AT&T Universal Card Service v. Mercer , 246 F.3d 391 ( 2000 )

Revised May 15, 2000
UNITED STATES COURT OF APPEALS
For the Fifth Circuit
No. 98-60693
In the matter of: CONSTANCE P. MERCER,
Debtor.
AT&T UNIVERSAL CARD SERVICES,
Appellant,
VERSUS
CONSTANCE P. MERCER,
Appellee.
Appeal from the United States District Court
For the Southern District of Mississippi
April 26, 2000
Before DUHÉ, BARKSDALE, and DENNIS, Circuit Judges.
DUHÉ, Circuit Judge:
AT&T Universal Card Services (“AT&T”) appeals the bankruptcy
court’s determination that Constance P. Mercer’s (“Mercer”) credit
card debt was dischargeable under 11 U.S.C. § 523(a)(2)(A). We
affirm.
I. FACTS AND PROCEEDINGS
We summarize only the facts relevant to our decision which
include AT&T’s pre-approval process, and Mercer’s response to
AT&T’s pre-approved credit card application. We do not discuss the
events after Mercer received the card or her general financial
standing. On November 10, 1995, AT&T opened Mercer’s credit card
account pursuant to a pre-approved credit application mailed to
Mercer and signed by her. Although Mercer’s credit limit on this
AT&T account was $3,000, within a month she had exceeded this limit
by $186.82 through charges and cash advances at automated teller
machines (“ATM”).
AT&T relies on third party credit agencies to screen potential
applicants. A credit bureau makes an initial screening. These
names are then matched against AT&T’s own internal risk and scoring
models to determine creditworthiness. The names that make this cut
are then returned to the credit bureau for a second screening to
review any change in credit standing or credit history. These
credit bureaus place a risk or FICO score on each name to determine
the probability of an account becoming delinquent. AT&T requires
a minimum FICO score of 680 before sending out a solicitation offer
to a prospective customer. The credit bureau assigned Mercer a
FICO score of 735. Under the Fair Credit Reporting Act, AT&T must
make a bonafide offer of credit to anyone who passed the screening
process.
In September 1995, AT&T mailed Mercer and offer to open a
credit card account. Mercer completed, signed, and returned her
acceptance. Mercer provided AT&T an income figure of $24,500, a
social security number, a date of birth, a home and business phone
2
number, and a maiden name. AT&T then conducted a further review of
Mercer’s ability to service a credit line of $3,000. AT&T then
sent Mercer on November 10, 1995 a card and a cardmember
agreement.1 Mercer then used the account to obtain fourteen cash
advances from ATMs, some in casinos. By early December, she had
exceeded her credit limit, and AT&T barred her from further use of
the account. In all, Mercer carried seven credit cards between
March and December 1995.
Mercer filed a petition for bankruptcy relief under Chapter
Seven of the Bankruptcy Code. AT&T challenged the dischargeability
of the debt under Section 523(a)(2)(A). The bankruptcy court
concluded that the debt was dischargeable. The court determined
that Mercer did not make any representations to AT&T regarding her
creditworthiness. Because she had made no representations, AT&T
could not meet the reliance requirement to challenge
dischargeability under Section 523(a)(2)(A). The district court
affirmed the bankruptcy court’s decision. We affirm.
II. STANDARD OF REVIEW
1
The agreement became effective when Mercer used the card or the
account. The agreement states that a card holder is “responsible
for all amounts owned on [the card holder’s] [a]ccount . . . and
[the card holder] agree[s] to pay such amounts according to the
terms of the [a]greement.” Regarding purchases and cash advances,
the agreement says a card holder may use the card to “obtain a loan
from [the card holder’s] [a]ccount, by presenting it to any
institution that accepts the [c]ard for that purpose, or to make a
withdrawal of cash at an automated teller machine (ATM). Both of
these transactions are treated as 'Cash Advance' on [the card
holder’s] [a]ccount.” AT&T also may limit these cash advances.
3
We review the bankruptcy court’s factual findings for clear
error and its conclusions of law de novo. Foster Mortgage Corp. v.
United Companies Financial Corp., 68 F.3d 914, 917 (5th Cir. 1995).
III. DISCUSSION
Section 523(a)(2)(A) of the Bankruptcy Code provides:
A discharge under section 727 . . . of this title does not
discharge an individual from any debt . . . for money,
property, services, or an extension, renewal, or refinancing
of credit, to the extent obtained by false pretense, a false
representation, or actual fraud, other than a statement
respecting the debtor’s or an insider’s financial condition.
. . .
A creditor must prove its claim of nondischargeability by a
preponderance of the evidence. In order for a debtor’s
representation to be a false representation or pretense, a creditor
must show that the debtor (1) made a knowing and fraudulent
falsehood; (2) describing past or current facts; (3) that was
relied upon by the creditor; (4) who thereby suffered a loss.
RecoverEdge L.P. v. Pentecost, 44 F.3d 1284, 1292-93 (5th Cir.
1995). The creditor must show that it actually and justifiably
relied on the debtor’s representations. Field v. Mans, 516 U.S.
59, 69-70, 116 S. Ct. 437, 133 L. Ed. 2d 351 (1995).
The bankruptcy court concluded that AT&T did not actually rely
on representations by Mercer because Mercer made no
representations. AT&T pre-approved the card based solely on its
own screening process. The court said, “Mercer never solicited the
credit card from AT&T; never knew of nor gave her permission for
the investigations; and was never asked about her debts, gambling
4
losses, financial condition, or other credit cards being used by
her or the balances thereon. . . . AT&T solely relied on its own
agents and investigative processes to makes its decision.”
The bankruptcy court’s determination is correct. Because AT&T
provided Mercer a pre-approved credit card with a pre-approved
credit limit, Mercer could not make any false representations AT&T
could rely on. Sears, Roebuck and Co. v. Hernandez, 208 B.R. 872,
877 (Bankr. N.D. Tex. 1997) (“Passively extending credit in itself
is not reliance.”); Household Credit Services, Inc. v. Walters, 208
B.R. 651, 654 (Bankr. W.D. La. 1997) (finding no evidence of
reliance where creditor issued pre-approved credit card).2 The
information Mercer returned to AT&T with her acceptance does not
amount to any sort of false representation regarding her intent to
pay. AT&T correctly points out that it has no duty to investigate
2
Several other courts have determined that a creditor cannot
show actual and justifiable reliance when it issued a pre-approved
credit card. AT&T Universal Card Services v. Ellingsworth, 212
B.R. 326, 338 (Bankr. W.D. Mo. 1997) (“[A] creditor cannot
justifiably rely on any representation, or the absence thereof,
made by a card holder if the card was pre-approved, and no direct
financial information was obtained by the issuer.”); AT&T Universal
Card Services Corp. v. Arroyo, 205 B.R. 984, 986 (Bankr. S.D. Fla.
1997) (concluding that creditor failed to meet burden of proof
under Section 523(a)(2)(A) because of failure to investigate
creditworthiness of debtor prior to pre-approval); AT&T Universal
Card Services Corp. v. Akdogan, 204 B.R. 90, 97 (Bankr. E.D.N.Y.
1997) (determining that creditor must at least conduct a credit
check in order to show justifiable reliance); AT&T Credit Card
Services and FCC National Bank v. Alvi, 191 B.R. 724, 731 (Bankr.
N.D. Ill. 1996) (“A creditor cannot sit back and do nothing and
still meet the standard for actual and justifiable reliance when it
had an opportunity to make an adequate examination or
investigation.”)
5
the debtor to show justifiable reliance. See La. Capital Fed.
Credit Union v. Melancon, 223 B.R. 300, 331 (Bankr. M. D. La. 1998)
citing American Express Travel Related Services Co. Inc. v.
Hashimi, 104 F.3d 1122 (9th Cir. 1996). However, justifiable
reliance pre-supposes that the debtor has made a representation.
Here Mercer made no representation. Therefore, AT&T neither could
have actually nor justifiably relied.
AT&T also contends that the bankruptcy court erroneously
concluded that because AT&T did not rely on the debtor’s
representations when the card was issued AT&T could not
subsequently rely on implied representations made by the debtor
with her use of the card. AT&T argues that we should adopt the
implied representation theory. Under this theory, the card holder
makes a representation that he or she intends to pay each time he
or she receives money at an ATM. The money received amounts to a
loan from the bank. Melancon, 223 B.R. at 311 (“When the card
holder inserts the card into the ATM, he is, in one step, asking
for a loan and promising to repay it if it is obtained.”)
