In re Lippert, Bankruptcy No. 96-12338

Decision Date04 March 1997
Docket NumberBankruptcy No. 96-12338,Adversary No. 96-1206.
Citation206 BR 136
PartiesIn re James R. LIPPERT and Shannon A. Lippert, Debtors. HUNTINGTON NATIONAL BANK, Plaintiff, v. James R. LIPPERT, Defendant.
CourtU.S. Bankruptcy Court — Northern District of Ohio

Stephen D. Hobt and Burl C. Robinette, Cleveland, OH, for Debtors-Defendant.

Karen E. Hamilton, Weltman, Weinberg & Reis, Cleveland, OH, for Plaintiff.

MEMORANDUM OF OPINION

DAVID F. SNOW, Bankruptcy Judge.

Huntington National Bank filed this adversary proceeding to establish that James Lippert's credit card indebtedness to it is nondischargeable under section 523(a)(2)(A) of the Bankruptcy Code. According to Huntington, Mr. Lippert incurred this indebtedness as part of a credit card kiting scheme pursuant to which he took cash advances on one of his Huntington credit cards under circumstances which indicated that he had neither the intent nor the ability to pay the debt. This is a core proceeding under 28 U.S.C. section 157(b)(2)(I) and was tried on November 13, 1996. This memorandum sets forth the Court's findings of fact and conclusions of law under Rule 7052 of the Federal Rules of Bankruptcy Procedure.

Facts

James and Shannon Lippert were married December 23, 1995. Mr. Lippert paid for the wedding with three checks drawn on that date on his Huntington credit card account. Mr. Lippert had 13 credit cards in all, including two from Huntington. One of the Huntington cards was issued to Mr. Lippert and his mother and the other, on which the checks for the wedding were drawn, was issued to Mr. Lippert and his ex-wife, Angela. When Huntington issued the second card to Mr. Lippert in 1989, it performed its usual credit check. Mr. Lippert was about 19 at that time and about 25 at the time of the trial.

James and Shannon Lippert had been living together for several years and decided to marry when Shannon became pregnant. Shannon Lippert, although a debtor in this case, was not liable on the Huntington card nor apparently on Mr. Lippert's other credit cards. These cards and much of Mr. Lippert's credit card debt predate their wedding and reflect indebtedness Mr. Lippert was obliged to pay under the terms of his divorce from Angela.

Mr. Lippert was fired from his job on March 15, 1995, for reasons that were not explained. This cut his income approximately in half from a take-home pay of about $600 a week to unemployment benefits of about $300 a week. Throughout 1995 he unsuccessfully sought work but did receive his bachelor's degree in business management from Baldwin-Wallace College in September 1995. He was reemployed as a stock clerk in January 1996 and took another fairly low paying job through a temporary agency at about the same time. He worked approximately 40 hours per week for each employer. His stock clerk position ended in May 1996 when he suffered an injury which prevented his continued employment. He continues to work a 40-hour week through the temporary agency. Although it is puzzling that someone with Mr. Lippert's education has been unable to find a better job, he is still young, and there is no evidence that he was, or believed himself to be, limited to low paying jobs in the future. Shannon Lippert is also employed and earned about $19,000 in 1995. She continues in that employment after having taken a month's maternity leave after the birth of the Lipperts' son in July. The Lipperts consulted their bankruptcy attorney in March 1996 after one of their secured creditors initiated a collection action. They filed their petition in this case on May 6, 1996.

At the time of filing Mr. Lippert's credit card indebtedness was about $43,000 of a total unsecured debt of about $48,000. During the period from January 1995 through December 1995 Mr. Lippert drew down a total of about $59,500 in cash advances and made total payments on his credit cards of about $57,400. Mr. Lippert's practice during this period was to pay off the balance on one credit card with the proceeds of cash advances from another card. For the period January 1995 through December 5, 1995, Mr. Lippert took down from Huntington cash advances of $12,500 and made payments of $10,300. The difference is reflected in the three cash advances totaling $2,400 which are the subject of this dischargeability proceeding.

Debtors' schedules filed in 1996 show that the couple's monthly expenses were about $1,000 more than their income. It also appears that there would have been a discrepancy between the Debtors' income and expenses during the nine months that Mr. Lippert was unemployed during 1995, but the evidence is unclear as to how much of the Debtors' credit card indebtedness was incurred during this period. The parties stipulated to various cash advances and payments on Mr. Lippert's credit cards during a substantial part of the 1995-96 period which appear to support Huntington's contention that the Debtors were financing their living expenses in part through credit card advances. During this period the Debtors also borrowed some money from Mr. Lippert's parents. Huntington did not allege that the Debtors lived luxuriously. So far as appears from the evidence the Debtors lived quite modestly with few indulgences other than the December 1995 wedding.

