In re Leonard, Bankruptcy No. 92-20809-RJB

• Decision Date: 25 August 1993
• Docket Number: Adv. No. 92-2338-SBB.,Bankruptcy No. 92-20809-RJB
• Citation: 158 BR 839
• Parties: In re John Robert LEONARD and Maria Lucinda Leonard a/k/a Lucy Leonard, Debtors. FIRST CARD, Plaintiff, v. John Robert LEONARD and Maria Lucinda Leonard a/k/a Lucy Leonard, Defendants.
• Court: U.S. Bankruptcy Court — District of Colorado

158 B.R. 839 (1993)

In re John Robert LEONARD and Maria Lucinda Leonard a/k/a Lucy Leonard, Debtors FIRST CARD, Plaintiff, v. John Robert LEONARD and Maria Lucinda Leonard a/k/a Lucy Leonard, Defendants.

Bankruptcy No. 92-20809-RJB, Adv. No. 92-2338-SBB.

United States Bankruptcy Court, D. Colorado.

August 25, 1993.

COPYRIGHT MATERIAL OMITTED

Barry Meinster, Barry Meinster & Assoc., P.C., Denver, CO, for plaintiff.

John Robert Leonard, pro se.

MEMORANDUM OPINION AND ORDER

SIDNEY B. BROOKS, Bankruptcy Judge.

THIS MATTER came before the Court on May 5, 1993 for a trial regarding Plaintiff's Complaint filed pursuant to 11 U.S.C. § 523(a)(2)(A). Plaintiff, Visa First Card, an issuer of Visa charge and cash advance cards, ("Visa") seeks to except from discharge its claim on a card issued to the Debtors on the grounds that the Debtors falsely represented that they had the intention of paying for the credit when they used the card.

The question before the Court is, essentially, did the Debtors obtain the extension of credit based on false representations, express or implied? This Court finds that they did not. Moreover, the Court finds that the creditor, Visa, did not exercise due diligence when it approved the line of credit to the Debtors, and it was so inept and lacking in responsible business practices when it extended this unsolicited credit that there was no reliance whatsoever on the alleged false representations. Reasonable expenses, including attorneys fees and costs, are awarded to the Debtors.

I. FINDINGS OF FACT

1. Debtors filed a Voluntary Petition in bankruptcy pursuant to Chapter 7 of the Bankruptcy Code on August 27, 1992. The Debtors' Schedules reflect $34,085.00 in unsecured claims, much of which is credit card debt.

2. Debtor, John Robert Leonard, reported that his income in 1990 was $65,000.00 for "crop spraying"; in 1991 it was $44,000.00 for serving as a "helicopter pilot on tuna boat"; and in 1992 it was $600.00 for "flying."¹

3. In January 1992, Debtors received an unsolicited Visa Gold Card Invitation for $7,500.00 on a "Pre-approved Credit Line." They accepted the Invitation, filled out the Invitation Certificate form, and they were sent their credit card and "live" checks, i.e., their $7,500.00 "pre-approved" line of credit.²

4. The Visa Gold Card Invitation required only that (a) Lucy Leonard identify her employer, and (b) both Debtors disclose their dates of birth, social security and telephone number(s). Lucy Leonard identified her employment as "self-housewife."

5. No other information regarding the Debtors, or their personal or financial situation, was evidently requested by Visa. No credit application, or similar form, was requested by Visa.

6. After signing the Invitation Certificate, Debtors then received a "Cardmember Agreement and Disclosure Statement." The "Agreement" was never signed. The Invitation Certificate contained no language constituting, or purporting to constitute, an agreement for an extension of credit.³

7. Debtors indicated they were essentially debt free with $6,000.00 in the bank in August 1991.

8. Debtors used the Visa First Card cash advances as follows:

a. Internal Revenue Service, $3,780.06, April 3, 1992;

b. Bank account, $1,000.00, May 24, 1992 c. Bank account, $500.00, June 28, 1992; and

d. Bank account, $1,000.00, July 7, 1992.

Visa First Card cash advances at the time of bankruptcy, August 27, 1992, totalled $6,280.00.

9. Medical problems beset the Debtors in 1991-1992. For examples, (a) John Leonard aggravated his hernia in June 1991, (b) Lucy Leonard underwent eye surgery for a detached retina in July 1991, (c) John Leonard had a hernia operation in September 1991, (d) John Leonard injured his back in April 1992, and (e) Lucy Leonard occasioned problems with cancer.⁴

10. Employment and income problems, largely due to the medical difficulties, beset the Debtors as well. After 25 years working on the tuna boat as a pilot and mechanic, John Leonard was forced to leave his employment, July 31, 1991, because of the hernia. He testified he expected to be rehired after surgery for the hernia. Between August 1991 and August 1992, however, John Leonard had almost no employment or income, except for about $600.00 in May 1992 earned from contract flying.

11. Mr. Leonard testified as to his expectations for work, returning to employment on the tuna boat, other job offer(s) that "fell through," and his efforts to locate employment after leaving the tuna boat, August 1991 through August 1992.

12. Mrs. Leonard filed for divorce on July 27, 1992, shortly before the bankruptcy was filed.

13. Debtor, John Leonard, asserts that much, if not most, of the Debtors' total credit card debt was incurred to pay for Debtors' medical care and health related services; the balance was for living expenses.