This Circuit has not adopted the implied representation
theory, and we decline to do so in the pre-approved credit card
context. First, although the debtor has borrowed money, the
primary decision to extend credit was made before the implied
representation. AT&T assumes the risk of any future lending by the
debtor. Second, adoption of this theory would improperly shift the
burden of proof in Section 523(a)(2)(A) actions. See Hernandez,
6
208 B.R. at 880. The debtor would essentially become the guarantor
of his or her financial condition, and the theory would offend “the
balance of bankruptcy policy struck by Section 523.” Chevy Chase
Bank v. Briese, 196 B.R. 440, 448 (Bankr. W.D. Wis. 1996) citing
Matter of Ford, 186 B.R. 312, 317 (Bankr. N.D. Ga. 1995). We
conclude that we should apply a rule that favors the debtor instead
of the creditor at least in the pre-approved credit card context,
and we decline to apply the implied representation theory.3
Finally, the dissent argues that this holding will only
encourage “irresponsible and dishonest debtors to go on
unrestrained spending sprees” leading to more consumer bankruptcies
and greater costs passed on to all credit card users through higher
interest rates. The credit card issuers' irresponsible lending
practices are another part of this problem. In this case, AT&T
issued Mercer a pre-approved credit card based on a minimal third-
party credit check. If AT&T had merely asked Mercer for
information regarding her credit card usage, AT&T may have been
more prudent in its lending practices, but AT&T did not.
This holding properly places a greater responsibility on
credit card issuers for their lending practices, which have become
increasingly irresponsible. According to a recent newspaper
article, credit card issuers are “paying more attention to high-
risk groups, such as households with proven debt problems and
3
Melancon dealt with credit card debt that was not the result
of pre-approval by the creditor.
7
younger consumers. Some issuers are even targeting high-school
students.” Scott Kilman, Credit-Card Come-Ons Met by Disinterest,
Wall St. J., March 23, 2000, at A2. This holding properly favors
the debtor instead of the creditor, and will hopefully encourage
more responsible lending practices by credit card issuers.
For these reasons, we affirm.
AFFIRMED.
8
DENNIS, Circuit Judge, specially concurring:
I agree with Judge Duhe’s conclusion that AT&T failed to
prove that Mercer’s debt is not dischargeable under section
523(a)(2). I also agree with much of his opinion. I concur
specially because, in my opinion: (1) when a debtor uses a credit
card, he or she impliedly promises to repay the loan; but (2) a
credit card company cannot justifiably rely upon every card
user’s representation simply because the card was used;
therefore, (3) a creditor who issues credit cards without a
reasonably adequate assessment of each debtor’s credit history
and present financial condition cannot claim that mere use of any
such card constitutes a justifiably relied upon representation to
pay; however, (4) such a creditor may, through a period of good
experience with the debtor, acquire a basis for believing that
the debtor’s mere use of the card is such a representation upon
which the creditor may justifiably rely.
To demonstrate that a debt is not dischargeable as
fraudulent under section 523(a)(2), a creditor must prove by a
preponderance of the evidence that (1) the debtor made false
representations; (2) at the time they were made the debtor knew
they were false; (3) the debtor made the representations with the
intention and purpose to deceive the creditor; (4) the creditor
actually and justifiably relied on such representations; and (5)
the representations proximately caused the debtor to obtain money
9
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and the creditor to sustain losses. See RecoverEdge L.P. v.
Pentecost, 44 F.3d 1284, 1292 (5th Cir. 1995) (as modified by
Field v. Mans, 516 U.S. 56, 69 (1995)).
I agree with the Ninth Circuit that “[e]ach time a ‘card
holder uses his credit card, he makes a representation that he
intends to repay the debt.’” American Express Travel Related
Services Company, Inc. v. Hashemi (In re Hashemi), 104 F.3d 1122,
1126 (9th Cir. 1997) (quoting Anastas v. American Savings Bank
(In re Anastas), 94 F.3d 1280, 1285 (9th Cir. 1996)). Thus,
Mercer clearly made representations of her intent to repay when
she used the credit card to obtain cash advances. However, to
prevail under section 523(a)(2), a creditor must prove all of the
essential elements of fraud. See RecoverEdge, 44 F.3d at 1292.
Proof of an implied representation of the debtor’s intent to
repay by the use of the card does not satisfy the creditor’s
burden to establish any of the other elements of fraud, including
the debtor’s knowledge of falsity and intent to deceive, the
creditor’s actual and justifiable reliance upon the
representation, and the causal link between the representation
and the debtor’s obtainment of money.
Because the bankruptcy court held that Mercer did not make
any implied representations, it did not address the falsity and
intent elements. Regardless of whether the implied
representations were knowingly false and made with the intent to
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deceive, however, AT&T failed to prove that Mercer’s debt was
excepted from discharge under section 523(a)(2) because, under
the undisputed facts AT&T did not justifiably rely on the
representations to repay loans implied by Mercer’s use of the
credit card. The Supreme Court has held that, for a debt to
qualify for the exception to discharge under section 523(a)(2),
the creditor must prove that he actually and justifiably relied
on knowingly false representations made by the debtor for the
purpose of deception. See Field, 516 U.S. at 70. The
requirement that reliance be justifiable is to insure that such
reliance is actual. As the Court stated:
As for the reasonableness of reliance, our reading of
the Act does not leave reasonableness irrelevant, for
the greater the distance between the reliance claimed
and the limits of the reasonable, the greater the doubt
about reliance in fact. Naifs may recover, at common
law and in bankruptcy, but lots of creditors are not at
all naive. The subjectiveness of justifiability cuts
both ways, and reasonableness goes to the probability
of actual reliance.
Field, 516 U.S. at 76. Professors Keeton and Prosser (cited with
approval by the Court in Field) discuss the justifiable reliance
factor similarly, stating:
The other side of the shield is that one who has
special knowledge, experience and competence may not be
permitted to rely on statements for which the ordinary
man might recover, and that one who has acquired expert
knowledge concerning the matter dealt with may be
required to form his own judgment, rather than take the
word of the defendant.
W. PAGE KEETON ET. AL., PROSSER AND KEETON ON THE LAW OF TORTS § 108, at
11
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751 (5th ed. 1984). Furthermore, as Justice Ginsburg,
concurring, pointed out, the creditor must prove not only that he
“justifiably relied”, but also that the money was “obtained by”
(i.e., the loan of money was caused by) the alleged
misrepresentation. Field, 516 U.S. at 78 (Ginsburg, J.,
concurring).
Justifiable reliance is something more than actual reliance,
but less than reasonable reliance, depending on the creditor.
With respect to the subjective element of justifiable reliance,
the Court stated that “the matter seems to turn upon a
plaintiff’s own capacity and the knowledge which he has or which
may fairly be charged against him from the facts within his
observation in the light of his individual case.” Field, 516
U.S. at 72 (citing W. PROSSER, LAW OF TORTS § 108, at 717 (4th ed.
1971)). In addition, the Court held that “[j]ustification is a
matter of the qualities and characteristics of the particular
plaintiff, and the circumstances of the particular case, rather
than of the application of a community standard of conduct to all
cases.” Id. at 70 (citing RESTATEMENT (SECOND) OF TORTS § 545A,
comment b (1976)).
It is undisputed that, in the present case, AT&T received no
direct financial information from Mercer. Rather, AT&T based its
decision to issue the pre-approved credit card on a screening
formula based on a report of a history of Mercer’s ability to
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make at least minimum monthly payments on her other credit cards
in the past. In doing so, AT&T relied “upon its own judgment and
experience as it issue[d] the card and as it determine[d] whether
to honor any specific charge made upon the card, and not upon any
representation made by the cardholder.” In re Herrig, 217 B.R.
891, 899 (Bankr. N.D. Okl. 1998). Thus, in this respect I agree
with Judge Duhe and the Bankruptcy Court in In re Ellingsworth
that credit card companies assume the risk of issuing pre-
approved credit cards on such meager information and thus “cannot
justifiably rely on any representation, or absence thereof, made
by a card-holder if the card was pre-approved, and no direct
financial information was obtained by the issuer.” 212 B.R. 326,
339 (Bankr. W.D. Mo. 1997).
