In re Blackburn
| Decision Date | 12 January 1987 |
| Docket Number | Bankruptcy No. 85-61354,Adv. No. 85-6130. |
| Parties | In re Laura BLACKBURN, Debtor. MONTGOMERY WARD AND COMPANY, INC., Plaintiff, v. Laura BLACKBURN, Defendant. |
| Court | U.S. Bankruptcy Court — Northern District of Indiana |
D. Hallett, Borns & Quinn, P.C., Merrillville, Ind., for plaintiff-creditor, Montgomery Ward and Co., Inc.
C. Hawkins, Gary, Ind., for defendant-debtor.
Opinion & Order on Objection to the Discharge of a Debt
This adversary proceeding concerns the plaintiff-creditor's objection under 11 U.S.C. § 523(a)(2)(A) to discharging a debt for furniture the debtor purchased on a credit card within forty days of her bankruptcy petition. We hold that, for goods or services purchased on a credit card to be excepted from discharge for fraud under § 523(a)(2)(A) when the debtor did not obtain the credit card fraudulently or use the card after being notified of its revocation, the objecting creditor must establish with clear and convincing evidence that the debtor charged the goods or services with no present intention of paying for them. Because the plaintiff has failed to show that the debtor did not intend to pay for the furniture when she charged it to her credit card, this debt should not be excepted from discharge.
The adversaries in this proceeding are the creditor, Montgomery Ward and Company ("Montgomery Ward"), and the debtor, who filed a petition in bankruptcy under Chapter 7 on September 13, 1985. Seventeen days earlier, on August 28, 1985, the debtor bought a sofa and love seat from the creditor for $1228.48, charging the purchase to her Montgomery Ward credit card. The creditor asks the Court to except this debt from discharge under 11 U.S.C. §§ 727(b) and 523(a)(2)(A), which provide that a debt for property obtained by false pretenses, a false representation, or actual fraud will not be discharged in Chapter 7.
The parties filed a stipulation of facts on September 25, 1986, acknowledging debtor's revolving charge card agreement, debtor's purchase of a sofa and love seat from plaintiff on August 28, 1985 for $1228.48 on this charge card, the unpaid balance on the account, and debtor's credit limit of $2,998.00. We heard this proceeding on December 9, 1986. At the hearing, the creditor called Ms. Marilyn Byker, a credit account manager with Montgomery Ward, and the debtor herself to testify. The debtor's attorney also took the stand to explain when he was first consulted by his client and when he prepared the petition. We accepted three exhibits into evidence: the charge slip and cash register receipt for debtor's purchase on August 28, 1985; her credit application and retail installment credit agreement; and, over the debtor's objection on grounds of relevance, a coded computer printout representing a credit history for debtor's charge card for the five and one-half months before the purchase at issue here.
The stipulated facts, the testimony of the witnesses at the hearing, and the documentary evidence reveal that the debtor has had a Montgomery Ward charge card at least since August 1984. Before filing bankruptcy, she regularly paid the monthly balance due, with the exception of June 1985, when she made no payment, instead doubling her payment the following month. Her highest balance on the card before the purchase of the furniture on August 28th had been about $2215.00. At the time of the purchase, her balance was about $1700.00, increasing to about $2900.00 afterwards. Because of her good credit history, the debtor enjoyed a credit limit of $2998.00 on this charge card, a limit she never exceeded.
On August 28, 1985 the debtor purchased from plaintiff a sofa and love seat for $1228.00, charging the purchase to her Montgomery Ward credit card. Both pieces were on sale: the sofa, originally listed at $999.99, for $599.99; the love seat, listed at $899.99, for $549.99. She bought this furniture to replace a couch in her living room that was eight years old, used by children, and no longer serviceable because the cushions sank to the floor. These two items of furniture were defendant's only purchases on the credit card in August 1985.
The defendant, Mrs. Blackburn, is a widow whose daughter, Belinda, lives with her. Before the filing of the bankruptcy, a granddaughter by another daughter, Loretta, also lived with them. For the past eight years Mrs. Blackburn has been employed by the Lake County Prosecutor's Office as a secretary and clerk earning about $550.00 net a month. She also receives a pension of $282.26 a month from her late husband's employer. In addition, Mrs. Blackburn's daughter, Loretta, who is in the armed services, sent her $200.00 a month through the month of August 1985 for the support of Loretta's daughter, who was cared for by Mrs. Blackburn. Loretta's contribution was relatively constant, though occasionally Mrs. Blackburn returned some of the money to her. Although Loretta and her daughter moved to Germany in July, she contributed $200.00 to the household in August.
