Opinion
Case No. 99-14415-SSM Chapter 7; Adversary Proceeding No. 99-1310
July 3, 2000.
Kevin M. Fitzpatrick, Esquire, Fairfax, VA, Counsel for the Plaintiff.
Sheila Venable, Esquire, Alexandria, VA, Counsel for the Defendant.
MEMORANDUM OPINION
Before the court is the renewed motion filed by the defendant on May 26, 2000, for summary judgment and for an award of attorney's fees. A hearing was held on June 20, 2000, at which both the plaintiff and the defendant were present by counsel. At the conclusion of the hearing, the court took the matter under advisement to review the affidavits, discovery responses, and the applicable law. For the reasons stated, the motion will be denied.
Background
The debtor, Zakia T. Munwani, filed a voluntary chapter 7 petition in this court on August 31, 1999, and received a discharge of her dischargeable debts on March 26, 2000. The present action was commenced by Citibank (South Dakota), N.A. on November 19, 1999, and seeks a determination that $8,613.71 in charges, interest, late fees and overlimit fees on a Citibank Preferred MasterCard and Citibank Drivers Edge MasterCard are nondischargeable under § 523(a)(2)(A), Bankruptcy Code. Following the discovery cut-off date, the debtor filed a motion for summary judgment, which the court denied without prejudice, since the debtor had not yet responded to any of Citibank's discovery. The debtor, having now served discovery responses on the plaintiff, has renewed her motion for summary judgment. The plaintiff opposes summary judgment both on the merits and also because the debtor's discovery responses are incomplete.
More precisely, the debtor had delivered to Citibank's counsel unsigned responses to requests for admissions but no responses to interrogatories or to document requests. Citibank moved for summary judgment based on the debtor's failure to respond to discovery. The court denied that motion, conditioned upon the debtor filing complete, signed responses to all outstanding discovery within ten days.
The evidence before the court reflects that the debtor was issued two credit cards by Citibank: a "Drivers Edge" MasterCard in April 1991, with a credit limit of $3,400, and a "Preferred" MasterCard in June 1998, with a credit limit of $6,660. No charges were made on either credit card in the 60 days immediately preceding the bankruptcy filing. However, during the period beginning 142 days prior to the bankruptcy filing and ending 64 days prior to the bankruptcy filing, the debtor took $7,900 in cash advances and charged $914.72 in merchandise on the two cards, while making $1,490 in payments. During this time, the debtor was a 20-percent owner and treasurer of NAN Towing, Inc. ("NAN Towing"), an "S" corporation engaged in the business of towing and repairing automobiles.
A schedule showing the dates and amounts of the charges, cash advances, and payments, together with the stated reason for the charges as reflected in the discovery responses, is attached as an exhibit to this opinion.
From the business, she drew a salary of $450.00 per month. That, added to her husband's salary as a restaurant chef, resulted in a net family income of $2,520.00 per month. The monthly living expenses for the family total $3,323.00 per month. According to the debtor's affidavit and discovery responses, the credit cards had historically been paid by NAN Towing. The 1999 Federal income tax return for NAN Towing reflects gross receipts of $237,287, and a net operating loss for the year of $91,380. In her affidavit, the debtor states that the operating loss resulted from vandalism to vehicles parked at the business as well as several traffic accidents. She also states that as a part-owner of NAN Towing, she grossed approximately $20,000.00 per month and paid expenses of $19,900 per month, including $1,800 for "credit cards." She further states that it was always her intention to pay Citibank, and that the only reason she did not do so is because the unexpected losses experienced by NAN Towing made it impossible. In her discovery responses, she states that she first realized in July 1999 that she needed to file bankruptcy; that she first met with her bankruptcy attorney on July 16, 1999; and that she paid her bankruptcy attorney on August 13, 1999. As noted above, the petition itself was filed on August 31, 1999.
The copy of the return provided does not appear to be complete. In particular, it appears to lack supporting schedules for $209,180 in deductions. Additionally, nothing in the tax return supports the assertion that the business was making the credit card payments. The court notes that the debtor has supplied a quarterly balance sheet for NAN Towing for March 31, 1999, but not for subsequent end-of-quarters (June 30, 1999 and September 30, 1999) covering the period in question. The court notes, finally, that the shareholder's equity of $160,298 reflected on the balance sheet is inconsistent with the beginning-of-year and end-of-year figures shown on the tax return of $1,369 and -$90,011, respectively.
Discussion I.