However, I do not think that the creditor’s initial
assumption of risk necessarily prevents the issuer of a pre-
approved credit card from ever justifiably relying on any future
representations made by the holder. Rather, I believe that
justification may develop over time -- for example, as the holder
develops a credit history of payments with the specific issuer.
This view is based upon section 523(a)(2) as it has been
interpreted by the Supreme Court in Field and applied by numerous
other courts that have addressed this issue. See, e.g., In re
Herrig, 217 B.R. at 900; In re Carrier, 181 B.R. 742, 749 (Bankr.
S.D.N.Y. 1995); see also In re Foley, 156 B.R. 645 (Bankr. D.N.D.
13
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1993) (holding that a series of payments established reasonable
reliance); cf. In re Hashemi, 104 F.3d at 1126 (holding that a
pre-approved credit card holder made implied representations with
each use of the card and that because “appellant himself
testified that he had repaid American Express balances of up to
$60,000 ‘numerous times’ before . . . American Express therefore
had no reason to question the good faith of appellant’s promise
to repay.”).4
Applying the elements of section 523(a)(2) to the undisputed
facts in the present case, I conclude that prior to the uninvited
issuance of the credit card to Mercer, AT&T did not make a
reasonably adequate assessment of her present financial condition
so as to warrant considering her mere use of the card as a
4
The partial quotation from In re Anastas, 94 F.3d at 1286, that
Judge Barksdale borrows as his standard is not a complete or
comprehensive statement of the Ninth Circuit’s jurisprudence on
justifiable reliance. The quote in In re Anastas was dicta as that
court ruled solely on fraudulent intent and not on justifiable
reliance. See id. at 1287. Further, the court in In re Anastas
cited In re Eashai for this test, a case in which the cardholder
had established a history of payments with the specific creditor at
issue. See Citibank (South Dakota) N.A. v. Eashai (In re Eashai),
87 F.3d 1082, 1090-92 (9th Cir. 1996)). If Mercer had, as in In re
Eashai, developed a credit history with AT&T without any red-flags,
AT&T’s reliance may arguably have been justifiable. See also In re
Hashemi, 104 F.3d at 1126; AT&T Universal Card Services Corp. v.
Burdge (In re Burdge), 198 B.R. 773, 778 (B.A.P. 9th Cir. 1996) (“In
the past, Burdge had a good payment record [with AT&T], which
demonstrated a responsible use of the charge card.”); F.C.C.
National Bank v. Cacciatore (In re Cacciatore), 209 B.R. 609
(Bankr. E.D.N.Y. 1997); AT&T Universal Card Services Corp. v. Feld
(In re Feld), 203 B.R. 360 (Bankr. E.D. Pa. 1996).
14
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representation upon which AT&T could justifiably rely.5 AT&T was
not primarily caused to authorize loans by Mercer’s use of the
card; on the contrary, AT&T relied primarily on a prediction of a
“risk score” based on impersonal credit bureau credit history
information–-Mercer’s “risk score” was 735 on a scale of 900, not
far above AT&T’s minimum score of 680. There was nothing in
AT&T’s brief experience with Mercer as a cardholder that would
justify its belief that it had acquired a more substantial basis
for its reliance upon her representations than it started out
with, to wit: (1) fourteen of Mercer’s transactions were cash
loans, several of which were made within a casino;6 (2) Mercer
borrowed the maximum cash advance amount within thirty one days
after receipt of the card; (3) Mercer had developed no history of
payment or good standing with the issuer (Mercer had only made
one payment of $25); (4) nineteen days after issuance, the
issuer’s own computer had red-flagged the use of Mercer’s credit
5
Judge Barksdale correctly points out that AT&T did have a credit
bureau screening process designed to assess her “risk score”
according to indices of her credit history, but it is undisputed
that AT&T did not have any information as to Mercer’s financial
condition or ability to pay at the time it issued the card, i.e.,
to what extent her current debt levels exceeded her net worth and
future income.
6
At trial, AT&T’s representative conceded that AT&T considers the
location of charges and cash withdrawals in determining whether
such charges should be a source of concern. For example, he
conceded that charges made at casinos (presumably for gambling)
would raise more of a concern than charges for food, shelter, or
clothing and that charges made in a high-crime area could possibly
be a cause for concern.
15
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card for excessive transactions. “[T]aking [the] qualities and
characteristics of the particular plaintiff, and the
circumstances of the particular case” as a whole, AT&T as a
sophisticated financial actor did not satisfy its burden to prove
that it had developed justifiable reliance upon any
representation by her before or after the issuance of the pre-
approved credit card, thus reducing the probability of any actual
reliance by AT&T on any such representations. Field, 516 U.S. at
71-76.7
The undisputed evidence shows that (1) AT&T approved
Mercer’s loans and made the cash accessible to her prior to any
implied representations made by her to repay the loans through
the use of the credit card; (2) AT&T most likely did not actually
rely on Mercer’s card-use representations before it authorized
her ATM loans; (3) any actual reliance by AT&T, as a
sophisticated financial actor, on the mere use of the card was
not justifiable because AT&T issued the card based on impersonal
credit bureau credit history and credit “risk score” predictors,
which included no information as to Mercer’s current financial
condition, solvency or ability to repay the loans contemplated;
7
By listing the specific factors present in this particular case,
I am not indicating (as Judge Barksdale suggests) that, inter alia,
credit card companies must cancel cards used frequently within the
first billing cycle or that credit card companies may never approve
cash withdrawals from a casino. I find not that these factors
caused AT&T’s reliance to be unjustified, but rather that they do
not make AT&T’s otherwise unjustified reliance justifiable.
16
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(4) nothing in Mercer’s use of the card after issuance did
anything to justify AT&T’s reliance on Mercer’s implied by card
use representations.
There is no doubt that AT&T made credit card loans to Mercer
that she was legally obligated to pay but did not. This is not a
suit on that contract or debt, however. Under section 523 of the
Bankruptcy Code, to deny Mercer a discharge AT&T was required to
prove that Mercer knowingly made false representations, which
AT&T actually and justifiably relied upon, and which caused AT&T
to lend her the money. The evidence is clear and undisputed that
AT&T failed to prove that it actually relied upon, much less
justifiably relied upon, any representation by Mercer that caused
AT&T to make the credit card loans available to Mercer.
Accordingly, because AT&T manifestly failed to prove all of the
elements of fraud required by law, I join in affirming the
judgment of the bankruptcy court.
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RHESA HAWKINS BARKSDALE, Circuit Judge, dissenting:
I am not able to agree with the approach by either of my
colleagues for resolving the issue presented by this appeal.
Although the amount at stake is relatively small, the issue is
exceptionally important. The analysis for determining whether
credit card debt is dischargeable in bankruptcy has enormous
implications, not only for credit card issuers, but also for
millions of credit card users. Moreover, neither the card’s
being pre-approved, nor its use in large part for gambling,
should alter the standards for representations and justifiable
reliance vel non.
According to a recent newspaper article, “bank, retail and
credit-card industry advocates estimate consumer bankruptcies
cost their businesses about $40 billion a year”. Dawn Kopecki &
Jeffrey Taylor, House, Senate Diverge on Bills for Bankruptcy,
WALL ST. J., 4 Feb. 2000, at A20. As expected, that cost is
passed along to users of those services. Bankruptcies are said
to cost each United States household $400 annually, in part
because, in order to recoup their losses from bankrupt
cardholders, credit card companies increase interest rates for
all of their customers. Julie Hyman, Senate Set to Pass
Legislation to Curb Bankruptcy Abuse, WASH. TIMES, 2 Feb. 2000, at
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B8.
