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indicating that "there is no apparent reason why the transcript of the debtor's testimony at a Rule 2004 examination would not in appropriate instances qualify as a prior inconsistent statement under Fed. R. Evid. 801(d) or party admission under Fed. R. Evid. 801(d)" (footnote omitted)
Summary of this case from Bavely v. Daniels (In re Daniels)Opinion
Case No. 96-14256-SSM, Adversary Proceeding No. 96-1326
September 17, 1997
Kevin M. Fitzpatrick, Esquire, Fitzpatrick Raftery, P.C., Fairfax, VA, of Counsel for the plaintiff
Joseph M. Goldberg, Esquire, Washington, D.C., of Counsel for the defendant
MEMORANDUM OPINION
This matter is before the court on the defendant's motion for an award of attorney's fees and costs under § 523(d), Bankruptcy Code. A hearing was held in open court on September 9, 1997, at the conclusion of which the court took the matter under advisement in order to review the record.
Findings of Fact
The defendant, Richard A. Aguero ("the debtor"), filed a joint voluntary petition with his wife under chapter 7 of the Bankruptcy Code in this court on August 9, 1996, and received a discharge of his dischargeable debts on November 23, 1996. The plaintiff, ATT Universal Card Services Corp. ("ATT") filed a timely complaint on November 9, 1996, to determine the dischargeability of $2,450.03 in credit card charges incurred from December 1995 through March 1996. ATT alleged that the charges were nondischargeable under § 523(a)(2)(a), Bankruptcy Code as having been incurred through fraud, false pretenses, or a false representation. The card itself had been issued in response to an unsolicited "preapproved offer," and had a credit limit of $2,500.00. The record does not reflect the date the card was issued, but the billing records reflect that substantial charges were being made to the account as early as August, 1995.
ATT did not attend the meeting of creditors under § 341, Bankruptcy Code, nor did it seek to examine the debtor under F.R.Bankr.P. 2004 prior to the filing of the complaint. It appears that the only prefiling investigation conducted by ATT was to review its own billing records for the time period in question. These reflected a total of 49 charges at various stores averaging approximately $41 each (the smallest being $8.69 and the largest being $125.38), plus a $500 cash advance. The cash advance was taken on February 5, 1996, approximately seven months prior to the chapter 7 filing. The last credit card charge was made on March 5, 1996, approximately six months prior to the chapter 7 filing. None of the charges on their face even remotely suggested that they were incurred for the purchase of "luxury goods." It does appear that on September 25, 1996, an attorney representing ATT mailed debtor's counsel what appears to be a form letter asserting that ATT believed the account balance to be nondischargeable under § 523(a)(2)(a) based on the pattern of charges and stating, "As the last date for filing objections is quickly approaching, we request your immediate response if you desire an amicable settlement of this matter." Debtor's counsel, who presumably received the letter, did not reply.
After the complaint was filed, each side engaged in discovery, including the depositions on June 18, 1997, of the debtor and of ATT's designated representative. Trial had previously been set for July 31, 1997. A month after the depositions and two weeks prior to the trial, ATT filed a motion to voluntarily dismiss its complaint with prejudice, stating that although it believed its case had merit, it wished to dismiss the action "out of an abundance of caution." On July 29, 1997, after a hearing to consider the motion, the court dismissed the complaint with prejudice but retained jurisdiction to hear and determine the debtor's request for attorneys fees and costs under § 523(d), Bankruptcy Code, provided such motion was filed within 10 days. On August 5, 1997, the debtor filed the motion that is presently before the court seeking $5,955.00 in attorneys fees and $229.31 in costs.
Conclusions of Law and Discussion I.
Under § 523(d), Bankruptcy Code,
If a creditor requests a determination of dischargeability of a consumer debt under [§ 523(a)(2)], and such debt is discharged, the court shall grant judgment in favor of the debtor for the costs of, and a reasonable attorney's fee for, the proceeding if the court finds that the position of the creditor was not substantially justified, except that the court shall not award such costs and fees if special circumstances would make the award unjust.
Here, there is no dispute that the debt in question was a "consumer debt"; that ATT requested a determination of dischargeability under § 523(a)(2); and that the debt was discharged. Accordingly, the court is required to ("shall") grant the debtor a judgment for costs and a reasonable attorney's fee if the court finds that ATT's position was "not substantially justified." Even if ATT's position was not substantially justified, the court may nevertheless decline to make such an award if "special circumstances" would make the award unjust.
