Opinion
CASE NUMBER: R05-45090-PWB, ADVERSARY PROCEEDING NO. 06-4063, IN PROCEEDINGS UNDER CHAPTER 7 OF THE BANKRUPTCY CODE.
January 12, 2007
ORDER ON DEFENDANT'S MOTION FOR SUMMARY JUDGMENT
The Plaintiff seeks a determination in this adversary proceeding that money obtained by the Debtor in the use of a charge account issued by the Plaintiff constitutes a nondischargeable debt pursuant to 11 U.S.C. § 523(a)(2). The Debtor seeks summary judgment and dismissal of the complaint on the basis that the Plaintiff's legal theory fails to state a claim for relief. The Debtor argues that the Plaintiff's reliance on an "implied representation theory" for nondischargeability fails as a matter of law, citing Citibank (South Dakota), N.A. v. Kim, Case No. 00-75273-ADK (Bankr. N.D. Ga. 2001) (unpublished opinion). For the reasons stated herein, the Court finds that the Debtor is entitled to summary judgment to the extent the Plaintiff's claim is for false pretenses or false representation. However, the Court finds that the Plaintiff has sufficiently asserted a legal and factual basis for "actual fraud" such that summary judgment is not appropriate.
Section 523(a)(2)(A) provides that a discharge under chapter 7 does not discharge a debtor from a debt for "money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by false pretenses, a false representation, or actual fraud. . . ." 11 U.S.C. § 523(a)(2)(A). The Court reads the complaint as asserting two alternative grounds for nondischargeability. The first is that the debt was incurred through false pretenses or false representations. The second is that the Debtor engaged in actual fraud. The Court will discuss each in turn.
False Pretenses or False Representation
To establish nondischargeability of a debt based on false pretenses or false representation the creditor must show, among other things, a false representation. This Court has previously held that in order to meet this requirement in the context of a credit card debt, there must be an express, affirmative representation or use of a credit card after the issuer has revoked it. FDS National Bank v. Alam (In re Alam), 314 B.R. 834 (Bankr. N.D. Ga. 2004) ( citing First Nat. Bank of Mobile v. Roddenberry (In re Roddenberry), 701 F.2d 927 (11th Cir. 1983)). In Alam, the Court expressly rejected the implied representation theory with respect to false pretenses or false representation claims. Id. at 838 (this Court "rejects the implied representation theory that Plaintiff's complaint pleads"). Paragraph 10 of the Plaintiff's complaint relies on the theory that an intent to repay is implied when a debtor obtains an account and extension of credit and then uses that account and extension of credit. The Plaintiff has alleged no "express, affirmative representation" necessary to state a claim for false pretenses of false representation and, as such, has stated no basis for recovery on these grounds. Accordingly, the Court will enter summary judgment in favor of the Debtor on these limited grounds.
Actual Fraud
In Alam, the Court recognized that the concept of "actual fraud" is much broader than false pretenses or false representation and that the existence of a fraudulent misrepresentation is not necessary to prove actual fraud. Alam, 314 B.R. at 840 (quoting McClellan v. Cantrell (In re Cantrell), 217 F.3d 890, 893 (7th Cir. 2000) (actual fraud may encompass "deceit, artifice, trick, or design involving direct and active operation of the mind, used to circumvent and cheat another."). The Court concluded in Alam that "a debtor commits actual fraud for purposes of § 523(a)(2)(A) if the debtor uses a credit card without the actual, subjective intent to pay the debt thereby incurred." Alam, 314 B.R. at 841. The Court further stated that although a number of objective facts may be relevant to determining intent, "the ultimate factual issue is the debtor's subjective intent not to pay. This factual issue cannot be determined by a formulaic use of objective criterion and, critically, is quite distinct from the question of ability to pay." Id. Nevertheless, "subjective intent is not established solely by the fact that an insolvent debtor used a credit card and did not have the ability to pay." Id. at 839.