Our panel’s divergent views as to the proper analysis for
dischargeability of credit card debt mirror the inconsistencies
reflected in the opinions of other courts that have addressed
this issue.8 Among those courts are some of the bankruptcy and
8
See, e.g., Rembert v. AT&T Universal Card Servs., Inc. (In re
Rembert), 141 F.3d 277, 281 (6th Cir.) (use of credit card is
implied representation of intent, but not ability, to repay), cert.
denied, 525 U.S. 978 (1998); Anastas v. American Sav. Bank (In re
Anastas), 94 F.3d 1280, 1285 (9th Cir. 1996) (credit card
transaction is unilateral contract between cardholder and issuer
consisting of cardholder’s promise to repay and issuer’s
performance by reimbursing merchant who accepted credit card in
payment; use of card is representation of intent, but not ability,
to repay); Citibank (S.D.), N.A. v. Eashai (In re Eashai), 87 F.3d
1082, 1088 (9th Cir. 1996) (adopting 12 non-exclusive factors for
determining whether debtor had subjective intent to deceive);
Manufacturer’s Hanover Trust Co. v. Ward (In re Ward), 857 F.2d
1082, 1085 (6th Cir. 1988) (unless credit card issuer conducts
credit check before issuing card, it assumes risk debtor will fail
to pay for subsequent charges); First Nat’l Bank of Mobile v.
Roddenberry, 701 F.2d 927, 932-33 (11th Cir. 1983) (concealment of
inability to pay not actionable under Bankruptcy Act predecessor to
§ 523(a)(2)(A); credit card issuer assumes risk of non-payment
until issuer unconditionally revokes cardholder’s right to further
possession and use of card); Universal Card Servs. v. Pickett (In
re Pickett), 234 B.R. 748, 755 (Bankr. W.D. Mo. 1999) (use of
credit card is express representation of both intent and ability to
repay charge); AT&T Universal Card Servs. Corp. v. Reynolds (In re
Reynolds), 221 B.R. 828, 837 (Bankr. N.D. Ala. 1998) (use of credit
card is promise to pay in future, not implied representation of
present intent and actual ability to pay); AT&T Universal Card
Servs. v. Alvi (In re Alvi), 191 B.R. 724, 726 (Bankr. N.D. Ill.
1996) (“use of a credit card, in itself, does not constitute
representation or statement which is capable of being true or
false” (emphasis added)); GM Card v. Cox (In re Cox), 182 B.R. 626,
636 (Bankr. D. Mass. 1995) (§ 523(a)(2)(A) does not encompass
“implied misrepresentation of intent to pay when both the
representation and the absence of intent to pay must be based upon
inference”).
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district courts in our circuit.9
9
See, e.g., East v. AT&T Universal Card Servs. Corp., 1999 WL
425886, at *5 (N.D. Tex. 1999) (debtor’s subjective fraudulent
intent may “be inferred from objective facts suggesting ... debtor
knew, or should have known, at the time the credit card was used,
that the debtor was insolvent and lacked the ability to repay the
charge”); AT&T Universal Card Servs. v. McLeroy (In re McLeroy),
237 B.R. 901, 903-05 (Bankr. N.D. Miss. 1999) (use of credit card
was representation that debtor would honor cardmember agreement;
totality of circumstances, including 12 objective factors, used to
determine whether debtor had fraudulent intent); Universal Card
Servs. Corp. v. Akins (In re Akins), 235 B.R. 866, 872-74 (Bankr.
W.D. Tex. 1999) (applying “commercial entrapment” theory, credit
card debt dischargeable because issuer’s extension of credit was
result of its own negligent lending practices and industry’s
negligent use of faulty FICO (risk) score system); LA Capitol Fed.
Credit Union v. Melancon (In re Melancon), 223 B.R. 300, 311, 324,
329-32 (Bankr. M.D. La. 1998) (“[w]hen the card holder inserts the
card into an ATM, he is, in one step, asking for a loan and
promising to repay it if it is obtained”; “inability to pay coupled
with proof of the debtor’s knowledge of inability to pay is
sufficient to establish fraud”; although creditor has no duty to
investigate, creditor who lends money in a casino cannot
justifiably rely on debtor’s promise to repay); Sears, Roebuck &
Co. v. Hernandez (In re Hernandez), 208 B.R. 872, 877 (Bankr. W.D.
Tex. 1997) (“[p]assively extending credit in itself is not reliance
... nor can the court assume that a creditor relied on any alleged
representation”); Household Credit Servs., Inc. v. Walters, 208
B.R. 651, 654 (Bankr. W.D. La. 1997) (use of credit card is implied
representation regarding repayment; if issuer justified in relying
on debtor’s creditworthiness when card issued, reliance thereafter
is presumptively justifiable unless some event occurs to rebut that
presumption); Bank One Columbus, N.A. v. McDaniel (In re McDaniel),
202 B.R. 74, 78 (Bankr. N.D. Tex. 1996) (“use of a credit card to
incur debt in a typical credit card transaction involves no
representation, express or implied”, and “creditor cannot sit back
and do nothing and still meet the standard for actual and
justifiable reliance when it had an opportunity to make an adequate
examination or investigation”); AT&T Universal Card Servs. v.
Samani (In re Samani), 192 B.R. 877, 879-80 (Bankr. S.D. Tex. 1996)
(creditor cannot establish fraud based on implied representation of
intent and ability to pay based on mere use of credit card;
instead, court considers objective totality of circumstances;
reliance by creditor justified based on debtors’ prior sporadic
payment of at least minimum payment due); First Deposit Credit
Servs. Corp. v. Preece (In re Preece), 125 B.R. 474, 477 (Bankr.
20
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Although Congress is considering bankruptcy reform
legislation, it does not address the standard for determining
credit card debt dischargeability. See H.R. 833, 106th Cong.,
1st Sess. (1999); S. 625, 106th Cong., 2d Sess. (2000).
Accordingly, rehearing en banc is necessary and appropriate for
this exceptionally important issue.
A.
Section 523(a)(2)(A) excepts from discharge “any debt ...
for money ... to the extent obtained by ... false pretenses, a
false representation, or actual fraud”. 11 U.S.C. §
523(a)(2)(A). Our court has applied different, but somewhat
overlapping, elements of proof for actual fraud, as opposed to
false pretenses/representation. See RecoverEdge L.P. v.
Pentecost, 44 F.3d 1284, 1292-93 (5th Cir. 1995).10
W.D. Tex. 1991) (use of credit card is implied representation of
present intention and ability to repay); City Nat’l Bank of Baton
Rouge v. Holston (In re Holston), 47 B.R. 103, 109 (Bankr. M.D. La.
1985) (credit card debt incurred prior to notification that account
was closed is dischargeable, but portion occurred thereafter non-
dischargeable); Central Bank v. Kramer (In re Kramer), 38 B.R. 80,
82 (Bankr. W.D. La. 1984) (creditor proves false misrepresentation
“if it can show that the defendant purchased goods by means of the
credit card and that the purchases were made at a time when the
debtor either did not have the means to or did not have the intent
to pay for the goods”); Ranier Bank v. Poteet (In re Poteet), 12
B.R. 565, 567 (Bankr. N.D. Tex. 1981) (purchase of merchandise by
credit card is implied representation to issuer of card that buyer
has means and intention to pay for purchase).
10
The predecessor to § 523(a)(2)(A) did not include actual fraud
as a basis for nondischargeability. Davison-Paxon Co. v. Caldwell,
115 F.2d 189, 191-92 (5th Cir. 1940), cert. denied, 313 U.S. 564
(1941), held that a debt created by fraud (obtaining credit through
21
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The false pretenses/representation prongs require the
creditor to prove the debtor made “(1) a knowing and fraudulent
falsehood, (2) describing past or current facts, (3) that was
relied upon by the other party”. Id. at 1293 (brackets, internal
quotation marks, and citation omitted).
The actual fraud prong requires showing: (1) the debtor
made representations; (2) she knew they were false when made; (3)
she made them with the intent to deceive the creditor; (4) the
concealment of insolvency and present inability to pay) was
dischargeable because nondischargeability for false pretenses or
representations under the Bankruptcy Act required proof of an overt
false pretense or misrepresentation; concealment was insufficient.