The phrase "substantially justified" is not defined in the Bankruptcy Code. The phrase does occur, however, in a similar context in the Equal Access to Justice Act, 5 U.S.C. § 504, which requires an award of attorneys fees to successful private litigants in adversary adjudication with a Federal Government agency unless the agency's position "was substantially justified or that special circumstances make an award unjust." 5 U.S.C. § 504(a)(1). It has been held that the Government's position is "Substantially justified" under the Equal Access to Justice Act if "justified to a degree that could satisfy a reasonable person" or "having a reasonable basis both in law and fact." EEOC v. Clay Printing Co., 13 F.3d 813, 815 (4th Cir. 1994), quoting Pierce v. Underwood, 487 U.S. 552, 565 (1988). This standard, however, must be applied in light of the concerns that lead to the enactment of § 523(d). As explained by a leading treatise,
In the absence of section 523(d), the threat of litigation over the discharge exception of section 523(a)(2) and the attendant costs of litigation could induce debtors to settle for a reduced sum. Thus, creditors with marginal cases could compel at least part of their claims to be excepted from discharge or reaffirmed, despite the weakness of their cases. To balance the scales, Congress enacted section 524(d) [ sic]. The purpose is to discourage creditors from bringing objectively weak . . . litigation in the hopes of extracting a settlement from a debtor anxious to avoid paying attorney's fees to defend the action.
4 Collier on Bankruptcy, ¶ 523.08[8], p. 523-59 (Lawrence P. King, ed; 15th ed. rev. 1997) (footnotes omitted). See, ATT Univ. Card Svcs. Corp. v. Duplante (In re Duplante), 204 B.R. 49 (Bankr. S.D. Cal. 1996). Such concern is well-illustrated by the present case, in which the debtor was required to incur approximately $6,000 in attorneys fees to defend against a $2,450.03 dischargeability claim which the creditor then dismissed on the eve of trial.
II.
In order to place this issue in perspective, it is necessary to review briefly the law of dischargeability as it relates to credit card debt. Under § 523(a)(2), Bankruptcy Code, a chapter 7 discharge does not discharge an individual debtor from a debt —
In so summarizing, I do not mean to suggest that the whole subject matter is not an area of intense controversy, or that the courts are uniform in their holdings. In particular, a number of courts and commentators have criticized the view, discussed below, that a card holder's use of a credit card carries with it an implied representation of intent to repay. See, e.g., 4 Collier on Bankruptcy, § 523.08[6], p. 523-55 ("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.")
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 $1,000 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 $1,000 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 following five elements must be proven:
1. That the debtor made representations;
2. That at the time the representations were made the debtor knew them to be false;
3. That the debtor made the representations with the intention and purpose of deceiving the creditor;
4. That the creditor justifiably relied on the representations; and
5. That the creditor sustained the alleged injury as a proximate result of such representations.
Field v. Mans, — U.S. —, 116 S.Ct. 437, 440, n. 4, 133 L.Ed.2d 351 (1995). 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, this court has held, as have others, that "with the use of his card a credit card holder represents that he has both the ability and the intention to pay for the goods and services." Bank of Virginia v. Davis (In re Davis), 42 B.R. 611, 613 (Bankr. E.D. Va. 1984) (Bostetter, J.). With respect to the second and third elements, "[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 the second and third elements." 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:
The formulation in Davis does somewhat overstate, I believe, the scope of the implied representation. Under § 523(a)(2) (A) and (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 Steinbnrg (In re Van Steinbnrg), 744 F.2d 1060 (4th Cir. 1984). Accordingly, if an express statement by a debtor, "I have the ability to pay this debt" would not be grounds for holding the resulting debt nondischargeable where the statement is not in writing, it is difficult to see how a representation of ability to pay that is merely implied could provide a basis for nondischargeability. See Collier, supra, at p. 523-56. Accordingly, I would hold that a debtor's use of a credit card carries with it an implied representation only of intent to repay.
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.
