Cite as: 196 B.R. 440
Chase Bank, FSB, Plaintiff, v.
David M. Briese and Noreen K. Briese, Defendants
(In re David M. Briese and Noreen K. Briese, Debtors)
Bankruptcy Case No. 95-10989-7, Adv. Case. No. A95-1116-7
United States Bankruptcy Court
W.D. Wisconsin, Eau Claire Division
May 6, 1996
Randi L. Osberg, Garvey, Anderson, Johnson, Gabler &
Geraci, Eau Claire, WI, for plaintiff.
James T. Remington, New Richmond, WI, for defendants.
Thomas S. Utschig, United States Bankruptcy Judge.
MEMORANDUM OPINION, FINDINGS OF FACT,
AND CONCLUSIONS OF LAW
On March 4, 1996, the Court held a trial on the plaintiff's complaint to determine the
dischargeability of a debt under 11 U.S.C. § 523(a)(2)(A). The plaintiff, Chevy Chase
Bank, FSB, is an issuer of credit cards, and seeks to except from discharge its claim on a
card issued to the debtors, David and Noreen Briese. The plaintiff contends that the debt
should be determined nondischargeable on the grounds that the debtors falsely represented
their intent to pay for a number of cash advances Mrs. Briese obtained with the card. The
debtors are represented by James T. Remington, while the plaintiff is represented by Randi
Lured by the availability of easy credit and the promise of easy money, the debtors in
this case found themselves trapped between a modern-day version of Scylla and Charybdis,
the mythical sea monsters encountered by Homer's Odysseus.(1)
For these debtors, such monstrous images undoubtedly personify both the consumer credit
industry and legalized gambling. The growth recorded over recent years by these twin
titans has been phenomenal,(2) and as they have
grown they have become intertwined. Indeed, this case is a painful demonstration of how
insidiously easy it is to utilize credit cards to finance one's turn at the tables.(3) The question for the Court is whether the credit
card debts Mrs. Briese incurred to fuel her gambling fever were obtained in a manner
proscribed by 11 U.S.C. § 523(a)(2)(A).
The facts are as follows. David Briese is a machinist, and has worked for the same
employer for a number of years. He is a high school graduate and completed the two years
of vocational school necessary for his position. He earns approximately $30,000.00 per
year. Noreen, his wife of almost 14 years, works part-time as a nurse's aide and earns
about $16,000.00 per year. They have five children, ranging in ages from three to 13. In
the past, Mr. Briese paid all the household expenses from his salary. Mrs. Briese's
paycheck was to use as she chose. Unfortunately for all involved, she chose to use it to
fund her gambling habit.(4)
If Mrs. Briese had funnelled only her own money into the "one-armed bandits"
and other games of chance, the debtors likely would not be before this Court. However, she
also obtained numerous cash advances on a variety of credit cards, virtually all of which
she spent at the casino. By the fall of 1994, she had incurred approximately $30,000.00 in
unsecured credit card debt.(5) She was paying
approximately $800.00 per month, or well over half of her gross monthly paycheck, simply
to make the minimum payments on these debts. When she reached the credit ceiling on a
particular card, she would destroy it; her testimony was that she had destroyed most of
her credit cards long before the bankruptcy filing. It does not appear that she ever went
over her credit limit on any card, and she was in fact current on her credit card payments
as of the petition date.
According to Michael J. Miele, a representative of the plaintiff, the relationship
between the parties began that fateful fall of 1994. In September of that year, Chevy
Chase Bank requested credit information from Equifax, one of the nation's largest
providers of credit reporting services. Like virtually all credit card companies, the
plaintiff desired to expand its customer base. What it sought from Equifax was a listing
of potential customers who fit the desired profile and fell within a certain range of
credit history "scores." Essentially, the plaintiff wanted likely targets for
its credit card solicitations. The debtors' names were among the thousands forwarded to
the plaintiff from Equifax.
Thereafter, the plaintiff sent the debtors a "pre-approved" credit card
solicitation promising them a credit line "up to $10,000.00." Since Mrs. Briese
had "maxed out" nearly all of her other cards, she and her husband signed the
form and returned it to the plaintiff. Thereafter, the plaintiff conducted a credit check
on the debtors. The testimony of Mr. Miele was most instructive in this regard. He
acknowledged that the plaintiff knew the debtors had a debt-to-income ratio of 66% (in
other words, their unsecured debts exceeded 2/3 of their annual income). The credit report
obtained by the plaintiff also provided numerous details regarding the debtors' past
credit history, including their history of timely payment and the fact that they typically
carried large outstanding balances on their credit cards.
After conducting this credit check, the plaintiff issued a credit card to the debtors
with a credit line of $11,500.00.(6) Initially, the
plaintiff placed a $3,450.00 cap on cash advances the debtors could receive, although this
limit was ultimately raised to $11,500.00 as well.(7)
Mrs. Briese testified that she was "surprised" to receive such a generous credit
allotment, especially since several other lenders had only recently rejected her
applications. However, she was nonetheless quite happy to get the card, as she was just
entering the most destructive phase of her gambling addiction and never had enough money
to spend. During this period of time, it seems she spent every available moment, and every
available dollar, at the casino.
Mrs. Briese's work schedule was ideally suited to her addiction. As a nurse's aide, she
would work just five days in a two-week period. Her youngest child was in day care and her
older children were in school. Consequently, without anyone to monitor her activities she
could gamble away her days off. Prior to the fall of 1994, she worked a shift which ended
at about two o'clock in the afternoon; as a result, she could not visit the casino on the
days she worked because she had to be home to greet her husband and children. That fall,
however, she switched to a shift that ended at about eleven o'clock at night. Since her
husband and children were asleep she often went gambling after work, sometimes returning
home at dawn. Apparently, her credit cards financed these late-night escapades. In its
rush to increase profits, the plaintiff gave her yet another opportunity to wager more
borrowed money at the same time her schedule granted her the time necessary to do so.
Given the frequency of her trips to the casino, it is perhaps unsurprising that Mrs.
