Eashai, In re, 94-55749

• Decision Date: 02 July 1996
• Docket Number: No. 94-55749,94-55749
• Citation: 87 F.3d 1082
• Parties: , 29 Bankr.Ct.Dec. 409, Bankr. L. Rep. P 77,040, 96 Cal. Daily Op. Serv. 4948, 96 Daily Journal D.A.R. 7976 In re Amjad I. EASHAI, Debtor. CITIBANK (SOUTH DAKOTA), N.A., Plaintiff-Appellee, v. Amjad I. EASHAI, Defendant-Appellant.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1082

87 F.3d 1082

65 USLW 2047, 29 Bankr.Ct.Dec. 409, Bankr.

L. Rep. P 77,040,

96 Cal. Daily Op. Serv. 4948,

96 Daily Journal D.A.R. 7976

In re Amjad I. EASHAI, Debtor CITIBANK (SOUTH DAKOTA), N.A., Plaintiff-Appellee, v. Amjad I. EASHAI, Defendant-Appellant.

No. 94-55749.

United States Court of Appeals Ninth Circuit.

Argued and Submitted Dec. 14, 1995.

Decided July 2, 1996.

Darvy Mack Cohan, La Jolla, California, for appellee.

Andrew E. Smyth, Smyth & Smyth, Los Angeles, California, for appellant.

Appeal from the Ninth Circuit Bankruptcy Appellate Panel.

Before: SCHROEDER, FERGUSON, and O'SCANNLAIN, Circuit Judges.

FERGUSON, Circuit Judge:

Amjad Eashai, a Chapter 7 debtor, appeals the Bankruptcy Appellate Panel's decision ¹ which affirmed the bankruptcy court's judgment in favor of Citibank (South Dakota), N.A. The bankruptcy court found that Eashai's $22,567.79 in credit card debt owed to Citibank was nondischargeable under 11 U.S.C. § 523(a)(2)(A) because of fraud. On appeal, Eashai claims that the bankruptcy court erred by not requiring Citibank to establish "reliance" as an element of fraud in determining that the debt was nondischargeable. ² We have jurisdiction pursuant to 28 U.S.C. § 158(d). We AFFIRM.

I. BACKGROUND

This is not a typical credit card fraud case. This is a case in which a debtor employed a fraudulent scheme of credit card kiting. Amjad Eashai, the debtor, obtained many personal credit cards while he was employed as a car lease consultant for a bank. In that position, he earned approximately $24,000 a year. In April of 1990, he injured his back and became unemployed. He has not worked steadily since his injury. After the injury, his income was $1,200 per month from disability compensation. At that time his monthly expenses amounted to $3,300, which created a monthly deficit of $2,100.

While Eashai was unemployed, he had twenty-six credit cards. The minimum monthly payments on these cards totalled approximately $2,000. Eashai engaged in a credit card kiting scheme utilizing the credit available to him on his various credit cards to pay for his living expenses and to make the minimum payments on his other credit card accounts, including his Citibank account that is the subject of this litigation.

Citibank issued Eashai a credit card in 1988. From July 1989 to April 1990, Eashai's Citibank card remained at a zero balance except for one charge that was paid in full. However, once Eashai became unemployed in April 1990, he began using his Citibank card. By that time, Eashai's credit limit was $20,000. Over the course of the next year and through April 1991, Eashai made all of the required minimum monthly payments on the credit card. By May 1991, Eashai reached both his cash advance limit and his credit limit for purchases on his Citibank account. Eashai then stopped making payments on the account.

In October 1991, when Eashai filed his Chapter 7 petition, his credit limit on his Citibank card was $20,000 and his balance, including finance payments, was $22,567.79. At trial Eashai admitted that he was in debt On October 18, 1991, Eashai filed his voluntary petition under Chapter 7 of the Bankruptcy Code in the Bankruptcy Court for the Central District of California. Citibank filed a complaint in the bankruptcy court on January 21, 1992, seeking a determination that Eashai's debt to Citibank was nondischargeable. After a bench trial, the bankruptcy court found the credit card debt to be nondischargeable under 11 U.S.C. 523(a)(2)(A) and entered a judgment for Citibank in the amount of $22,567.79.

for approximately $100,000 on his various credit cards. However, Eashai's schedules filed with the bankruptcy court listed $141,000 in unsecured debt, primarily from credit cards. Citibank established at trial that Eashai took out cash advances on his Citibank card to maintain current minimum monthly payments on his other credit cards. Eashai also paid for his living expenses with cash advances from his Citibank card. Additionally, he financed a trip to visit his family in Pakistan and a $1,000 gambling spree in Las Vegas on his Citibank card. Finally, Eashai used his Citibank card to invest $10,000 in gold bars, which he later sold at a loss for $6,500.

Eashai appealed the bankruptcy court's decision to the Bankruptcy Appellate Panel of the Ninth Circuit. The Bankruptcy Appellate Panel heard oral argument on the matter and rendered a published opinion affirming the district court. See In re Eashai, 167 B.R. 181 (9th Cir. BAP 1994). Eashai brings this timely appeal.

Eashai challenges the legal standard applied by the bankruptcy court in its determination that Eashai's debt to Citibank was nondischargeable because of actual fraud. Eashai contends that a creditor must show reliance as an element of actual fraud for a credit card debt to be excepted from discharge. This is a question of first impression in the Ninth Circuit.

