In re Hinman, Bankruptcy No. 90-05229

• Decision Date: 25 October 1990
• Docket Number: Bankruptcy No. 90-05229,Adv. No. 90-7038.
• Citation: 120 BR 1018
• Parties: In re Marc and Kathleen HINMAN, Debtors. CITICORP CREDIT SERVICES, INC., Plaintiff, v. Marc and Kathleen HINMAN, Defendants.
• Court: U.S. Bankruptcy Court — District of North Dakota

120 B.R. 1018 (1990)

In re Marc and Kathleen HINMAN, Debtors CITICORP CREDIT SERVICES, INC., Plaintiff, v. Marc and Kathleen HINMAN, Defendants.

Bankruptcy No. 90-05229, Adv. No. 90-7038.

United States Bankruptcy Court, D. North Dakota.

October 25, 1990.

Richard P. Olson, Todd Cresap, Minot, N.D., for plaintiff.

James Nostdahl, Minot, N.D., for debtors.

MEMORANDUM OPINION

WILLIAM A. HILL, Bankruptcy Judge.

This adversary proceeding arose by Complaint filed June 22, 1990, by which the plaintiff, Citicorp Credit Services, Inc., seeks a determination that the Debtors' outstanding indebtedness to it arising by reason of credit card charges is nondischargeable pursuant to section 523(a)(2)(A) of the Bankruptcy Code. The allegations are generally denied.

The case came on for trial on October 17, 1990. From the evidence produced at trial and the schedules filed in connection with the case, the facts deemed material are as follows:

Findings of Fact

The Debtors filed their joint Chapter 7 petition on March 26, 1990, listing total unsecured debt of $11,070.00 including unpaid bank charges owing to Citibank in consequence of two Visa cards and one Master card. A discharge was granted them by order entered August 9, 1990 (the bar date for section 523(c) complaints was July 3, 1990).

Debtor, Marc Hinman, was separated from the United States Air Force in May 1975 and since that time has held a variety of low income jobs — his most stable employment being as a drummer with several local bands. From February to December, 1989, he was earning $300.00 per month as a drummer. The band broke up and for the next several months (January through February, 1990) he worked in an air base pizza shop earning $206.00 per month. From February through April, 1990, he was unemployed because he could not find a job which paid enough to offset the cost of babysitting.

Co-debtor, Kathleen Hinman, has been a member of the United States Air Force since May of 1987 with separation not scheduled until May 1991. Her current gross monthly income is $1,200.00. In the fall of 1989 the Debtors' combined net monthly income was approximately $1,000.00 per month. At the filing of their bankruptcy petition in March 1990 their joint net monthly income was listed at $950.00 according to the schedules. According to the schedules, family living expenses total $885.00 per month.

In October 1989 Kathleen applied for and received a Master card credit card (account no. 5424 1802 5563 1282) from Citibank. The card had a credit limit of $1,200.00. By February 16, 1990, charges against this card had exceeded the credit limit with total unpaid purchases totalling $1,375.20 at the time of petition filing.

In January 1990, Marc applied for and was issued an NFL Visa credit card (account no. 4128 770 763 808) from Citibank. This card had a credit limit of $700.00. Charges made against this card total $759.81 at the time of filing and exceeded the card's credit limit.

Kathleen also applied for a Visa card in January 1990 and received one from Citibank with a $2,200.00 credit limit (account no. 4128 293 283 763). Charges made against this card also exceeded the credit limit at the time of filing and totaled $2,288.12.

Charges were made on the Master card in November and December 1989, totalling $1,295.68. By November of 1989 the Debtors already were obligated to other retail creditors in the sum of $4,120.00¹ and in December incurred an additional debt of $500.00 to Amoco Oil Company. By November 1989 they also had secured debts outstanding of at least $2,475.00.

