery rule doesn't generally apply to contract actions so you would likely be out of luck on a contract claim after the statute ran.

A fraud/deceit claim is probably not great against a buyer who then resells it, since the knowing/reckless element will almost never be there. I would guess that's more a breach of contract/warranty issue, with that seller then having a potential indemnity claim against whoever he/she/it got the card from back up the line, subject to any applicable SOL. Yes, what a mess.

Interesting argument. I would think point 3 would be the tough one to establish, all the more so because since this was the first card PSA purportedly slabbed, it would probably be easier for them to argue that at that stage of card grading graders reasonably did not have the expertise to catch things that now-a-day they do. Adding to that problem is that for actions in fraud, in certain jurisdictions the legal standard is clear and convincing evidence, a higher standard than preponderance of the evidence (at least to the extent a jury would care about the distinction).

In the matter at hand, it has been alleged the person who actually graded the card knew it was trimmed and expressed such. Whether that is true and if it is can be revealed during discovery, that is another question. If though that can be established, then the action for fraud would seem to be viable -- except though for the SOL problem, as the allegations the card was trimmed and PSA always knew that have been out there for a long time.

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