Opinion
No. 3:99-CV-0642-P
June 23, 1999
MEMORANDUM OPINION AND ORDER
Now before the Court is Donna and Jeffie Easts' Appeal of the bankruptcy court's Findings of Fact and Conclusions of Law of November 18, 1998. Appellants appeal the trial court's finding that Appellants acquired a cash advance from ATT Universal Card Services Corp. with specific intent never to repay. Appellants also appeal the bankruptcy court's decision which held that Appellants' debt with ATT Universal Card Services Corp. was nondischargeable under 11 U.S.C. § 523(a)(2)(A). After careful review of the Parties' briefs, the record and applicable law, the Court hereby REVERSES and REMANDS the decision of the bankruptcy court.
STANDARD OF REVIEW
"When reviewing a Bankruptcy Court's decision in a `core proceeding,' a district court functions as an appellate court and applies the standard of review generally applied in federal courts of appeals." Reserve Life Ins. Co. v. Webb ( In re Webb), 954 F.2d 1102, 1103-04 (5th Cir. 1992). Accordingly, the bankruptcy court's factual determinations are subject to a "clearly erroneous" standard of review. MBank Waco, N.A. v. Kennard ( In re Kennard), 970 F.2d 1455, 1457 (5th Cir. 1992); Nationwide Mutual Ins. Co. v. Berryman Prods., Inc. ( In re Berryman), 183 B.R. 463, 466 (N.D.Tex. 1995). The Supreme Court defined the term "clearly erroneous" in Anderson v. City of Bessemer as follows,
Although the meaning of the phrase "clearly erroneous" is not immediately apparent, certain general principles governing the exercise of the appellate court's power to overturn findings of a district court may be derived from our cases. The foremost of these principles . . . is that "[a] finding is `clearly erroneous' when although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed." This standard plainly does not entitle a reviewing court to reverse the finding of the trier of fact simply because it is convinced that it would have decided the case differently . . . If the district court's account of the evidence is plausible in light of the record viewed in its entirety, the court of appeals may not reverse it even though convinced that had it been sitting as the trier of fact, it would have weighed the evidence differently. Where there are two permissible views of the evidence, the factfinder's choice between them cannot be clearly erroneous.Anderson v. City of Bessemer, 470 U.S. 564, 573-74 (1985). A bankruptcy court's conclusions of law are reviewed de novo. Kennard, 970 F.2d at 1458.
BACKGROUND
Appellants Donna Katherine East and Jeffie Clyde East ("Appellants," "Easts" or "Debtors") received a pre-approved credit card application offer from ATT Universal Card Services Corp. ("Appellee," "UCS," or "Creditor") in the early 1990s. Tr. at 54. Before sending the Easts the application for credit, UCS conducted a pre-screening process of its potential applicants. Tr. at 50. As part of its screening process, UCS contacted TRW, a credit bureau, and asked it to compile a list of potential applicants to receive an application. Tr. at 50. TRW evaluated the following factors when compiling its list for UCS: It assessed whether certain individuals had: (a) previous bankruptcy filings, (b) a history of past due accounts, (c) present past due accounts, and (d) a history of liens, foreclosures or garnishments. Tr. at 51. UCS would not issue a pre-approved credit card application unless the candidate received a minimum FICO score of 680. Tr. at 52. (A FICO score is a credit model which analyzes and assigns numerical values to aspects of an individual's credit history to determine the probability of an account going past due over a two year period of time. Tr. at 51-52.) Appellants received a FICO score of 793. Tr. at 52.
Appellants received an application for a card and accepted the offer by completing the credit card application and returning it to UCS. Tr. at 54. Appellants listed their annual income as $40,000.00. Tr. at. 55. UCS opened a credit account for Appellants on April 1, 1991 and sent Appellants a credit card and a cardmember agreement. Tr. at 55.
Appellants began to use the credit facility after their account was opened. Tr. at 35. Appellants understood that they were required to perform pursuant to the terms set forth in the card member agreement. Tr. at. 35. From 1991 through 1996, Appellants complied with the terms of the agreement and made regular payments, often paying in excess of the minimum payment due. Tr. at 35-36.
From May 1996 through March 1997, there was no activity recorded on Appellants' account. and the account had a zero balance. Appellee's Br. at 3. On May 6, 1997, Appellants drew a convenience check on the account in the amount of $8,259.29. Id. This sudden increased activity alerted UCS of the possibility of fraudulent activity on the account and forms the basis of this fraud action. Tr. at 48, 58-59.
