In re Valdes, Bankruptcy No. 94-1-5997-PM. Adv. No. 95-1-A036-PM.

• Decision Date: 13 November 1995
• Docket Number: Bankruptcy No. 94-1-5997-PM. Adv. No. 95-1-A036-PM.
• Citation: 188 BR 533
• Parties: In re Carlos VALDES, Sheila C. Valdes, Debtors. HECHT'S, A DIVISION OF the MAY DEPARTMENT STORES CO., Plaintiff, v. Carlos VALDES, Sheila C. Valdes, Defendants.
• Court: U.S. Bankruptcy Court — District of Maryland

188 B.R. 533 (1995)

In re Carlos VALDES, Sheila C. Valdes, Debtors HECHT'S, A DIVISION OF the MAY DEPARTMENT STORES CO., Plaintiff, v. Carlos VALDES, Sheila C. Valdes, Defendants.

Bankruptcy No. 94-1-5997-PM. Adv. No. 95-1-A036-PM.

United States Bankruptcy Court, D. Maryland.

November 13, 1995.

Warren Rosenfeld, Washington, DC.

John Owen, Jr., Hyattsville, MD.

Michael Wolff, Trustee, Gaithersburg, MD.

MEMORANDUM OF DECISION

PAUL MANNES, Chief Judge.

Before the court is a Complaint to Determine Dischargeability of Debt filed by Hecht's, a Division of the May Department Stores Company ("Hecht's"). Plaintiff seeks a ruling that $732.16 in unpaid charges be declared nondischargeable. This court has jurisdiction pursuant to 28 U.S.C. § 1334 (District Courts have original and exclusive jurisdiction of all cases under Title 11), 28 U.S.C. § 157(a) and Maryland District Court Local Rule 402 (all cases under Title 11 as proceedings arising under Title 11 or arising in or related to cases under Title 11 are deemed referred to the Bankruptcy Judges of this District). This action is a core proceeding under 28 U.S.C. § 157(b)(2)(I).

BACKGROUND

The debtors, Carlos Valdes and Sheila C. Valdes, filed a joint petition under Chapter 7 of the Bankruptcy Code on November 14, 1994. As of the date of filing, Mr. Valdes owed $1,134.93 to the plaintiff, $713.16 of this debt resulted from five charges made between August 28, 1994, and September 21, 1994, on Mr. Valdes' Hecht's credit card. The purchases consisted of twin mattresses, cookware, a television set, a handbag, and clothing.

Plaintiff named Sheila C. Valdes as a defendant. It offered no evidence of any involvement on her part in the purchases. Only at final argument did plaintiff's counsel state, "We are only pursuing Carlos at this point" (Transcript, p. 27). Counsel was unable to point to a scintilla of evidence justifying her inclusion as a defendant. Bankruptcy Rule 9011(a) appears applicable.¹

Plaintiff pleaded that the debtors made these purchases on "their" Hecht's credit card while intending not to repay the debt. Plaintiff argued that these purchases were made by Mr. Valdes when he knew or should have known that such debt could not be repaid. Therefore, plaintiff argues the debt must be excepted from discharge pursuant to 11 U.S.C. § 523(a)(2)(A). In support of this contention, the plaintiff relies heavily on the fact that, at the time the debtors filed this bankruptcy case, their combined income was only $3,368.38 and their total monthly liabilities amounted to $3,427.00. Plaintiff avers that the debtors' desperate financial condition at the petition date is indicative of their financial condition at the time the purchases were made as the purchases were made only seven weeks prior to the petition date. Plaintiff further notes that prior to the Hecht's credit card purchases, the debtors already had incurred approximately $12,787.00 in unsecured debt between them from twelve other credit card accounts.

Debtor denies any fraudulent intent to deceive the plaintiff. Rather, Mr. Valdes states that he fully intended to repay his debt to the plaintiff when the purchases were made. Mr. Valdes attributes his inability to pay the plaintiff to two unexpected and unforeseen expenses that arose subsequent to the date of the subject purchases. He stated that he was forced to make repairs to his automobile and pay for medical bills incurred by his mother.² These unexpected expenses depleted his available income, making him unable to make payment to the plaintiff, as well as his other creditors.

DISCUSSION

The plaintiff's claim for nondischargeability of this debt is brought pursuant to 11 U.S.C. § 523(a)(2)(A), that provides:

§ 523. Exceptions to discharge.

(a) A discharge under 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.

The objecting creditor bears the burden of proving the nondischargeability of the debt under § 523 by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 286-90, 111 S.Ct. 654, 659-61, 112 L.Ed.2d 755 (1991).

Courts generally are in agreement that the traditional elements of fraud must be applied and proven to sustain a cause of action under § 523(a)(2)(A). These elements are:

(1) that the debtor made a representation;

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

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

(4) that the creditor relied on such representations; and

(5) that the creditor sustained the alleged loss and damage as the proximate result of the representations.

