In re Cox, Bankruptcy No. 94-43712-JFQ. Adv. No. 94-4358.
| Decision Date | 09 June 1995 |
| Docket Number | Bankruptcy No. 94-43712-JFQ. Adv. No. 94-4358. |
| Citation | 182 BR 626 |
| Parties | In re James C. COX and Christina L. Cox, Debtors. The GM CARD, Plaintiff, v. James C. COX and Christina L. Cox, Defendants. |
| Court | U.S. Bankruptcy Court — District of Massachusetts |
Robert S. Cooper, Rochester, NY, for GM card.
James M. Galliher, Bonville & Howard, Fitchburg, MA, for James C. Cox and Christina L. Cox.
The parties contest the dischargeability of indebtedness resulting from transactions with a credit card, that boon and bane of mankind. The GM Card ("GM") asserts its debt is excepted from discharge as a debt for money or property "obtained . . . by . . . false pretenses, a false representation, or actual fraud. . . ."1 GM says that in obtaining goods and cash through use of its credit card, James C. Cox (the "Debtor") impliedly represented he intended to pay, whereas the circumstances existing at the time indicate he had no such intent. Application of the statute to such facts has often challenged courts, with divided results based on at least three different theories. I hold the statute does not apply to misrepresentation of intent to pay when both the representation and lack of intent must be inferred from the circumstances. I also hold, alternatively, the debt is not excepted from discharge because GM did not rely on the representation.
The Debtor moves for dismissal of GM's complaint for failure to state a cause of action, submitting with the motion an affidavit of his wife, Christina L. Cox ("Mrs. Cox"). GM counters with the affidavit of its counsel, to which documents are attached. Following the hearing, at the request of the court, both parties submitted additional affidavits. Because the Debtor's motion and affidavits refer to matters outside the pleadings, I treat the motion as one for summary judgment.2
The pleadings and affidavits disclose no dispute as to the material factual background. During the time in question, the Debtor and Mrs. Cox each had a GM card in his or her individual name. No debt is owed under the card held in the name of Mrs. Cox, which was inactive in the months before bankruptcy except for payments on a prior balance. The present dispute concerns only the debt of $3,547.51 asserted to be owed under the Debtor's card.
The Debtor's card was issued in November of 1993, a few months after issuance of the card in Mrs. Cox's name. Both were issued pre-approved, without any prior application or request for issuance on the part of the Debtor or Mrs. Cox. At no time did the Debtor or Mrs. Cox furnish GM with a financial statement or other financial information. GM did, however, review a credit bureau report on the Debtor and Mrs. Cox prior to issuing the cards. At or about the time GM issued the Debtor's card, it furnished the Debtor with its standard cardholder's agreement. The agreement required a minimum monthly payment equal to 2% of the total balance owed. The Debtor's card had a $3,000 credit limit.
A merchant or bank presented with the card is required to obtain prior authorization from GM before honoring any transaction of $50 or more. This is usually done by scanning the card through a computer terminal. GM furnishes its authorization by supplying an authorization number via its computer. If GM's computer does not authorize the transaction, it furnishes a reason, such as the card being over its limit, delinquent or stolen.
The Debtor's card had a zero balance in January of 1994. Its balances at the end of the succeeding months were as follows: $1,478.04 (2/2/94), $1,725.03 (3/2/94), $1,613.35 (4/3/94), $1,601.02 (5/2/94), and $3,357.85 (6/2/94). Thereafter, the Debtor made no further charges, although interest and late charges accrued to the date of the bankruptcy filing, August 19, 1994. (The asserted debt of $3,547.51 is as of September 2, 1994, and includes some unallowable postfiling interest and late charges).
Payments totaling $565 were made during this period, the last being a $35 payment in April. The present balance reflects merchandise purchases, cash advances and a $1,000 transfer in January of charges from other credit cards. Except for this $1,000 transfer, until May of 1994 the charges in any month totaled less than $500. The May charges were for the following seven cash advances totalling $1,670: $200 (5/2/94), $350 (5/6/94), $20 (5/6/94), $300 (5/19/94), $300 (5/21/94), $300 (5/22/94), and $200 (5/23/94).
