In re Preece
| Decision Date | 21 March 1991 |
| Docket Number | Bankruptcy No. 90-11456-FM,Adv. No. 90-1260-FM. |
| Citation | 125 BR 474 |
| Parties | In re James Thomas PREECE and Kathleen Susan Preece, Debtors. FIRST DEPOSIT CREDIT SERVICES CORPORATION, Plaintiff, v. James Thomas PREECE, Defendant. |
| Court | U.S. Bankruptcy Court — Western District of Texas |
Elizabeth J. Hickson, F.E. Walker & Associates, P.C., Austin, Tex., for defendant.
Dale Ellis, Houston, Tex., for plaintiff.
The trial of this adversary proceeding occurred on March 4, 1991. At the conclusion of the trial, the Court made certain Findings of Fact and Conclusions of Law on the record pursuant to Bankruptcy Rule 7052. Those Findings and Conclusions are incorporated herein by reference and are relied upon in arriving at the ultimate judgment.
This Court has jurisdiction under 28 U.S.C. § 1334(b), 28 U.S.C. § 157(a) and (b)(1), and the standing Order of Reference existing in this District. This is core proceeding under 28 U.S.C. § 157(b)(2)(I) as it is a proceeding under 11 U.S.C. § 523(a)(2)(A) and (B) to obtain a judgment of nondischargeability with regard to an indebtedness owed by the Defendant to the Plaintiff.
The Defendant was the Vice President of Quality Control and Manufacturing Operations beginning May 1988 for a company in California named Aero Scientific, a subsidiary of Data Design Labs. On or about April 10, 1989, the Debtor made application for a Gold First Select Visa card with the Plaintiff with a $5,000.00 credit limit pursuant to an unsolicited application he had received from the Plaintiff. When received, the Debtor filled out the application which requested only minimal financial disclosures and sent it back to the Plaintiff who pulled credit bureau reports on the Debtor, reviewed both the reports and the application, conducted a telephone interview with the Debtor to verify basic information, and, based thereon, made a decision to issue the Visa card to the Debtor with a $5,000.00 credit limit. It is interesting to note that one of the conditions of issuance of the card was that the Debtor was required to receive an immediate $5,000.00 cash advance at the time of the issuance of the card.
The only financial information requested of the Debtor on the credit card application was his annual household income ($80,000.00), if he owned his own home (yes), his length of residence there (one year), and his length of employment (one year). The application was dated April 10, 1989, and was sent in by the Debtor on or before that date.
Unfortunately for the Debtor he was terminated by his employer on April 14, 1989, without prior reason to believe or knowledge that such was going to occur. The approval of his April 10, 1989 credit application was made by Plaintiff on April 17, 1989 and Plaintiff mailed the Debtor the Visa card and the initial mandatory $5,000.00 cash advance. This indebtedness was paid in full by the Debtor on September 20, 1989 from proceeds the Debtor received from the sale of his homes in California and New Hampshire (the Debtor's residence prior to moving to California).
In the summer of 1989, the Debtor moved to Round Rock, Texas where he and his wife purchased a children's learning center with a $10,000.00 down payment and execution of a $25,000.00 note. The source of the cash down payment was the sale of the Debtor's homes in California and New Hampshire.
Almost immediately the Debtor realized that the business he had purchased was not doing as well as had been represented. In fact, it was not generating a positive cash flow. Plus, a significant increase in enrollment was necessary in order for a profitable operation to result. Although enrollment did slowly increase, it never increased enough to allow the business to turn the corner. In fact, no profitable month occurred until after the Debtor first contacted an attorney in late January, 1990, concerning the tax ramifications from the sale of his homes and his use of the proceeds therefrom and for general information concerning bankruptcy.
From the time the Debtor lost his job in California until the time he filed for bankruptcy, a little over one year later, the Debtor received no income from any type of employment. And, in addition to his business not generating any net cash flow, he owned an undivided one-half interest in three rent houses in Round Rock which were also producing negative cash flows.
