In re McDonald

• Decision Date: 21 October 1994
• Docket Number: Bankruptcy No. 93-21037SR. Adv. No. 93-2199.
• Parties: In re Frances Cutri McDONALD, Debtor. BANK ONE COLUMBUS, N.A., Plaintiff, v. Frances Cutri McDONALD, Defendant.
• Court: United States Bankruptcy Courts. Third Circuit. U.S. Bankruptcy Court — Eastern District of Pennsylvania

177 B.R. 212 (1994)

In re Frances Cutri McDONALD, Debtor BANK ONE COLUMBUS, N.A., Plaintiff, v. Frances Cutri McDONALD, Defendant.

Bankruptcy No. 93-21037SR. Adv. No. 93-2199.

United States Bankruptcy Court, E.D. Pennsylvania.

October 21, 1994.

COPYRIGHT MATERIAL OMITTED

Gregg M. Feinberg, Allentown, PA.

Emil L. Iannelli, Southampton, PA.

Frederick J. Baker, Asst. U.S. Trustee, Philadelphia, PA.

OPINION

STEPHEN RASLAVICH, Bankruptcy Judge.

This adversary proceeding is before the Court on the complaint of Bank One Columbus, N.A. ("Bank One") the issuer of a credit card to the defendant-debtor, Frances Cutri McDonald ("the Debtor"), seeking to except its claim from discharge pursuant to 11 U.S.C. 523(a)(2)(A), (a)(2)(B), and (a)(2)(C). Bank One also requests costs and attorney's fees incurred in pursuit of this action. A hearing was held on August 25, 1994.

Facts

In December 1992, Bank One offered a pre-approved credit card with a $5,000 credit limit to the Debtor through the mail. The Debtor accepted Bank One's offer and requested the credit card by completing and returning a "reservation certificate" to Bank One. Bank One mailed the credit card to the Debtor on January 25, 1993, along with a Credit Card Account Cardholder Agreement which set forth the terms under which the Debtor was to use the credit card. The Debtor initially used the credit card to obtain two cash advances totalling $2,700, $1,700 at one Meridian Bank location and $1,000 at a second Meridian Bank location, on the same day, February 1, 1993. Subsequent cash advances were taken by the Debtor, as follows: $400 on February 16, 1993, $100 on March 1, 1993, and $150 on March 13, 1993. The Debtor also used the credit card on approximately 16 other occasions to purchase various goods and services during the same period.

The Debtor did not make her initial payment to Bank One which was due on March 11, 1993, and, by taking the $150 cash advance on March 13, 1993, exceeded her approved credit limit. The Debtor has not made any payment to Bank One. She filed a bankruptcy petition on April 2, 1993. In addition to the Debtor's approximately $5,000 scheduled obligation to Bank One, the Debtor's scheduled credit card obligations in her bankruptcy total $12,911.64, as follows: $834.51, Bradlees; $7,000 Corestates Bank; $1,101.27, Discover Card; $1,500, Chemical Bank Mastercard; $635, Sears; $1,016.65, Signet Bank; $824.21, Strawbridge and Clothier. The Debtor's monthly income totaled $415 during the period of her Bank One credit card use, $215 from welfare and $200 child support. She was also receiving food stamps. Her monthly expenses totaled approximately $2,000. The Debtor testified that she was living with her boyfriend, and he had been making up the deficit in her monthly budget at the time she completed the pre-approved credit card application. It is undisputed that the boyfriend had moved out of her apartment and was not providing financial assistance to the Debtor at the time she received the credit card.

The Debtor testified that she had used the credit card for her "survival," because she was unable to afford basic necessities or provide for her son. The Debtor has joint custody of her son. He lives with her on Friday through Monday. She testified further that at the time she incurred the credit card obligation she was actively seeking employment and believed she would be able to repay Bank One.

Discussion

Bank One is relying on 11 U.S.C. § 523(a)(2)(A) in seeking to have its claim declared nondischargeable. Section 523(a)(2)(A) provides:

(a) A discharge under section 727 . . . 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) (West 1993).

A creditor challenging the discharge of a particular debt under section 523(a)(2)(A)¹, must prove that the debt should not be discharged by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). The creditor may establish that the debt should be excepted from discharge by proving each of the following elements:

(1) that the debtor made the representations;

(2) that at the time he knew they were false;

(3) that he made them with the intention of and purpose of deceiving the creditor;

(4) that the creditor relied on such representations; and (5) that the creditor sustained the alleged loss and damages as a proximate result of the representations have been being made.

In re Bergman, 103 B.R. 660, 671 (Bankr. E.D.Pa.1989), quoting In re Stelweck, 86 B.R. 833, 846 (Bankr.E.D.Pa.1988), aff'd, sub nom. United States v. Stelweck, 108 B.R. 488 (E.D.Pa.1989).