Most of the testimony elicited during the trial concerned the $8,259.29 convenience check drawn on the Easts' UCS account. Mr. East testified that he agreed to convey a 39.5-acre tract of vacant land adjacent to his homestead to his longtime personal friend, Willard Thomas, for $31,000.00. Tr. at 19. He explained that the agreement had been made approximately ten years prior and that Mr. East and Mr. Thomas agreed that the property would be conveyed "when [Thomas] got ready." Tr. at 19. In March or April 1997, Thomas approached East about purchasing the land. Tr. at 22. In May 1997, Mr. East conveyed the 39.5 acre tract to Mr. Thomas for $31,000.00, the price the men had agreed upon ten or so years earlier. Tr. at 19; Appellee's Br. at. 3. The sale of the land closed on May 6, 1997. Tr. at 78. Appellants received approximately $31,000.00 for the conveyance. Tr. at 78.
In its Brief, Appellee states that Mr. East agreed to convey a 20 acre tract of land to Thomas. Appellee's Br. at 3. However, the trial transcript reads "Willard Thomas bought 39.5 acres of land for $31,000.00." Tr. at 19. Furthermore, the trial transcript indicates that the encumbrance was on a 20 acre tract of land. Tr. at 78. In any case, this inconsistency in the amount of land conveyed to Thomas from Mr. East does not affect the outcome of this appeal.
After the sale of the property, Appellants owned five acres of land and their home, all subject to a mortgage with NationsBank in the amount of $25,000.00. Tr. at 22, 41-42, 78. NationsBank also held a personal note from Mr. East in the sum of $2800.00. Tr. at 22, 41-42, 78. Appellants used the $31,000.00 from the sale of the 39.5-acre tract to pay off an $11,000 Texas Veteran's Board mortgage and $20,000.00 of the $25,000.00 NationsBank mortgage. Tr. at 19-20, 42. To pay off the remainder of the encumbrance on their homestead and the personal note, Appellants drew a convenience check in the sum of $8259.29 against their ATT Universal Card account on May 6, 1997. Tr. at 20-21. Appellants testified that they transferred the mortgage balance and the personal loan amount to their credit card because the interest rate on the credit card was lower and to avoid taking out a new loan with attendant expenses. Tr. at 42. Appellants made payments to UCS until August 1997 on that debt. Tr. at 68. Whether Appellants intended to defraud Appellees by using their ATT credit card to pay off their home mortgage was the subject of the trial in the court below.
The interest rate on the mortgage was between eight and eight and one-half percent, the interest rate on the personal loan was fourteen or fifteen percent, and the interest rate on the credit card was 6.9 percent. Tr. at 42.
At the time Appellants drew the convenience check (May 6, 1997), Mr. East was employed by Sales Equipment Company making $30,000.00 per year guaranteed plus a commission at twelve percent of gross profit. Tr. at 14, 37. When East accepted his position with Sales Equipment Company in 1997, he was told he could earn as much as $70,000.00 per year. Tr. at 37-38. From January until May 1997, East received net monthly payments in the amount of $2330.00 per month. Tr. at 14. Mrs. East was not employed. Tr. at 14. At that time, the Easts' monthly expenses totaled approximately $4000.00 per month. Tr. at 14-17. Although their checking account was "continuously drawing down" because their expenses exceeded their income by $1700 per month, there was no evidence that Appellants' checking account was overdrawn. Tr. at 19.
Mr. East testified that he learned sometime in May 1997 that his employer, Sales Equipment Company, was having financial difficulty. Tr. at 12, 26, 32-33. A payroll deposit check issued to Mr. East bounced on May 19, 1997. Tr. at 25. A replacement check also bounced on May 28, 1997. Tr. at 27. Mr. East testified that it was after his payroll checks began to bounce and other industry contacts informed him of the company's financial difficulty, that he believed he was in a potentially dire financial situation and thus formulated the intent to form his own freight hauling company. Tr. at 32-33. Mr. East testified that his intent was formed in late May, after the second payroll check bounced. Tr. at 24, 29. Mr. East explained that from May 28, 1997 through June 6, 1997 he did the following: First, he met with his brother-in-law to discuss the financial aspects of owning and leasing a long haul truck. Tr. at 82. Thereafter, he located, negotiated the price of, and closed the purchase of a Freightliner truck for $65,000.00. Tr. at 24, 29, 87. He also arranged to borrow and subsequently received $4000.00 on his life insurance and $3000.00 from Mrs. East's 401(k) Plan for use as a down payment on the truck. Tr. at 31-32, 88-89. Finally, Mr. East entered into an agreement to lease and haul freight for a company known as Builders Transport. Tr. at 29-30, 34.
