A T & T Universal Card Services v. Mercer

• Decision Date: 23 March 2001
• Docket Number: No. 98-60693,98-60693
• Citation: 246 F.3d 391
• Parties: (5th Cir. 2001) In The Matter Of: CONSTANCE P. MERCER, Debtor, AT&T UNIVERSAL CARD SERVICES, Appellant, v. CONSTANCE P. MERCER, Appellee
• Court: U.S. Court of Appeals — Fifth Circuit

Page 391

246 F.3d 391 (5th Cir. 2001)

In The Matter Of: CONSTANCE P. MERCER, Debtor,

AT&T UNIVERSAL CARD SERVICES, Appellant, v. CONSTANCE P. MERCER, Appellee.

No. 98-60693

UNITED STATES COURT OF APPEALS, FIFTH CIRCUIT

March 23, 2001

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Appeal from the United States District Court for the Southern District of Mississippi

Before JOLLY, HIGGINBOTHAM, DAVIS, JONES, SMITH, DUHE, WIENER, BARKSDALE, EMILIO M. GARZA, DeMOSS, BENAVIDES, STEWART, PARKER, and DENNIS, Circuit Judges.¹

RHESA HAWKINS BARKSDALE, Circuit Judge:

Rehearing en banc was granted to determine, for credit card debt (card-debt), the standards for bankruptcy nondischargeability under 11 U.S.C. 523(a)(2)(A) (credit obtained by false pretenses/representation or actual fraud). Primarily at issue are: whether credit card use (card-use) constitutes a representation of intent to pay the loan thereby obtained (intent to pay); and, if so, whether the issuer may justifiably rely on it. AT&T Universal Card Services (UCS) appeals the district court's judgment affirming the bankruptcy court's decision that the debt from Constance P. Mercer's "pre-approved" UCS card is dischargeable. We REVERSE and REMAND.

I.

In September 1995, when Mercer received UCS' pre-approved card-solicitation, she was employed as a paralegal, having worked approximately 20 years; had a junior college degree and gross annual income of approximately $25,000; and was familiar with card accounts and how obligations arise with them. She had begun gambling in casinos in 1993; as of UCS' 1995 solicitation, she had developed a "gambling obsession", financed by winnings and cash advances through card-use. That year, she began having problems paying her bills and acquired at least six more cards (four before UCS' that November).

UCS' solicitation followed a screening process begun months earlier. The credit bureau listed prospects based on UCS criteria, such as total revolving debt, bankruptcies, and existing credit utilization; a risk score was established for each prospect. That score predicted the probability of an account, within a one-year period, being delinquent for 60-90 days or more. The maximum score was 900; UCS required a minimum of 680. Mercer's was 735, evaluated at trial by UCS as "very good".

From the resulting prospects, an outside vendor eliminated duplicates and those who either had requested not to be solicited or were located in high fraud areas. Those remaining were matched against UCS' internal risk and scoring models. For those still remaining, the credit bureau screened again to ensure no change in credit history or standing. As the Fair Credit Reporting Act requires (according to UCS), UCS offered a pre-approved card to each post-second-screening prospect (including Mercer).

In September 1995, Mercer completed, signed, and returned her acceptance to UCS, providing, among other things, her income ($24,500) and identifying data, such as her social security number. UCS checked this information against its database. A third credit bureau screening determined Mercer's ability to service a $3,000 credit line (limit). Had there been any deterioration in credit history, UCS would have either withdrawn the offer or offered a lower limit.

On 10 November 1995, UCS opened Mercer's account, with a $3,000 limit, and provided a card and cardmember agreement (card- agreement). The agreement stated, inter alia: it was effective upon card-use; Mercer was "responsible for all amounts owed"; and she "agree[d] to pay such amounts according to the [card-agreement's] terms" (by making at least a minimum payment in each billing cycle against the balance due).

Mercer reached her limit within a month of card-receipt, obtaining 14 cash advances. Each was used for gambling. Four were on or before 24 November, from an automatic teller machine (ATM) at a casino; nine, between 28 November and 11 December, from an ATM at a bank; and one, from another entity. On 29 November, 19 days after card-issuance but before Mercer reached her limit, her account was flagged by UCS for excessive transactions. UCS determined they were not egregiously excessive and cleared the account for further use.

Mercer's last card-use was on 11 December, only a month after card-issuance. Her first UCS monthly statement (through mid-December), reflected a balance approximately $200 over-limit. The minimum payment was not made.