With respect to the fourth element — that the creditor justifiably relied on the representations — this court had held, prior to the Supreme Court's decision in Field v. Mans, supra, that a debtor's use of a credit card was not only an implied representation that he or she had both the ability and the intention to pay for the goods and services, but "that the credit card issuer relies on those implied representations in extending credit." In re Davis, 42 B.R. at 613. In light of Field v. Mans, however, it would appear that justifiable reliance cannot simply be implied from the debtor's use of the card and the card issuer's acceptance of the charges. Rather, it would appear that the plaintiff has the burden of presenting affirmative evidence to satisfy that element. In re Willis, 190 B.R. at 870 ("[A] creditor which relies on a debtor's representations must show that such reliance was justified based on the facts available to the creditor at the time the card was used.") 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 Services Co., Inc. v. Hashemi (In re Hashemi), 104 F.3d 1122 (9th Cir. 1997).
III.
Given the policy behind § 523(d) of deterring creditors from bringing objectively weak nondischargeability complaints in consumer cases with a view to extracting a settlement from debtors who cannot afford or are anxious to avoid the attorneys fees that would be incurred in defending the action, it is appropriate to look to the information that was available to the creditor at the time it filed the nondischargeability complaint. First Chicago FCC Nat'l Bank v. Willett (In re Willett), 125 B.R. 607, 609 (Bankr. S.D. Cal. 1991) (test is "whether under all the circumstances at the time of filing of the complaint, the plaintiff was substantially justified in filing the complaint[.]") (finding complaint not substantially justified and awarding attorneys fees of $5,708). As noted above, ATT performed no prefiling investigation other than to examine the debtor's pattern of charges and payments reflected on its own accounting records. In particular, it did not attend the meeting of creditors under § 341, Bankruptcy Code, in order to question the debtor, nor did it seek to examine the debtor under F.R.Bankr.P. 2004.
ATT argues that the September 25, 1996, letter to debtor's counsel should be considered as part of its prefiling investigation. Contrary to counsel's assertion, however, the letter does not request any information or invite any explanation from the debtor. Rather, it simply sets forth ATT's position that the debt is nondischargeable and asks for a response if the debtor desires "an amicable settlement."
The court gives little weight to the failure to appear at the meeting of creditors, since it is true, as ATT argues, and debtor's counsel acknowledges, that the large number of cases scheduled on any particular day make any extended questioning of debtors by creditors at the § 341 meeting impractical. ATT's counsel asserts that a Rule 2004 examination would also be pointless because, it is argued, the testimony obtained could not be used in an ensuing dischargeability action. That argument ignores the reality that the debtor's credibility — assuming the debtor asserts that he or she intended to repay the credit card charges at the time they were incurred — is likely to be the determinative factor at trial, and that unless a credit card issuer takes advantage of the opportunity provided by the Bankruptcy Rules to question the debtor and assess his or her credibility, the creditor has little upon which to assess the actual strength of its case. If the creditor ultimately decides to file a dischargeability complaint, the information learned as a result of the examination can be used to frame interrogatories and requests for admission under F.R.Bankr.P. 7033 and 7036, thereby possibly obviating the need to take the debtor's deposition as part of the adversary proceeding itself. Additionally, there is no apparent reason why the transcript of the debtor's testimony at a Rule 2004 examination would not in appropriate instances qualify as a prior inconsistent statement under Fed.R.Evid. 801(d)(1)(a) or party admission under Fed.R.Evid. 801(d)(2) or why, if the debtor were not present at the trial, it would not be admissible as former testimony under Fed.R.Evid. 804(b)(1).
The plaintiff cites to a non-existent "Official Comment 2" to F.R.Bankr.P. 2004 for the proposition that the transcript of a Rule 2004 examination cannot be used to impeach a debtor's testimony at trial. The advisory committee notes to Rule 2004, however, set forth no such restriction, and the court is aware of no other authority that would so restrict the use of the Rule 2004 transcript. See Longo v. McLaren (In re McLaren), 3 F.3d 958 (6th Cir. 1993) (transcript of a Rule 2004 examination of the debtor was admissible at trial after the debtor declined to testify on Fifth Amendment grounds). The only authority the court has found supporting ATT's position is dicta m Moore v. Lang (In re Lang), 107 B.R. 130, 132 (Bankr. N.D. Ohio 1989) (Baxter, J.) (allowing the deposition of the debtor to be taken even though the creditor had already conducted a Rule 2004 examination because "[a] deposition of a party has a much broader applicability in subsequent evidentiary proceedings, while the use of testimony given at a Rule 2004 examination is more limited."). Lang provides no authority or discussion in support of that proposition, however.