As noted in Sears, Roebuck & Co. v. Boydston (Matter of Boydston),
520 F.2d 1098, 1101 (5th Cir. 1975), “[t]he rationale underlying
Davison-Paxon has been severely eroded in the modern world of
credit transactions and the decision has been the subject of much
criticism”. Nevertheless, it has not been overruled, and has
caused considerable confusion among the bankruptcy courts in our
circuit. Our en banc court should resolve that confusion. See,
e.g., In re Melancon, 223 B.R. at 312-15 (discussing Davison-Paxon
at length and concluding that it is obsolete due to Bankruptcy
Code’s addition of actual fraud and Supreme Court’s adoption of
common-law interpretation); In re Samani, 192 B.R. at 879 (allowing
creditor to establish fraud based on implied representation of
intent and ability to repay based on credit card use would directly
contravene Davison-Paxon); ITT Fin. Servs. v. Hulbert (In re
Hulbert), 150 B.R. 169, 175 (Bankr. S.D. Tex. 1993) (concluding
that Code’s addition of actual fraud has no effect on validity of
Davison-Paxon); In re Holston, 47 B.R. at 107 (unnecessary to
decide whether Davison-Paxon is still good law, because Code’s
addition of actual fraud as nondischargeability ground expands
scope of nondischargeable debts to include those arising from
intentional concealment or omission); Louisiana Nat’l Bank of Baton
Rouge v. Talbot (In re Talbot), 16 B.R. 50, 54 (Bankr. M.D. La.
1981) (bound by Davison-Paxon); In re Poteet, 12 B.R. at 568
(rejecting Davison-Paxon requirements as not relevant to credit
card transactions).
22
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creditor actually and justifiably relied on the representations;
and (5) the creditor sustained a loss as a proximate result of
the representations. Id.
Judge Duhé applies the former; Judge Dennis, the latter.
Moreover, AT&T did not specify on which prong it based its
complaint. Under either type, AT&T had the burden of proving the
elements by a preponderance of the evidence. Grogan v. Garner,
498 U.S. 279, 287 (1991).
In the light of Field v. Mans, 516 U.S. 59 (1995), it is
questionable whether there is justification for our applying
different elements for § 523(a)(2)(A)’s false
pretenses/representation and actual fraud prongs. Field, in
defining the justifiable reliance element for actual fraud,
relied on the RESTATEMENT (SECOND) OF TORTS (1976), which did not
differentiate between false pretenses, misrepresentations, and
actual fraud. See Field, 516 U.S. at 70-72. In any event, the
elements for both types of actions being similar,
dischargeability will be analyzed using those for § 523(a)(2)(A)
actual fraud.
B.
Judge Duhé disposes of the case on the first element,
concluding that Mercer made no representations each time she used
the pre-approved credit card; and, that, because she made no
representations upon obtaining the card as the result of a pre-
23
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approved solicitation, there were no representations upon which
AT&T could actually or justifiably rely.
Obviously, this theory makes it virtually impossible for any
issuer of a pre-approved credit card to prevail in a §
523(a)(2)(A) action. And, because the theory does not consider
the debtor’s intent in incurring credit card debt, it is likely
to result in the discharge of fraudulently-incurred debts,
contrary to the language and purpose of § 523(a)(2)(A). See
Grogan, 498 U.S. at 286-87 (“fresh start” policy of Bankruptcy
Code is for benefit of “honest but unfortunate” debtors, not
perpetrators of fraud); Chevy Chase Bank, FSB v. Briese (In re
Briese), 196 B.R. 440, 449 (Bankr. W.D. Wis. 1996) (“While the
bankruptcy code is to be construed liberally in favor of the
debtor, it is also to be fair to creditors.”).
Moreover, this theory could also have the unintended
consequence of encouraging irresponsible and dishonest debtors to
go on unrestrained spending sprees, until they have exhausted the
credit limits of their accounts, secure in the knowledge their
debts will be forgiven in bankruptcy court, as long as they wait
at least 60 days before filing the petition. See 11 U.S.C. §
523(a)(2)(C) (consumer debt for luxury goods or services, or cash
advances aggregating more than $1075, within 60 days before
filing petition presumptively nondischargeable). Concomitantly,
adoption of this theory undoubtedly would result in increased
24
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credit costs for millions of honest card users.
Finally, because Mercer did not rely on this theory or urge
its application, adoption of this theory is especially troubling.
In closing argument at the trial of the adversary proceeding in
bankruptcy court, Mercer’s counsel stated he was not urging
adoption of the “assumption of risk” theory because “in all
fairness it goes a little bit too far”. And, in her appellate
brief, Mercer implicitly concedes that, each time she used the
card, she made a representation of intent to pay the debt
incurred. Judge Duhé rejects the so-called “implied
representation” theory urged by AT&T. Under it, with each use of
a credit card, the debtor represents she intends to repay the
amount charged. He does so on the grounds that, in deciding to
extend credit to Mercer before she made any representations, AT&T
assumed the risk of non-payment of charges incurred by Mercer
through her subsequent card-use; and the theory would improperly
shift the burden of proof in § 523(a)(2)(A) cases, by making the
debtor a guarantor of her financial condition.
The first ground for rejection of AT&T’s “implied
representation” theory is a variant of the much-criticized
“assumption of the risk” theory adopted by the Eleventh Circuit
in First Nat’l Bank of Mobile v. Roddenberry, 701 F.2d 927, 932-
25
-25-
33 (11th Cir. 1983).11 The Bankruptcy Code should not be
interpreted to require a creditor who investigates a debtor’s
credit history prior to making a pre-approved solicitation, as
AT&T did in this case, to assume the risk of the debtor
committing fraud in subsequently using the card. “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.” In re Briese, 196 B.R. at 449
(emphasis added).
Furthermore, the assumption of the risk theory ignores the
nature of credit card transactions. More appropriate is the
position of those courts which have viewed “each individual
credit card transaction as the formation of a unilateral contract
11
For criticism of the assumption of the risk theory, see AT&T
Universal Card Servs. Corp. v. Searle, 223 B.R. 384, 389 (D. Mass.
1998) (theory “advantages the dishonest and deceptive debtor”); In
re Briese, 196 B.R. at 449 (theory “unsatisfactory, primarily
because dishonest debtors may manipulate its mechanical distinction
between debts incurred before and after credit privileges are
revoked”; “creditor does not ‘assume the risk’ that the debtor is
dishonest”); Chase Manhattan Bank, N.A. v. Ford (Matter of Ford),
186 B.R. 312, 318 n.8 (Bankr. N.D. Ga. 1995) (“many courts have
criticized the Eleventh Circuit’s approach as going to an extreme,
tipping the scales so far in favor of debtors that very few credit
card debts will qualify as nondischargeable”); In re Cox, 182 B.R.
at 634 (theory “too judgmental to support a court decision
purporting to apply a statute”); In re Preece, 125 B.R. at 477
(theory “places credit card issuers in a virtually impossible
position with respect to credit card charges made prior to
revocation of the card” (internal quotation marks and citation
omitted)).
26
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between the card holder and card issuer consisting of the
following promise in exchange for performance: the card holder
promises to repay the debt plus to periodically make partial
payments along with accrued interest and the card issuer performs
by reimbursing the merchant who has accepted the credit card in
payment”. Anastas v. American Sav. Bank (In re Anastas), 94 F.3d
1280, 1285 (9th Cir. 1996); see also AT&T Universal Card Servs.
Corp. v. Searle, 223 B.R. 384, 389 (D. Mass. 1998) (adopting
Anastas unilateral contract approach because it “is consistent
with the notion that a representation can be made by words or
conduct and recognizes representation as inherent in the
transaction” (citing RESTATEMENT (SECOND) OF TORTS, § 525, comment b
(1976)).
Moreover, the assumption of the risk theory is inconsistent
with the common law, as expressed in the RESTATEMENT (SECOND) OF
TORTS. See RESTATEMENT (SECOND) OF TORTS, § 530(l) (“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” (emphasis
added)); id., comment c (“intention to perform the agreement may
be expressed but it is normally merely to be implied from the
making of the agreement”). Accordingly, when Mercer used her
AT&T card to make a purchase or obtain a cash advance, she
represented her intent to perform her obligation under the
cardmember agreement, i.e., to repay the debt by making at least
27
-27-
the minimum monthly payment.
The second ground relied on by Judge Duhé for rejecting
AT&T’s “implied representation” theory seems to be based on an
assumption that the theory encompasses not only a representation
of intent to repay, but also a representation of ability to do
so. See Sears, Roebuck & Co. v. Hernandez (In re Hernandez), 208
B.R. 872, 877 (Bankr. W.D. Tex. 1997) (rejecting “implied
representation” theory based on assumption that, under that
theory, card-use represented not only an intent, but also the
ability, to repay); In re Briese, 196 B.R. at 448-50 (rejecting
“implied representation” of intent and ability to pay theory for
reasons similar to those expressed by Judge Duhé, but holding
that, in using card, debtor makes express representation — a
“promise to pay for the credit advanced”); Chase Manhattan Bank,
N.A. v. Ford (Matter of Ford), 186 B.R. 312, 317 (Bankr. N.D. Ga.