Briese intermittently beat the odds and actually won sizeable sums of money. In the years
prior to 1995, this had never amounted to more than $5,400.00; however, in February of
1995 she won two jackpots totalling approximately $33,000.00. She testified that it was
only after she won these jackpots that she actually calculated her entire credit
card debt and realized how deep in the hole she really was. After payment of income taxes,
the debtors paid a couple of unsecured creditors and made a few improvements to their
home. This left approximately $15,000.00, which Mrs. Briese took to the casino in an
unproductive attempt to make enough to pay off all her credit card debt.(8)
After Mrs. Briese lost her "winnings," the debtors decided to file bankruptcy
because of their large credit card bills, on which they could make little more than
minimum payments. They filed for relief under chapter 7 of the bankruptcy code and
scheduled a number of credit card companies, including the plaintiff, among their
unsecured creditors. The plaintiff now seeks to have its claim against them declared
nondischargeable under 11 U.S.C. § 523(a)(2)(A), contending that by her use of the credit
card in the months prior to the bankruptcy filing, Mrs. Briese obtained credit totalling
$7,811.05 through "false pretenses, a false representation, or actual fraud."
The purpose of the bankruptcy code is to permit debtors to "reorganize their
financial affairs, make peace with their creditors, and enjoy 'a new opportunity in life
with a clear field for future effort, unhampered by the pressure and discouragement of
pre-existing debt.'" Grogan v. Garner, 498 U.S. 279, 286, 111 S. Ct. 654, 659,
112 L. Ed. 2d 755 (1991) (citations omitted). However, this fresh start is available only
to the "honest but unfortunate debtor." Id., 498 U.S. at 287, 111 S. Ct.
at 659. Section 523(a)(2)(A) is among those provisions of the bankruptcy code which sift
the chaff from the wheat, so to speak -- it prohibits the discharge of those debts
incurred through fraud, thus limiting the fresh start of the dishonest debtor. However,
like all exceptions to discharge, it is to be narrowly construed in favor of the debtor. Meyer
v. Rigdon, 36 F.3d 1375, 1385 (7th Cir. 1994); Matter of Ford, 186 B.R. 312,
316 (Bankr. N.D. Ga. 1995); In re Friend, 156 B.R. 257, 260 (Bankr. W.D. Mo. 1995);
3 Lawrence P. King, et al., Collier on Bankruptcy, ¶ 523.05C, at 523-20 (15th ed.
The creditor has the burden of establishing nondischargeability by a preponderance of
the evidence. Grogan, 498 U.S. at 287; 111 S. Ct. at 659. The Seventh Circuit has
articulated the elements of an action under § 523(a)(2)(A) as follows:
[t]o succeed on a claim that a debt is nondischargeable under section
523(a)(2)(A), a creditor must prove three elements. First, the creditor must prove that
the debtor obtained the money through representations which the debtor either knew to be
false or made with such reckless disregard for the truth as to constitute willful
misrepresentation. Carini v. Matera, 592 F.2d 378, 380 (7th Cir. 1979). The
creditor also must prove that the debtor possessed scienter, i.e, an intent to deceive. Gabellini
v. Rega, 724 F.2d 579, 581 (7th Cir. 1984). Finally, the creditor must show that it
actually relied on the false representation, and that its reliance was reasonable.
In re Kimzey, 761 F.2d 421, 423-24 (7th Cir. 1985). Thus, a
creditor must combine three ingredients to succeed under § 523(a)(2)(A) -- falsity,
fraudulent intent, and reliance. Matter of Mayer, 51 F.3d 670, 674 (7th Cir. 1995).(9)
Bankruptcy courts have long struggled with application of these requirements to cases
involving the alleged fraudulent use of a credit card. The initial conceptual problem is
that there is no "face-to-face" contact between the credit card issuer and the
debtor. For example, in this case the debtors never met or even spoke with anyone
associated with the plaintiff. Further, when Mrs. Briese used the card, she presented the
card to the "bank" at the casino, not the plaintiff.(10)
As "the cardholder and [card issuer] have no personal contact . . . the cardholder
cannot be said to have directly represented anything to the issuing bank [and] the bank
has nothing upon which to base an act of reliance." Ford, 186 B.R. at 317; see
also In re Branch, 158 B.R. 475, 477 (Bankr. W.D. Mo. 1993) ("[T]he
[cardholder] makes no explicit representation to anyone, certainly not to the third party
issuer who is far removed, at least geographically, from the purchase transaction.").
In response to this perceived conceptual dilemma, courts "have come to modify the
way in which the elements of section 523(a)(2)(A) proof are met in credit card
situations." In re Hinman, 120 B.R. 1018, 1021 (Bankr. D.N.D. 1990). Almost
without considering whether this "modification" of the law was appropriate
absent congressional action, in the past decade and a half courts have crafted several
theories to support nondischargeability judgments in credit card cases. The majority of
these courts have resolved the "problem" by adopting what has been called the
"implied representation" theory. Under this approach, the use of a credit card
is an implied representation that the holder has both the intent and the ability to pay
the issuer for the charged purchases and advances. See In re Murphy, 190
B.R. 327, 331 (Bankr. N.D. Ill. 1995). As one court stated:
the act of using the 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 . . . [t]hus, the debtor who is
without ability to pay at the time a credit card purchase is made or a cash advance is
obtained and knows he does not have the ability or is reckless about whether he has the
ability, has made the required false representations and has the required intent to
deceive the creditor.
Branch, 158 B.R. at 477. [Emphasis added].(11)
Another view, the so-called "assumption of the risk" approach, is based upon
the decision in First Nat'l Bank of Mobile v. Roddenberry, 701 F.2d 927 (11th Cir.