Belinda also provided about $200.00 a month through May 1985 toward the household expenses, purchased her own gas, and paid the Montgomery Ward charge with the balance. This income stopped when Belinda was laid off from her job in the cafeteria at Indiana University in May 1985 with "total recall," that is, with the full expectation of being rehired in September. Unfortunately, in early September, Belinda and her mother learned she would not be recalled to work after all. Mrs. Blackburn first consulted an attorney by telephone about bankruptcy on September 12, 1985. The next day the attorney prepared and filed her petition under Chapter 7.
On December 10, 1985, plaintiff filed a form complaint alleging that, by purchasing the merchandise "and obtaining cash advances," debtor "impliedly represented" that she had the means and intention of paying when in fact she "knew or should have known that she would be unable to pay," had no intention of paying, and intended to defraud plaintiff through false representations and false pretenses. Plaintiff did not allege that the pieces defendant purchased were luxury goods under 11 U.S.C. § 523(a)(2)(C).
At the beginning of the hearing, the Court inquired whether, despite the failure to raise the issue in its pleadings, plaintiff would try to avail itself of the presumption of nondischargeability for luxury goods in § 523(a)(2)(C). Plaintiff argued that this subsection expressly refers to § 523(a)(2)(A), which it had clearly raised in the complaint. Defendant objected, pointing out that the defendant had earlier rejected a proposed stipulation that included a concession that the purchased items were luxury goods. We allowed plaintiff to present evidence under § 523(a)(2)(C), but reserved decision on whether to admit the evidence.
In accordance with Rule 7015 of the Bankruptcy Rules and Rule 15(b) of the Federal Rules of Civil Procedure:
. . . If evidence is objected to at trial on the ground that it is not within the issues made by the pleadings, the court may allow the pleadings to be amended and shall do so freely when the presentation of the merits of the action will be subserved thereby and the objecting party fails to satisfy the court that the admission of such evidence would prejudice him in maintaining his action or defense upon the merits. . . .
The rule provides that permission to amend be granted freely unless the objecting party demonstrates actual prejudice. We find that plaintiff's claim at trial that defendant's purchases were luxury goods was not made in bad faith. Moreover, on the facts and on the law, defendant had adequate notice that the issue might come up. The claim that the sofa and love seat are luxury goods arises out of the same transaction or occurrence as the claim that the defendant charged these items with fraudulent intent. And the claim is under the selfsame statutory section; for, as counsel points out, subsection (a)(2)(C) specifically refers to subsection (a)(2)(A). Compare In re Tester, 56 B.R. 208, 210 (W.D.Va.1985) (); In re Dunn, 49 B.R. 547, 550 (Bkrtcy.W.D.N.Y.1985) (). Nor did defendant suggest that she was surprised or prejudiced by the claim. Indeed, defendant must have realized that plaintiff might raise the issue since plaintiff had included it as one of the terms in a proposed stipulation that defendant rejected. See, generally, Foman v. Davis, 371 U.S. 178, 83 S.Ct. 227, 9 L.Ed.2d 222 (1962), and the cases cited in Annot., What Constitutes "Prejudice" to Party Who Objects to Evidence Outside Issues Made by Pleadings so as to Preclude Amendment of Pleadings Under Rule 15(b) of Federal Rules of Civil Procedure, 20 A.L.R.Fed. 448 (Supp.1986). In the absence of bad faith by the plaintiff or prejudice to the defendant, we admit plaintiff's evidence supporting the presumption of nondischargeability under § 523(a)(2)(C).
Accordingly, we need to decide first whether defendant's purchase of the furniture satisfies the six pertinent elements of § 523(a)(2)(C), which refers back to § 523(a)(2)(A). To be presumed nondischargeable under § 523(a)(2)(A), the expenditures must be for:
Mrs. Blackburn, an individual debtor, purchased...
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