The second statement requested the required payment and no card-use. When contacted twice in February by UCS, Mercer stated: she was trying to become current, and did not know when she could make a payment; later (62 days post last card-use), that she had consulted an attorney about bankruptcy. The final statement (ending mid-March) advised the account had been closed. Quarterly, UCS reviewed its customers' creditworthiness. But, because Mercer's limit had been reached during the first billing cycle, her review was irrelevant. Notwithstanding her claimed inability to make the minimum payments, Mercer's checking account statements for that period reflect numerous ATM cash withdrawals, including in casinos. For example, that for 17 January 1996 reflected 26, totaling approximately $2,200.

On filing for Chapter 7 bankruptcy relief in April 1996, Mercer was indebted to nine card-issuers for more than $31,000. Most of those accounts (including with UCS) had been opened between March and December 1995. She had lost approximately $36,000 in gambling within two years prior to filing bankruptcy, including at least $25,000 in 1995, when her income from two jobs was approximately $24,000.

Following trial in 1997, Mercer's UCS debt was held dischargeable, the bankruptcy court ruling: for card-issuance, UCS relied on its own investigation, rather than on any representation by Mercer; therefore, UCS could not rely on her representation, "if any", at card-use; and, even assuming UCS actually relied on any Mercer representation, it would not have been justifiable, because UCS' pre-issuance investigation was inadequate. AT&T Universal Card Servs. v. Mercer (In re Mercer), 220 B.R. 315, 326-27 (Bankr. S.D. Miss. 1998).

The district court affirmed, AT&T Universal Card Servs. v. Mercer, No. 1:98cv290BrR (S.D. Miss. 30 Sept. 1998) (unpublished), as did a divided panel on our court; but the majority could not agree. AT&T Universal Card Servs. v. Mercer (Matter of Mercer), 211 F.3d 214, reh'g granted, 218 F.3d 770 (5th Cir. 2000). One member concluded: UCS having provided a pre-approved card and limit, "Mercer could not make any false representations" on which UCS could rely; and it had assumed the risk of non-payment. 211 F.3d at 217 (Duh, J.) (emphasis added). The other concluded: card-use is an implied promise to pay; but, UCS could not justifiably rely on it "without a reasonably adequate assessment of [Mercer's] credit history and present financial condition". Id. at 218 (Dennis, J., specially concurring). The dissent concluded: card-use is a representation of intent to pay; and the case should be remanded for application of the correct justifiable reliance standard. Id. at 231-32 (Barksdale, J., dissenting).

II.

Although the amount of the debt at stake in this nondischargeability proceeding is relatively small, card-debt is involved in many consumer bankruptcies. Accordingly, it is imperative that we clarify the standards governing nondischargeability of card-debt.

Cards play a major role in, and promote, modern commerce. A few examples of their ever-increasing uses and importance follow. Cards are a convenient -- if not necessary -- substitute for cash and checks, especially where they are not a viable medium, such as in telephone and Internet purchases. See Todd J. Zywicki, The Economics of Credit Cards, 3 Chap. L. Rev. 79, 83, 91-92 (Spring 2000). They help small retailers compete with larger ones, many of which have their own credit operations, by allowing the former to shift the risk of non-payment to the issuer. Id. at 92-93. Finally, cash advances, the focus of the case at hand, are a prompt, simple, and extremely convenient alternative to bank loans.

The downside for increased consumer credit is bankruptcy. See David F. Snow, The Dischargeability of Credit Card Debt: New Developments and the Need for a New Direction, 72 Am. Bankr. L.J. 63, 94 (Winter 1998) (readily available cards "tempt consumers, hard-pressed by loss of work, illness, or family difficulties, to attempt to tide themselves over and to postpone financial collapse or bankruptcy with little or no realistic prospect of success"). Filings increased from approximately 800,000 in 1990 to 1.4 million in 1998 (decreasing somewhat in 1999 and 2000). See American Bankr. Inst., Annual Total Bankruptcy Filings For 1990-1999, available at (last checked 15 Mar. 2001). "[B]ank, retail and credit-card industry advocates estimate consumer bankruptcies cost their businesses about $40 billion a year". Dawn Kopecki & Jeffrey Taylor, House, Senate Diverge on Bills For Bankruptcy, Wall St. J., 4 Feb. 2000, at A20. As expected, that cost is passed along to customers. Bankruptcies are said to cost each United States household $400 annually, in part because, to recoup losses, issuers and other businesses increase customers' interest rates. Julie Hyman, Senate Set to Pass Legislation to Curb Bankruptcy Abuse, Wash. Times, 2 Feb. 2000, at B8.

Our court has not addressed the standards for card-debt 523(a)(2)(A) nondischargeability (card-dischargeability). Numerous others have, with conflicting theories emerging. Because of the issue's importance, the need for a uniform standard, and the many subissues in this case, arising out of a pre-approved card being used to obtain funds for gambling, we address each element in detail.

In this regard,...