In re Davis
| Decision Date | 30 December 1994 |
| Docket Number | Bankruptcy No. 93-11792 B. Adv. No. 93-1234 B. |
| Parties | In re Robert E. DAVIS, Sr., Susan E. Davis, Debtors. CITIBANK (NEW YORK STATE), Plaintiff, v. Robert E. DAVIS, Sr., Susan E. Davis, Defendants. |
| Court | U.S. Bankruptcy Court — Western District of New York |
Relin & Goldstein (Raymond Stillwell, of counsel), Rochester, NY, for plaintiff.
Brick, Brick, Elmer & Belczak, Daniel E. Brick, North Tonawanda, NY, for defendants.
It is a sure sign of financial distress when a consumer takes a cash advance on a credit card to pay the minimum installment due on other unsecured obligations. Unfortunately, personal involvement often obscures that which may be obvious to outsiders. At issue in this core proceeding is whether this practice nonetheless demonstrates actual fraud within the meaning of 11 U.S.C. § 523(a)(2)(A), so as to preclude a discharge of debt owed to the lender which provided the cash advance.
For Robert and Susan Davis, bankruptcy represented a final chapter in their personal struggle to deal with the restructuring of the economy of Western New York. Until his layoff in December of 1979, Mr. Davis was an employee of the Bethlehem Steel Corporation.1 After a period of unemployment and reliance upon part time jobs, he finally secured a permanent position with an airline company. By 1991, in the face of its own financial difficulties, this new employer announced the need for cutbacks and its intent to seek wage concessions. Confronting the prospect of another layoff, Mr. Davis reluctantly accepted a transfer to Philadelphia in May 1991. Expecting to relocate, the Davises sold their home in August of that year. For personal reasons, however, the family chose to remain in Western New York. The debtors now reside in rented premises, while Mr. Davis commutes on a weekly basis to Philadelphia.
When the Davises sold their home, they used the proceeds to satisfy all of their then outstanding debts. In essence, they sacrificed their homestead exemption for the benefit of creditors. Among the beneficiaries of this action was Citibank, for an account on which the debtors would maintain a zero balance until early in 1993. Meanwhile, the Davises began to encounter financial difficulties. Although his employer provided free transportation to Philadelphia, Mr. Davis incurred the expense of maintaining a second household. Then, his union agreed to concessions that effectively reduced the debtors' income by 8 percent as of June 1992. Soon, Mr. and Mrs. Davis were falling further and further behind in meeting their financial obligations. The unpaid balances on a number of their credit cards began to approach the borrowing limits. In January of 1993, the debtors started to write checks against their credit line with Citibank, the only lender with whom the debtors still possessed some meaningful capacity to borrow. In less than four months, however, the amount due to Citibank grew to a balance of $4,709.35. Having nearly exhausted this last source of credit, the debtors found that their cash flow was insufficient to satisfy their minimum monthly obligations. After consulting with counsel, Robert and Susan Davis filed a petition for relief under Chapter 7 of the Bankruptcy Code on June 7, 1993.
Citibank commenced the present adversary proceeding to determine the dischargeability of the obligation to repay monies that the Davises had borrowed beginning in January, 1993. It contends that at the time of the disputed advances, the debtors knew or should have known that their financial troubles would preclude repayment. In Citibank's view, the debtors committed fraud when they failed to disclose their change of circumstances prior to accepting the cash advances.
At trial, Mr. and Mrs. Davis testified that they had never intended to file bankruptcy. Rather, they believed that their financial affairs would improve if only Mr. Davis could be reassigned to Buffalo. Indeed, the debtors appear never to have fully considered the implications of their conduct. Perhaps most telling were the words of Susan Davis:
Section 523(a)(2) of the Bankruptcy Code provides that an Order of Discharge will not discharge any debt "for money, property, services, or 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." The parties acknowledge that the only issue now before this Court is whether the debtors' conduct constitutes actual fraud within the meaning of this statute.
The concept of actual fraud is particularly troublesome in the context of third party consumer credit. With little regard to levels of financial sophistication, the credit card industry has deluged virtually every adult American with invitations to become a charge customer. Many of these solicitations offer "preapproved" credit, whose extension requires nothing but a signature.2 Lending practices almost encourage the misuse of credit, such as to finance existing debt service. For example, card holders are given "opportunities" for cash advances. In the present case, the Davises utilized "checks" that Citibank had provided to facilitate borrowing for the purpose of paying other obligations. Credit card issuers rarely investigate for changes in financial circumstances, or to assess whether unsecured debt has grown to imprudent levels. So long as they continue to pay the minimum balance due, borrowers can maintain an exemplary credit rating. This court fully agrees with the observation of Judge Kaplan in In re Shanahan, 151 B.R. 44, 47 (Bkrtcy.W.D.N.Y.1993), that although credit card issuers may assume many...
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