Under Rule 56(c), Federal Rules of Civil Procedure, as incorporated by Federal Rule of Bankruptcy Procedure 7056, summary judgment is appropriate "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." In ruling on a motion for summary judgment, a court should believe the evidence of the non-movant, and all justifiable inferences must be drawn in his favor. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255, 106 S.Ct. 2505, 2513, 91 L.Ed.2d 202 (1986). At the same time, the Supreme Court has instructed that summary judgment "is properly regarded not as a disfavored procedural shortcut, but rather as an integral part of the Federal Rules as a whole, which are designed `to secure the just, speedy and inexpensive determination of every action.'" Celotex Corp. v. Catrett, 477 U.S. 317, 327, 106 S.Ct. 2548, 2555, 91 L.Ed.2d 265 (1985). Additionally, not every dispute as to the facts will preclude the entry of summary judgment, but only those disputes over facts that might affect the outcome of the suit under the governing law. Anderson at 248, 106 S.Ct. at 2510.
II.
Under § 523(a)(2), Bankruptcy Code, a chapter 7 discharge does not discharge an individual debtor from a debt —
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.
Section 523(a)(2)(C) further provides that "for the purpose of" § 523(a)(2)(A),
consumer debts owed to a single creditor and aggregating more than $1,075 for "luxury goods or services" incurred by an individual debtor on or within 60 days before the order for relief under this title, or cash advances aggregating more than $1,075 that are extensions of consumer credit under an open end credit plan obtained by an individual debtor on or within 60 days before the order for relief under this title, are presumed to be nondischargeable[.]
To establish fraud under § 523(a)(2)(A), the creditor "must prove four elements: (1) a fraudulent misrepresentation; (2) that induces another to act or refrain from acting; (3) causing harm to the plaintiff; and (4) the plaintiff's justifiable reliance on the misrepresentation." Foley Lardner v. Biondo (In re Biondo), 180 F.3d 126, 133 (4th Cir. 1999). The burden of proof is on the objecting creditor, and the standard of proof is preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 291, 111 S.Ct. 654, 661, 112 L.Ed.2d 755 (1991). With respect to the first element, the majority of courts have held that with the use of a credit card, a cardholder impliedly represents that he or she intends to repay. In this connection, "[c]ourts have recognized that it is nearly impossible to adduce direct proof of an individual's knowledge, intention and purpose. Therefore, case law has developed a list of objective or circumstantial factors which a creditor might use to prove [fraudulent intent]." FCC National Bank v. Willis (In re Willis), 190 B.R. 866, 868 (Bankr. W.D. Mo. 1996). A representative list of such factors is the following:
It must be noted, however, that a number of courts and commentators have sharply criticized the theory that a card holder's use of a credit card carries with it an implied representation of intent to repay. See, e.g., 4 Lawrence P. King, Collier on Bankruptcy, ¶ 523.08[6] at 523-56.1,57 (15th ed. rev. 2000) ("The better view is that a cardholder does not, simply by using a card, make any representation to the issuer; a false representation arises only when the debtor continues to use the card after the creditor has communicated to the debtor that credit privileges have been revoked.").
Additionally, a few opinions, including an early decision out of this district, held that use of the card carried not only an implied representation of intent to repay, but also of ability to repay. See, e.g., Bank of Virginia v. Davis (In re Davis), 42 B.R. 611, 613 (Bankr.E.D.Va. 1984) (Bostetter, J.). However, under § 523(a)(2)(A) and (a)(2)(B), a false representation concerning the debtor's financial condition is actionable as a basis for nondischargeability only if the representation is in writing. Engler v. Van Steinburg (In re Van Steinburg), 744 F.2d 1060 (4th Cir. 1984). Accordingly, if an express oral statement by a debtor, "I have the ability to pay this debt," would not be grounds for holding the resulting debt nondischargeable, a representation of ability to pay that is merely implied is plainly insufficient. See Collier, supra, at p. 523-57; First Card Svcs., Inc. v. Kitzmiller (In re Kitzmiller), 206 B.R. 424, 426-27 (Bankr.N.D.W.Va. 1997) (rejecting argument that credit card use constitutes actionable representation of ability to pay).
1. The length of time between the charges made and the filing of bankruptcy;
2. Whether or not an attorney has been consulted concerning the filing of bankruptcy before the charges are 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 are 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 debtor's financial sophistication;
11. Whether there was a sudden change in the debtor's buying habits; and
12. Whether the purchases were made for luxuries or necessities.
Id. at 869. It is important to keep in mind, however, that the so-called "twelve-factor" test is not a scoring system. Not only are not all of the factors of equal weight, but in many instances the presence or absence of a particular factor sheds little, if any, light on the ultimate question to be determined, which is the debtor's intent.