Therefore, after the proceeds of the home sales were gone sometime in September 1989, the Debtor continued to exist only by borrowing. The borrowing was necessary to provide money to pay his family's living expenses, fund the negative cash flow of the rent houses, and fund the negative cash flow of the children's learning center.
And borrow he did. The evidence reflects that as of the date of filing the Debtor owed American Express approximately $18,796.27 (3 separate cards), MasterCard $4,647.30, Visa $25,643.69 (5 separate cards including $5,961.36 on First Select Visa Card), Discover $3,050.61 and Texaco $116.18.
The indebtedness at issue results from three cash advances obtained by the Debtor under the Gold First Select Visa card issued by Plaintiff. The first advance of $3,000.00 occurred on November 2, 1989; the second of $1,500.00 on December 5, 1989; and the third of $1,100.00 on December 19, 1989. During the time these advances were made, the Debtor did make the minimum monthly payment as called for pursuant to his agreement with the Plaintiff; however, he failed to notify the Plaintiff that he no longer had a job with an $80,000.00 salary but was self employed and therefore he was totally dependent upon profits of his recently purchased business, which had only negative cash flow, to live. Both of these notifications were required under the terms of the agreement pursuant to which the Gold First Select Visa card was issued.
At the conclusion of the hearing the Court found that the information contained on the credit card application was completely and totally accurate when submitted. The Debtor's base salary at Aero Scientific at that time was $80,000.00 per year; he had held that job for just under one year; and he had lived in his present home which he owned for approximately one year. Based thereon, the Court concluded that judgment in favor of the Debtor/Defendant was appropriate upon the cause of action pled by Plaintiff under 11 U.S.C. § 523(a)(2)(B).
The question remaining for the Court is whether the Debtor's unilateral use of the Visa card to obtain the cash advances outlined above constitute the obtaining of money by false pretense, false representation, or actual fraud under § 523(a)(2)(A) of the Code. In order to win, the Plaintiff must establish that the Debtor "(1) made a materially false representation, (2) with the intent to defraud, and (3) that the bank relied upon that false representation." Matter of Ratajczak, 5 B.R. 583, 586 (Bankr.N.D.Fla.1980).
On January 15, 1991, the United States Supreme Court rendered its decision in Coy R. Grogan, et al v. Frank J. Garner, Jr., 498 U.S. ___, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991) in which it unanimously concluded that "the standard of proof for the dischargeability exceptions in 11 U.S.C. § 523(a) is the ordinary preponderance-of-the-evidence standard" normally applicable in civil actions between private litigants. At ___, 111 S.Ct. at 661. Prior thereto a great many courts had previously invoked a clear and convincing standard. Further, courts had cited earlier United States Supreme Court decisions for the following proposition:
Chevy Chase FSB v. Hable (In re Hable), 107 B.R. 356 (Bankr.N.D.Fla.1989) citing Lines v. Frederick, 400 U.S. 18, 91 S.Ct. 113, 27 L.Ed.2d 124 (1970); Local Loan v. Hunt, 292 U.S. 234, 54 S.Ct. 695, 78 L.Ed. 1230 (1934).
Contrasted with this older language from the Supreme Court we have the new language of the Grogan v. Garner case.
Grogan v. Garner, at ___, 111 S.Ct. at 659. The Supreme Court goes on to state that it was "unlikely that Congress, in fashioning the standard of proof that governs the applicability of these provisions, would have favored the interest in giving perpetrators of fraud a fresh start over the interest in protecting the victims of fraud." Id. It is, therefore, clear from the Grogan opinion that the Supreme Court now thinks that a preponderance of evidence in § 523(a) matters "reflects a fair balance between these conflicting interests". Id.
Accordingly, this Court will use that standard and will refrain from liberally construing the § 523(a) provisions in favor of debtors and against creditors.
At the conclusion of the hearing the Court concluded that each...
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