ATT argues that, in any event, there was no need for it to conduct any prefiling investigation beyond its own analysis of the debtor's pattern of charges and payments, since — ATT asserts — proof of those charges and payments would, standing alone, satisfy six of the twelve " Dougherty factors." As both a legal and a factual matter, the court does not concur. First, the "twelve-factor test" is not, and was never intended to be, a scoring system. It is merely a suggested list of circumstances that courts have found useful in approaching the factual determination of whether a particular debtor charged purchases or took cash advances without an intent to repay. By their very nature, the factors will not only not carry equal weight, but often will not weigh one way or the other. In the present case, for example, the first circumstance — the length of time between the charges made and the filing of bankruptcy — weighs against a finding that the debtor incurred the charges knowing that he was going to file for bankruptcy. Congress has, as noted above, provided credit card issuers a helpful presumption in § 523(c) that large cash advances and large purchases for "luxury goods and services" within 60 days of the bankruptcy filing are nondischargeable. Charges and cash advances incurred outside the presumptive period, however, carry no presumption. Here the last cash advance — which in any event was below the threshold amount to trigger the presumption — was taken seven months prior to the bankruptcy filing, and the last charge for goods or services was made six months prior to the bankruptcy filing. None of the charges on their face appear to be for "luxury" goods or services. There was (and is) no evidence that an attorney was consulted concerning the filing of bankruptcy before the charges were made, the charges did not exceed the credit limit of the account, and there was (and is) no evidence suggesting the debtor and his wife were not both gainfully employed.
So-called from the opinion in Citibank South Dakota, N.A. v. Dougherty (In re Dougherty), 84 B.R. 653 (Bankr. 9th Cir. 1988), which, while rejecting the "implied representation" theory of credit card use, endorsed a non-exclusive list of twelve factors for consideration by trial judges in determining whether credit card charges incurred prior to the issuer's revocation of card privileges were "incurred through actual fraud, i.e., where the debtor made the charges with no intention of paying for same." The twelve factors in Dougherty are identical to those set forth in the Willis opinion, supra.
Contrary to ATT's argument, the court does not consider a $22.27 restaurant meal, for example, to be a "luxury" purchase. AT T's counsel also pointedly referred at oral argument to a charge made for merchandise at Circuit City, a large discount retailer of electronic goods. There was indeed one such charge — in the amount of $10.38, hardly the stuff of luxuries. The bulk of the credit card charges appear to have been incurred at automobile parts stores, clothing stores, grocery stores, and restaurants.
ATT argues, however, that there was a "sudden change" in the debtor's buying habits, as reflected by 24 charges aggregating $1,065.76 made in the period from December 10, 1995 to January 9, 1996, 11 charges aggregating $435.84, plus a $500 cash advance during the period January 10, 1996 to February 2, 1996, and 14 charges aggregating $520.58 made during the period February 10, 1996 to March 9, 1996. A number of the charges, particularly in December, were made on the same day, but that is hardly unusual in the weeks leading up to and following Christmas. Although it is literally true, as ATT points out, that the debtor began the December 10, 1995, billing period with a "zero balance," such a characterization is misleading to the extent it implies that the account had not been heavily used prior to that date. In August, 1995, for example, the debtor had begun the billing cycle with a $249.26 balance, made one purchase at a gas station and took two cash advances totalling $700.00. The next month he made one purchase at a gas station and one at a supermarket and took a $1,500.00 cash advance, bringing his account balance to $2,523.17, slightly in excess of his credit limit. ATT did not supply in its discovery responses the statement for the billing cycle beginning October 10, 1995, but apparently in that month the debtor paid off all but $77.29 of the charges. He paid that amount in November 1995, thereby bringing the account balance down to zero. In each of the months from August through November, he made at least the minimum payment required, and no payment was required in December because the account had been paid down to zero in November. In January, 1996, he made a payment of $30.00, slightly in excess of the minimum ($22.00) required as a result of his December charges. He made no payments in February or March, 1996. In short, while the debtor increased the use of his card for small purchases beginning in December, the level of debt did not, contrary to ATT's assertion, suddenly and dramatically skyrocket, considering that in prior months the account had carried balances at least as high, and in one month greater, than the balances for the billing cycles to which ATT points.
