Opinion
Case No. 00-10376-SSM, Chapter 7, Adversary Proceeding No. 00-1107
January 31, 2001.
Kevin M. Fitzpatrick, Esquire, Fairfax, VA., Counsel for the plaintiff.
Richard G. Hall, Esquire, Annandale, VA., 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 from the plaintiff under § 523(d), Bankruptcy Code. A hearing was held in open court on January 16, 2001, at the conclusion of which the court took the matter under advisement in order to review the record and the applicable law. For the reasons stated, the defendant will be awarded the reasonable fees and costs incurred in defending this action.
Background
The defendant, Quoc T. Lien ("the debtor"), filed a voluntary petition under chapter 7 of the Bankruptcy Code in this court on February 3, 2000, and received a discharge of his dischargeable debts on October 15, 2000. The plaintiff, Universal Bank, N.A. ("Universal"), which at the time had its headquarters in Florida, filed a timely complaint on May 8, 2000, to determine the dischargeability of $2,280.00 in credit card charges incurred from November 8, 1999 through November 23, 1999. Universal 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 record reflects that Universal issued the debtor a MasterCard on February 7, 1991; that the card had a credit limit of $5,800.00; and that $3,318.30 in charges were made to the account prior to November 8, 1999. On that date, the debtor incurred the first of the three charges in question: a $1,000.00 cash advance on November 8, 1999; a $600.00 cash advance a week later on November 15, 1999; and a $680.00 charge at a gas station on November 23, 1999. The account statement reflects a $70.00 payment by the debtor on December 1, 1999 (apparently the minimum payment for the prior month's balance) and a closing balance of $5,647.24. It is represented, and not denied, that Universal did not attend the meeting of creditors, nor did it seek, before filing the present action, to conduct an examination of the debtor under Federal Rule of Bankruptcy Procedure 2004. Nor does it appear that Universal, before filing this action, even reviewed the debtor's schedules and statement of financial affairs. Accordingly, the court is left to assume that the only prefiling investigation conducted by Universal was to review its own billing records for the period leading up to the bankruptcy filing.
After filing this action, Universal asked for a copy of the "petition" — which the court takes to include the schedules and statement of financial affairs — in discovery, implying that it did not already have a copy. Additionally, Universal's trial exhibits, filed two weeks prior to the trial in compliance with the pretrial order, reserved space for the schedules and statement of financial affairs with the notation "To be provided," implying that Universal still did not have a copy. The schedules, had they been examined, would have reflected a total of $118,848 in unsecured debt, much of which appears to be related to the Chinese restaurant the debtor owned. The schedules further reflect net monthly income of $560.82 and monthly living expenses of $1,259.23. Additionally, the statement of financial affairs reflects that the debtor incurred $2,000 in gambling losses in the year prior to filing bankruptcy.
After the complaint was filed, Universal engaged in discovery by means of interrogatories, requests for admissions, and requests for the production of documents. A deposition of the defendant was also noticed, but was canceled by Universal at the last minute. In his answers to Universal's interrogatories, the debtor stated that he had first consulted with his bankruptcy attorney on November 2, 1999 (approximately a week before the first of the three challenged charges), and that he paid his attorney a retainer on January 11, 2000 (which was within 60 days of the $600 cash advance and the $680 gas station charge). His interrogatory answers further stated that he had used the cash advances to pay expenses for the Chinese restaurant that he owned, that the gas station charge was for repair of his automobile, and that he expected to be able to repay the charges from income earned by the restaurant.
The court accepts counsel's representation that the cancellation was occasioned by counsel's medical condition. It is, however, noteworthy that no attempt was made to reschedule the deposition.
