Rembert, In re

• Citation: 141 F.3d 277
• Decision Date: 29 May 1998
• Docket Number: No. 96-2293,96-2293
• Parties: , Bankr. L. Rep. P 77,666 In re Benethel REMBERT, Debtor. Benethel REMBERT, Appellee, v. AT & T UNIVERSAL CARD SERVICES, INC.; Citibank South Dakota, N.A., Appellants.
• Court: United States Courts of Appeals. United States Court of Appeals (6th Circuit)

Page 277

141 F.3d 277

32 Bankr.Ct.Dec. 531, Bankr. L. Rep. P 77,666

In re Benethel REMBERT, Debtor Benethel REMBERT, Appellee, v. AT & T UNIVERSAL CARD SERVICES, INC.; Citibank South Dakota, N.A., Appellants.

No. 96-2293.

United States Court of Appeals Sixth Circuit.

Argued Oct. 31, 1997.

Decided April 9, 1998.

Rehearing and Suggestion for Rehearing En Banc Denied May 29, 1998. ^*

Adam L. Wiener (argued and briefed), David H. Lewiston, Law Offices of David H. Lewiston, Southfield, MI, for Appellee.

Richardo I. Kilpatrick (argued and briefed), Patrick Casey Coston, Shermeta, Chimko & Kilpatrick, Rochester Hills, MI, for Appellants.

Before: KRUPANSKY, DAUGHTREY, and COLE, Circuit Judges.

COLE, J., delivered the opinion of the court, in which DAUGHTREY, J., joined. KRUPANSKY, J. (pp. 283-284), delivered a separate concurring opinion.

COLE, Circuit Judge.

Appellants AT & T Universal Card Services, Inc. ("AT & T") and Citibank South Dakota, N.A. ("Citibank") appeal the district court's order that reversed a judgment of the bankruptcy court and determined that Appellee Benethel Rembert's debts to Appellants were dischargeable pursuant to 11 U.S.C. § 523(a)(2)(A). For the following reasons, we AFFIRM the decision of the district court.

I.

Appellee Benethel Rembert has worked for Chrysler Motors Corporation as an hourly-wage factory inspector for over twenty-eight years. In 1993, Rembert encountered financial difficulties resulting from an automobile accident, which caused her to miss work for several months. Rembert's financial difficulties were exacerbated when, between 1994 and 1995, her income was reduced by one-third because she was unable to work overtime. During this time, Rembert had an established credit card account with Citibank and opened two separate credit card accounts with AT & T.

Rembert's financial woes continued. Between June 1994 and January 1995, Rembert incurred gambling losses of between $18,000 and $24,000, primarily at the Windsor Casino in Ontario, Canada. To finance her gambling, she withdrew thousands of dollars in cash advances from automated teller machines at the casino on her credit card accounts, including those with Citibank and AT & T. As a result of the heavy debts she had incurred by virtue of these withdrawals, Rembert obtained a second mortgage on her home in November 1994, in the amount of $28,000. Rembert used a significant portion of the loan proceeds to pay her credit card debts; on November 14, 1994, Rembert completely paid her Citibank balance of $5,936, and also paid a $3,051.86 balance on one of her AT & T accounts.

Despite her mounting losses and the second mortgage on her home, Rembert continued to gamble and withdraw cash advances. By January 1995, Rembert again owed substantial amounts on her Citibank and AT & T accounts. During that time, Rembert made additional payments of approximately $2000 to Citibank and approximately $1500 to AT & T.

On April 20, 1995, Rembert filed a petition for relief under Chapter 7 of the Bankruptcy Code, 11 U.S.C. § 701, et seq. Thereafter, Citibank and AT & T initiated adversary proceedings against her, seeking a determination that Rembert's debts to them were nondischargeable under 11 U.S.C. § 523(a)(2)(A). The two adversary proceedings were consolidated and tried together in the bankruptcy court.

At trial, Rembert testified that at the time she was obtaining cash advances for gambling, she believed that she would be able to win enough money to repay her credit card debts. There was no evidence indicating that she did not intend to repay the cash advances from Citibank and AT & T. Notwithstanding, the bankruptcy court found that Citibank and AT & T had established that, at the time Rembert obtained the cash advances, she intended to defraud Citibank and AT & T in connection with these debts. Accordingly, the bankruptcy court determined these debts to be nondischargeable under § 523(a)(2)(A). The bankruptcy court based its finding of fraudulent intent on an objective analysis of both Rembert's intent and ability to repay, concluding that Rembert: (1) did not intend to repay the debt; and (2) had reason to know that she would not be able to repay it. ¹ In addition to determining that the debts were nondischargeable, the bankruptcy court entered judgment in favor of Citibank and AT & T in the amount of $6299.71 and $5323.77, respectively.