II. DISCUSSION

Plaintiff seeks to except from discharge its $6,280.00 claim pursuant to Section 523(a)(2)(A) which provides:

§ 523. Exceptions to discharge.

(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. . . .

11 U.S.C. § 523(a)(2)(A).

To have a debt determined to be non-dischargeable pursuant to Section 523(a)(2)(A) the party opposing discharge, here Visa, must prove, by a preponderance of the evidence:

(1) The debtor made a materially false representation;

(2) the debtor had intent to deceive;

(3) the creditor relied on the false representation;

(4) the creditor\'s reliance was reasonable; and

(5) the creditor sustained a loss as a result of the debtor\'s representation.

Grogan v. Garner, 498 U.S. 279, 111 S.Ct. 654 112 L.Ed.2d 755 (1991). See also, In re Mullet, 817 F.2d 677, 680 (10th Cir.1987); In re Kurtz, 110 B.R. 528 (Bankr.D.Colo.1990). Comerica Bank-Midwest v. Kouloumbris, 69 B.R. 229, 230 (N.D.Ill.1986).

Plaintiff maintains that Debtors "did not have the intention to pay the cash advance obligations" when they obtained same and that conduct constitutes a "false representation" sufficient to bar the debt from discharge. Visa urges the Court to find the requisite intent element, or "fraudulent intent" by circumstantial evidence. The creditor, Visa, finds support for this position in case law, perhaps best articulated in In re Kramer, 38 B.R. 80 (Bankr. W.D.La.1984). There the court reasoned and held as follows:

False pretenses or fraudulent or reckless misrepresentations may be implied by the debtor\'s conduct or silence and numerous courts have consistently held that no overt misrepresentation is necessary to find a debt nondischargeable under 11 U.S.C. § 523(a)(2)(A). As stated, in Matter of Schnore, 13 B.R. 249, 254 (Bankr.W.D.Wis.1981):

`The debtor\'s presentment of his or her credit card and signature on the credit receipt in exchange for goods is deemed an implied representation that the debtor has the intent and ability to pay for the goods. This implied representation makes overt statements of intent and solvency unnecessary.\'

See also In Re Black, 373 F.Supp. 105, 107 (E.D.Wisc., 1974); Matter of Banasiak, 8 B.R. 171 (Bankr. M.D.Fla., 1981); Matter of Schneider, 3 B.C.D. 175 (D.Nev., 1977).

Kramer, supra at 82.⁵

In re Kramer also recited the criteria by which a debtor's fraudulent intent in the actual use of a credit card can be found, based on circumstantial evidence. These criteria include the following:

(1) The length of time between making the charges and filing bankruptcy; (2) the number of charges made; (3) the amount of the charges; (4) whether the charges were above the credit limit on the account; (5) a sharp change in the buying habits of the debtor; (6) whether charges were made in multiples of three or four per day; (7) whether charges were less than the $50.00 floor limit; (8) the financial condition of the debtor was hopelessly insolvent when the charges were made; (9) whether or not an attorney has been consulted concerning the filing of bankruptcy before the charges were made; (10) the debtor\'s employment circumstances; and (11) the debtor\'s prospects for employment. See In Re Pannell, 27 B.R. 298 (Bankr. E.D.N.Y.1983); Matter of Stewart, 7 B.R. 551 (B.C.M.D., Ga., 1980); Matter of Boydston, 520 F.2d 1098 (5th Cir., 1975); Matter of Hadley, 25 B.R. 713 (Bankr. M.D.Fla.1982); In Re Smith, 25 B.R. 396 (Bankr. D.Md., 1982); In Re Black, 373 F.Supp. 105 (E.D.Wis. 1974); Matter of D\'Amico, 1 B.R. 170 (Bankr. W.D.NY, 1979); Matter of Schnore, 13 B.R. 249 (Bankr.W.D.Wis. 1981); In Re Poteet, 12 B.R. 565 (B.C.N.D.TX, 1981); In Re Petrini, 23 B.R. 981 (B.C.E.D.Pa., 1982); Matter of Scheider, sic 3 B.C.D. 175 (D.Nev. 1977).

Kramer, supra at 83.

There are no reported decisions on this topic by judges in this District, but there is a host of recent decisions applying this theory with different degrees of success in other districts. Some decisions apply the theory and determine a credit card debt to be non-dischargeable. In re Rouse, 156 B.R. 314 (Bankr.M.D.Fla.1993) and In re Vermillion, 136 B.R. 225 (Bankr.W.D.Mo. 1992). Others apply the theory and determine the credit card debt to be dischargeable. See, In re Friend, 156 B.R. 257 (Bankr.W.D.Mo.1993); Matter of Cordova, 153 B.R. 352 (Bankr.M.D.Fla.1993); In re Pressgrove, 147 B.R. 244 (Bankr.D.Kan. 1992); In re Cronk, 144 B.R. 903 (Bankr. M.D.Fla.1992); In re Sharp, 144 B.R. 372 (Bankr.S.D.Ohio 1992).⁶

Two theories could support Visa's claim under Section 523(a)(2)(A). First, Visa First Card could prevail if it is shown that issuance of the card and the pre-approved $7,500.00 credit line was extended pursuant to some fraud or false representation by the Debtors. Second, Visa could prevail if it proved that...