Trial was set for December 15, 2000. The day prior to trial, Universal moved for a continuance on the ground that the employee whom it had planned to present as its party witness had unexpectedly left its employ. The motion for continuance was heard at the outset of the trial and was denied. After introducing in evidence copies of the billing statement for the period from November 8 to December 7, 1999, and the debtor's discovery responses, Universal then moved for a voluntary dismissal with prejudice. The court dismissed the complaint with prejudice but retained jurisdiction to hear and determine the debtor's request for attorneys fees and costs, provided such a motion was filed within 10 days. On December 21, 2000, the debtor filed the motion that is presently before the court seeking $3,402.00 in attorneys fees and $392.44 in costs.
Discussion I.
Under § 523(d), Bankruptcy Code,
[i]f 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 Universal requested a determination of dischargeability under § 523(a)(2); and that the debt was discharged. Accordingly, the court is required to ("shall") grant judgment in favor of the debtor for costs and a reasonable attorney's fee if the court finds that Universal's position was "not substantially justified," and provided that "special circumstances" do not exist that would make the award unjust.
The phrase "substantially justified" is not defined in the Bankruptcy Code. It is, however, used in another Federal statute, the Equal Access to Justice Act ("EAJA"). Courts construing the EAJA have held that the Government's position is "substantially justified" if "justified to a degree that could satisfy a reasonable person" or if it has "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 special concerns that lead to the enactment of § 523(d). As explained by a leading treatise:
The Equal Access to Justice Act, 5 U.S.C. § 504, 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).
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 In re Stahl, 22 B.R. 497, 506 (Bankr.W.D.N.C. 1998). Such a concern is particularly relevant where, as here, the amount in controversy — $2,280.00 — is less than the likely fee that a competent and conscientious attorney in the metropolitan Washington, D.C. area would charge to answer the complaint, respond to discovery, prepare for trial, and represent the debtor at the trial of the action. In any event, in order to determine whether the present complaint was "substantially justified," it is necessary first to review the law of dischargeability as it relates to the credit card debt and what facts were known to Universal at the time it filed this action.
II.
Under § 523(a)(2), Bankruptcy Code, a chapter 7 discharge does not discharge an individual debtor from a debt —
for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by —
(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's or an insider's financial condition.
Additionally, § 523(a)(2)(C) provides that "for the purpose of" § 523(a)(2)(A),
consumer debts owed to a single creditor and aggregating more than $1,075 for "luxury goods or services" incurred by an individual debtor on or within 60 days before the order for relief under this title, or cash advances aggregating more than $1,075 that are extensions of consumer credit under an open end credit plan obtained by an individual debtor on or within 60 days before the order for relief under this title, are presumed to be nondischargeable[.]"
To establish fraud under § 523(a)(2)(A), the following five elements must be proven:
1. That the debtor made a misrepresentation;
2. That at the time the representation was made, the debtor knew it was false;
3. That the debtor made the false representation with the intention of defrauding the creditor;
4. That the creditor justifiably relied upon the representation; and
5. That the creditor was damaged as the proximate result of the false representation.
Harmon v. Scott (In re Scott), 203 B.R. 590, 595-96 (Bankr.E.D.Va. 1996). The burden of proof is on the objecting creditor, and the standard of proof is preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 291, 111 S.Ct. 654, 661, 112 L.Ed.2d 755 (1991).
With respect to the first element, this court has held, as have most courts, that "a debtor's use of a credit card carries with it an implied representation . . . of [an] intent to repay." AT T Universal Card Services Corp. v. Aguero, 1997 WL 633276, *3 n. 2 (Bankr.E.D.Va. 1997). See also Chase Manhattan Bank v. Carpenter (In re Carpenter), 53 B.R. 724, 727 (Bankr.N.D.Ga. 1985) (noting that this is the majority view). 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), aff'd, 200 B.R. 868 (W.D.Mo. 1996). Such factors include:
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, finally, to the element of reliance, the Supreme Court, in Field v. Mans, 516 U.S. 59, 70, 116 S.Ct. 437, 444, 133 L.Ed.2d 351 (1995), drew a distinction between the concept of "reasonable" reliance and the lesser standard of "justified" reliance by citing a scenario set forth in the Second Restatement of Torts. The Court stated:
[T]he illustration is given of a seller of land who says it is free of encumbrances; according to the Restatement, a buyer's reliance on this factual representation 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 (1976)). Thus, it has been said that "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." American Express Travel Related Services Co., Inc. v. Hashemi (In re Hashemi), 104 F.3d 1122 (9th Cir. 1997), cert. denied, 520 U.S. 1230, 117 S.Ct. 1824, 137 L.Ed.2d 1031 (1997).