1983). This theory presupposes that credit card transactions inherently possess an element
of risk -- namely, that the cardholder will exceed the card's credit limit. Given that the
issuer voluntarily assumes this risk, there is no basis to deny discharge of those debts
incurred before the issuer notifies the cardholder that it is revoking the
cardholder's right to use the card. Id. at 932. Charges made thereafter constitute
debts created by "false pretenses or false representations" because such
purchases amount to an "affirmative representation that one is entitled to possess
and use the card." Id.; see also In re Eashai, 167 B.R. 181, 184
(9th Cir. BAP 1994).(12)
Yet another line of cases purportedly examines the "totality of the
circumstances" to determine whether the debt should be discharged. A leading case
which discusses this concept is In re Dougherty, 84 B.R. 653 (9th Cir. BAP 1988).
Under this approach, the court should apply a list of factors to the debtor's situation
and, in essence, mix and match to see if the debt should be discharged. The list of
factors is commonly expressed as follows:
1. The length of time between the charges made and the filing of bankruptcy;
2. Whether or not an attorney was 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;
6. Whether the charges were above the credit limit of the account;
7. Whether the debtor made 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;
12. Whether the purchases were made for luxuries or necessities.
84 B.R. at 657; see also In re Troutman, 170 B.R. 156,
157 (Bankr. D. Neb. 1994); In re Eashai, 167 B.R. 181 (9th Cir. BAP 1994); In re
Holmes, 169 B.R. 186 (Bankr. W.D. Mo. 1994); In re Orndorff, 162 B.R. 886
(Bankr. N.D. Okla. 1994).(13)
Though their rhetoric may indicate otherwise, in reality there is a good deal of
overlap between these theories. A number of the "implied representation" courts
rely on the "twelve factors" of Dougherty to ascertain the debtor's
intent. See Holmes, 169 B.R. at 190; Friend, 156 B.R. at 261.
Similarly, the "totality of the circumstances" courts often adopt the
"assumption of the risk" concept to the extent the charges in question were
incurred after card privileges were revoked. See Troutman, 170 B.R.
at 157. Finally, the "assumption of the risk" courts have adopted an analysis of
the phrase "actual fraud" in § 523(a)(2)(A) which ignores the Roddenberry
holding and essentially adopts the "implied representation" theory. See Ford,
186 B.R. at 319. These shifting boundaries have led some to contend that the courts are
waging nothing more than a war of words over distinctions which have no substantive
difference. See, e.g., Drew Frackowiak, The Fallacy of Conflicting Theories For
Analyzing Credit Card Fraud Under 11 USC Section 523(a)(2)(A), 4 J. Bankr. L. &
Prac. 641, 652-53 (September/October 1995).
Regardless, navigating the uncertain waters of credit card fraud with these conceptual
models as a compass is a tricky proposition. In recent months courts have recognized the
judicial conflict on the issue and are in the process of re-assessing these various
theories, in part because of the Supreme Court's decision in Field v. Mans, __ U.S.
__, 116 S. Ct. 437, 133 L. Ed. 2d 351 (1995). The emerging consensus appears to be that
none of the approaches fully explains or resolves the issue of a debtor's fraudulent use
(or abuse) of a credit card. See, e.g., In re Alvi, 191 B.R. 724 (Bankr.
N.D. Ill. 1996); In Re Murphy, 190 B.R. 327 (Bankr. N.D. Ill. 1995); Matter of
Ford, 186 B.R. 312 (Bankr. N.D. Ga. 1995); In re Cox, 182 B.R. 626 (Bankr. D.
There are several troubling aspects to each approach. One problem faced by the
"implied representation" school and, to a lesser extent, the "totality of
the circumstances" cases as well, is the risk that the debtor in essence becomes the
"guarantor" of his or her financial condition. For example, the leading
proponent of the "twelve factors" analysis, the Ninth Circuit Bankruptcy
Appellate Panel, cautions:
[c]are must be taken to stop short of a rule that would make every
desperate, financially strapped debtor a guarantor of his ability to repay, on pain of
nondischargeability. Such a rule would unduly expand the "actual fraud"
discharge exception by attenuating the intent requirement. A substantial number of
bankruptcy debtors incur debts with hopes of repaying them that could be considered
unrealistic in hindsight. This by itself does not constitute fraudulent conduct warranting
Eashai, 167 B.R. at 185 (quoting In re Karelin,
109 B.R. 943, 947-48 (9th Cir. BAP 1990)). While the Eashai court believed that its
"totality of the circumstances" test was the most appropriate, it also
acknowledged the chief problem with the approach -- that courts could come to treat the
factors as a "singular formula" or a litmus test for fraud, rather than
nonexclusive factual considerations. 167 B.R. at 184.
To establish a system which makes the debtor an absolute guarantor of his or her
ability to repay "offends the balance of bankruptcy policy struck by section
523." Ford, 186 B.R. at 317. Most courts appear to examine a debtor's
"ability" to repay on an objective basis, focusing on "the debtor's
insolvency in either the bankruptcy sense (excess of liabilities over assets) or the
equity sense (inability to pay debts as they mature)." Cox, 182 B.R. at 633.
However, this approach does not consider the reality of the consumer credit marketplace,
where people use credit cards precisely because they do not have a present ability to
pay. Ford, 186 B.R. at 317; see also In re Carpenter, 53 B.R.
724, 728 (Bankr. N.D. Ga. 1985). It is exactly this reality which makes the credit card
industry so profitable, and it is why credit card companies often advertise their cards as
just the thing to use in an "emergency." See Friend, 156 B.R. at
261 n.2 (credit card and related checks for "expenses that hit you out of
nowhere"). Further, although the minimum monthly payments are often the only relevant
concern for cash-strapped consumers, courts rarely concern themselves with the debtor's
ability to make those payments. Cox, 182 B.R. at 633.