Or for expenses that would be incurred in operating the truck. Tr. at 30-31.
By August 1997, Mr. East's trucking business had failed. Tr. at 24, 82-83. He then began working first as a meter reader for the local water company and then as a retail manager. Tr. at 72, 83-84.
Appellants filed their Chapter 7 petition for bankruptcy on November 26, 1997. Appellee timely filed a Complaint to determine dischargeability claiming that Debtors violated 11 U.S.C. § 523(a)(2)(A) by drawing the convenience check on their UCS account. Debtors were granted a discharge from all other dischargeable debts on April 8, 1998.
This case was tried before The Honorable Harold Abramson, United States Bankruptcy Judge. Final judgment was entered for Appellees on November 17, 1998. Appellants timely filed a Motion for Reconsideration/New Trial which was denied on February 3, 1999. Appellants then filed their Notice of Appeal on February 9, 1999 pursuant to Bankruptcy Rule 8002.
DISCUSSION
In their appeal, Appellants argue that the trial court erred in finding that Appellants acquired a cash advance from UCS with specific intent never to repay.
The issue of whether a requisite element of § 523(a)(2)(A) is present is a factual determination reviewed for clear error. Anastas v. Am. Sav. Bank ( In re Anastas), 94 F.3d 1280, 1283 (9th Cir. 1996); Runnion v. Pedrazzini ( In re Pedrazzini), 644 F.2d 756, 757 (9th Cir. 1981).
In a Chapter 7 bankruptcy, all debts are discharged except those enumerated in 11 U.S.C. § 523. 11 U.S.C.A. § 727(b) (1993). Section 523(a)(2)(A) reads as follows:
(a) A discharge under section 727 . . . of this title does not discharge an individual from
any debt . . . (2) 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.11 U.S.C.A. § 523(a)(2)(A) (1993 Supp. 1999). A creditor seeking a determination of nondischargeability based on "actual fraud" must prove by a preponderance of the evidence that: (1) the debtor made 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 justifiably relied on such representations; and (5) the creditor sustained losses as a proximate result of the representations. Field v. Mans, 516 U.S. 59, 69 (1995); Recoveredge v. Pentecost, 44 F.3d 1284, 1292-93 (5th Cir. 1993); Allison v. Roberts ( In re Allison), 960 F.2d 481 (5th Cir. 1992).
Appellants dispute the trial court's finding that UCS sustained its burden of proving the second element — that Debtors acquired a cash advance with the intent never to repay, and thus, that Debtors perpetrated an actual fraud upon UCS. Appellants' Br. at 4.
Appellants and the lower court use the terms "false representation" or "false pretense" and "actual fraud" interchangeably. Appellants' Br. at 4; Findings of Fact and Conclusions of Law at 3. However, the elements a creditor must prove differ between the two. In order for a debtor's representation to be a "false representation or false pretense" under § 523(a)(2)(A), it must have been: (1) a knowing and fraudulent falsehood. (2) describing past or current facts, (3) that was relied upon by the other party. Recoveredge, 44 F.3d at 1293. As stated supra, the elements for actual fraud are (1) the debtor made 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 relied on such representations; and (5) the creditor sustained losses as a proximate result of the representations.Id.
As counsel for the Appellee pointed out at oral argument, it is irrelevant to this appeal whether Appellants are being accused of a false pretense or actual fraud. In both causes of action, a plaintiff must prove "intent to deceive" by a preponderance of the evidence and the issue before the Court on appeal is whether the trial court erred in finding that Appellants possessed the requisite intent to defraud.
Section 523(a)(2)(A) allows a bankruptcy court to except certain debts from a debtor's general discharge if the money owed was obtained through "false pretenses, a false representation, or actual fraud." 11 U.S.C.A. § 523(a)(2)(A). Because Congress did not define these terms in the Bankruptcy Code, courts have been responsible for determining what constitutes false pretenses, a false representation, and actual fraud. Abigail Gerlach, A Game of Chance: The Dischargeability of Credit Card Gambling Debt under 11 U.S.C. § 523(a)(2)(A) , 28 U. Mem. L. Rev. 985, 986 (1998). In Field v. Mans, the United States Supreme Court held that the terms used in 523(a)(2)(A) "are common-law terms, and . . . in the case of `actual fraud' . . . they imply elements that the common law has defined them to include." Field, 516 U.S. at 69. As a result of this holding, the Fifth Circuit has held that a creditor must prove the following five common law fraud elements to make out a successful 523(a)(2)(A) actual fraud claim: (1) the debtor made 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) that the creditor relied on such representations; and (5) that the creditor sustained losses as a proximate result of the representations. Bank of La. v. Bercier ( In re Bercier), 934 F.2d 689, 692 (5th Cir. 1991).
