In re Grayson
| Decision Date | 29 July 1996 |
| Docket Number | 96-40402. Adversary No. 96-3004,Bankruptcy No. 95-30473,96-4073. |
| Citation | 199 BR 397 |
| Court | U.S. Bankruptcy Court — Western District of Missouri |
| Parties | In re Mary Carolyn GRAYSON, Debtor. AT & T UNIVERSAL CARD SERVICES CORP., Plaintiff, v. Mary Carolyn GRAYSON, Defendant. In re Arthur L. MOBLEY, Sr., Pearl Mobley, Debtors. AT & T UNIVERSAL CARD SERVICES CORP., Plaintiff, v. Arthur L. MOBLEY, Sr., Defendant. |
Amy Ginsberg, Kansas City, MO, for Plaintiff.
Phillip J. Metz, Joplin, MO, for Defendant Mary Carolyn Grayson.
David Westfall, Kansas City, MO, for Defendant Arthur L. Mobley, Sr.
In both these cases plaintiff AT & T Universal Card Services Corporation ("AT & T") filed a complaint seeking a finding that certain credit card debt was not dischargeable under 11 U.S.C. § 523(a)(2)(A). When pressed to take the cases to trial, AT & T moved in both cases to dismiss the Complaint. Thereupon, debtors' counsel requested awards of attorney's fees under a special provision of the Bankruptcy Code (the "Code") enacted for the benefit of consumer debtors. 11 U.S.C. § 523(d). The general issue is whether the filing of these adversary actions was substantially justified. In particular, the Court must determine whether AT & T conducted a sufficient investigation prior to filing Complaints alleging that these debtors had committed fraud. This is a core proceeding under 28 U.S.C. § 157(b)(2)(I), over which this Court has jurisdiction pursuant to 28 U.S.C. §§ 1334(b), 157(a), and 157(b)(1). I begin with a recitation of the allegations made as to each debtor.
Debtor Mary Grayson filed a Chapter 7 bankruptcy petition on October 30, 1995. She listed an obligation to AT & T in the amount of $3,172.51 on her bankruptcy schedules. The Section 341 First Meeting of Creditors was held on December 11, 1995. AT & T was not represented at said meeting. AT & T then filed a Complaint to Determine Dischargeability of Debt (the "Complaint"), pursuant to 11 U.S.C. § 523(a)(2)(A), on February 5, 1996. In its Complaint AT & T claims that between May 11, 1995, and July 24, 1995, debtor incurred charges on its credit card in the amount of $3,257.50. AT & T also claims that debtor obtained one cash advance for $600.00 with the credit card, that she made two payments to AT & T, and that she visited a bankruptcy attorney within ninety days after her last use of the credit card. AT & T also alleges that debtor incurred these debts "at a time when Defendant was unable to meet her existing financial obligations as they became due and when defendant was already in default on loans from other creditors." Doc. # 1, ¶ 7. AT & T goes on to plead that at the time debtor "used this credit card for purchases and each advance prior to her filing her petition for relief, Plaintiff submits that Debtor/Defendant did not have the ability nor the reasonable intent to repay Plaintiff." Id. at ¶ 12.
The adversary proceeding was set for trial on June 28, 1996. At the pre-trial conference held on June 12, 1996, the parties announced that they were discussing a settlement, under which the plaintiff would be granted a nondischargeable judgment for the full amount of the debt, with a stay of execution provided debtor paid $100.00 per month to plaintiff. In addition, plaintiff would file a satisfaction of judgment when seventy-five percent of the obligation had been paid.
During the pretrial conference, the Court expressed concern that the debtor might be obligating herself to pay a debt which appeared to be dischargeable. And, given that the schedules filed by debtor show monthly net income of $966.33 and expenses of $982.66, the Court expressed concern about her ability to make the scheduled payments. Since the allegations in the Complaint did not appear to rise to the level of fraud, but debtor, nonetheless, was consenting to a nondischargeable judgment based on fraud, the Court advised the parties that it would hold a hearing to determine whether the settlement should be approved. Counsel for AT & T then notified the Court that, rather than have judgment entered, she would dismiss her adversary action, and enter into an agreement with debtor to reaffirm the debt owed AT & T. The Court reminded counsel that, pursuant to 11 U.S.C. § 524(c)(3), reaffirmation agreements are not binding unless approved by the Court. In order to approve a reaffirmation agreement, the Court must find that the agreement represents a fully informed and voluntary agreement by the debtor, and does not impose an undue hardship on the debtor. 11 U.S.C. § 524(c)(3).
