First Nat. Bank of Mobile v. Roddenberry

• Decision Date: 01 April 1983
• Docket Number: No. 81-7952,81-7952
• Citation: 10 B.C.D. 469,701 F.2d 927
• Parties: , Bankr. L. Rep. P 69,328 FIRST NATIONAL BANK OF MOBILE d/b/a Bankamericard/Visa, Plaintiff-Appellant, v. Harold Eugene RODDENBERRY and Jayne Hettie Roddenberry, Defendants-Appellees.
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 927

701 F.2d 927

10 Bankr.Ct.Dec. 469, Bankr. L. Rep. P 69,328

FIRST NATIONAL BANK OF MOBILE d/b/a Bankamericard/Visa Plaintiff-Appellant, v. Harold Eugene RODDENBERRY and Jayne Hettie Roddenberry Defendants-Appellees.

No. 81-7952.

United States Court of Appeals Eleventh Circuit.

April 1, 1983.

Lawrence B. Voit, Mobile, Ala., for plaintiff-appellant.

Stephen M. Gudac, Mobile, Ala., for defendants-appellees.

Appeal from the United States District Court for the Southern District of Alabama.

Before HILL and ANDERSON, Circuit Judges, and LYNNE ^*, District Judge.

JAMES C. HILL, Circuit Judge:

This appeal raises the important and timely issue of when liabilities resulting from abuse of bank credit cards are exempt from general discharge through bankruptcy proceedings. In Davison-Paxon Co. v. Caldwell, 115 F.2d 189 (5th Cir.1940), cert. denied, 313 U.S. 564, 61 S.Ct. 841, 85 L.Ed 1523 (1941), a divided panel of the former Fifth Circuit concluded that the purchase of goods on credit, with an intentional concealment of insolvency at the time of purchase, was not exempt from general discharge. Upon reviewing the scope of Davison-Paxon, we conclude that the rule enunciated in the decision does not warrant mechanical application. Instead, each case involving modern credit transactions must be examined individually to determine if the challenged liability is of the type anticipated to be discharged in Davison-Paxon. It is our conclusion that in transactions involving bank credit cards the analysis must involve a determination of whether the bank unconditionally revoked the cardholder's right to use and possession of that card and if so when the cardholder became aware of such revocation. Debts incurred prior to unconditional revocation may be dischargeable. However, debts incurred with the knowledge that one is not entitled to possession or use of a credit card are nondischargeable.

I.

In November 1975, Harold and Jayne Roddenberry applied for a joint Bank Americard with the First National Bank of Mobile. Their application was approved, and they were issued two credit cards with a total credit limit of $400. In January 1978, their credit limit was automatically extended to $600. This extension was pursuant to an across-the-board increase to all credit customers in good standing. In May 1978, their limit again was extended to $1,000, this time at the request of the Roddenberrys.

By April 21, 1978, however, the Roddenberrys already had an outstanding balance on their account of $1,620.41. Thus, on May 5, 1978, the bank mailed its first form letter to the Roddenberrys informing them that they had exceeded their credit limit and requesting that no further charges be made until the balance was reduced to a permissible level. A similar form letter was mailed to the Roddenberrys on May 19, 1978. Although payments to the bank in June and July reduced the account's balance to $1,078.32, in August, the balance began to rise once again. Thus, a third form letter was mailed on August 25, 1978.

In September 1978, an official of the bank's credit department telephoned the Roddenberrys. During one such conversation, Mr. Roddenberry promised that he would make no further charges on the account. Mr. Roddenberry apparently kept his promise. In October 1978, however, the couple separated, and Mrs. Roddenberry moved away, taking with her both of the credit cards. It is not disputed that all charges on the account after September 1978 were made by Mrs. Roddenberry.

Upon leaving her husband, Mrs. Roddenberry embarked on what can only be characterized as a credit card spending spree. From September through November she obtained $1,300 in cash advances from the bank's automatic teller. The bank therefore telephoned the Roddenberrys who promised to pay the $2,583.17 account in full within one week from November 21, 1978. When payments were not forthcoming, the bank maintains that it tried to contact the Roddenberrys by leaving messages on the Roddenberrys' telephone answering recorder.

Not until December 11, 1978, did the bank finally program its automatic teller to pick up the credit cards if they were used to obtain a cash advance. In addition, on December 12, 1978, the bank claims that the National Authorization Center for BankAmericard/VISA was advised to instruct any merchant calling for an authorization to pick up the cards. ¹ The December balance on the Roddenberrys' account was $3,098.92.