III.
Given the policy behind § 523(d) of protecting debtors from creditors who bring 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, many courts look to the information that was available to the creditor at the time it filed the nondischargeability complaint in order to determine whether the creditor was "substantially justified" in bringing its complaint. See First Chicago FCC Nat'l Bank v. Willett (In re Willett), 125 B.R. 607, 609 (Bankr.S.D.Cal. 1991); FCC Nat'l Bank v. Dobbins, 151 B.R. 509, 512 (W.D. Mo. 1992); Rochester Hills Chrysler Plymouth v. Phillips (In re Phillips), 153 B.R. 758 (Bankr.E.D.Mich. 1993); and Chevy Chase v. Kullgren (In re Kullgren), 109 B.R. 949, 953 (Bankr. C.D. Cal. 1990).
A.
In this case, as noted, Universal appears to have performed no prefiling investigation other than to examine the debtor's pattern of charges and payments as reflected on its own accounting records. There is nothing in the record to suggest that Universal attended the meeting of creditors under § 341, Bankruptcy Code, in order to question the debtor, or that Universal sought to examine the debtor under Fed.R.Bankr.P. 2004. Indeed, it is not clear that Universal even reviewed the debtor's schedules and statement of financial affairs before filing its nondischargeability complaint. Additionally, the timing of the cash advances and charges in relationship to the filing date did not give Universal the benefit of the statutory presumption of fraud that would have arisen under § 523(a)(2)(C) had they been made within 60 days of the petition filing date.
Sixty days prior to the petition date was December 5, 1999.
Obviously, what constitutes a sufficient pretrial investigation will depend on the facts of a particular case. A credit card issuer armed with the Section 523(a)(2)(C) presumption may be able to rely on that alone. Additionally, while some courts have placed great weight upon a creditor's failure to attend the meeting of creditors, this court is aware that the large number of cases typically scheduled on any particular day in this district often makes extended questioning of a debtor at such a meeting impractical. The less that is known by the creditor at the time a dischargeability case is filed, however, the stronger is the inference that the complaint was filed to coerce a settlement, and the stronger is the showing that the creditor must make to show that an unsuccessful action was substantially justified. If a creditor is uncertain whether it has a meritorious action, Federal Rule of Bankruptcy Procedure 2004 provides a mechanism by which the debtor may be examined under oath before suit is filed. Obviously, no hard and fast rule can be laid down that a creditor must always take a Rule 2004 examination to avoid a finding that an unsuccessful nondischargeability complaint was not substantially justified; however, a failure to do so can weigh heavily where the other evidence available to the creditor would not make out a particularly compelling case.
Indeed, in the context of credit card dischargeability cases, a 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 a determinative factor at trial. See Aguero, 1997 WL 633276 at *4. Therefore, unless a credit card issuer takes advantage of the opportunity provided by Rule 2004 to question the debtor and assess his or her credibility, the creditor has little upon which to assess the actual strength of its case. Id.
Here, no attempt was made to examine the debtor before filing suit, and the only evidence shown to have been known to the creditor before filing the complaint was the fact that the debtor, within three months of the bankruptcy filing, took $1,600 in cash advances and charged $680 at a gas station, none of which caused him to exceed his credit limit. The court can only conclude that Universal simply took a shot that discovery would reveal additional facts that would strengthen its case or — even if not — that the debtor would settle rather than incur more in attorney's fees to defend the suit than Universal was demanding.