The Debtor was employed by Simplex, Inc. in Gardner, Mass. during the time in question. Mrs. Cox was apparently not employed. By May of 1994, the Debtor had fallen behind in paying current expenses, due in significant part to the illness of his infant daughter. The May cash advances of $1,670 were used to pay a variety of expenses, including the following: a late car payment ($235), medical bills ($261.75), late rent ($375), Visa card charges ($281) and a payment to GM on Mrs. Cox's card ($121).
On June 22, 1994, the Debtor discussed his financial problems with a co-worker, who advised him to consult a bankruptcy attorney. Mrs. Cox then looked through the yellow pages and contacted their present counsel. They consulted with counsel on June 23rd. A decision was immediately made to file for bankruptcy, and they paid counsel a retainer of $860 on that day. As previously mentioned, the filing was made on August 19, 1994.
Although there is no dispute as to the foregoing factual background, the parties disagree on whether at the time of the charges the Debtor had formed an intent to pay. If this case were tried, I doubt I would find GM had sustained its burden of proving the Debtor did not intend to pay for the charges. However, for purposes of the present motion, I must regard the underlying circumstances in the light most favorable to GM.3 In doing so, I conclude a trier of fact could reasonably infer that at least by May 1st the Debtor had formed an intent not to pay for further charges. I similarly conclude, in favor of GM, that one could infer from the Debtor signing a credit charge slip a representation he intended to pay GM for the charge.
Thus, for purposes of the present motion, I assume the Debtor did not intend to pay for the May cash advances and he impliedly represented he did intend to pay by signing the charge slip for the advances. The question remains whether this is sufficient to except the debt (or at least the portion resulting from the May cash advances) from discharge pursuant to section 523(a)(2)(A).
Section 523(a)(2), as in effect when this case was filed, is set forth in full in the margin.4 The question is whether a misrepresentation of intent to pay which must be inferred solely from the circumstances constitutes "false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's or an insider's financial condition . . ." within the meaning of the statute. That is, does the statute apply to misrepresentation of intent to pay when both the representation and absence of intent must be inferred from the circumstances?
It seems clear from the statute's wording that a debtor's implied representation of his ability to pay is outside the statute's coverage. Such a representation is of the debtor's "financial condition." This type of representation is expressly excluded from subparagraph (A).5 Nor does such a representation come under subparagraph (B). That subparagraph applies only to a "statement in writing . . . respecting the debtor's . . . financial condition. . . ." (emphasis supplied).
Less clear is the effect of this exclusion upon an implied misrepresentation of intent to pay. An individual's intent, that most hidden of human attributes, is invariably ascertained from the surrounding circumstances. When the question concerns intent to pay, the individual's ability to pay is critical. Did Congress intend to include within subsection (A) implied misrepresentation of intent to pay when a finding of lack of intent must be largely based on the debtor's lack of ability, which itself cannot be the subject of an implied representation covered by the statute?
Representations concerning intent and ability are of course not the same. And yet intent is inextricably linked to ability. As shall be seen, a finding by the fact finder that the debtor lacks intent to pay is typically based primarily upon the debtor's lack of ability to pay.
The decisions are in sufficient disarray to require some history. The wording of section 17a(2) of the prior Bankruptcy Act was similar to present subsections (A) and (B).6 If a debt was to be excepted from discharge because of the creditor's reliance upon the debtor's false financial statement, section 17a(2) of the prior Act also required that the financial statement be in writing. But unlike subparagraph (A) of the present statute, section 17a(2) did not expressly exclude from its coverage unwritten misrepresentations concerning the debtor's financial condition.
A leading Act decision on implied misrepresentation of intent to pay is Davison-Paxon Co. v. Caldwell.7 The creditor had there obtained judgment against the debtor in a Georgia court for the price of merchandise sold at the creditor's store. Upon learning of the debtor's bankruptcy, the creditor amended its state court complaint to allege that at the time of the sale the debtor was insolvent and had no intention to pay. After obtaining her discharge in bankruptcy, the debtor sought an injunction in federal court against enforcement of the judgment. Noting the creditor had made no allegation in its state court complaint of any express representation, the...
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