The Plaintiff may prevail on its nondischargeability claim only if it can prove by a preponderance of the evidence that the Debtor had the subjective intent not to pay. However, an inability to pay a debt when it is incurred, standing alone, does not establish actual fraud. To that end, the implied representation theory (that the debtor made an implicit representation of ability to pay and intent to pay) is not available to establish actual fraud. The Plaintiff has alleged in its complaint that the "[Debtor] incurred the debts when [the Debtor] had no ability or objective intent to repay them." (Complaint, ¶ 12). This allegation, however, does not demonstrate a debtor's intent to defraud. In the Plaintiff's response to the Debtor's motion for summary judgment, however, the Plaintiff has identified a number of material facts it contends demonstrate the Debtor's lack of subjective intent which warrant denial of the Debtor's motion for summary judgment (Plaintiff's Statement of Material Facts, ¶¶ 2-8) and concedes that it must establish that the Debtor had an actual subjective intent not to pay (Plaintiff's Response to Motion for Summary Judgment, ¶ 2).
Some courts have identified factors to consider in determining whether a debtor had the intent to defraud, including: (1) the length of time between charges made and the filing of the bankruptcy petition; (2) whether an attorney was consulted regarding bankruptcy before the charges were made; (3) the number of charges made by the debtor; (4) the amount of the charges; (5) the debtor's financial condition at the time the charges were incurred; (6) whether the charges exceeded the account's credit limit; (7) whether multiple charges were made on the same day; (8) whether the debtor was employed; (9) the debtor's employment prospects; (10) the debtor's financial sophistication; (11) sudden changes in the debtor's buying habits; and (12) whether the charges were made for luxuries or necessities. Citibank (South Dakota), N.A. v. Brobsten (In re Brobsten), 2001 WL 34076352 (Bankr. C.D. Ill. Nov. 20, 2001); see Chase Manhattan Bank (U.S.A.), N.A. v. Carpenter (In re Carpenter), 53 B.R. 724, 730 (Bankr. N.D. Ga. 1985) (listing the 12 factors, but finding analysis of intent unnecessary since plaintiff had failed to prove all elements of its case). Contra AT T Univ. Card Svcs. v. Alvi (In re Alvi), 191 B.R. 724, 733 (Bankr. N.D. Ill. 1996) (rejecting factors because they equate inability to pay with lack of intent to pay).
This Court has not adopted or endorsed a particular set of criteria for discerning intent and does not do so now. The ultimate question is whether the Plaintiff can prove by a preponderance of the evidence, whether that evidence is direct or circumstantial (but not based on implied representations), that the Debtor committed actual fraud because he lacked the subjective intent to pay the Plaintiff at the time the charges were incurred. Neither party has sought summary judgment on this issue, and based on the fact sensitive nature of the inquiry, summary judgment would be inappropriate even if either had sought such a ruling.
In conclusion, the Court finds that the Plaintiff may not rely on an implied representation theory for purposes of proving a false representation, false pretenses, or actual fraud under § 523(a)(2). In order to prevail on its § 523(a)(2) claim, the Plaintiff must establish that the Debtor incurred the debt by actual fraud, to wit, he lacked the subjective intent to pay the Plaintiff at the time the charges were incurred. Because discovery has closed in this proceeding, the Court will schedule this matter for a pretrial conference to discuss scheduling and other related matters. It is unnecessary for the parties to submit a pretrial order prior to the conference. Accordingly, it is
ORDERED that the Debtor's motion for summary judgment is granted in part and denied in part. The Plaintiff's claims for false pretenses or false representation are dismissed. The Plaintiff has asserted a sufficient factual and legal basis under an "actual fraud" theory and, as such, summary judgment is not warranted on this ground. It is
FURTHER ORDERED that the Court shall hold a pretrial conference February 14, 2007 , at 11:00 a.m. , in Courtroom 326, U.S. Courthouse, 600 East First Street, Rome, Georgia. It is unnecessary for the parties to submit a pretrial order prior to the conference.
The Clerk is directed to serve copies of this Order on the persons on the attached Distribution List.