The court can take judicial notice that the majority of the nondischargeability actions brought by Universal in this court are settled on terms that allow the debtor to pay, in small installments over an extended period, a fraction of the amount for which suit was filed.
B.
At oral argument, Universal stressed that the debtor's revelation, in discovery, that he had first consulted a bankruptcy attorney prior to the transactions in question, and that he had paid the attorney a retainer within approximately two months after the transaction, was strong evidence of fraud. Thus, the question arises whether a creditor can be "substantially justified" in bringing a nondischargeability case which is objectively weak at the outset but which is made stronger through discovery. In this connection, a number of courts have held that a creditor's justification for litigation must be assessed not only at the time the complaint is filed, but throughout the litigation. See In re McCarthy, 243 B.R. 203, 210 (1st Cir. BAP 2000); In re Williams, 224 B.R. 523, 530 (2nd Cir. BAP 1998). See also In re Grant, 237 B.R. 97, 121 (Bankr.E.D.Va. 1999) (St. John, J.) ("A determination of substantial justification should be determined by an analysis of the totality of the circumstances."). However, this court does not read McCarthy and Williams to hold that a creditor can bootstrap itself into a position of substantial justification simply because discovery made an initially weak case stronger. Such a rule, by encouraging creditors to pursue even long shots, would exacerbate the very evil that Congress sought to address in enacting § 523(d). Rather, this court reads McCarthy and Willis as simply standing for the common-sense proposition that a creditor whose case initially appears meritorious must nevertheless abandon it, subsequent to filing suit, if the creditor learns that the evidence does not support its claim. Williams, 224 B.R. at 530; McCarthy, 243 B.R. at 210.
In some instances, evidence uncovered in the course of discovery might be so damning to the debtor's position as to constitute "special circumstances that would make [an] award unjust" within the meaning of Section 523(d). That is not the case here, however. The additional facts obtained through discovery, while helpful to Universal's case, were hardly overwhelming. Not every person who consults bankruptcy counsel ultimately files bankruptcy. Sometimes it is prudent simply to know one's options. In his interrogatory answers, the debtor stated that he had hoped the fortunes of his restaurant would improve over the holidays. If that testimony were believed at trial, the debtor's honest but mistaken belief that he could repay the debt out of restaurant profits would preclude a finding of fraud even if the debtor's expectations were not objectively reasonable.
Having considered all the circumstances, the court can only conclude that this action was not "substantially justified" when brought, and that Universal, having unsuccessfully gambled that it would nevertheless prevail at trial, cannot escape liability for the debtor's reasonable attorney's fees simply because its case improved after it filed suit.
IV.
At oral argument, the court, on its own motion, raised the question of whether, independently of § 523(d), the debtor could be awarded attorneys fees based on the contract between the parties. The cardmember agreement offered by Universal as one of its exhibits contains the following provisions applicable to attorney's fees and choice of law:
17. If we refer this claim to an attorney for collection, you will be liable for any reasonable attorney's fees we incur, plus the costs and expenses of any legal action[; and]
* * *
21. This agreement . . . shall be governed by and interpreted in accordance with the Laws of the state of the issuer of the Account . . . regardless of where you may reside or use your Account at any time."
Pltf. Exh. 6.
It was acknowledged by Universal's counsel that its headquarters were located in Jacksonville, Florida, at the time the card was issued. Accordingly, the law of Florida would control with respect to an allowance of attorney's fees. See In re Martin, 761 F.2d 1163 (6th Cir. 1985) (creditors are entitled to recover attorney's fees in bankruptcy claims if they have a contractual right to them under state law); accord In re Ziegler, 109 B.R. 172 (Bankr.W.D.N.C. 1989). See also Mayer v. Spanel Intern. Ltd., 51 F.3d 670 (7th Cir. 1995), cert. denied, 516 U.S. 1008, 116 S.Ct. 563, 133 L.Ed.2d 488 (1995); TranSouth Financial Corp. of Florida v. Johnson, 931 F.2d 1505 (11th Cir. 1991); and Matter of Luce, 960 F.2d 1277 (5th Cir. 1992).
