In re Sziel
| Decision Date | 24 March 1997 |
| Docket Number | Adversary No. 96 A 01294.,Bankruptcy No. 96 B 15237 |
| Citation | 206 BR 490 |
| Parties | In re Patrick and Janet SZIEL, Debtors. AT & T UNIVERSAL CARD SERVICES, CORP., Plaintiff, v. Patrick M. SZIEL, Defendant. |
| Court | U.S. Bankruptcy Court — Northern District of Illinois |
Bruce E. de'Medici, Oak Park, IL, for Plaintiff.
Lawrence Korrub, Chicago, IL, for Defendant.
This is a routine adversary proceeding alleging that the Debtor committed fraud in the use of a credit card. Indeed, the problem is that it is too routine. The Debtor is in default and the plaintiff wants a judgment. Notwithstanding the Debtor's failure to appear and defend this action, this Court finds that AT & T has not established grounds for finding the debt nondischargeable under § 523(a)(2)(A). Accordingly, the motion for default and default judgment is denied. On the Court's own motion the adversary proceeding is dismissed because the complaint fails to state a claim for relief.
The Debtors filed a joint petition for relief under Chapter 7 of the Bankruptcy Code on June 12, 1996. The Chapter 7 trustee concluded that the Debtors had no assets to be administered and filed his report so indicating on July 29, 1996. On October 10, 1996, this Court granted the Debtors a discharge of all debts, other than any debts excepted from discharge by § 523(a). On September 18, 1996, AT & T Universal Card Services, Corp., ("AT & T") filed an adversary proceeding against one of the Debtors, Patrick M. Sziel, ("Debtor") to have a debt for credit card purchases and fees in the amount of $3,031 declared nondischargeable under § 523(a)(2)(A). The summons and complaint were served upon the Debtor and his attorney, Lawrence Korrub. They failed to answer, and on November 26, 1996, AT & T requested that a default and default judgment be entered against the Debtor. Again, neither the Debtor nor his attorney responded.
According to the unanswered complaint, as of the filing of the case, the balance due AT & T was $3,031.02. AT & T alleged that between March 18 and June 12, 1995, the Debtor "began a systematic withdrawal of the entire available credit line" consisting of twenty purchases totaling $2,691.26. The complaint does not allege what was "systematic" about this use of the credit card. After the charges were made and before the bankruptcy case was filed, the Debtor made a single payment totaling $100.
The remaining allegations of the complaint consist of conclusions of law or fact, i.e., that the Debtor never intended to repay the debt, that the Debtor did not have the ability to repay the debt, that he intended to defraud AT & T and that such actions constituted a misrepresentation that was reasonably relied upon by AT & T. No facts are alleged in support of those conclusions.
The New York Times reports that, "Over the last three years, Americans have received in the mail more than eight billion offers for credit cards." The New York Times, C1 (March 18, 1997). As the Times goes on to report, the rate of defaults is growing. Not surprisingly, these trends are having consequences in bankruptcy that have come to the attention of courts and commentators. As they have noted, issuers do not ask debtors to make any serious representations about their finances before issuing cards, but wait until bankruptcy to "make their first meaningful investigation into a debtor's financial condition." In re Chinchilla, 202 B.R. 1010, 1016 (Bankr.S.D.Fla.1996).1 See also, Lisa K. Gorman, Rethinking Credit Card Fraud and § 523(a)(2)(A), Norton Bankr.L. Adviser 1 (Feb. 1997). Then the issuer may charge that the debtor committed fraud by using the card without intending to pay the resulting bills. That charge is made, as in this case, in a complaint filed in the bankruptcy to except the debt from the debtor's discharge under § 523(a)(2)(A).2
Once such a complaint is filed, the ordinary rules of procedure are invoked (see Fed. R.Bankr.P., 7001, et seq.), and the debtor must defend the charge if he or she wants to preserve the full value of the bankruptcy fresh start. Many consumer debtors are in such precarious financial condition when they file bankruptcy, however, that they can ill afford to pay additional fees to defend a lawsuit.3 These circumstances create a risk that the card issuers may coerce settlements from unrepresented consumers or obtain default judgments, regardless of the merits of the complaint. Cf. In re Grayson, 199 B.R. 397, 396-97 (Bankr.W.D.Mo.1996)(dealing with settlements entered into for similar financial reasons). This is not a newly discovered risk. Congress enacted § 523(d) () to deal with this problem. See H.R.Rep. No. 595, 95th Cong., 2d Sess. 131, reprinted in 1978 U.S.Code Cong. & Admin. News. pp. 5787, 5963, 6092. See also, Chinchilla, 202 B.R. at 1013 (Bankr.S.D.Fla.1996)( ) Of course, § 523(d) is effective only when the debtor is represented by an attorney. The problem presented by this case is the vulnerability to abuse of unrepresented debtors.