Another problem is that the use of these implied representations gives credit card
creditors an advantage over normal creditors, who bear the burden of establishing each and
every element of a nondischargeability claim. Ford, 186 B.R. at 317; see also
In re Faulk, 69 B.R. 743, 753 (Bankr. N.D. Ind. 1986). For example, according to
one court the "implied representations" of ability and intent to repay, together
with evidence regarding the debtor's purported "knowledge or recklessness" is
sufficient to "surmount the hurdle" of essential elements of a § 523(a)(2)(A)
claim. Branch, 158 B.R. at 477. Nothing in the bankruptcy code authorizes such
preferential treatment for credit card companies. Debtors do not commit fraud just by
using their credit cards, even when they are heavily in debt. In re Bonnifield, 154
B.R. 743, 745 (Bankr. N.D. Cal. 1993). To permit credit card plaintiffs to benefit from
"implications" is to engage in impermissible burden-shifting.(14)
The "assumption of the risk" theory is also unsatisfactory, primarily because
dishonest debtors may manipulate its mechanical distinction between debts incurred before
and after credit privileges are revoked. Eashai, 167 B.R. at 184. It is quite
possible that a debtor might intentionally defraud a credit card company, yet not exceed
his credit limit or otherwise engage in behavior which would result in the revocation of
card privileges. While the bankruptcy code is to be construed liberally in favor of the
debtor, it is also to be fair to creditors. The creditor does not "assume the
risk" that the debtor is dishonest. Rather, the credit card transaction (like any
other lending relationship) is premised upon the notion that both parties will act in good
faith. Thus, the debtor is expected to make "bona fide" use of the card and not
engage in fraud. Id. at 185; see also Cox, 182 B.R. at 634
(assumption of risk theory is "too judgmental"); In re Shanahan, 151 B.R.
44, 47 (Bankr. W.D.N.Y. 1993) (creditor does not assume risk of fraud).
Given the growing dissatisfaction with the current models for ascertaining the
nondischargeability of credit card debt, the question arises whether there is an
acceptable alternative. In Field v. Mans, supra, the Supreme Court
determined that a creditor must prove "justifiable reliance" upon the debtor's
fraudulent representation to succeed in an action under § 523(a)(2)(A). In the course of
its discussion, the court stated that "[i]t is well established that '[w]here
Congress uses terms that have accumulated settled meaning under . . . the common law, a
court must infer, unless the statute otherwise dictates, that Congress means to
incorporate the established meaning of those terms.'" ___ U.S. at ___, 116 S. Ct. at
443, 133 L. Ed. 2d at 361 (citations omitted). In drafting the 1978 bankruptcy code,
Congress added "actual fraud" as an exception to discharge, and the court should
look to the meaning of the phrase at common law when determining its application in the
context of a claim under § 523(a)(2)(A). Id. at ___, 116 S. Ct. at 443-44, 133 L.
Ed. 2d at 361-62.(15)
Field thus neatly solves the struggle over conceptualizing credit card fraud.
Quite simply, it directs the focus to the common law of fraud. At common law, a promise of
future performance or intention is actionable as fraud if at the time the statement was
made, the debtor never actually intended to honor the statement. See Bay State
Milling Co. v. Martin, 916 F.2d 1221 (7th Cir. 1990); Hartwig v. Bitter, 29
Wis. 2d 653, 139 N.W.2d 644 (1966); Hoffman v. Red Owl Stores, Inc., 26 Wis. 2d
683, 133 N.W.2d 267 (1965). See also In re Murphy, 190 B.R. 327, 332 (Bankr.
N.D. Ill. 1995); Restatement (Second) of Torts (1976) § 530(1) ("A representation of
the maker's own intention to do or not to do a particular thing is fraudulent if he does
not have that intention.").(16)
As to the ongoing concern regarding the lack of "face-to-face" contact
between the debtor and the card issuer, it is unclear why this issue is such a conceptual
hurdle. Although the debtor may not speak directly to the credit card issuer when making a
purchase or obtaining a cash advance, there is little doubt that the debtor makes a
representation -- namely, the promise to pay for the credit advanced. One court recently
expounded upon the broad scope of the concept of a "representation" as follows:
"[r]epresentation" includes "statement," but can
include other things as well. A "statement" means "a detailed or
explicit communication," The Random House College Dictionary (rev. ed., Random
House, Inc., 1975) (emphasis added), or "a formal written or oral
account," The New Shorter Oxford English Dictionary (Clarendon Press: Oxford, 1993)
(emphasis added). A "representation" may include "an implication
or statement," or any "act" which accomplishes "presentation to the
mind, as of an idea," The Random House College Dictionary, supra (emphasis
added), or even "symbolic action," The New Shorter Oxford English Dictionary, supra.
In re Peterson, 182 B.R. 877, 880 (Bankr. N.D. Okla. 1995). In
Wisconsin, a person need not make an oral or written misrepresentation to be guilty of
fraudulent conduct; such representations may also be made by acts or conduct. Scandrett
v. Greenhouse, 244 Wis. 108, 11 N.W.2d 510 (1943). The Restatement (Second) of Torts
also defines "representation" broadly. See Restatement (Second) of Torts
§ 525 cmt. b (misrepresentation includes not only written or spoken words "but also
any other conduct that amounts to an assertion not in accordance with the truth").
The combination of this definition of "representation" with the common law
regarding fraudulent statements of future performance provides a satisfactory vehicle for
dealing with the dischargeability of credit card debts. There is no longer a need to craft
"legal fictions" under which the debtor purportedly makes various
representations regarding ability or intent to pay. Nor is there the risk that the debtor
becomes the guarantor of his or her financial condition. And finally, there is no
inappropriate judicial favoritism of credit card issuers over other creditors. Although a
representation is inherent in the transaction, the credit card company must still prove all
of the remaining elements of § 523(a)(2)(A) -- falsity, fraudulent intent, and reliance
-- without assistance in surmounting these "hurdles."