In February 1990 charges made against the two Visa cards totaled $3,032.00. This was at a time when the Debtors' combined joint income was less than $1,000.00 per month and living expenses were $885.00 per month; at a time when they already owed over $1,000.00 on their Master card in addition to the earlier incurred unsecured consumer debt of $4,120.00 and $2,475.00 of secured debt outstanding.

From the monthly statements it appears that the Debtors were using the three cards for everything from auto repairs to evenings out. The cards were used to purchase restaurant meals totalling $138.00, collectible stamps and coins totalling $211.00, cash advances of $355.00, fishing gear totalling $33.80 and $778.00 for outdoor wear purchased at an up-scale sporting goods store. The Debtors' 1984 Jeep Cherokee was stolen in November 1989 and, unable to afford a reliable replacement vehicle, they bought two old cars which were both in need of frequent repairs. At trial Debtor, Marc Hinman, acknowledged that they could not afford to buy a good used car so bought the old cars upon which they charged repair expenses of over $1,700.00 in February 1990. He also testified that when they could not afford to buy something and needed clothes or a nicer than normal present they would simply make use of their charge cards at better stores. At one point he said they "got tired of buying at K-Mart all the time". Explaining how he and his wife came to purchase expensive ski jackets and $138.00 shoes at a time when they could not even afford a serviceable used car, Marc stated he felt they deserved these items — "my feet deserve it" was the exact statement made. The parties understood that they had exceeded the credit limits on all cards but stated at trial they had no intention of not paying their bills. The Debtors were, however, unable to explain exactly how they intended to accomplish payment.

Conclusions of Law

The bank's complaint arises from section 523(a)(2)(A) of the Bankruptcy Code which provides:

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

(2) 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; ...

To establish a case under the foregoing section in typical fraud situations requires proof by clear and convincing evidence of the following five elements:

(1) that the debtor made representations;

(2) that at the time the representations were made he knew them to be false;

(3) that the representations were made with the intention and purpose of deceiving the creditor;

(4) that the creditor relied on the misrepresentations;

(5) that the creditor sustained the alleged injury as a proximate result of the representations having been made.

In re Ophaug, 827 F.2d 340, 342 n. 1 (8th Cir.1987); In re Mutschler, 45 B.R. 482, 490 (Bankr.D.N.D.1984). Third party credit card transactions, however, are not typical fraud cases due to the difficulty, if not impossibility, of applying the concepts of representation and reliance to situations where the card holder, in making use of the card presents it not to the bank issuer seeking section 523 relief but to a retail merchant who accepts it in faith that the issuing bank will pay him. Credit card cases involve an ongoing relationship between the holder and issuer with only infrequent inquiry being made concerning the status of the holder's financial affairs. Recognizing this relationship, courts have come to modify the way in which the elements of section 523(a)(2)(A) proof are met in credit card situations.

The element of representation is implied from the mere use of a bank card. The use of a bank or credit card is an implied representation to the issuer that the holder has both the intent and ability to pay the issuer for the charged purchases and advances. In re Cirineo, 110 B.R. 754, 758 (Bankr.E.D.Pa.1990); Matter of Stewart, 91 B.R. 489, 494 (Bankr.S.D.Iowa 1988); Comerica Bank-Midwest v. Kouloumbris, 69 B.R. 229, 230 (Bankr.N.D.Ill. 1986); In re Barnacle, 44 B.R. 50, 53 (Bankr.D.Minn.1984). In the instant case this element is easily established by the mere fact that the Debtors used the three cards to make purchases.

Proof that a credit card debtor knew the representations were false and that they were made with the intent and purpose of deceiving the issuer are more difficult to prove because, as with all fraud cases, there is an element of subjective intent to deceive. Rarely, if ever, will a debtor admit such was his intent. Such is the situation in the instant case. Courts are in agreement, however, that actual fraud i.e., an intent to deceive, may be inferred from objective factors suggesting that the debtor knew or should have known at the time of card use that he/she was insolvent and lacked the...