In re Eashai, 167 B.R. 181, 183 (CA9 BAP1994); In re Weiss, 139 B.R. 928, 929 (BC S.D.1992).

In applying the above elements to situations involving credit cards, courts generally follow one of three legal theories. See generally, 2 David G. Epstein et al., Bankruptcy § 7-26 (1992); Chase Manhattan Bank N.A. v. Ford (In re Ford), 186 B.R. 312 (BC N.D.Ga.1995). The first theory commonly is referred to as the "implied representation" theory. Under this theory, the card holder impliedly represents, upon using the credit card, that he or she has both the ability and the intent to pay for the goods or services charged. In re Faulk, 69 B.R. 743, 752 (BC N.D.Ind.1986). Thus, two of the required elements, representation and reliance, are satisfied through implication as opposed to strict proof. This fiction is required, because at the time of the transaction, in most cases, the cardholder and the credit extender have no personal contact.³

In rejecting the implied representation theory, this court adopts the analysis of In re Ford, 186 B.R. 312, 317 (BC N.D.Ga.1995).

Without doubt, the implied representation doctrine solves the problem of fitting credit card transactions within the section 523(a)(2)(A) criteria. However, the employment of such a fiction breeds its own series of concerns, the majority of which arise from the ability-implying prong of the doctrine. First, to the extent that it makes each card user an absolute guarantor of his ability to pay, the doctrine offends the balance of bankruptcy policy struck by section 523. Second, inferring a guarantee of ability runs afoul of consumer practice and the natural course of events in the marketplace. Third, using such a series of presumptions gives card-issuing creditors an unfair advantage over normal creditors, who have to establish each and every element of fraud before a court will consider their claims non-dischargeable. Lastly, and most importantly, by constructing a separate implied representation of ability, the doctrine suggests that a breach of that duty, in and of itself, will present sufficient grounds for denying a debtor his discharge. Faced with it inherent problems, pro-creditor orientation and risks of misapplication, a majority of courts nonetheless have adopted the implied representation theory as the rule for credit card non-dischargeability issues. See Citibank (S.D.), N.A. v. Dougherty (In re Dougherty), 84 B.R. 653, 655-56 (9th Cir. BAP 1988) (noting the majority view).

Some courts, in rejecting the "implied representation" theory, refuse to imply "actual fraud" based solely on the insolvency of the debtor. See In re Hiemer, 184 B.R. 345, 348 (BC Neb.1995). This inference presents creditors with a significant advantage in bankruptcy. It has the effect of making all debts of this nature non-dischargeable, because nearly all debtors are insolvent to some degree when a Chapter 7 bankruptcy case is filed. Id.

The second theory, known as the "assumption of the risk" theory, holds that the cardholder, merely by using the credit card, does not make any representations to the issuer. Rather, under this theory, the charges are excepted from discharge only if the cardholder continues to use the credit card after the issuer unequivocally and unconditionally revokes the cardholder's right to possess and use the credit card, and communicates such revocation to the cardholder. First Nat'l Bank of Mobile v. Roddenberry, 701 F.2d 927, 932-33 (CA11 1983).⁴ The rationale underlying this theory is that the issuer assumes the risk that the cardholder will incur debts he or she cannot repay. Id.; see also In re Dougherty, 84 B.R. 653, 656 (CA9 BAP1988).⁵

As with the "implied representation" theory, the "assumption of the risk" theory also has met criticism. Courts rejecting this theory note that the creditor is placed in a virtually impossible position with respect to charges incurred prior to the revocation of charging privileges. In re Dougherty, 84 B.R. at 656, 657. During the pre-revocation period, all charges would be discharged regardless of the debtor's intent, thereby leaving the creditor with little or no recourse even under the most egregious of situations. The focus should not be on the conduct of the "improvident creditor" but on a fundamental tenet of bankruptcy — the discharge and fresh start are intended for the honest, but unfortunate debtor. Local Loan Co. v. Hunt, 292 U.S. 234, 244, 54 S.Ct. 695, 699, 78 L.Ed. 1230 (1934); Grogan v. Garner, 498 U.S. 279, 286-87, 111 S.Ct. 654, 659, 112 L.Ed.2d 755 (1991).

The third theory, known as the "totality of the circumstances" theory, is set out and adopted in In re Faulk, 69 B.R. 743, 757 (BC N.D.Ind.1986). Under this theory, a court may infer the existence of the debtor's intent not to pay if the facts and circumstances of a particular case present a picture of deceptive conduct by the debtor. Id. at 755. This theory is similar to the "assumption of the risk" theory in that any charges made after the issuer communicates the revocation of the card privileges will be...