Because of these concerns, this and other courts have become hesitant to "rubber stamp" motions for default judgments and agreed judgments in § 523(a)(2)(A) actions, particularly when the allegations of fraudulent intent are as conclusory as they are here. Under Fed. R. Bank. P. 7055, courts have broad discretion to "conduct such hearings . . . as it deems necessary and proper" to determine whether a default judgment should be entered. In re Beltran, 182 B.R. 820, 824 (9th Cir. BAP 1995); In re Villegas, 132 B.R. 742, 746 (9th Cir. BAP 1991) () This discretion has been exercised in bankruptcy cases where the complaint contains general allegations of fraud and requests denial of discharge (Villegas) or a determination of nondischargeability (Beltran).4
This Court, therefore, required AT & T to substantiate its allegations of fraud. It attempted to do so by serving requests for admissions and interrogatories on the Debtor. Again the Debtor failed to respond. Generally when a party fails to respond to requests for admissions the matters are deemed admitted. Fed. R. Bankr.P. 7036. But the requests here are no less conclusory than the complaint. Like the complaint, they lack specific factual statements that support the conclusion that the Debtor committed fraud when he used the credit card.
Moreover, even though entry of a default results in admission of the allegations of the complaint, the plaintiff is not automatically entitled to entry of a default judgment. Beltran, 182 B.R. at 823. Entry of a judgment of default is discretionary with the trial judge and may be denied where there are insufficient facts to support a cause of action. Peerless Indus., Inc. v. Herrin Illinois Cafe, Inc., 593 F.Supp. 1339 (E.D.Mo.1984), aff'd, 774 F.2d 1172 (8th Cir.1985). Accordingly, it is consistent with the requirements of Rule 7055 to refuse to rely upon the "deemed admitted" effect of a failure to respond to requests to admit as support for the motion for default judgment.
This leaves us where we started: with a skeletal complaint containing conclusory allegations of fraud, based upon the sole fact that several charges were made one year before the bankruptcy petition was filed.
Elements of Nondischargeability Under § 523(a)(2)(A)
A debt is excepted from discharge under § 523(a)(2)(A) if the credit was obtained by false pretenses, a false representation or actual fraud. As this Court and others have stated, this sub-section is not well-suited to credit card debts. See In re Murphy, 190 B.R. 327 (Bankr.N.D.Ill.1995); In re Briese, 196 B.R. 440 (Bankr.W.D.Wis. 1996); Gorman at 1-2. However, unless the charges were for luxury goods in excess of $1,000 that were incurred within sixty days preceding the filing of the petition and thus presumed nondischargeable under § 523(a)(2)(C), it is the only discharge exception generally available to challenge credit card debts. There is no special credit card exception to discharge.
In Murphy, this Court concluded that the use of a credit card constitutes a promise to pay, but refused to equate inability to repay with intent not to repay. See Murphy, 190 B.R. at 332. Instead, this Court, following Field v. Mans, ___ U.S. ___, 116 S.Ct. 437, 133 L.Ed.2d 351 (1995), concluded that a creditor relying on the fraud exception to dischargeability must satisfy the common law standard of fraud, which requires establishing a subjective intent to defraud. See also, Briese, 196 B.R. at 449-51. Of course proving subjective intent to defraud involves an analysis of all the circumstances. Murphy, at 333-34.
The only "evidence" of fraud here is that the Debtor made twenty purchases, totaling $2,691.26, more than one year before filing bankruptcy and made only one payment of $100.00 on the account. AT & T also submitted a summary of the account along with the unanswered discovery. The summary showed that although the Debtor had purchased more than $2,000 worth of merchandise (or possibly services; AT & T apparently did not think what the Debtor had purchased was relevant to its claim), approximately $1,500 was credited to the account, perhaps due to returns, during this same period. In addition, while the complaint alleges that the Debtor made a "systematic...
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