In the case at bar, the issue in dispute before the bankruptcy court was whether Defendants intended to defraud the credit card company by incurring debt Defendants knew they would not repay. If a credit card issuer can demonstrate that a debtor did not have the intent to pay for the charge when he presented the card to the third party, the debt will be excepted from the discharge. This lack of intent can be proven through direct evidence of subjective intent not to repay or inferred from the debtor's inability to repay the debt at the time the debt was incurred. Sears, Roebuck Co. v. Boydston ( In re Boydston), 520 F.2d 1098, 1101 (5th Cir. 1975). If a debtor incurs credit card debt with the subjective bad faith intention of petitioning for bankruptcy and avoiding the debt, that subjective intent not to repay will satisfy the intent element. Boydston, 520 F.2d at 1101. However, fraudulent intent may also be inferred from objective facts suggesting that the 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. Boydston, 520 F.2d 1098 ("Where hopeless insolvency at the time of the purchase makes payment impossible, fraudulent intent may be inferred."); see ITT Fin. Resources v. Hulbert ( In re Hulbert), 150 B.R. 169, 175. (S.D.Tex. 1993).
A court must look a the totality of the circumstances to determine whether the 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, in which case, fraudulent intent may be inferred. Bank One Columbus, N.A. v. McDaniel ( In re McDaniel), 202 B.R. 74, 79 (N.D.Tex. 1996); ATT Universal Card Svcs v. Samani, 192 B.R. 877, 880 (S.D.Tex. 1996); Hulbert, 150 B.R. at 173. In evaluating the totality of the circumstances, courts look to factors such as the length of time between the loan and the bankruptcy; changes in the buying habits of the debtor; the debtor's financial sophistication; the debtor's employment status; whether the debtor consulted an attorney regarding filing bankruptcy before the charges were made; whether the purchases were for luxuries or necessities; and whether the debtors were hopelessly insolvent at the time of the charges. Samani, 192 B.R. at 880.
Appellants challenge as clearly erroneous the bankruptcy court's finding of fraudulent intent. They construe the bankruptcy court's order as finding that "a check bounced from the employer prior to the sale of the homestead." Appellants' Br. at 6. After reviewing the bankruptcy court's Findings of Fact and Conclusions of Law, the Court determines that the bankruptcy court did not intend for its Order to be construed in such a way. The lower court did not base its finding of fraudulent intent on the fact that a "check bounced from the employer prior to the sale of the homestead." Rather, the lower court found that a check from East's employer bounced, and that East sold a portion of his homestead. There is no finding that the incidents took place in that order; the bankruptcy court merely described the check incident before it described the sale of the homestead property.
The bankruptcy court stated in its Findings of Fact and Conclusions of Law that Debtors possessed fraudulent intent because they knew "they could not repay that cash amount." Findings of Fact and Conclusions of Law at 3. The bankruptcy court found that "Mr. East began to suspect earlier than May that his job was a problem, because his employer was having problems." Id. The court held that "they knew they couldn't repay and would not repay" the credit card debt. Id. Further, the court concluded that Debtors knew and "intend[ed] never to repay by filing bankruptcy." Id. After careful review of the testimony and evidence before the trial court, the Court finds that the evidence does not support the bankruptcy court's finding of fraudulent intent and that said finding was clearly erroneous.
During the trial, Mr. East testified that the reason he took the cash advance to pay off the mortgage and a portion of the unsecured note was to secure a lower interest rate — the interest rate on the card was less than the interest rate on the homestead loan and on the personal loan. Tr. at 41-42. The bankruptcy court did not "buy" East's explanation for drawing the convenience check. Findings of Fact and Conclusions of Law at 2. Rather, the bankruptcy court found that Debtors were trying to clear up their secured debt and their homestead property. Id. at 2-3. The trial court judge stated that "this case bothers me in that there was a history of payment before the draw of cash knowing they could not repay that cash amount." Id. The bankruptcy court believed that the evidence indicated that Debtors knew they could not and would not repay the cash amount because they knew at the time the convenience check was drawn that his job and thus his financial situation were in jeopardy. Id. The evidence the bankruptcy court relied on was that "Mr. East began to suspect earlier than May that his job was a problem, because his employer was having problems." Id. at 2. It then found that "Mr. East then draws down on his credit card $8,200.00 plus dollars and uses part of that to pay off the balance of his homestead and part is paid to an unsecured note to the same bank." Id. The bankruptcy court inferred fraudulent intent by concluding that Debtors knew they did not have the ability to repay at the time the convenience check was drawn because East knew he was soon going to lose his job.