Two principal schools of thought have emerged in the cases analyzing credit card use as fraudulent under section 523(a)(2)(A). The minority view is that the card credit issuer assumes the risk of use or abuse, up to the credit limit. The Court has reviewed the cases following this "assumption of the risk" rationale. See, e.g., In re Ward, 857 F.2d 1082 (6th Cir.1988); First Nat'l Bank of Mobile v. Roddenberry, 701 F.2d 927 (11th Cir.1983); In re Cirineo, 110 B.R. 754 (Bankr.E.D.Pa.1990).

Under the assumption of the risk theory, a credit cardholder does not, by merely using the credit card, make any representation to the issuer. Rather, the cardholder makes a false representation to the issuer only when revocation of the card is communicated to the cardholder and the cardholder continues to use the card, or when the cardholder continues to use the card even though the user knows or should know the charges are in excess of the credit limit granted.

The Court declines to adopt the assumption of the risk theory, because, among other reasons, that approach "places credit card issuers in a virtually impossible position with respect to credit card charges made prior to revocation of the card." Citibank South Dakota v. Dougherty (In re Dougherty), 84 B.R. 653, 656 (9th Cir. BAP 1988); In re Preece, 125 B.R. 474 (Bankr.W.D.Tex. 1991); see also, In re Sigrist, 163 B.R. 940 (Bankr.W.D.N.Y.1994). Moreover, the most frequently cited case adopting the assumption of the risk theory, Roddenberry, held that any and all charges, incurred after the fact of revocation of a card by the issuer is communicated to the debtor are nondischargeable. Unfortunately, that case is frequently cited for the converse; i.e., that all charges incurred before communication of revocation are dischargeable. See, e.g., In re Rivera, 151 B.R. 602, 604 (Bankr.M.D.Fla. 1993); In re Blackburn, 68 B.R. 870, 879 (Bankr.N.D.Ind.1987); In re Shrader, 55 B.R. 608, 612 (Bankr.W.D.Va.1985). Actually, the Roddenberry Court recognized that the underlying facts in any case needed to be analyzed carefully to determine if there had been fraud. This Court concurs fully with those courts that have adopted a fact-based approach.

The majority of bankruptcy courts have held that the act of using a credit card, by itself, carries two implied representations: (1) that the debtor has the intent to repay the credit card debt; and (2) that the debtor has the ability to repay the debt. In re Branch, 158 B.R. 475, 477 (Bankr.W.D.Mo. 1993); In re Preece, 125 B.R. at 477; In re Hinman, 120 B.R. 1018 (Bankr.D.N.D.1990). If a credit card issuer establishes with the requisite degree of proof that at the time the debtor used the card, he knew or should have known that he would be unable to repay the obligations incurred, that constitutes false pretenses, a false representation or actual fraud. In re Pursley, 158 B.R. 664 (Bankr. N.D.Ohio 1993); In re Meeks, 139 B.R. 559 (Bankr.M.D.Fla.1992); In re Hansbury, 128 B.R. 320 (Bankr.D.Mass.1991); In re Hinman, 120 B.R. at 1021 (Bankr.D.N.D.1990); In re Lipsey, 41 B.R. 255 (Bankr.E.D.Pa. 1984). Proof that at the time the debtor used the card, he knew or should have known that he would be unable to repay the obligations incurred, satisfies the creditor's burden with respect to the first three elements outlined above. In re Branch, 158 B.R. at 477.

Various factors have been utilized by this Court, as well as many other bankruptcy courts, in determining whether a credit card user had the requisite intent to deceive, and specifically that he knew or should have known that he would be unable to repay the credit card obligations incurred. Those factors are:

1.) the length of time between the charges made and the filing of the bankruptcy;

2.) whether or not an attorney has been consulted concerning the filing of bankruptcy before the charges were made;

3.) the number of charges made;

4.) the amount of the charges;

5.) the financial condition of the debtor at the time the charges were made; and

6.) whether the charges were above the credit limit of the account.

In re Cirineo, 110 B.R. at 758, citing, among other cases, In re Lipsey, 41 B.R. at 258.

Several other courts have also considered the following additional factors:

7.) did the debtor make multiple charges on the same day;

8.) whether or not the debtor was employed;

9.) the debtor\'s prospects for employment;

10.) the financial sophistication of the debtor;

11.) whether there was a sudden change in the debtor\'s buying habits; and

12.) whether the purchases were made for luxuries or necessities.

See In re Dougherty, 84 B.R. at 657; In re Faulk, 69 B.R. 743, 757 (Bankr.N.D.Ind. 1986); In re Carpenter, 53 B.R. 724, 729 (Bankr.N.D.Ga.1985).

In the instant case, the Debtor began charging on her credit card within days of, if not immediately upon, receiving the card, and incurred an obligation of over $5,000, which was over the Debtor's credit limit, in a 41 day period. At the time, the Debtor was unemployed and her monthly expenses exceeded her total...