With respect to the issue of reliance, the Supreme Court held in Field v. Mans, 516 U.S. 59, 116 S.Ct. 437, 133 L.Ed.2d 351 (1995), that the standard to be applied under § 523(a)(2)(A) is "justifiable" reliance. As the Court explained, a creditor may be justified in relying on a debtor's representation of fact "although he might have ascertained the falsity of the representation had he made an investigation." Id. at 70; 116 S.Ct. at 444 (internal quotation marks omitted). At the same time, a person is "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. at 71; 116 S.Ct. at 444 (internal quotation marks omitted). In the context of credit card charges, one standard that has been adopted is as follows:
[T]he credit card issuer justifiably relies on a representation of intent to repay as long as the account is not in default and any initial investigations into a credit report do not raise red flags that would make reliance unjustifiable.
American Express Travel Related Svcs Co., Inc. v. Hashemi (In re Hashemi), 104 F.3d 1122, 1126 (9th Cir. 1997).
III. A.
As an initial matter, the court must briefly address the plaintiff's argument that summary judgment is inappropriate because the debtor has not, even yet, provided full discovery responses, thereby precluding a meaningful deposition. As noted, the court denied the debtor's prior motion for summary judgment — otherwise identical to the present motion — because she had not responded to the plaintiff's timely discovery requests. Responses have now been provided, and while the court has directed that they be supplemented, the court is no longer faced with a party moving for summary judgment who has provided no discovery whatsoever. The court need not reach the disputed issue of whether the failure to respond to interrogatories or document requests actually prevented the plaintiff from taking the debtor's deposition, because, as the debtor correctly argues, the plaintiff has not complied with Rule 56(f), Federal Rules of Civil Procedure, which is incorporated by Federal Rule of Bankruptcy Procedure 7056. Rule 56(f) provides in relevant part:
(f) When Affidavits are Unavailable. Should it appear from the affidavits of a party opposing the motion [for summary judgment] that the party cannot for reasons stated present by affidavit facts essential to justify the party's opposition, the court may refuse the application for judgment or may order a continuance to permit affidavits to be obtained or depositions to be taken or discovery to be had or may make such other order as is just.
Rule 56(f) is plain and unambiguous. The plaintiff, while grumbling on brief and at oral argument that the debtor has obstructed discovery, has not filed an affidavit as required by Rule 56(f) showing how that failure prevents it from opposing the summary judgment motion. For that reason, the court will address the motion for summary judgment on its merits.
B.
In the present case, the statutory presumption of fraud arising from cash advances or from charges for "luxury goods and service" within 60 days of the bankruptcy filing is not applicable, since the last charge made under either card was 64 days prior to the filing of the debtor's petition. Even if one were to hypothesize that the 6-week delay from the date the debtor first consulted bankruptcy counsel to the actual filing of the petition was motivated by a desire to run out the clock on the statutory presumption, only $2,300 of the cash advances and $637.91 of the merchandise charges — none of which on their face appear to be for "luxury goods" — would fall within the 60-day period preceding the initial consultation with bankruptcy counsel.
As discussed above, among the factors that may be considered in determining whether the debtor honestly intended to repay a debt at the time it was incurred are the debtor's employment and financial situation. The focus, of course, remains and must remain always on the debtor's intent. A debtor may honestly believe he or she will be able to repay the debt even if an objective observer would conclude that there was no realistic likelihood of repayment. Nevertheless, although mere inability to repay a debt at the time it is incurred is not a proxy for fraud and will not make a debt nondischargeable, common sense suggests that the more hopeless the debtor's financial situation at the time the debt is incurred, the less likely it is the debtor could have honestly expected or intended to repay it.
In this connection, charges and cash advances totaling $8,814.72 were made within a three-month period. The debtor, at the time, was earning only $450.00 a month from NAN Towing. Even adding in her husband's salary, her family living expenses exceeded her and her husband's combined take-home pay by $803.00 per month. Nevertheless, $1,490.00 in payments were made on the two credit card accounts during that period. The debtor, as noted, states in her affidavit and discovery responses that NAN Towing, prior to the time it started experiencing unexpected losses, was able to pay $1,800 per month on "credit cards." This assertion, however, raises its own questions, since most, if not all, of the merchandise charges appear to be personal in nature, and why the bills for those charges would have been paid by NAN Towing is far from clear, particularly since the debtor was only a 20% owner of the business. In addition, $6,000 of the cash advances are stated by the debtor to have been used to make loans to third parties whose relationship either to her or to NAN Towing is totally unexplained.
