In re Borste, Bankruptcy No. 89-08064
| Decision Date | 03 August 1990 |
| Docket Number | Bankruptcy No. 89-08064,Adv. No. A90-01153. |
| Citation | 117 BR 995 |
| Parties | In re Cathy Christine BORSTE, Debtor. NORDSTROM, INC., Plaintiff, v. Cathy Christine BORSTE, Defendant. |
| Court | U.S. Bankruptcy Court — Western District of Washington |
Grant E. Courtney, Lane Powell Spears Lubersky, Seattle, Wash., for plaintiff.
Marc S. Stern, Seattle, Wash., for defendant.
Cathy Borste filed a Chapter 7 petition on November 7, 1989. Nordstrom filed a complaint, alleging that, from May through September, 1989, the debtor incurred credit card charges with no intention or apparent ability of paying them. As such, Nordstrom maintains that these charges are nondischargeable under § 523(a)(2)(A) of the Bankruptcy Code. Nordstrom relies on In re Dougherty, 84 B.R. 653 (Bankr.App. 9th Cir.1988). The debtor asserts as a defense that she suffers from an obsessive-compulsive disorder (known as OCD), a mental illness which deprived her of the ability to formulate the intent required to establish fraud under § 523(a)(2)(A).
1. Elements of Proof Under § 523(a)(2)(A).
In Dougherty, the Bankruptcy Appellate Panel addressed the issue of nondischargeability of credit card obligations. Prior to Dougherty, the courts had attempted to adapt the elements traditionally applied in § 523(a)(2)(A) to such transactions, i.e. 1) that the debtor made representations, 2) which he knew at the time to be false; 3) that he made the representations with the intention and purpose of deceiving the creditor; 4) that the creditor relied on the misrepresentations; and 5) that the creditor sustained the alleged loss as the proximate result of the representations. Id. at 656. Given the difficulty of proving these elements in credit card transactions, the courts had developed two avenues of approach. The majority espoused the "implied representation" theory, the premise of which is that when making a charge, a cardholder impliedly represents that he or she has the ability and intention to pay for the goods or services charged. A minority of courts had advocated the "assumption of risk" theory, which provides that the cardholder makes a false representation to the issuer only when he or she continues to use the card after revocation of the card has been communicated.
Each of the theories employs a fiction in order to satisfy the representation and reliance elements of fraud. The Dougherty Court rejected both theories, observing that, "in third party credit card transactions . . . the concepts of representation and reliance have little meaning." Id. Instead, the Court adopted the test enunciated in In re Faulk, 69 B.R. 743 (Bankr.N.D. Ind.1986), which provides, "`Where purchases are made through the use of a credit card with no intention at that time to repay the debt, that debt must be held to be nondischargeable pursuant to section 523(a)(2)(A).'" 84 B.R. at 657 (citing Faulk, 69 B.R. at 753-54). Under this analysis, the continued use of a credit card after revocation of the card has been communicated renders nondischargeable the liabilities incurred thereafter. As to prerevocation charges, the card issuer must prove by clear and convincing evidence that "the debt was incurred through actual fraud, i.e. where the debtor made the charges with no intention of paying for same." Id.
The plaintiff and defendant agree that subjective intent to deceive need not be shown under § 523(a)(2)(A). All that is required is a showing of reckless disregard for the truth, i.e. that the debtor intentionally continued to incur charges after she knew or should have known that she lacked the ability to repay them. In re Pedrazzini, 644 F.2d 756 (9th Cir.1981). The Dougherty court identified twelve nonexclusive factors from which the Court may deduce the requisite intent in credit card transactions. They are as follows:
2. Application of Dougherty Factors.
The Dougherty factors apply to the evidence as follows:
1) Length of time between charges and filing bankruptcy. Nordstrom is seeking a nondischargeability finding only as to those charges incurred by the debtor between May and September, 1989. Borste's last charge at Nordstrom occurred September 2nd, when she charged $170.13 in the beauty salon and an additional $43.24 on clothing. She went to Europe in the beginning of September and returned in mid-October. According to answers to interrogatories, Borste consulted an attorney on October 20 and filed for bankruptcy on November 7th.