1995) (criticizing “ability-implying prong” of “implied
representation” theory).
Even if card-use could be understood as a representation of
not only an intent to repay, but also the ability to do so, the
latter is not actionable under § 523(a)(2)(A). It exempts from
discharge “any debt ... for money ... to the extent obtained by
... false pretenses, a false representation, or actual fraud,
other than a statement respecting the debtor’s ... financial
condition”. 11 U.S.C. § 523(a)(2)(A) (emphasis added).
28
-28-
Accordingly, the representation element is properly confined
to encompassing only a statement of intent to repay.12 This
makes consideration of the ability to pay but one of many factors
relevant to whether the representation was false and made with
the subjective intent to deceive.13
12
See In re Rembert, 141 F.3d at 281 (“use of a credit card
represents either an actual or implied intent to repay the debt
incurred”); In re Anastas, 94 F.3d at 1285 (“[w]hen the card holder
uses his credit card, he makes a representation that he intends to
repay the debt”); Chevy Chase Bank FSB v. Kukuk (In re Kukuk), 225
B.R. 778, 785 (10th Cir. B.A.P. 1998) (“use of a credit card
creates an implied representation that the debtor intends to repay
the debt incurred thereby, but does not create any representation
regarding the debtor’s ability to repay the debt”); American
Express Travel Related Servs. Co. v. Christensen (In re
Christensen), 193 B.R. 863, 866 (N.D. Ill. 1996) (“debtor’s use of
a credit card is a representation that he or she will pay off the
debt at some point in the future”); In re Melancon, 223 B.R. at 311
(“[w]hen the card holder inserts the card into an ATM, he is, in
one step, asking for a loan and promising to repay it if it is
obtained”); In re Reynolds, 221 B.R. at 837 (debtor’s use of credit
card is representation of “promise to pay under terms of the
debtor’s contract with the credit card issuer”); In re Briese, 196
B.R. at 450 (“[a]lthough 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”); Chase Manhattan Bank v. Murphy (In re Murphy), 190 B.R.
327, 332 (Bankr. N.D. Ill. 1995) (“the use of a credit card is a
representation regarding future action”).
13
See, e.g., In re Eashai, 87 F.3d at 1091 (considering debtor’s
financial condition, including fact that monthly expenses exceeded
income when credit card charges made, as one factor for inferring
intent to defraud); In re Reynolds, 221 B.R. at 839 (debtor’s
“reliance upon ... speculative financial arrangements appears to be
a reckless disregard of the truth of his ability to make the
minimum monthly payments”); AT&T Universal Card Servs. Corp. v.
Pakdaman, 210 B.R. 886, 889 (D. Mass. 1997) (“A debtor’s ability to
repay at the time he or she incurs indebtedness may of course be
circumstantial evidence on the issue of intent, but it is only one
29
-29-
In this light, the “implied representation” theory does not
have the undesirable consequence of making the debtor the
guarantor of her financial condition. See Briese, 196 B.R. at
450 & n.16 (“implied representation” is inappropriate, because
debtor’s card-use “constitutes an actual representation of future
performance”, “namely, the promise to pay for the credit
advanced”; when ability to pay is not treated as part of the
representation made with card-use, there is no “risk that the
debtor becomes the guarantor of his or her financial condition”).
C.
Judge Dennis concludes correctly, in my opinion, that, each
time she used her AT&T card, Mercer made a representation of an
intent to repay. We part ways, however, because he would affirm
the discharge on the basis that AT&T failed to prove it actually
and justifiably relied on such representations.
Judge Dennis agrees with Judge Duhé that a credit card
issuer cannot justifiably rely on any representation made by a
cardholder if the card was pre-approved and, prior to card-
factor.”); In re Murphy, 190 B.R. at 332 n.6 (ability to pay “is
merely one factor to be considered in determining whether the
debtor intended to repay”, but “[a]lone ... does not establish
fraudulent intent”); Household Credit Servs., Inc. v. Jacobs (In re
Jacobs), 196 B.R. 429, 434 (Bankr. N.D. Ind. 1996) (relying on fact
that, when debtor incurred charges, debtor was unable to pay
monthly payments on pre-existing debts and monthly income was less
than expenses as factor supporting conclusion that debtor
subjectively intended to defraud creditor); Matter of Ford, 186
B.R. at 320 (“debtor’s inability to pay the debt at the time that
he incurred it may present indicia of an intent to defraud”).
30
-30-
issuance, the issuer obtained no direct financial information
from the debtor. But, in his view, the creditor’s initial
assumption of risk does not prevent it from justifiably relying
on future representations if the debtor has established a history
of prompt payment. Nevertheless, he concludes, as a matter
of law, that, because AT&T received no direct financial
information from Mercer prior to card-issuance, but instead based
its decision to issue the card on the credit bureau screening
process, AT&T assumed the risk that Mercer would not repay the
charges, and could not justifiably rely on her implied promises
to repay loans incurred through her card-use. The “justifiable
reliance” standard applied by Judge Dennis is far more stringent
than that by Field, which, as Judge Duhé notes, does not require
an investigation. See LA Capitol Fed. Credit Union v. Melancon
(In re Melancon), 223 B.R. 300, 328-29 (Bankr. M.D. La. 1998)
(requiring credit card issuer to demonstrate that it examined
cardholder’s credit history before issuing card impermissibly
contradicts Restatement rule adopted in Field).
In adopting the justifiable reliance standard, Field
“look[ed] to the concept of ‘actual fraud’ as it was understood
in 1978 when that language was added to § 523(a)(2)(A)”, as
reflected in “the most widely accepted distillation of the common
law of torts”: the RESTATEMENT (SECOND) OF TORTS (1976). 516 U.S. at
70. Under the Restatement, “a person is justified in relying on
31
-31-
a representation of fact ‘although he might have ascertained the
falsity of the representation had he made an investigation’”.
Id. quoting RESTATEMENT (SECOND) OF TORTS, § 540). The Court cited
the Restatement’s illustration that “a buyer’s reliance on th[e]
actual representation [of a seller of land who says it is free of
encumbrances] is justifiable, even if he could have ‘walk[ed]
across the street to the office of the register of deeds in the
courthouse’ and easily have learned of an unsatisfied mortgage”.
Id. (quoting RESTATEMENT (SECOND) OF TORTS, § 540).
Furthermore, Field pointed out that “contributory negligence
is no bar to recovery because fraudulent misrepresentation is an
intentional tort”. Id. (emphasis added). Although
“[j]ustification is a matter of the qualities and characteristics
of the particular plaintiff, and the circumstances of the
particular case”, id. at 71, this does not mean that, simply
because AT&T is a large corporation and has the ability to obtain
financial information from the debtor, it cannot justifiably rely
on her representation of an intent to repay the charges she
incurred each time she used her card.
Field’s quotations from other tort treatises indicate
clearly that the justifiable reliance standard Judge Dennis would
impose is not consistent with the Court’s view of the scope of
that standard. For example, 1 F. HARPER & F. JAMES, LAW OF TORTS §
7.12, pp. 581-83 (1956), quoted in Field, states:
32
-32-
[T]he plaintiff is entitled to rely upon
representations of fact of such a character
as to require some kind of investigation or
examination on his part to discover their
falsity, and a defendant who has been guilty
of conscious misrepresentation can not offer
as a defense the plaintiff’s failure to make
the investigation or examination to verify
the same[.]
Id. at 72 (emphasis added).
Thus, even assuming AT&T could have obtained financial
information directly from Mercer prior to issuing her the card,
that does not preclude finding it was justified in relying on the
information it obtained, which raised no “red flag” requiring
further investigation. Moreover, as hereinafter discussed, the
record does not support Judge Dennis’ statement that the credit
bureau information obtained by AT&T prior to card-issuance
“included no information as to Mercer’s current financial
condition, solvency or ability to repay the loans contemplated”.
(Emphasis added.)
At trial, an AT&T bankruptcy specialist testified that the
screening process began six to seven months prior to AT&T’s
solicitation to Mercer. In the first screening, the credit
bureau produced a list of prospects based on criteria specified
by AT&T, including total revolving debt, delinquencies,
bankruptcies, judgments, utilization of existing credit, and
historical delinquency periods over 60-90 days. The credit
bureau determined a risk score (“FICO” score) for each prospect.