This approach to fraudulent representations can be examined by reference to Popeye's
good friend Wimpy, who always promised, "I'll gladly pay you Tuesday" for a
hamburger today. Wimpy is not guilty of fraud just because on Tuesday he doesn't have the
money, or even if he was hopelessly insolvent when he made the promise. The common law
notion of actual fraud requires that he have acted with an intent to deceive when he made
the promise to pay; i.e., that when he told Popeye he would pay him back, he never
intended to actually fork over the cash or otherwise acted recklessly. The situation is
the same even if Popeye gives Wimpy a credit card to use in making the purchase. The act
of using the card constitutes a "representation" or promise regarding Wimpy's
future performance. Murphy, 190 B.R. at 332; Peterson, 182 B.R. at 880; see
also Restatement (Second) of Torts § 525 cmt. f (a promise as to the future course of
events "may justifiably be interpreted as a statement that the maker knows of nothing
which will make the fulfillment of his prediction or promise impossible or
improbable"). The same is true in the present case. By using their credit card, the
debtors made a promise of future performance -- they "represented" to the
plaintiff that they would pay those charges in full. That promise is not actionable as
fraud -- or excepted from discharge under § 523(a)(2)(A) -- unless the plaintiff can
prove that they acted with an intent to deceive when they incurred the charges and made
the representation. Murphy, 190 B.R. at 332.
It is of course difficult, if not impossible, for a plaintiff to present direct
evidence of a debtor's intent to deceive. Rare indeed is the case in which the debtor
broadcasts his intent to friends and neighbors, or writes a letter to his mother
confessing the details of his plot to defraud his creditors. As a result, courts may
legitimately utilize circumstantial evidence to ascertain the debtor's intent. The
question is whether the Court should judge the debtor's intent on an objective or
subjective standard. Under an objective standard, the court must inquire into the
"reasonableness" of the debtor's representation, while a subjective standard
focuses upon the debtor's state of mind at the time of the representation. Murphy,
190 B.R. at 332.
As Murphy indicates, many courts have blurred the lines between these standards,
switching intermittently between objective and subjective examinations in the course of a
single opinion. Id. at 333; see also In re Berz, 173 B.R. 159, 163
(Bankr. N.D. Ill. 1994) (The court shifts from requiring that "debtor knew full
well" his statements were fraudulent to whether "debtor had a reasonable belief
in his intent and ability to repay the debt."). Others have clung solely to an
objective approach, condemning debtors who "knew or should have known" they
lacked the ability to repay the debts in question. See In re Rouse, 156 B.R.
314, 316 (Bankr. M.D. Fla. 1993) (debtors had "no realistic basis" to believe
they could pay off their credit card debt); In re Stokes, 155 B.R. 785, 787 (Bankr.
M.D. Fla. 1993) (a "realistic assessment" left no doubt debtors could not
honestly believe they could have paid their debts); In re Sparks, 154 B.R. 766, 768
(Bankr. W.D. Ala. 1993) (debtor "knew or should have known" he couldn't pay his
credit card debts).
In many instances, however, there is likely to be quite a gulf between what the
proverbial "reasonably prudent person" might consider appropriate and the actual
mental state of a debtor teetering on the brink of bankruptcy. "Human experience
tells us debtors can be unreasonably optimistic despite their financial
circumstances." Cox, 182 B.R. at 635; see also Eashai, 167 B.R.
at 185 (many debtors incur debts with hopes of repayment which are "unrealistic in
hindsight"). The Seventh Circuit has held that a debt may be excepted from discharge
under § 523(a)(2)(A) only when the debtor makes a statement he "either knew to be
false or made with such reckless disregard for the truth as to constitute willful
misrepresentation." Mayer, 51 F.3d at 675; see also In the Matter of
Sheridan, 57 F.3d 627, 635 (7th Cir. 1995). It is problematic to tie this inquiry to
an objective standard because
[a] reasonably prudent person would not rely almost entirely upon
gambling and speculative investments as a basis for a promise to satisfy short term credit
obligations. A reasonable person in the Debtor's circumstances would not have believed
that he could continue to pay substantial credit card debts forever. Such a person would
have realized that sooner or later he would lose enough to render him unable to pay those
debts. But it is less clear that the Debtor had an actual intent to deceive.
Murphy, 190 B.R. at 333. (Emphasis added.)
Again, the answer is provided by reference to the common law principles of "actual
fraud." The Restatement (Second) of Torts § 526 indicates that an objective
"reasonable person" standard is inappropriate when ascertaining fraudulent
intent. One of the comments to § 526 states that the issue is not whether a person
"of ordinary care and intelligence" would have recognized the statement as
false, but whether the person making the statement (in this case the debtor) was
aware of the falsity. See Restatement (Second) of Torts § 526 cmt. d; Murphy,
190 B.R. at 333. Wisconsin law also appears to reject an objective standard. See Volk
v. McCormick, 41 Wis. 2d 654, 659, 165 N.W.2d 185 (1969) (the standard "that in
the exercise of reasonable diligence [the defendant] should have known of the
falsity" is insufficient to constitute a fraudulent misrepresentation). Thus,
although the reasonableness of the debtors' belief as to the truth of their
representations may be circumstantial evidence of their intent, ultimately the issue is
their actual intent and not the objective reasonableness of it. Murphy,
190 B.R. at 333; see also Alvi, 191 B.R. at 733 (objective ability to pay is
not the issue). Hindsight, as they say, has twenty-twenty vision, but that is not the
standard by which debtors are judged. A debtor may honestly, if mistakenly, believe he can
repay a debt without falling prey to the penalties found in § 523(c)(2)(A). Alvi,
191 B.R. at 733.
Of course, even a subjective determination of intent requires an examination of all the
circumstances. Murphy, 190 B.R. at 333. However, the debtor's subsequent failure to
pay is "clearly insufficient" to prove an intent to deceive; this demonstrates
only a breach of contract, not fraud. Id. Mere inability to pay is not the criteria
for determining the debtor's intent, although it may be an "indicia" of
fraudulent intent. Ford, 186 B.R. at 320. Instead, the Court must examine all of
the circumstantial evidence available and formulate a conclusion regarding the debtors'
intent. At this point, the Court could recite Dougherty's twelve factors (or, for
that matter, the ten factors listed in Ford, supra, or the six in Pursley,
158 B.R. at 668), and try to stretch and pull these debtors to fit the canvas of existing
case law. But that the Court will not do. It cannot be doubted that it is often
instructive to know how other courts have considered similar cases, and such insights may
often illuminate the present case. Insight, however, is often lost in rote application of
listed factors when the inquiry should be driven by the evidence at hand. Despite the many
warnings that these factors are "non-exclusive," see Eashai, 167
B.R. at 184, the truth is that by copying such lists courts may limit their investigation
to a review of the items on the list. As a result, the circumstances of the particular
case are clouded, if not ignored outright. Murphy, 190 B.R. at 334; see also
Alvi, 191 B.R. at 733.