AT & T then filed its "Memorandum" On June 25, 1996, stating its intention to withdraw the Complaint because "plaintiff believes that the costs that would be incurred in order to conduct a hearing on this settlement would be unduly burdensome." Doc. # 14. Such "Memorandum" is treated as a motion to dismiss the Complaint. AT & T apparently failed to notify debtor or debtor's attorney that it had decided to withdraw the Complaint, so both debtor and debtor's attorney appeared at the stated time of the hearing on June 28, 1996, in Joplin, Missouri, only to discover an empty courthouse. Debtor's attorney, thereafter, filed a Motion for Payment of Legal Fees in the amount of $807.50.
Debtor Arthur L. Mobley, Sr., filed his Chapter 7 case on February 9, 1996. The section 341 Meeting of Creditors was held on March 15, 1996. AT & T did not appear. The Complaint contends that on unspecified dates between November 21, 1995, and December 15, 1995, Mr. Mobley made five purchases totaling $56.28 and one cash advance totaling $2,000.00. Doc. # 1, ¶ 5. The Complaint went on to allege that the outstanding balance due AT & T was $12,306.71. Id. at ¶ 7. The Complaint then alleges that "at the time the aforesaid debt was incurred, Debtor/Defendant did not have the ability nor the reasonable intent to repay Plaintiff." Id. at ¶ 11. Finally, the Complaint alleges that the debt due AT & T should not be discharged as it represents money or property "obtained by false pretenses, a false representation, or actual fraud . . ." Id. at ¶ 13. An Answer was filed, and the case was set for trial on July 24, 1996. At that time, counsel for both parties appeared and presented a Stipulation for Dismissal. According to AT & T's counsel, her client had determined that the amount of money involved in the case did not justify the cost of sending a witness from another city to testify. At that point, debtor's counsel requested attorney's fees of $200.00, based on two hours of work in defending the adversary action filed by AT & T.
The only issue to decide here concerns whether debtors should be awarded attorney's fees and costs. However, in view of the attempt by AT & T to settle these matters, a brief discussion of the Court's responsibility in entering a judgment of non-dischargeability is in order. As stated, at the pre-trial conference in the Grayson case, the parties indicated that they were discussing a settlement involving entry of a judgment finding the debt to be nondischargeable. Debtors in bankruptcy are typically not able to settle nondischargeability cases by making lump sum cash payments. Instead, if the cases are to settle at all, the debtor will often agree that the debt is nondischargeable, but that he/she will be given some time to pay an agreed upon amount, with or without interest. Oftentimes, the amount the debtor agrees to pay per month is more than the creditor could garnish from debtor's wages even if the debt were found to be nondischargeable. Again, typically, if any payment is not made, the creditor has the right to act to collect the entire amount of the nondischargeable debt immediately. Thus, in effect, the debtor waives the benefit of the discharge as to this debt.
The vehicle used by creditors to enforce these agreements is a Bankruptcy Court Judgment finding that the debt is nondischargeable. The approval of the Court is required for entry of such judgment. Fed. R.Civ.P. 58; Fed.R.Bankr.P. 9021. Unless the entry of an Order approving such judgment is a meaningless, ministerial task, a Court is authorized to satisfy itself that there is a reasonable basis for entry of the judgment on the terms agreed to by the parties.
In dischargeability proceedings, there is particularly good cause to review agreed-upon judgments with some care. Debtors are often represented by counsel who take their case on a flat-fee basis, and, therefore, have no financial incentive to litigate dischargeability complaints.1 Such counsel generally carry out their ethical responsibility to vigorously represent the interests of their clients. But, too often in cases where a creditor alleges fraudulent use of a credit card, debtors, with the advice or urging of counsel, agree to judgments which saddle them with obligations they are unable to pay. As a result, these same debtors forego protections provided them by the Bankruptcy Code (the "Code").
The Code is intended to provide an honest debtor with a "fresh start." Caspers v. Van Horne (In re Van Horne), 823 F.2d 1285, 1287 (8th Cir.1987). There is a presumption of honesty, Castner v. Wilson (In re Wilson), 12 B.R. 363, 369 (Bankr. M.D.Tenn.1981), and exceptions to discharge are to be strictly construed. Barclays American/Business Credit, Inc. (In re Long), 774 F.2d 875, 879 (8th Cir.1986); 3 Collier on Bankruptcy, ¶ 523.05A, at 523-19 (Lawrence P. King et al. eds., 15th ed. 1996). Only the Court can make a determination of dischargeability. 3 Collier on Bankruptcy, ¶ 523.05A, at 523-17 (Lawrence P. King et al. eds., 15 ed. 1996); 28 U.S.C. § 157(a), (b)(1) and (b)(2)(I). The party contesting the dischargeability of a particular debt has the burden of proving same by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 284-85, 111 S.Ct. 654, 658, 112 L.Ed.2d 755 (1991); Brown v....
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