There was evidence from which the bankruptcy court could infer that East may have suspected "earlier than May that his job was a problem" and that "his employer was having problems." First, East testified that in an eight day time span he (1) met with his brother-in-law to discuss the financial aspects of owning and leasing a long haul truck, (2) located, negotiated the price of, and closed the purchase of a $65,000.00 Freightliner truck, (3) arranged to borrow and subsequently received $4000.00 on his life insurance and $3000.00 from Mrs. East's 401(k) Plan, and (4) entered into an agreement to lease and haul freight Builders Transport. The trial court found it incredible that East could arrange those plans within an eight-day period of time. Findings of Fact and Conclusions of Law at 2. The trial court believed that East's swift and comprehensive action was circumstantial evidence of knowledge and planning prior to May. The bankruptcy court believed that East began planning because East believed that his employer's financial condition was in jeopardy. East also testified that while employed with Sales Equipment, he "didn't feel good about selling a product [when] you didn't know [if] it would be delivered or not." Tr. at 45. It was not clearly erroneous for the lower court to infer from this evidence that East suspected his employer was in financial trouble earlier than May 1997.
However, the evidence in the record does not support the trial court's inference that because East "suspect[ed] earlier than May that his job was a problem" and that "his employer was having problems," that he knew by May 6, 1997 that he was going to lose his job. As of May 6, 1997, the date the debt was incurred, Plaintiff was still receiving paychecks. Further, East was still expecting his commission payment. Tr. at 19, 37. That the employer's checks began to bounce on May 19, 1997 cannot be evidence that East knew his job was in jeopardy on May 6, 1997.
Further, even if East did know by May 6, 1997 that he was soon going to be out of a job, the trial court made an impermissible inferential leap that East did not have the intent to repay the credit card debt at the time the debt was incurred. The record does not support the Court's finding that Appellants knew they would be unable to repay at the time the debt was incurred or that they knew they were going to file bankruptcy. In fact, when evaluating the totality of the circumstances, all evidence is to the contrary. First, the fact that Appellants paid down the credit card debt in May, June, July and August of 1997 flies in the face of a finding that they had the intent "never to repay." Furthermore, the court's findings that Appellants knew they were on the verge of filing bankruptcy, and that Appellants incurred debt with the intent of never repaying, are wholly inconsistent with Appellants' decisions to borrow $7000.00 on their life insurance and 401(k) Plan to start a new business instead of using the $10,000.00 in available credit from other credit cards. If Appellants had believed they were hopelessly insolvent and on the verge of bankruptcy, they would have been foolish to invest their own money and/or pay off the credit card debt when they could have incurred "dischargeable" credit card debt in the case of the life insurance and 401(k) Plan. Furthermore, that East took active steps in May and June to establish his own business — a business in which he believed he could earn between fifty and sixty thousand dollars per year — is evidence that he did not intend on May 6 on filing bankruptcy and failing to repay the debt he was incurring. In addition, Appellants' sale of their property and their act of paying off a considerable amount of their debt is evidence that they intended to repay their debts. Appellants paid off $31,000.00 worth of debt. Simply put, there is no evidence that Appellants had the intent to defraud UCS by transferring $8000.00 worth of debt they knew they would never repay, while at the same time paying off $31,000.00 of other debt. Moreover, Appellants did not incur new debt, they merely transferred their existing debt.
Further, the evidence does not support a finding that Appellants were hopelessly insolvent at the time the debt was incurred. On May 6, 1997, East was still receiving his paycheck and expecting his commission payment. Even assuming East knew on May 6 he was going to be out of a job shortly, according to the bankruptcy court's findings, he had a plan to begin a trucking business that he believed would earn him at least $50,000.00 per year. There is no evidence that Appellants' financial situation was impossibly hopeless at the time the debt was incurred.
In sum, the bankruptcy court's findings that East knew on May 6 that he was going to lose his job, that East knew on May 6 that he would not be able to pay due to insolvency, that East knew on May 6 that he was going to file bankruptcy and ultimately, that East intended at the time he incurred the debt not to repay it, is not supported by the evidence in the record. The evidence does not support a finding of intent and therefore, the Court concludes that the bankruptcy court's holding was clearly erroneous.
Accordingly, for the reasons stated herein, the bankruptcy court's judgment is REVERSED and the Appellants' debt to Appellee is discharged.
SO ORDERED this 23rd day of June 1999.