The debtors in this case deserve to have their testimony considered in light of their
particular circumstances, not by reference to some chart of how many days it took to incur
the challenged debts or whether they talked to an attorney before they incurred the debt.
All of that may be relevant, and certainly may be considered as circumstantial evidence
from which their intent may be ascertained. However, the Court will not limit the inquiry
to the factors of any "list." The issue is whether the debtors acted with
fraudulent intent, and that involves more than mechanical application of objective
factors. It involves a determination of their credibility. Alvi, 191 B.R. at 734.
In this case, Mrs. Briese received a "pre-approved" credit card from the
plaintiff. She used it to fund her gambling habit. She testified she was unaware of her
overall financial situation until she won nearly $33,000.00 and sat down to calculate her
debts. Only then did she realize the hole she had dug for herself and her family. After
payment of income taxes, a few bills and a few small improvements to their house (a modest
home undoubtedly bursting at the seams given the presence of two adults and five
children), she had $15,000.00 left. In the throes of her addiction, she returned to the
casino looking to ride her "roll" a little longer. Unfortunately, she only added
to her losses, and ultimately found it necessary to file bankruptcy.
The Court finds that she did not act with an intent to deceive the plaintiff when she
obtained the cash advances. The fact that she subsequently lost all that she had won is
not evidence of fraudulent intent; it only evidences the drug-like power of gambling upon
certain people. Mrs. Briese herself testified that she felt she was on a "roll"
because casino employees told her no one had ever won two large pots in 48 hours before.
She testified that she hoped to win enough to pay off her debts. She had won some smaller
jackpots previously, and she did manage to keep making her monthly payments until the
bankruptcy filing. All of this indicates that she had an intent to pay which, although
perhaps not objectively reasonable to the "average" person, was nonetheless
understandable given her mental state.
The Court recognizes the case law which would deny the debtors a discharge in this case
simply because the money was spent gambling. See, e.g., In re Clagg, 150
B.R. 697 (Bankr. C.D. Ill. 1993); In re Vermillion, 136 B.R. 225 (Bankr. W.D. Mo.
1992); In re Bartlett, 128 B.R. 775 (Bankr. W.D. Mo. 1991); In re Karelin,
109 B.R. 943 (9th Cir. BAP 1990). In Clagg, the court recognized that "there
is no basis for treating a debt that arose from legal gambling activities any differently
from other debts legally incurred." 150 B.R. at 698. At the same time, the court
rejected the debtor's hope that he would "win the big one" on the stated grounds
that "[m]ere hope, or unrealistic or speculative sources of income, are
insufficient" to demonstrate an ability to repay. Id. However, under the
common law approach to the issue suggested by Field, it is the debtor's subjective
intent which is critical. Section 523(a)(2)(A) was not intended to deny discharge to
"debtors who made significant, albeit patently unreasonable, financial
miscalculations," nor did Congress single out gambling debts for any particular
punishment. Alvi, 191 B.R. at 734 n.19. A debtor who honestly believes that
gambling will create the necessary income to pay his debts lacks the "scienter"
required for a debt to be nondischargeable on the basis of fraud. Id.; see also
In re Landen, 95 B.R. 826 (Bankr. M.D. Fla. 1989).
In this case, Mrs. Briese had an honest, if questionable and undoubtedly foolish,
belief that she could win enough to pay her debts. She paid her bills and maintained the
minimum payments on her credit cards until the day she filed bankruptcy. She had no
intention of filing bankruptcy when she incurred the charges, and did not even realize the
depths of her problem until she sat down to calculate how much of her casino winnings were
needed to pay off her credit cards. She did not operate in "reckless
indifference" to her financial state. Rather, she acted as many gamblers do -- in
truth, as many consumers do, whether they file bankruptcy or not. She thought she was
better off than she actually was; she miscalculated her financial condition. The simple
fact that many would consider her foolish, or that she made significant "financial
miscalculations," does not make her guilty of fraud. Alvi, 191 B.R. at 734.
Thus, the plaintiff has failed to prove an essential element of its action under §
523(a)(2)(A) -- fraudulent intent -- and the claim must fail.
Additionally, the claim must fail because the plaintiff has failed to demonstrate
justifiable reliance upon the debtors' alleged misrepresentations. The
"representation," of course, is the debtors' promise of future payment inherent
in the use of the credit card. Section 523(a)(2)(A) requires that the plaintiff
demonstrate reliance upon that representation, and the Supreme Court's decision in Field
requires a showing that its reliance was "justifiable." __ U.S. at __, 116 S.
Ct. at 444, 133 L. Ed. 2d at 362. The notion of "justifiable reliance" is to
some extent intentionally vague. Much like the intent requirement, it is a subjective
analysis which examines the particular plaintiff and the circumstances of the case, and
does not judge the plaintiff under a "community standard of conduct." Id.
In this regard, the plaintiff may be justified in relying upon a representation of fact
even though an investigation might have revealed the falsity of the statement; however,
the plaintiff is also
required to use his senses, and cannot recover if he blindly relies
upon a misrepresentation the falsity of which would be patent to him if he had utilized
his opportunity to make a cursory examination or investigation.
Id. (quoting Restatement (Second) of Torts § 541 cmt.
a). The Court must examine all of the facts available to the plaintiff, a large and
sophisticated corporation, and determine whether the plaintiff should have realized that
there might be some problem in extending credit to the debtors in this case. In re
Willis, 190 B.R. 866, 870 (Bankr. W.D. Mo. 1996).