33
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The FICO score is a credit bureau model, developed by Fair Isaacs
Co., which predicts the probability of an account being
delinquent for 60-90 days or more within a one-year period. The
maximum possible FICO score is 900; the lowest, 0. AT&T requires
a minimum score of 680 as a condition for solicitation. Mercer’s
was 735, which AT&T’s bankruptcy specialist evaluated as “very
good”.
The list of prospects derived from the initial screening was
then referred to an outside vendor. It eliminated prospects who
had requested not to be solicited, duplicates, and prospects
located in high fraud areas. The list was then matched against
internal risk and scoring models used by AT&T; the list of
prospects retained after that process was then returned to the
credit bureau for a second screening to ensure there had been no
changes in a prospect’s credit standing or credit history since
the first screening.
The prospects who survived this second screening (including
Mercer) received an offer for a pre-approved credit card, as AT&T
is required to do, according to AT&T’s representative, under the
Fair Credit Reporting Act. When Mercer accepted the offer, AT&T
checked the information she supplied on the acceptance form to
ensure it matched the information in its database. Then, a third
credit bureau screening was performed to determine whether there
had been any deterioration in credit history, in which case AT&T
34
-34-
could either withdraw the offer or offer a lower line of credit.
In the light of that testimony, it is simply inaccurate to
say AT&T had no information about Mercer’s ability to pay when it
issued her a credit card.
Affirmance for the reasons stated by Judge Dennis is also
inappropriate because, although the bankruptcy court correctly
stated the applicable justifiable reliance standard, 220 B.R. at
323, it did not correctly apply it in determining AT&T did not
actually or justifiably rely on any representations by Mercer.
It held that, even assuming AT&T actually relied on any
representations by Mercer, such reliance was not justifiable “in
light of the incomplete nature of the credit information obtained
by AT&T”. Id. at 327. The bankruptcy court suggested that,
“[i]f AT&T does not want its cardholders to use cash advances for
gambling purposes and wants such uses to be non-dischargeable,
why not put a specific restriction on this use in the cardholder
agreement”. Id. at 328. During the trial, the bankruptcy judge
suggested a number of questions AT&T should have asked Mercer
before issuing her a credit card.14 The court’s opinion and
14
The bankruptcy court asked AT&T’s representative why AT&T had
not asked Mercer where she worked, how many children she had, and
whether she was married; and why it did not prohibit cardholders’
use of ATM machines at casinos. At the conclusion of the adversary
proceeding, the court suggested that, in addition to relying on
credit bureau information and FICO scores, credit card companies
could ask whether, among other things, the debtor: has any problem
35
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remarks reflect it imposed a much higher standard than
justifiable reliance.
Instead, whether AT&T actually and justifiably relied on
Mercer’s representations of intent to pay through her card-use is
a question of fact. See Coston v. Bank of Malvern (Matter of
Coston), 991 F.2d 257, 260 (5th Cir. 1993) (en banc) (pre-Field
case holding that reasonable reliance is question of fact). The
bankruptcy court, applying the correct legal standard, should
make that determination on remand.
Judge Dennis further concludes that nothing in AT&T’s
experience with Mercer as a cardholder, subsequent to card-
issuance, could justify a belief it had acquired a more
substantial basis for its reliance upon her representations than
it had when it issued the card. In support, he cites the
following factors:
(1) fourteen of Mercer’s transactions were
cash loans, several of which were made within
a casino; (2) Mercer borrowed the maximum
cash advance amount within thirty one days
after receipt of the card; (3) Mercer had
developed no history of payment or good
standing with [AT&T] (Mercer had only made
one payment of $25); [and] (4) nineteen days
after issuance, [AT&T]’s own computer had
red-flagged the use of Mercer’s credit card
with gambling; owes any gambling debts; has had any gambling losses
or winnings over the last several years; has other credit cards
and, if so, the balance due; has a savings account and, if so, the
balance; has a second job and, if so, why. The court suggested
further that credit card companies should be required to exercise
due diligence.
36
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for excessive transactions.
Judge Dennis states that he does not find that the cited
“factors caused AT&T’s reliance to be unjustified, but rather,
that they do not make AT&T’s otherwise unjustified reliance
justifiable”. AT&T does not, however, rely on any of the factors
cited by Judge Dennis to demonstrate justifiable reliance. In
any event, as hereinafter discussed, none of the cited factors
supports a conclusion that AT&T did not actually or justifiably
rely on Mercer’s representation, each time she used the card,
that she intended to repay the charge incurred.
1. Fourteen transactions were cash loans, several of which
were made within a casino. Although Mercer used the card to
obtain 14 cash advances, only four (three on 23 November and one
on 24 November, totaling approximately $1350) could be identified
as occurring within a casino; nine (one on 28 November, three on
1 December, three on 10 December, and two on 11 December,
totaling approximately $1300) are shown as having been obtained
from an automatic teller machine at Peoples Bank, 676 Bayview,
Biloxi, Mississippi; and one ($81 on 28 November) is shown as
having been obtained from “STB SO. MISSIS”, at 854 Howard,
Biloxi, Mississippi. In any event, the fact that some of the
cash advances were obtained at a casino is irrelevant in
determining whether AT&T justifiably relied on Mercer’s
representation that she intended to repay those loans. In the
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first place, the billing statement reflects that, although the
advances were obtained by Mercer at the casino on 23 and 24
November, they were not posted until 27 November. As AT&T’s
representative explained at trial, the date a transaction is
posted to a cardholder’s account is the date AT&T receives an
electronic transfer notification from the clearing bank. There
was no evidence that AT&T had the ability to instantaneously
determine, at the time Mercer inserted her card into the ATM,
that she was in a casino.
Moreover, there is no basis for, as a matter of law,
treating cash advances obtained at casinos differently from cash
advances obtained at other locations, such as banks or stores.
Although Mercer testified that she used all of the cash advances
obtained from AT&T for gambling, she obtained many of them at a
bank rather than a casino. Moreover, the trial testimony
established that AT&T has no control over ATM locations and is
not affiliated with the entity which operated the casino ATM from
which Mercer obtained cash advances.
The record contains no empirical or other evidence to
support a rule precluding credit card issuers from justifiably
relying on a cardholder’s promise to repay a cash advance simply
because it was obtained within a casino.15 Common sense suggests
15
Some courts have criticized the credit card industry for
allowing debtors to use credit cards at casinos, and have held that
credit card issuers cannot justifiably rely on representations of
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that not everyone who uses a credit card to obtain a cash advance
at a casino does so in order to obtain money for gambling, or
does so because she is losing and has no other source of funds
with which to gamble. For example, if given a choice, some might
consider it safer or more convenient to enter a casino to obtain
cash, rather than do so at an ATM outside a bank, where there is
no security and far greater potential for being robbed. Or,
someone might be in a casino hotel because a convention is being
held there or entertainment provided and, without using it for
gambling, obtain a cash advance at an ATM in the casino to use
for various monetary needs, such as dining. In short, obtaining
cash from such an ATM does not automatically translate into that
cash being used for gambling.
2. Mercer borrowed the maximum cash advance amount within
31 days after receipt of the card. This factor supports, rather
than detracts from, finding justifiable reliance. Mercer used
intent to pay when their cards are used to obtain cash advances at
casinos. See, e.g., In re Melancon, 223 B.R. at 329 & nn. 42, 43
(noting “obvious stupidity of an institutional policy that
sanctions the decision to lend money in a casino to borrowers who
gamble and are willing to do so with somebody else’s money”; “[i]f
a lender allows a holder to borrow money inside a casino, then the
lender must be charged with two bits of information: the money
will be used for gambling, and either the borrower has been losing
or he has no money of his own with which to gamble”; “[a] creditor
that lends money inside a casino is not justifiably relying on
anything”); In re Reynolds, 221 B.R. at 840 (“[c]redit card issuers
which allow cash advances on ATMs in gambling casinos are on notice
their customers may use the money to gamble, and presumably that
some gamblers may be poor credit risks”).
