In re Karelin
| Citation | 109 BR 943 |
| Decision Date | 01 February 1990 |
| Docket Number | Adv. No. 880040.,Bankruptcy No. 587-05576-JRG,BAP No. NC-89-1467 VMeJ |
| Parties | In re Jeanette KARELIN, a/k/a Jeanette Smith, Debtor. Jeanette KARELIN, a/k/a Jeanette Smith, Appellant, v. BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, Appellee. |
| Court | Bankruptcy Appellate Panels. U.S. Bankruptcy Appellate Panel, Ninth Circuit |
Nicolas De Lancie, Office of General Counsel, Bank of America, San Francisco, for appellee.
Thomas A. Casazza, Palo Alto, Cal., Keith A. Ducote, San Jose, Cal. for appellant.
Before VOLINN, MEYERS and JONES, Bankruptcy Judges.
OVERVIEW
The debtor and appellant, Ms. Karelin,1 obtained cash advances on her credit card accounts with the appellee Bank of America National Trust and Savings Association ("the Bank"). Ms. Karelin obtained the cash advances for the purpose of gambling in Nevada. Several months later Ms. Karelin filed a voluntary bankruptcy petition under Chapter 7, and the Bank filed an adversary proceeding seeking to have its claim based on Ms. Karelin's credit cards excepted from discharge under 11 U.S.C. § 523(a)(2)(A).2 After a bench trial, the court rendered a judgment in favor of the Bank, and Ms. Karelin appealed. We affirm.
Ms. Karelin had an established career in the employment and recruitment field dating back to 1969. For the ten years from 1977 through 1986, her average annual income exceeded $100,000, except for 1985 when she earned only $27,000 due to illness. Ms. Karelin lost her job in December of 1986, and started her own recruitment company in February 1987. Her new company generated less than $10,000 in income during 1987. According to her bankruptcy schedules she terminated the business in September of that year, although she contradicted that statement in her testimony at trial, explaining the contradiction as "a misunderstanding or a typographical error." Her total income during 1987 was approximately $20,000, including less than $10,000 from her business, $8,370 in commissions from her previous job, and less than $5,000 from her husband's military pension.
Ms. Karelin had been a heavy casino gambler for the previous fifteen or twenty years, making between one and three gambling trips to the Reno/Lake Tahoe area each month. Fifteen or twenty times each year one of the casinos would send a private jet to San Jose to bring Ms. Karelin and her guests to Nevada to gamble. It was not unusual for Ms. Karelin to gamble between $25,000 and $50,000 on a given gambling trip.
Ms. Karelin financed her gambling through credit extended by various casinos in the form of "markers,"3 and cash advances on several credit cards. At the time she incurred the debts at issue here, Ms. Karelin's credit limit on her primary credit card was $55,000.4 Ms. Karelin's practice was to obtain a cash advance up to her credit limit on her credit card account in the form of a cashier's check payable to a casino before each trip, use the check to pay on the amount owing to one or more casinos, and then gamble on credit extended by the casinos. Upon her return she would make a payment on her credit card account out of any remaining funds. She also made payments on her credit card account out of her salary.
In her testimony Ms. Karelin conceded that she gambled heavily during the past fifteen or twenty years without having made a net gain in any calendar year, that she did not look to gambling as a source of income, and that in the 18 months preceding her bankruptcy she suffered gambling losses of approximately $400,000, incurring approximately $260,000 in debts to casinos.
In order to satisfy her expenses during 1987, Ms. Karelin twice refinanced her personal residence, which was her primary asset, on March 30 receiving approximately $70,000 and on June 25 receiving approximately $93,000. In each instance the proceeds were used to make significant payments on her credit card accounts, but each time, within several weeks she took large additional cash advances. After the second refinancing, Ms. Karelin's residence, which was worth approximately $215,000, was encumbered by a lien in the amount of $196,000.
On Thursday, July 16, 1987, having recently reduced the balance on her credit card account to zero, Ms. Karelin obtained from the Bank a cashier's check, payable to a casino known as "Harvey's," in the amount of $66,100, $55,000 of which represented a cash advance on her credit card account. She then paid the check to the casino, returned to the Bank the next Monday (July 20), and from her weekend gambling "winnings" made payments totalling $32,000 on her credit card accounts. Although the payments were posted promptly, through a Bank error, the $55,000 cash advance was not posted to the account until August 25.