Analysis

The Lipperts' credit card travails reflect a pervasive and serious consumer finance problem that is widely blamed for the recent dramatic increase in consumer bankruptcy filings. These filings have in turn spawned a rash of nondischargeability proceedings initiated by credit card issuers attempting to cut bad debt losses. The volume of these proceedings is due not only to aggressive collection efforts by credit card issuers but to the uncertainty of the law governing discharge of credit card debt. Although there is agreement that the dischargeability of credit card debt is governed by section 523(a)(2) of the Bankruptcy Code,1 the cases reflect substantial disagreement as to how the ordinary fraud concepts—intentional misrepresentation by the debtor and detrimental reliance of the creditor—can or should be applied to credit card debt. This problem is exacerbated by the fact that few circuits have provided much guidance on the issue.

The Sixth Circuit addressed the question of the dischargeability of credit card debt nearly 10 years ago. Manufacturer's Hanover Trust v. Ward (In re Ward), 857 F.2d 1082 (6th Cir.1988). It held the debt dischargeable despite the fact that the debtor, who was insolvent and had been convicted of embezzlement, had misrepresented his financial condition to the issuer when he obtained his card. The issuer, however, had failed to make any check of the debtor's credit. The court held that "a credit check must be conducted at some point" and that in its absence the issuer assumed the risk of nonpayment. Id. at 1085. In this case, however, the issuer checked Mr. Lippert's credit when the card was issued, and Mr. Lippert offered no proof or argument that Huntington's credit check was inadequate. Although the Eleventh Circuit had held in a Bankruptcy Act case that the issuer bore the risk of all credit card misuse until the card was revoked, First Nat'l Bank of Mobile v. Roddenberry, 701 F.2d 927 (11th Cir.1983), its holding has won few adherents and it appears unlikely that the Sixth Circuit would apply an assumption of risk approach where, as here, Huntington did a credit check when the card was first issued and there was no evidence that Mr. Lippert had credit problems at that time. See Household Credit Servs., Inc. v. Haji (In re Haji), 201 B.R. 176 (E.D.Mich.1996). Since there is no controlling Sixth Circuit precedent, the Court must look for guidance elsewhere.

Fortunately, or unfortunately, it does not have far to look. There have recently been a plethora of published opinions in which courts have endeavored to provide the definitive analysis of credit card fraud under section 523(a)(2)(A). This has proved a daunting task. To some courts it is clear that no representation should be implied from credit card use, Citibank South Dakota v. Dougherty (In re Dougherty), 84 B.R. 653, 656 (9th Cir. BAP 1988); AT & T Universal Card v. Alvi (In re Alvi), 191 B.R. 724, 731 (Bankr. N.D.Ill.1996); J.C. Penney Co. v. Shanahan (In re Shanahan), 151 B.R. 44, 47 (Bankr. W.D.N.Y.1993), while to others such implication is necessary and appropriate. AT & T Universal Card v. Feld (In re Feld), 203 B.R. 360, 366-67 (Bankr.E.D.Pa.1996); Chevy Chase Bank v. Briese (In re Briese), 196 B.R. 440, 449-50 (Bankr.W.D.Wis.1996); Chase Manhattan Bank v. Murphy (In re Murphy), 190 B.R. 327, 332 (Bankr.N.D.Ill. 1995); Citicorp Credit Servs., Inc. v. Hinman (In re Hinman), 120 B.R. 1018, 1021 (Bankr.D.N.D.1980).

Although the earlier cases often stated that the implied representation included both the intent and ability to pay the charges incurred, Ward, 857 F.2d at 1087 (Merritt, J., dissenting); Hinman, 120 B.R. at 1021; FCC Nat'l Bank v. Branch (In re Branch), 158 B.R. 475, 477 (Bankr.W.D.Mo.1993), most of the recent cases have limited the implied representation to the intent to pay. See, e.g., Anastas v. American Savings Bank (In re Anastas), 94 F.3d 1280, 1285 (9th Cir.1996); Murphy, 190 B.R. at 332.

Having found the requisite implied fraudulent intent, some courts have required little or no actual proof of reliance by the card issuer. See, e.g., Citibank (South Dakota), N.A. v. Eashai (In re Eashai), 87 F.3d 1082, 1091 (9th Cir.1996); Hinman, 120 B.R. at 1022. Other courts have insisted on specific proof of reliance by the issuer on the implied misrepresentation. See, e.g., Feld, 203 B.R. at 368-69; Alvi, 191 B.R. at 730. This division reflects a split between those courts which impose some obligation upon the issuer to protect itself against deadbeats and others which do not. Compare Feld, 203 B.R. at 372 and Alvi, 191 B.R. at 731, with AT & T Universal Card Services v. Burdge (In re Burdge), 198 B.R. 773, 777 (9th Cir. BAP 1996)...

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