The district court reversed, finding that the bankruptcy court clearly erred because Citibank and AT & T had failed to establish that Rembert had the requisite fraudulent intent under § 523(a)(2)(A) at the time she obtained cash advances. Citibank and AT & T have timely appealed the judgment of the district court.

II.

"We review a bankruptcy appeal differently than a typical appeal from the district court. The bankruptcy court makes initial findings of fact and conclusions of law. The district court then reviews the bankruptcy court's findings of fact for clear error and the bankruptcy court's conclusions of law de novo." Wesbanco Bank Barnesville v. Rafoth (In re Baker & Getty Fin. Servs. Inc.), 106 F.3d 1255, 1259 (6th Cir.) (citing Bankr.Rule 8013), cert. denied, --- U.S. ----, 118 S.Ct. 65, 139 L.Ed.2d 27 (1997). We in turn review the bankruptcy court's findings of fact for clear error and the district court's legal conclusions de novo. See id. (citing First National Bank v. Rafoth (In re Baker & Getty Fin. Servs., Inc.), 974 F.2d 712, 717 (6th Cir.1992)). "A factual finding will only be clearly erroneous when, although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed." United States v. Ayen, 997 F.2d 1150, 1152 (6th Cir.1993) (citations and quotation omitted).

III.

Citibank and AT & T contend that Rembert's debts to them should have been excepted from discharge under § 523(a)(2)(A). That provision of the bankruptcy code 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 any 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.

In order to except a debt from discharge under § 523(a)(2)(A), a creditor must prove the following elements: (1) the debtor obtained money through a material misrepresentation that, at the time, the debtor knew was false or made with gross recklessness as to its truth; (2) the debtor intended to deceive the creditor; (3) the creditor justifiably ² relied on the false representation; and (4) its reliance was the proximate cause of loss. See Longo v. McLaren (In re McLaren ), 3 F.3d 958, 961 (6th Cir.1993). In order to except a debt from discharge, a creditor must prove each of these elements by a preponderance of the evidence. See Grogan v. Garner, 498 U.S. 279, 291, 111 S.Ct. 654, 661, 112 L.Ed.2d 755 (1991). Further, exceptions to discharge are to be strictly construed against the creditor. See Manufacturer's Hanover Trust v. Ward (In re Ward ), 857 F.2d 1082, 1083 (6th Cir.1988).

The focus in the present case is on the first two elements of the McLaren test: material misrepresentation and intent to defraud. Whether a debtor possessed an intent to defraud a creditor within the scope of § 523(a)(2)(A) is measured by a subjective standard, see Field v. Mans, 516 U.S. 59, 70-72, 116 S.Ct. 437, 444, 133 L.Ed.2d 351 (1995); thus, we must determine whether Rembert had a subjective fraudulent intent, based on her representations to Citibank and AT & T. In so determining, we first must consider the nature of those representations.

The use of a credit card represents either an actual or implied intent to repay the debt incurred. See, e.g., Chevy Chase Bank, FSB 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); The GM Card v. Cox (In re Cox ), 182 B.R. 626, 628 (Bankr.D.Mass.1995). Subject to more debate, however, is the issue of whether the debtor's representation includes a representation that she has an ability to repay the debt. Compare Anastas v. American Savings Bank (In re Anastas ), 94 F.3d 1280, 1287 (9th Cir.1996) (the representation made by the card holder in a credit card transaction is not that he has an ability to repay the debt), and AT & T Universal Card Services Corp. v. Feld (In re Feld), 203 B.R. 360, 367 (Bankr.E.D.Pa.1996) ("We therefore reject those cases that measure a debtor's intention to repay by her ability to pay."), with Mercantile Bank v. Hoyle (In re Hoyle), 183 B.R. 635, 638 (Bankr.D.Kan.1995) (debtor implied that he had ability to repay when he took out cash advances) and Bank One Columbus, N.A. v. McDonald (In re McDonald ), 177 B.R. 212, 216 (Bankr.E.D.Pa.1994) (the act of using a credit card carries the implied representation that the debtor has the ability to repay the debt).

We believe that "the representation made by the cardholder in a credit card transaction is not that he has an ability to repay the debt; it is that he has an intention to repay." Anastas, 94 F.3d at 1287. To measure a debtor's intention to repay by her ability to do so, without more, would be contrary to one of the main reasons consumers use credit cards: because they often lack the ability to pay in full at the time they desire credit. See Feld, 203 B.R. at 368 (citing Briese, 196 B.R. at 448). Further, the language of § 523(a)(2)(A) expressly prohibits using a "statement respecting the debtor's or an insider's financial condition" as a basis for fraud. As noted by the Ninth Circuit,

the focus should not be on whether the debtor was hopelessly insolvent at the time he made the credit card charges. A person on the verge of bankruptcy may have been brought to that...