Intent, as noted, is seldom subject to direct proof. The debtor has unequivocally stated in her affidavit that she intended to repay the charges and cash advances. The only evidence to the contrary is admittedly circumstantial and consists of her extremely modest salary relative to the amount of the charges, and the fact that her monthly living expenses exceeded her income. The debtor's explanation as to how she expected to repay the charges, while certainly plausible, does raise an number of unanswered questions. Depending on how those questions are answered, the debtor's explanation may very well carry the day at trial. Much, undoubtedly, will depend on the debtor's candor and credibility as a witness. At this point, there is no reason to believe that she will not be a credible witness. On the current state of the record, however, the court cannot say that the issue of the debtor's intent is so clear-cut that no reasonable finder of fact could find in favor of the plaintiff. For that reason, summary judgment must be denied.
A separate order will be entered consistent with this opinion.
Because final judgment has not yet been entered in favor of the debtor, consideration of the debtor's request for attorney's fees under § 523(d), Bankruptcy Code, is premature. Given the current state of the record, the court expresses no opinion as to whether Citibank was "substantially justified" in bringing the dischargeability complaint or whether the credit card agreement would independently provide a basis for awarding attorney's fees to the debtor for defending this action. The court likewise expresses no view as to the reasonableness of the claimed fees incurred to date.
Zakia T. Munwani Citibank Preferred MasterCard Acct # 5424-1802-6062-5956 Credit Limit $6,660
Days Date Amount Merchant Stated Purpose
(prior to filing date)
Beginning Bal. = $1,273.92
137 4/16/99 $ 33.13 Giant Food Personal for family 137 4/16/99 $3,000.00 Chevy Chase FSB Loan to C. I. Hussan 136 4/17/99 $ 22.84 Ames Dept Store Personal for family 129 4/24/99 $ 15.00 Sherwood Hall Pharmacy Personal for family 118 5/5/99 $ 17.50 Texaco, Inc. Personal for family 115 5/8/99 $2,600.00 Chevy Chase FSB Loans to T. Khan and I. Ahmed 112 5/11/99 $ 18.51 Rite Aid Personal for family 89 6/3/99 $ 41.12 Shoppers Food Warehouse Personal for family 83 6/9/99 $ 10.00 Mobil Oil Personal for family 77 6/15/99 $ 41.30 Giant Food Personal for family 76 6/16/99 $ 56.51 Shoppers Food Warehouse Personal for family 75 6/17/99 $ 15.50 Texaco, Inc. Personal for family 74 6/18/99 $ 54.65 Shoppers Food Warehouse Personal for family 69 6/23/99 $ 44.86 Art's Mart Gifts Flowers Personal for family 69 6/23/99 $ 33.25 Greyhound Lines Personal for family 68 6/24/99 $ 400.00 First Va. Bank Loan to C. I. Hussan 67 6/25/99 $ 14.00 Citgo Personal for family 67 6/25/99 $ 17.98 CVS Personal for family 64 6/28/99 $ 52.88 Edith's Gift Shop Personal for family
Ending Bal. = $6,748.90
(includes $439.27 in finance charges and late fees)
Total $ 6,489.03
Payments
4/13/99 $ 100.00 5/3/99 $1,000.00 6/3/99 $ 250.00
Total $1,350.00
Pet. Date 8/31/99
Zakia T. Munwani Citibank Drivers Edge MasterCard Acct # 5410-6540-1503-9610 Credit Limit $3,400
Days Date Amount Merchant Stated Purpose
(prior to bankruptcy filing)
Beginning Bal. = $1,096.30
148 4/5/99 $ 59.71 Service Merchandise Personal for family 144 4/9/99 $ 30.00 Sherwood Hall Pharmacy Personal for family 144 4/9/99 $ 29.00 Rite Aid Personal for family 68 6/24/99 $1,900.00 First Va. Bank Business expenses for NAN Towing 66 6/26/99 $ 286.98 Unique Halal Meat Personal for family 66 6/26/99 $ 20.00 Rite Aid Personal for family
Ending Bal. = $3,466.91
(includes $119.81 in finance charges and late fees)
Total $2,325.69
Payments 4/16/99 $ 50.00 5/10/99 $ 40.00 6/14/99 $ 50.00
Total $ 140.00
Pet. Date 8/31/99