In re Crutcher

• Decision Date: 11 August 1997
• Docket Number: Bankruptcy No. 96-23556,Adversary No. 96-0593.
• Citation: 215 BR 696
• Parties: In re Norma Jane CRUTCHER, Debtor. AT & T UNIVERSAL CARD SERVICES, Plaintiff, v. Norma Jane CRUTCHER, Defendant.
• Court: U.S. Bankruptcy Court — Western District of Tennessee

215 B.R. 696 (1997)

In re Norma Jane CRUTCHER, Debtor.

AT & T UNIVERSAL CARD SERVICES, Plaintiff, v. Norma Jane CRUTCHER, Defendant.

Bankruptcy No. 96-23556, Adversary No. 96-0593.

United States Bankruptcy Court, W.D. Tennessee, Western Division.

August 11, 1997.

David L. Mendelson, Memphis, TN, for Plaintiff.

William A. Cohn, Cordova, TN, for Defendant.

MEMORANDUM OPINION AND ORDER RE COMPLAINT TO DETERMINE DISCHARGEABILITY OF DEBT AND CREDITOR'S MOTION FOR SANCTIONS

G. HARVEY BOSWELL, Bankruptcy Judge.

It is an uncontroverted fact that the debtor in this case, Norma Jane Crutcher, suffers from a severe gambling addiction. Over a period of ten (10) days in April 1995, Crutcher used her AT & T Universal MasterCard to obtain over $11,000.00 in cash advances at various casinos in Tunica, Mississippi. Upon filing her chapter 7 bankruptcy petition, AT & T Universal Card Services filed this adversary proceeding seeking to declare the outstanding debt nondischargeable under 11 U.S.C. § 523(a)(2)(A). Such section bars the discharge of debts which were fraudulently incurred.

This Court conducted a trial on this matter on June 17, 1997, pursuant to FED. R. BANKR. P. 7001. This is a core proceeding. 28 U.S.C. § 152(b)(2). After reviewing the testimony from the trial and reviewing the record as a whole, the Court makes the following findings of fact and conclusions of law. FED. R. BANKR. P. 7052.

I. FINDINGS OF FACT

The facts in this case are essentially undisputed. The debtor, Norma Jane Crutcher ("Crutcher"), is a self-admitted addicted gambler. Over a period of two years, Crutcher gambled away thousands of dollars at various casinos in Tunica, Mississippi, mainly at the $25.00 slot machines. Crutcher was both successful and unsuccessful in her gambling endeavors. In 1994, she hit a jackpot of $134,000.00 on one machine. In describing her gambling experiences, Crutcher testified "I know you can win and I know you can lose. I know you can do both."

Not surprisingly, Crutcher's gambling addiction drained her family's finances. So bad was her habit, that after she had spent all the money in her and her husband's bank accounts, she turned to the cash advance privileges of her credit cards to fund her addiction. Over a period of approximately two years, Crutcher ran up large balances on her AT & T Universal MasterCard, Account # XXXX-XXXX-XXXX-XXXX, which she eventually paid off by refinancing her family's house several times. In February 1995, Crutcher's outstanding balance on her AT & T MasterCard was $11,600.00. On February 23, 1995, Crutcher called AT & T to inform them she was considering filing a chapter 13 bankruptcy petition. Despite this professed intention, Crutcher was able to pay off the entire balance of her card by refinancing her house once again. On April, 7, 1995, Crutcher sent AT & T a check for $11,600.00 which had the effect of reducing the balance on her MasterCard to $0.00.

Upon paying her MasterCard bill in full, Crutcher informed AT & T that she was an addicted gambler and requested that AT & T close her account and not reopen it under any circumstances. On April 11, 1995, however, Crutcher found herself in the unfortunate situation of owing a casino $2500.00. Faced with the prospect of going to jail unless the money was repaid, Crutcher phoned AT & T and sought an emergency cash withdrawal of $2500.00. AT & T approved this transaction and charged the $2500.00 to the debtor's MasterCard account.

With her AT & T account now reactivated, Crutcher used the cash advance privileges of her MasterCard to go on a gambling spree in late April of 1995. Within a 24-hour period, the following cash advances were taken by Crutcher on her MasterCard:

                  April 20, 1995  $ 402.00  Circus Circus Casino
                  April 21, 1995  $ 521.99  Circus Circus Casino
                  April 21, 1995  $ 521.99  Horseshoe Casino
                  April 21, 1995  $1041.99  Circus Circus Casino
                  April 21, 1995  $1041.99  Circus Circus Casino
                  April 21, 1995  $1041.99  Circus Circus Casino
                  April 21, 1995  $1041.99  Circus Circus Casino
                  April 21, 1995  $1041.99  Horseshoe Casino
                  April 21, 1995  $1559.99  Horseshoe Casino
                

In addition to the $2500.00 emergency cash withdrawal and various finance charges, these cash advances raised the outstanding balance on Crutcher's MasterCard to $11,885.75. This balance exceeded the credit limit on Crutcher's account by over $2000.00. Crutcher has made no payments towards this balance, nor have any subsequent charges or cash advances been made on this card since April 21, 1995.