After December, Mrs. Roddenberry did not attempt to obtain any further cash advances. Instead, she engaged in the creative practice of purchasing items less than $50.00 in value. By making numerous small purchases, Mrs. Roddenberry was able to use her charge cards without detection because merchants generally are required to call-in for authorization only if the total purchase price of a sale exceeds $50.00. Thus, in January 1979, Mrs. Roddenberry successfully made 91 separate charges, each for less than $50.00. This raised the balance on the Roddenberrys' account to $5,221.77 as of January 22, 1979.

The bank again contacted Mr. Roddenberry in January. At that time, he assured the bank that he would try to recover the cards from his estranged wife. When Mr. Roddenberry did speak with his wife, he apparently informed her that she was not to make any further charges with the credit cards. However, Mrs. Roddenberry told her husband that she needed the cards to "live on" until she could find a job. She testified that she used the cards to buy merchandise for friends, who in turn would pay her the cash she used to support herself.

On March 2, 1979, the Roddenberrys filed petitions for bankruptcy. The balance of their credit card account as of the date of filing was $7,050.55, but Mrs. Roddenberry continued to make purchases with the credit cards even after the bankruptcy petitions were filed. ² The bank subsequently filed a complaint seeking to have the debts declared nondischargeable because the money and merchandise were obtained under false pretenses within the meaning of section 17a(2) of the former Bankruptcy Act. 11 U.S.C. Sec. 35a(2) (1976). Relying on Davison-Paxon Co. v. Caldwell, 115 F.2d 189 (5th Cir.1940), cert. denied, 313 U.S. 564, 61 S.Ct. 841, 85 L.Ed. 1523 (1941), the bankruptcy court held that the debts incurred prior to bankruptcy filings were dischargeable because they were not obtained by means of actual overt false pretenses or representations. Those charges incurred after the filings, on the other hand, were not dischargeable. The district court affirmed.

II.

Section 17a(2) of the Bankruptcy Act of 1898 provides a limited exception to the general discharge of debts in bankruptcy. If the challenged liabilities are "for obtaining money or property by false pretenses or false representations," then the debts are not dischargeable through bankruptcy proceedings. 11 U.S.C. Sec. 35a(2) (1976). ³ Underlying this exception is the principle that bankruptcy is designed to provide a fresh start for honest debtors who unexpectedly fall into financial difficulty. See Local Loan Co. v. Hunt, 292 U.S. 234, 244, 54 S.Ct. 695, 699, 78 L.Ed. 1230 (1934); Williams v. United States Fidelity & Guaranty Co., 236 U.S. 549, 554-55, 35 S.Ct. 289, 290, 59 L.Ed. 713 (1915). By rendering fraudulently obtained debts nondischargeable, the bankruptcy laws implicitly attempt to discourage abuse of bankruptcy proceedings by those whom the laws were not intended to protect.

The issue raised by this appeal involves the scope of conduct which will render a debt nondischargeable under this exception. More specifically, the issue is whether Mrs. Roddenberry's purchases and cash advances were obtained by false pretenses or false representations within the meaning of the statute. According to the bankruptcy court, the decision of Davison-Paxon mandates a discharge of the Roddenberrys' credit card debts even if Mrs. Roddenberry had no intention of paying for the goods she purchased. However, the scope of Davison-Paxon 's application must be viewed in light of its factual context.

The course of events leading to Davison-Paxon began when a creditor, Davison-Paxon Company, filed a state court action for payment of merchandise purchased by Lizabeth Caldwell. Caldwell subsequently filed a bankruptcy petition and received a general discharge. Accordingly, the creditor amended its state court suit to allege that Caldwell had obtained the merchandise by means of a fraudulent concealment of her insolvency. Caldwell responded by seeking to enjoin the state court action on grounds that the debts had been discharged through bankruptcy proceedings. The district court agreed that the debts had been discharged, and the court of appeals affirmed. 115 F.2d at 189-191. In so ruling, the court of appeals concluded that section 17a(2) "does not except from discharge, debts created by obtaining credit through concealment of insolvency and present inability to pay." Id. at 191.

Davison-Paxon has been subject to severe criticism because it is understood to reward a debtor's fraudulent concealment of insolvency. ⁴ A closer examination of the decision, however, reveals that by discharging Caldwell's debts, the court did not intend to reward deceitful non-disclosure. Instead, it sought to deny a particularly improvident creditor the special privilege of an exemption from a general discharge. Although the court acknowledged that Caldwell "did not act in a straight-forward and honest way in not making full disclosure of her financial condition ...," it went on to stress that the Bankruptcy Act was remedial statute for the benefit of debtors and that exemptions to discharge therefore should be construed narrowly. 115 F.2d at 191.

The practical wisdom of the court's refusal to extend the special protection of a section 17a(2) exemption to Davison-Paxon Company is evident upon examination of the circumstances surrounding the debt. These circumstances are detailed in ...