II. DISCUSSION

A. Standard of Review

Decisions of the Bankruptcy Appellate Panel are reviewed de novo. Steelcase Inc. v. Johnston (In re Johnston), 21 F.3d 323, 326 (9th Cir.1994). This court independently reviews the bankruptcy court's rulings on appeal from the Bankruptcy Appellate Panel. The bankruptcy court's conclusions of law are reviewed de novo, while its factual findings are reviewed for clear error. Id.

B. The Basics Under 11 U.S.C. § 523(a)(2)(A)

In bankruptcy some debts are nondischargeable. Section 523 of the Bankruptcy Code provides in relevant part:

(a) A discharge under section 727, 1141, or 1328(b) of this title does not discharge an individual debtor from any debt--...

(2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained, by--

(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's or an insider's financial condition.

11 U.S.C. § 523(a)(2)(A) (emphasis added). This exception to discharge furthers the policy that an honest but unfortunate debtor obtains a fresh start while a dishonest debtor does not benefit from his wrongdoing. Grogan v. Garner, 498 U.S. 279, 286-87, 111 S.Ct. 654, 659-60, 112 L.Ed.2d 755 (1991).

In the Ninth Circuit, to prove actual fraud, a creditor must establish each of the following elements:

(1) [that] the debtor made the representations;

(2) that at the time he knew they were false;

(3) that he made them with the intention and purpose of deceiving the creditor;

(4) that the creditor relied on such representations; [and]

(5) that the creditor sustained the alleged loss and damage as the proximate result of the representations having been made.

Britton v. Price (In re Britton), 950 F.2d 602, 604 (9th Cir.1991); Eugene Parks Law Corp. Defined Benefit Pension Plan v. Kirsh (In re Kirsh), 973 F.2d 1454, 1457 (9th Cir.1992). The creditor must prove each element

                of fraud by a preponderance of the evidence.  Grogan v. Garner, 498 U.S. 279, 290, 111 S.Ct. 654, 661, 112 L.Ed.2d 755 (1991).  Recently, in Field v. Mans, --- U.S. ----, 116 S.Ct. 437, 133 L.Ed.2d 351 (1995), the Supreme Court determined that when Congress used the term "actual fraud" in § 523(a)(2)(A), Congress was referring to the general common law of torts. 3  Id. at ---- n. 9, 116 S.Ct. at 443 n. 9.   Thus, the Supreme Court's interpretation of the term "actual fraud" reaffirms the Ninth Circuit's practice of using the common law elements of fraud in exception to discharge cases
                

C. Applying 11 U.S.C. § 523(a)(2)(A) to Credit Card Cases

Many courts have acknowledged that credit card debts are different from other types of debts which are discharged for fraud. See, e.g., First Nat'l Bank v. Roddenberry, 701 F.2d 927, 931 (11th Cir.1983); Citibank, S.D., N.A. v. Dougherty (In re Dougherty), 84 B.R. 653, 655-56 (9th Cir. BAP 1988); Nordstrom, Inc. v. Borste (In re Borste), 117 B.R. 995, 996 (Bankr.W.D.Wash.1990). Traditional credit transactions are two-party transactions between the debtor and the creditor. In contrast, credit card transactions involve three-parties: 1) the debtor/card holder; 2) the creditor/card issuer; and 3) the merchant who honors the credit card. The difficulty in credit card cases is for the creditor, who does not deal face-to-face with the debtor, to prove the elements of misrepresentation and reliance.

In applying the common law elements of fraud to credit card cases, courts generally follow one of three legal theories. Hecht's, A Division of the May Dep't Stores Co. v. Valdes (In re Valdes), 188 B.R. 533, 535-37 (Bankr.D.Md.1995). The majority approach is the "implied representation" theory. Chase Manhattan Bank, N.A. v. Ford (Matter of Ford), 186 B.R. 312, 318 (Bankr. N.D.Ga.1995). According to this theory, a credit card holder impliedly represents, upon using the credit card, that he has the ability and intention to pay for the goods or services. Sears Roebuck & Co. v. Faulk (In re Faulk), 69 B.R. 743, 752 (Bankr.N.D.Ind.1986).

The minority approach is the "assumption of the risk" theory. First Nat'l Bank v. Roddenberry, 701 F.2d 927, 932-33 (11th Cir.1983). According to this approach, a card holder makes a false representation to the issuer only when revocation of the card is communicated to the card holder and the card holder continues to use the card. Thus, only charges made after the revocation of the card are nondischargeable under § 523(a)(2)(A).

The third approach, sometimes called the "totality of the circumstances" theory, was established in In re Faulk, 69 B.R. 743, 757 (Bankr.N.D.Ind.1986), and adopted by the Ninth Circuit Bankruptcy Appellate Panel in In re Dougherty, 84 B.R. 653 (9th Cir. BAP 1988). Under this theory, a court may infer the existence of the debtor's intent not to pay if the facts and circumstances of a particular case present a picture of deceptive conduct by the debtor. In re Faulk, 69 B.R. at 755. In Dougherty the Bankruptcy Appellate Panel for the Ninth Circuit set out twelve...