On Wednesday, August 12, Ms. Karelin returned to the Bank for a cash advance in the full amount of her credit limit. Because of the posting error, the Bank's computer showed $87,000 in available credit on her account (the $55,000 credit limit plus the $32,000 credit balance due to the payments), and Ms. Karelin took an advance for the full amount in the form of a cashier's check, again payable to Harvey's.
On August 25 the first $55,000 advance was posted to Ms. Karelin's account, and the Bank discovered that the balance on the account was $110,000 plus finance charges, greatly exceeding her credit limit of $55,000. As a result, Ms. Karelin's required minimum payment for September under the terms of the credit card account was equal to the entire amount by which the balance exceeded the credit limit, or more than $57,000. This precipitated several desperate and embarrassing attempts by Ms. Karelin to stave off the inevitable consequences, first by asserting that the charges to her account were in error, then by asserting that a bank employee had agreed to increase her credit limit to a level sufficient to cover the outstanding balance, and finally by writing a series of letters to the Bank's president containing statements which Ms. Karelin ultimately admitted were not true. Ms. Karelin filed bankruptcy on October 15.
The Bank filed an adversary proceeding seeking to have the entire outstanding balance of the credit card account excepted from discharge under § 523(a)(2)(A).5 After a two-day bench trial at which Ms. Karelin and various bank employees testified, the bankruptcy court found that Ms. Karelin's testimony was not credible, and that she was "hopelessly insolvent" when she accepted the cash advances, having a negative net worth exceeding $400,000, virtually no equity in her residence, less than $15,000 in unencumbered personal property, and less than $20,000 in annual income.
In view of these circumstances, the court found that Ms. Karelin took the cash advances without the intention of repaying the Bank, and concluded that this constituted actual fraud under In re Dougherty, 84 B.R. 653 (9th Cir. BAP 1988), rendering the resulting debt non-dischargeable under § 523(a)(2)(A).
1. Was it proper for the bankruptcy court to decide this case using the legal standard of In re Dougherty, 84 B.R. 653 (9th Cir. BAP 1988), which held that credit card debts are incurred through actual fraud when the debtor makes charges with no intention of repaying them?
2. Did the bankruptcy court err in finding that Ms. Karelin incurred the debt in question with no intention of repaying it?
3. Did the bankruptcy court err in excluding evidence offered by Ms. Karelin consisting of copies of checks evidencing payments she made to the Bank prior to the time she incurred the debt in question?
4. Did the bankruptcy court err in determining the amount of the non-dischargeable debt?
Whether the bankruptcy court applied the correct legal standard is a legal issue, which we review de novo. In re Contractors Equipment Supply Co., 861 F.2d 241, 243 (9th Cir.1988). The bankruptcy court's findings of fact are reviewed under a "clearly erroneous" standard. In re Wolf & Vine, 825 F.2d 197, 199 (9th Cir.1987). The application of the Dougherty legal standard to the facts is a question of law which is reviewed de novo. Wymer v. Wymer, 16 B.R. 497, 503-04 (9th Cir. BAP 1980). The bankruptcy court's evidentiary rulings are reviewed for abuse of discretion. United States v. Lummi Indian Tribe, 841 F.2d 317, 320-21 (9th Cir. 1988); Jenkins v. Whittaker Corp., 785 F.2d 720, 725 (9th Cir.1986).
In Dougherty we set forth the standard to be used in evaluating the non-dischargeability of credit card debts under § 523(a)(2)(A). 84 B.R. 653, 655-58 (9th Cir. BAP 1988). We declined to use either the "implied representation" theory, under which the cardholder is deemed to impliedly represent that he or she has the ability and the intention to repay the charges, or the "assumption of the risk" theory, under which the cardholder is deemed to make a false representation only if the cardholder uses the card after the issuer communicates to the cardholder that the card has been revoked. 84 B.R. at 655-56. We held that to except the debt from discharge under § 523(a)(2)(A), "the card issuer must prove by clear and convincing evidence that `the debt was incurred through actual fraud, i.e., where the debtor made the charges with no intention of paying for same.'" 84 B.R. at 657 (citation omitted).
Ms. Karelin urges that the Dougherty test is appropriate only where third parties are involved in the credit card transactions, and not where, as in this case, the debt arises from cash advances directly from the issuer to the cardholder. Ms. Karelin urges that the appropriate test for the latter situation is the "assumption of the risk" test because the issuer is in a position to monitor and evaluate the status of the cardholder's account and make an informed decision whether...
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