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her available credit within the first billing cycle, before she
received her first statement, giving AT&T no opportunity to
evaluate her creditworthiness based on a history with it. Up
until 11 December, the last day Mercer used the card, when she
exceeded her $3,000 credit limit by approximately $186, her card-
use was within the terms of the cardmember agreement. By using
the card, she signified her acceptance of the terms of that
agreement, including the term which required her to repay AT&T.
The AT&T representative testified that, as long as a cardholder
is using the card in accordance with the terms of the cardmember
agreement, AT&T is obligated to honor it.
3. Mercer had developed no history of payment or good
standing with AT&T. As stated, Mercer exhausted her credit limit
during the first billing cycle. Requiring that a cardholder have
a history of timely payments before the issuer can justifiably
rely on the cardholder’s representation of an intent to pay would
result in the discharge of all credit card debt incurred by
cardholders within at least the first month of use. Such a rule
would encourage irresponsible and dishonest debtors to “max out”
their credit limits within the first billing cycle in order to
preclude nondischargeability. It could also have the unintended
consequence of spurring credit card issuers to establish such low
credit limits that credit cards would serve no useful purpose to
many card users.
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4. Nineteen days after issuance, AT&T’s own computer had
red-flagged the use of Mercer’s credit card for excessive
transactions.16
This factor is not particularly relevant. AT&T’s
representative testified that: the account was reviewed by an
AT&T employee, who determined that the transactions were not
egregiously excessive and cleared Mercer’s account for further
use; and, because the charges were within the terms of the
cardmember agreement, AT&T was obligated to honor it. Reliance
on this factor could encourage prudent credit card companies to
cancel cards when cardholders use them frequently within the
first billing cycle, regardless of whether such use did not
exceed the cardholder’s credit limit.
D.
Based on the foregoing reasons, this case should be remanded
to the bankruptcy court. Continuing to use § 523(a)(2)(A) actual
fraud as the template, the following considerations for each of
its five elements should come into play. Again, the five
elements for such actual fraud are: (1) the debtor made
representations; (2) when made, she knew they were false; (3)
16
The bankruptcy court misstated that Mercer’s account was
flagged for excessive transactions nine days after issuance. See
AT&T Universal Card Servs. v. Mercer (In re Mercer), 220 B.R. 315,
320 (Bankr. S.D. Miss. 1998) (stating AT&T representative testified
Mercer’s account was flagged for excessive use on 19 November
1995).
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they were made with the intent to deceive the creditor; (4) it
actually and justifiably relied on them; and (5) it sustained a
loss as a proximate result of them.
For the first element, I would hold that, on each occasion
Mercer used her AT&T credit card to make a purchase or obtain a
cash advance, she expressly represented to AT&T her intent to
repay the amount charged, in accordance with the terms of the
cardholder agreement, by at least making the required minimum
payment.
For the second and third elements, the bankruptcy court did
not consider whether Mercer’s representations were false when
made, or whether she made them with the subjective intent to
deceive AT&T. For such factual determinations, all of the facts
and circumstances surrounding Mercer’s card-use should, of
course, be considered. Because a debtor rarely will admit credit
card debt is incurred with the intention of not repaying it, the
bankruptcy court should consider objective evidence of her state
of mind.17 I consider especially relevant her testimony that:
17
See, e.g., In re Eashai, 87 F.3d at 1090 (“Since a debtor will
rarely admit to his fraudulent intentions, the creditor must rely
on [objective factors] to establish the subjective intent of the
debtor through circumstantial evidence.”); Citibank (S.D.), N.A. v.
Michel, 220 B.R. 603, 606 (N.D. Ill. 1998) (“Obviously the court
must consider objective evidence that is probative of the debtor’s
intent to repay in addition to considering the debtor’s demeanor,
but the ultimate inquiry still seeks to determine the debtor’s
subjective intent”); In re Briese, 196 B.R. at 451 (because it is
“difficult, if not impossible, for a plaintiff to present direct
evidence of a debtor’s intent to deceive[,] ... courts may
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when she used the AT&T card, she did not have enough income from
her employment to pay all of her living expenses and make the
minimum payments on all of her credit cards; and she intended to
use gambling winnings to meet those expenses.18
For the fourth element, and as stated, the bankruptcy court
applied an incorrect legal standard in finding AT&T did not
actually and justifiably rely on any representations by Mercer.
I would use the standard of justifiable reliance applied in the
Ninth Circuit: “the 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”. In
legitimately utilize circumstantial evidence to ascertain debtor’s
intent”).
18
See In re Melancon, 223 B.R. at 336-41 (discussing at length
whether gamblers who hope to repay debts with gambling winnings
have requisite intent to repay, and concluding that, although
debtor “like all other gamblers, may have hoped that she would win
a lot of money, ... [she] never intended to repay the cash
advances”); In re Jacobs, 196 B.R. at 434 (subjective intent to
deceive established by proof that debtors obtained cash advances
and purchases when they were unable to pay monthly payments on pre-
existing debts and when their monthly income was less than their
monthly expenses; they were in default on other debts when they
incurred debts at issue, thus putting themselves in position of
insolvence; and they had in excess of $45,000 in secured debt when
they began to incur debt at issue); In re Preece, 125 B.R. at 478
(debtor’s professed intention to repay cash advances charged to
credit card not held in good faith because he knew he did not have
ability to repay them; “[a] debtor cannot ignore the reality of his
financial situation and still maintain that he has a ‘good faith
intent’ to repay”).
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re Anastas, 94 F.3d at 1286 (emphasis added).19
That standard is appropriate because it “recognizes the
unique nature of credit card transactions, the ability of a
cardholder to mask an actual financial condition by making
minimum payments from whatever sources, and the credit card
issuer’s lack of access to the cardholder’s present financial
condition at the point of each transaction”. See Searle, 223
B.R. at 391 (adopting Ninth Circuit’s justifiable reliance
standard). Facts relevant to that inquiry include: (1) AT&T’s
decision to offer Mercer a pre-approved credit card was based on
an examination of her credit history — twice before she accepted
the offer, and again after she accepted the offer and before it
sent a card to her; (2) the terms of the cardmember agreement,
19
Judge Dennis criticizes my quotation from In re Anastas for the
Ninth Circuit’s justifiable reliance standard, stating it is dictum
and “not a complete or comprehensive statement of the Ninth
Circuit’s jurisprudence on justifiable reliance”. In stating the
standard, In re Anastas cited In re Eashai, 87 F.3d at 1091, in
which the discussion of justifiable reliance was not dictum.
Moreover, in a subsequent decision, the Ninth Circuit quoted that
same language from In re Anastas in describing its standard. See
American Express Travel Related Servs. Co. v. Hashemi (In re
Hashemi), 104 F.3d 1122, 1126 (9th Cir. 1996) (quoting In re
Anastas, 94 F.3d at 1286). In stating that I would adopt this
standard, is not my intention to provide a complete or
comprehensive statement of the Ninth Circuit’s jurisprudence on
justifiable reliance. Obviously, if a cardholder has established
a history of payments with the creditor, justifiable reliance will
be easier to prove. But, I do not interpret the Ninth Circuit’s
jurisprudence to require such a history; and, as discussed supra,
I would not hold that the absence of such a history precludes
finding justifiable reliance.
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which provided that Mercer’s card-use signified her acceptance of
those terms, including the requirement that she repay the charges
incurred, by at least making the minimum monthly payments; and
(3) Mercer’s exhausting her available credit limit within the
first billing cycle, within the scope of the cardmember agreement
and before AT&T had any reason to suspect that she would not
repay the charges.
Finally, for the fifth element, I would hold that AT&T’s
loss (the unpaid charges) was proximately caused by its reliance
on Mercer’s promise, each time she used the card, to repay the
charge incurred.20
For the foregoing reasons, I respectfully dissent and urge
en banc consideration of this quite important case.
20
See Pakdaman, 210 B.R. at 890 (“issuer’s extension of credit
constitutes both actual reliance and damages”); In re Melancon, 223
B.R. at 326 (in using credit card, debtor represents intent to
repay; representation is made with intent to cause issuer to
provide credit; and representation is cause in fact of issuer’s
decision to provide credit); AT&T Universal Card Servs. Corp. v.
Wong (In re Wong), 207 B.R. 822, 832 (Bankr. E.D. Pa. 1997)
(creditor proved it sustained loss as proximate result of debtor’s
representations by establishing that, as direct result of debtor’s
use of credit card, debtor incurred debt that has not been paid).
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