2) Consultation of attorney. While the debtor testified that she did not consult an attorney until October, she had in fact gone to Consumer Credit Counseling in June. According to the testimony, it was at this time that she first totalled her bills and was informed of bankruptcy as an option.
3) Number of charges. During the four-month period from May through August, 1989, the debtor incurred a minimum of ninety-two charges on seven credit cards, including thirty-six charges at Nordstrom. Of the Nordstrom charges, she incurred eleven in July and eighteen in August. Of the Bon Marche charges, she incurred eleven in July and twenty-one in August. In addition to the charges, her credit union advanced funds to cover checking overdrafts fourteen times.
4) Amount of charges. During the four-month period, the debtor's Nordstrom charges totalled $2,241.39 in merchandise and $400 in gift certificates (which were redeemed for cash). She returned $653.50 in goods, for a net total of $1,987.89. Of this amount, a net total of $1,247.53 (charges less returns) was charged in July and August alone. For the period May through August, the debtor's total credit card charges, including overdraft advances, were at least $10,287.89. She returned approximately $1,406.53 in goods and paid approximately $1,393.00 on these bills.
In Dougherty, the debtor had incurred multiple charges under $50, often in the same day from the same merchant. From this the Court inferred that the debtor was attempting to avoid verification of the charges. There is no pattern in the present case to support such an inference.
5) Financial condition of debtor. Currently and during the period at issue, the debtor worked at the University of Washington as a machinist. In her Statement of Affairs, she reports earnings of $26,000 in each of the years 1988 and 1989. In addition, she earned a minimal amount in an attempt at outside sales. She testified that her net income has been somewhere between $1,500 and $1,600 per month. She has no other source of income.
As reported on the Schedule of Current Income and Expenditures, her monthly expenses (including $100 for clothing, $140 for miscellaneous, and $100 for entertainment) total $1,535.00 per month. This does not include her car payment of $263.98 per month.
In May, 1989, the debtor owed nearly $18,000 in unsecured consumer debt, plus $6,000 on a loan secured by her car. The car loan was, at least in part, a consolidation loan to pay bills. In June, 1989, the minimum monthly payments on the debtor's credit cards totalled over $1,300, and by July they were over $1,800. These amounts do not include her $263.98 car payment. By the time she filed, the debtor owed a total of $29,623 in unsecured consumer debt, $2,380 for medical and accounting services, and $5,600 on the secured loan.
The debtor had no nonexempt property and only negligible savings. She has a 1986 Nissan automobile on which she owes the Credit Union approximately $5,700.
6) Credit limits. The debtor had $20,600 available credit, plus a Frederick and Nelson "open" account with no stated limit. By June, 1989, the debtor had exceeded her credit limits on two bank cards. In response, U.S. Bank increased her limit from $2,500 to $3,100, after which she promptly increased her balance to over $3,200. By the first of September, she was well over the limit on all her cards, and was up to the limit on her line of credit with the Credit Union. She was $369.00 over the limit on her Nordstrom card by the first of September. Many of her statements contain over-limit fees, increased minimum payments, and notices that she had exceeded her limit. Thus the debtor knew or should have known that she had exceeded or was fast approaching the limits of her credit.
7) Multiple charges on same day. As indicated above, in Dougherty the debtor made multiple small charges on the same day at the same store, presumably in order to avoid verification of charges. In the present case, the debtor did in fact make multiple same-day charges at Nordstrom on numerous occasions. However, these retail account charges were incurred from different departments within the same store. Verification is not standard practice in such circumstances, and thus this factor is of no import.
8) Employment. As indicated above, the debtor was employed at the University of Washington, earning $26,000 per year and netting $1,500-$1,600 per month.
9) Prospects for employment. The debtor had no plans or prospects for more lucrative employment. An attempt at a small business had failed, and there was no evidence that she had explored more lucrative employment or additional employment to...
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