In the present case, there is little likelihood that the plaintiff relied upon any
representation made by the debtors. The plaintiff chose to send a "pre-approved"
solicitation to the debtors because they fit within its desired customer profile. After
receiving their application, it conducted a credit check which revealed their large
outstanding debts, including unsecured credit debts which totalled 66% of their annual
income. The plaintiff knew they made little more than minimum payments; arguably, it knew
that they were financially incapable of making payments any larger than the
minimum amount. The plaintiff relied upon this investigation in extending the debtors a
sizeable credit allotment, and in permitting the continued use of the card. The debtors'
actions or representations were largely irrelevant to the plaintiff's chosen course of
action. Unintentional and wholly immaterial misrepresentations which have no effect on a
creditor's decision are not a bar to discharge. Field, __ U.S. at __, 116 S. Ct. at
442-43, 133 L. Ed. 2d at 360-61.
Further, even presupposing the plaintiff relied upon the debtors' representations,
there is no doubt that its reliance was unjustified. It is clear that the plaintiff made
an examination of the debtors' finances which indicated a high debt load and an inability
to make more than minimum payments. This indicates that the plaintiff knew it was unlikely
the debtors could ever pay a large account balance in full. The plaintiff chose to blindly
ignore those warning signs and proceeded to extend credit to the debtors when, by Mrs.
Briese's own account, other lenders had refused to do so. Field teaches that the
court should examine the plaintiff's individual capacity and "the knowledge which he
has." __ U.S. at __, 116 S. Ct. at 444, 133 L. Ed. 2d at 363. A plaintiff may not
recover for fraud if he ignores a known or obvious risk. Mayer, 51 F.3d at 676. The
plaintiff ignored an obvious risk in extending credit to the debtors, and cannot now claim
to have been "justified" in its reliance upon the debtors' representations. Alvi,
191 B.R. at 731.(17)
In this case, the plaintiff has failed to prove essential elements of an action under
§ 523(a)(2)(A) -- namely, fraudulent intent and reliance. Accordingly, the plaintiff's
complaint is dismissed. Costs are denied to both parties.
This decision shall constitute findings of fact and conclusions of law pursuant to
Bankruptcy Rule 7052 and Rule 52 of the Federal Rules of Civil Procedure.
1. In Homer's Odyssey, the classic Greek tale of a hero
returning home from the battle of Troy, Odysseus and his men must battle numerous monsters
and overcome seemingly insurmountable obstacles in the course of their journey. Scylla, a
multi-headed monster, and Charybdis, a creature whose daily consumption of the sea
apparently created a whirlpool, were among the terrors faced during the voyage. As these
creatures lived upon opposite shores of a very narrow strait, it was virtually impossible
to navigate away from one without falling into the clutches of the other. Hence the
phrase, "trapped between Scylla and Charybdis," wherein one is caught between
two equal difficulties.
2. Legalized gambling has mushroomed in the past fifteen years. Just
ten years ago, only two states -- Nevada and New Jersey -- permitted casinos. Now 27
states authorize such enterprises, often on top of parimutuel racing, dog tracks, and
lotteries. See "America's Gambling Fever," U.S. News. & World
Report, January 15, 1996, at 53. Americans wagered $482 billion in 1994, 85%
of that at casinos. As tourist attractions, casinos rank behind only amusement parks in
total attendance; 146 million people visited the top 50 amusement parks in 1994, compared
to 125 million visitors at casinos, approximately 70 million at baseball games, 24 million
at symphony concerts, and 14 million at NFL games. Id.; see also "No
Dice: The Backlash Against Gambling," Time, April 1, 1996, at 29.
The credit card business has also been incredibly profitable, leading to increased
competition and the proliferation of "plastic." For the first time in history,
consumers owe more than $1 trillion on non-mortgage installment credit, with nearly $400
billion of that debt on credit cards. See "Lenders Worry That Consumers Cannot
Afford Increased Debt," 28 Bankruptcy Court Decisions No. 8, at A8 (January
30, 1996). There are approximately 460 million credit cards presently in circulation in
this country, issued by over 9000 different "banks" (many, like AT&T
Universal Bank, are banks in name only). The average card has a continuing balance of
$1,800.00, while the average family has about $3,000.00 in credit card debt. See
"House of Cards," Consumer Reports, January 1996, at 31. In the
never-ending quest for new customers, the credit card industry's newest tactic is the
"pre-approved" credit card solicitation, which offers high credit lines and low
"teaser" rates to entice consumers. Over 2.4 billion of such solicitations were
sent out last year alone. Id.
3. Rare indeed is the gambler who must leave the tables to find a
local pawn shop and hawk a few more precious possessions. As one recent article indicated,
"[i]t's easy to use the automated teller machines . . . or to open a line of credit
[at the casino]." "America's Gambling Fever," U.S. News & World
Report, January 15, 1996, at 58.
4. Mrs. Briese testified that she has sought assistance with her
gambling problem by attending Gamblers' Anonymous meetings and visiting a counselor.
However, Mr. Briese indicated that he was not certain his wife had completely abandoned
her visits to the casino. The operation of the debtors' household finances also does not
appear to have altered significantly, although Mr. Briese testified they now have a joint
account into which both paychecks are deposited.
5. The testimony at trial indicated that Mrs. Briese incurred
virtually all of the debtors' credit card debt alone. Mr. Briese testified that he carried
a credit card but never used it. According to Mrs. Briese, she may have occasionally used
the card for presents or school clothes, but the overwhelming bulk of the debt was for
6. The debtors apparently never had a credit card with a line of
credit greater than $5,000.00 before they received the plaintiff's card. Despite this
fact, the plaintiff issued them a card with a credit line which not only doubled the
credit available to them on any other card, but which also exceeded the amount described
in the solicitation. Mr. Miele explained that the debtors' past payment history justified
this credit increase. However, as debtors' counsel suggested in argument, it is unclear
exactly how a history of making little more than minimum payments can account for the
extension of such large sums of credit, unless the creditor's goal is simply to perpetuate
the existence of large balances subject to inflated interest rates.
7. The circumstances surrounding this increase are vague. Mrs.
Briese testified that she was at the casino, attempted to get a cash advance at the teller
window, and was turned down because she had reached her advance limit. On a subsequent
attempt (allegedly at the teller's prompting), she apparently was able to get the advance.