ATT, however, also points to information it learned, as a result of the discovery deposition it took approximately one month prior to the scheduled trial date, that at some point in the December 1995 through March 1996 time frame, the debtor consulted a consumer credit counseling service and subsequently made payments to them for two or three months before apparently deciding that the situation was hopeless. The debtor testified that he began "thinking" about bankruptcy in late June or early July 1996, and that he first consulted an attorney on August 6, 1996.
The date was never quite pinned down, but, having carefully read the entire deposition, the court finds that the initial contact was most probably made in February 1996.
The fact that the debtor may have made some of the charges in question after having consulted a consumer credit counseling service to assist him in making payment arrangements, however, does little to improve ATT's case. Such consultation is at least as consistent with an intent to manage and repay debt, as it is with an intent to run up debt that he had no intention of paying. The debtor, when asked at the deposition how he expected to be able to repay the charges, testified, "My wife and I were working. We were making the minimum payment. We thought we could make more payments later." The debtor and his wife had a combined annual gross income, at the time they filed their bankruptcy petition, of $42,252.00 per year, and they listed on their schedules a total of $32,922.51 in credit card and consumer loan debt.
The most objective indication of just how weak ATT's case was, however, is its own action — after it learned of the consumer credit counseling it now says was so damning — in voluntarily dismissing the nondischargeability complaint with prejudice on the eve of trial. ATT is now represented by a different law firm, and present counsel urged at oral argument that former counsel had been improvident in moving to dismiss because ATT actually had a strong case. The court does not agree. Every nondischargeability case obviously has to stand on its own facts, but this court has presided over a number of such trials and can only conclude that this case was weak from the outset, most notably because of the considerable period of time that elapsed after the charges and prior to the bankruptcy filing, and because no other circumstance was strongly probative of an intent, at the time the charges were incurred, not to repay them.
Having considered carefully the facts known to ATT at the time it filed its complaint and the discovery record made after the complaint was filed, this court is left with the definite and firm conviction that ATT could not have prevailed at trial on the meager evidence available to it at the time it filed the complaint; that its case was not made so substantially stronger as a result of what it learned during discovery as to constitute "special circumstances"; and that ATT, from the time it first mailed the September 25, 1996, letter, was primarily looking for a "settlement." Given the relatively small amount in controversy, it was inevitable that any vigorous and conscientious defense of the action would likely result in legal fees exceeding the indebtedness for which ATT was seeking a judgment of nondischargeability. The natural result of that economic fact of life would be to coerce a debtor into settlement — either by reaffirmation of the debt or by an agreed judgment of nondischargeability — regardless of whether the debtor believed his actions had been fraudulent. It was precisely to protect debtors against being presented with such a Hobson's choice that Congress enacted § 523(d). Accordingly, the court concludes that an award of costs and attorneys fees is proper, since the debt was discharged, the creditor was not "substantially justified" in bringing the litigation, and special circumstances do not make an award unjust.
IV.
The court has reviewed the fee request and statement of expenses submitted by debtor's counsel. Counsel seeks compensation at the rate of $150.00 per hour for 39.7 hours spent defending the nondischargeability action. Having reviewed the services as itemized in the motion, the court finds them to have been reasonable and necessary. While ATT's case was never strong, counsel obviously had a duty to prepare carefully for trial. The record reflects that he promptly propounded discovery, and when ATT failed to respond fully, corresponded with opposing counsel in a good faith response to resolve the dispute before filing a motion — which required briefing and a court appearance — to compel discovery. He corresponded with ATT's counsel, attempting to persuade them that they had no case. He prepared responses to ATT's discovery, took the deposition of ATT's respresentative, and represented the debtor at the deposition taken by ATT. When ATT moved two weeks prior to trial to dismiss the case with prejudice, he filed appropriate pleadings to preserve his client's right to seek attorneys fees. His motions were well-researched and well-drafted. Counsel is an experienced practioner with a good reputation, and his hourly fee is well within the range of fees charged by attorneys of similar experience and reputation in this area. The expenses consist primarily of court-reporter and transcript fees incurred in connection with the depositions. The court concludes, therefore, that the requested fees of $5,955.00 and costs of $229.31 are reasonable.
V.
A separate order will be entered granting judgment in favor of the debtor for $6,184.31.