Following a violent episode with her husband in May of 1995 and talks of suicide, Crutcher was admitted to Charter Lakeside Hospital for a psychiatric evaluation. On May 25, 1997, Crutcher was evaluated by Dr. Rickey Carson, an addiction medicine and psychiatric medicine specialist.¹ Dr. Carson diagnosed Crutcher as a pathological gambler suffering from major depression with signs of manic depression. Pathological gambling was described by Dr. Carson as "simply out of control gambling with illogical, compulsive, irrational gambling behavior." During the time Crutcher was in Charter Lakeside, a physical examination was also conducted which determined that Crutcher was suffering from severe diabetes mellitus that was insulin dependent with very poor control. Crutcher only occasionally took her insulin and did not adhere to a strict diet to regulate her condition.

Eleven months after her gambling spree, Crutcher filed a chapter 7 petition on March 19, 1996, seeking the protection of the bankruptcy system. Displeased with the prospect of having their debt discharged, AT & T filed this adversary proceeding on June 3, 1996. In their complaint, AT & T alleged that the cash advances taken by Crutcher on her MasterCard account were incurred fraudulently and sought to have such debt declared nondischargeable under 11 U.S.C. § 523(a)(2)(A).

II. CONCLUSIONS OF LAW

Increasingly, credit card companies are turning to 11 U.S.C. § 523(a)(2)(A) in hopes of excepting credit card debts from the bankruptcy discharge. Such section provides that:

(a) A discharge under section 727, 1141, 1228a 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt—

(2) for money, property, services, 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). The terms "false pretenses," "false representation" and "actual fraud" are not defined by the Bankruptcy Code. As a result, courts have had the responsibility for setting their boundaries. In the case of Field v. Mans, the U.S. Supreme Court held that the terms used in § 523(a)(2)(A):

. . . carry the acquired meaning of terms of art. They are common law terms, and in the case of "actual fraud," . . . they imply elements that the common law has defined them to include.

Field, 516 U.S. 59, 69, 116 S.Ct. 437, 443, 133 L.Ed.2d 351 (1995).

In following the Supreme Court mandate announced in Field v. Mans, all courts have unanimously held that, as used in § 523(a)(2)(A), actual fraud involves moral turpitude and does not include fraud implied in law which may exist without imputation of "bad faith or intentional wrong." In re Pommerer, 10 B.R. 935 939 (Bankr.D.Minn.1981). For a creditor to succeed in excepting a debt from discharge, the debtor must have engaged in some conduct which can be fairly said to be "blameworthy." In re Anderson 181 B.R. 943, 948 (Bankr.D.Minn.1995) If a creditor is unable to show that the debtor acted with a deliberate intent to deceive, he will be unsuccessful in his claim.

In addition to agreeing on what type of fraudulent behavior § 523(a)(2)(A) covers, courts are also unanimous in the procedural aspects of such an action. First, the party asking for the exception to discharge bears the burden of proof in a § 523(a)(2)(A) cause of action. In re Martin, 698 F.2d 883, 887 (7th Cir.1983). Secondly, exceptions to discharge are to be strictly construed against the creditor and liberally in favor of the debtor. In re Zarzynski, 771 F.2d 304, 306 (7th Cir.1985). Thirdly, all courts agree that the burden of proof on the objecting creditor is a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 291, 111 S.Ct. 654, 661, 112 L.Ed.2d 755 (1991). These approaches have received widespread acceptance from courts because they are thought to further the well-espoused bankruptcy policy of granting the honest, but unfortunate debtor a fresh start in bankruptcy. In re Balzano, 127 B.R. 524, 529 (Bankr.E.D.N.Y. 1991); Local Loan Co. v. Hunt, 292 U.S. 234, 244, 54 S.Ct. 695, 699, 78 L.Ed. 1230 (1934).

Another well-settled area of § 523(a)(2)(A) law concerns the elements of proof that a claim for an exception to discharge includes. In order to have a debt declared nondischargeable pursuant to this section, the creditor must prove (1) the debtor made a material representation, (2) the debtor knew the representation was false at the time of making it, or made the representation with gross recklessness as to the truth, (3) the debtor made the representation with the intention of deceiving the creditor, (4) the creditor justifiably relied upon such representation, and (5) the creditor sustained loss and damage as the proximate result of the representations. In re McLaren, 3 F.3d 958 (6th Cir.1993), Field, 516 U.S. at 74-76, 116 S.Ct. at 446.

Although the courts have come to a great deal of consensus on how to evaluate a § 523(a)(2)(A) cause of action, there has been little agreement on how to analyze the second prong of such inquiry, that of the falsity of the representation. Currently, there are two main approaches, to determining whether or not the debtor fraudulently represented his intent regarding repayment of the debt.² These theories are known as the "Totality of the...