The plaintiff contests the accuracy of this story, but it is uncontested that the debtors'
cash advance limit was raised to match their credit line.
8. It is entirely possible to simply shake one's head at the
foolishness of this return trip. Even though she could not make full payment on her debts,
she could have made a sizeable dent with the $15,000.00. Still, to chide Mrs. Briese too
strongly for this folly is to ignore the mentality of the true gambling addict, to whom no
amount is ever enough and who always believes that the lucky streak will continue.
Compulsive gambling often leads to divorce, lost employment, embezzlement, and even
suicide. See "No Dice: The Backlash Against Gambling," Time, April
1, 1996, at 33; "America's Gambling Fever," U.S. News & World Report,
January 15, 1996, at 59. As one gambler put it, "Casinos are the crack cocaine of
9. It must be noted that Kimzey has come under some
criticism. For example, it also held that a creditor must prove the statutory elements by
clear and convincing evidence, a standard disapproved by the Supreme Court in Grogan.
Similarly, the requirement of "reasonable reliance" was questioned by the
Seventh Circuit in Mayer, 51 F.3d at 675, and ultimately repudiated in favor of a
"justifiable reliance" standard by the Supreme Court in Field v. Mans, __
U.S. __, 116 S. Ct. 437, 133 L. Ed. 2d 351 (1995). Nonetheless, the essential requirements
as articulated in Mayer remain constant, though the standards by which they are
judged may shift. Mayer, 51 F.3d at 675-76.
10. For its customers' "convenience," the casino featured
not only ATM machines (from which customers could withdraw limited amounts, up to about
$200.00 per day) but also a teller window. By utilizing her credit card at this window,
Mrs. Briese could receive "Cash & Win" checks in any amount up to her credit
11. See also In re Holmes, 169 B.R. 186, 190 (Bankr.
W.D. Mo. 1994); In re Pursley, 158 B.R. 664, 668 (Bankr. N.D. Ohio 1993); In re
Friend, 156 B.R. 257, 260-61 (Bankr. W.D. Mo. 1993); In re Vermillion, 136 B.R.
225, 226 (Bankr. W.D. Mo. 1992).
12. Roddenberry was decided under section 17a(2) of the
Bankruptcy Act of 1898, the predecessor of the present bankruptcy code. Section 17a(2)
excepted from discharge debts created by "false pretenses or false
representations." In the code, Congress specified "actual fraud" as an
additional ground for nondischargeability. It appears that even those courts bound by Roddenberry
have latched onto the phrase "actual fraud" as a basis for circumventing the
pure "assumption of the risk" concept. See Ford, 186 B.R. at 319.
The test adopted by these courts is essentially a reconstruction of the "implied
representation" analysis. Id.
13. It should be noted that the Bankruptcy Appellate Panel in Eashai
stressed that these factors are not exclusive:
Dougherty does not stand for the proposition that these factors
create a type of "constructive fraud" that is nondischargeable . . . [t]he
factors do not constitute a singular formula; they were stated to provide a guide for
evidence of an inferential nature which may be considered by the court in evaluating the
actual intent of the debtor at the time the card was used.
167 B.R. at 184. A similar set of objective factors was cited with
approval by the court in In re Schnore, 13 B.R. 249 (Bankr. W.D. Wis. 1981), and
discussed at length by debtors' counsel in this case. Given recent developments in this
area, however, the Court finds it unnecessary to resort to mechanical consideration of
such objective criteria when ascertaining whether the debtor acted with
"scienter," or intent to deceive, as mandated by Kimzey and Mayer.
14. The Cox court suggests that some courts permit not only
an "implied representation" of ability and intent to repay, but also an
inference that the debtor actually had no intention of repaying the charges. 182 B.R.
at 633. Such an inference clearly violates a fundamental precept of bankruptcy
jurisprudence -- that exceptions to discharge be narrowly construed in favor of the
debtor. Id. at 635; see also Ford, 186 B.R. at 316.
15. Under section 17(a)(2) of the of Bankruptcy Act of 1898, the
predecessor of the present code, debts arising from "false pretenses or false
representations" were excepted from discharge. When Congress added the phrase
"actual fraud" to § 523(a)(2)(A), the purpose was to codify the existing case
law, which "interprets 'fraud' to mean actual or positive fraud rather than fraud
implied in law." Cox, 182 B.R. at 632 (quoting 124 Cong. Rec. H11,096
(daily ed. Sept. 28, 1978), S17412 (daily ed. October 6, 1978) (remarks of Rep. Edwards
and Sen. DeConcini)).
16. Murphy disagrees with Cox's argument that the
debtor's use of the card does not carry with it an "implied representation" of
an intent to pay for the charges incurred. Murphy, 190 B.R. at 332 n.6. However,
the continued use of the phrase "implied representation" at any stage of an
action under § 523(a)(2)(A) is inappropriate because it is actual fraud, not implied or
constructive fraud, which is the concern of § 523(a)(2)(A). Ford, 186 B.R. at
317-18 n.7. In the credit card context, the debtor's use of the card constitutes an actual
representation of future performance. That representation, if fraudulent, may justify
an exception from discharge.
17. The reasoning in Field and Mayer is superficially
similar to the "assumption of the risk" theory which was rejected for its
mechanical approach to the issue of credit card fraud. Both of these cases speak to the
plaintiff's failure to attend to a known risk. Field, __ U.S. at __, 116 S. Ct. at
444-45, 133 L. Ed. 2d at 363; Mayer, 51 F.3d at 676. Although this sounds similar
to the risks "assumed" by the creditor in Roddenberry, a close
examination reveals that this comparison is inaccurate. The creditor is not defeated
because of the assumption of a blanket risk (i.e., that some debtors will exceed their
credit limits or otherwise act in a fraudulent manner) but because in the particular case
the creditor chose to ignore a known or obvious risk. As the court in Mayer
put it, "[e]ven a material lie may be disregarded when the victim is not actually
taken in." Id.