In this connection, Florida Code § 57.105(2) provides:
If a contract contains a provision allowing attorney's fees to a party when he or she is required to take any action to enforce the contract, the court may also allow reasonable attorney's fees to the other party when that party prevails in any action, whether as plaintiff or defendant, with respect to the contract. This subsection applies to any contract entered into on or after October 1, 1988.
(Emphasis added). The phrase "any action" has been interpreted to include "a dischargeability proceeding to collect a debt under a contract." In re Woollacott, 211 B.R. 83 (Bankr.M.D.Fla. 1997). Accord In re Hunter, 243 B.R. 824 (Bankr.M.D.Fla. 1999); In re Mowji, 228 B.R. 321 (Bankr.M.D.Fla. 1999); In re Eckert, 221 B.R. 40 (Bankr.S.D.Fla. 1998); and In re Pichardo, 186 B.R. 279 (Bankr.M.D.Fla. 1995). Therefore, because the debtor was issued his credit card by Universal on February 7, 1991, and because § 57.105(2) has been held to encompass a dischargeability proceeding, the debtor would be entitled to attorneys fees as a matter of contract without regard to whether the position unsuccessfully advanced by Universal was substantially justified.
In the present instance, however, the court is unable to rely on the cardmember agreement for the simple reason that it was never admitted in evidence and is not part of the record. It was attached as an exhibit to the complaint, but the debtor, in his answer, denied that it was the contract between the parties. The agreement was also filed as a trial exhibit, but the debtor objected to its admissibility on a number of grounds, including lack of authenticity. It was not one of the exhibits admitted at trial before Universal took a voluntary dismissal. Thus, on the current state of the record, there is simply no evidence before the court of any contract between the parties. In the absence of a contract, Florida Code § 57.105(2) creates no alternative basis for an award of attorney's fees, and any fees in this instance will be awarded solely under § 523(d).
V.
With that said, the court has reviewed the fee request and statement of expenses submitted by debtor's counsel. Counsel seeks compensation at the rate of $200.00 per hour for 16.26 hours spent defending the nondischargeability action. Additionally, counsel seeks compensation for 2.0 hours of his paralegal's time at $75.00 per hour and out of pocket expenses totaling $392.44.
In the Fourth Circuit, the standard for an award of statutory attorneys fees is set forth in Barber v. Kimbrell's, Inc., 577 F.2d 216, 226 n. 28 (4th Cir. 1978), cert. denied 439 U.S. 934 (1978). Specifically, the factors to be considered are as follows: (1) the time and labor expended; (2) the novelty and difficulty of the questions raised; (3) the skill required to properly perform the legal services rendered; (4) the attorney's opportunity costs in pressing the instant litigation; (5) the customary fee for like work; (6) the attorney's expectations at the outset of the litigation; (7) the time limitations imposed by the client or circumstances; (8) the amount in controversy and the results obtained; (9) the experience, reputation and ability of the attorney; (10) the undesirability of the case within the legal community in which the suit arose; (11) the nature and length of the professional relationship between the attorney and client; and (12) attorneys' fee awards in similar cases. Many of the Barber factors are subsumed into the setting of an appropriate hourly rate, which, when multiplied by the time expended, provides a lodestar amount which is then subject to adjustment based on the remaining factors.
Anderson v. Morris, 658 F.2d 246, 249 (4th Cir. 1981). Having considered the factual and legal issues presented, customary fees in the Northern Virginia area, the experience and reputation of the debtor's attorney, and the lack of any suggestion that the case (other than the relatively small amount in controversy and client's limited resources) was undesirable within the legal community, involved any lost opportunity costs, or unusual time constraints, the court finds that an hourly rate of $185.00 per hour for attorney time and $65.00 an hour for paralegal time is appropriate.
Having reviewed the time records submitted by the debtor's attorney, the court concludes that all of the expenditures of time were reasonable and necessary for the defense of the case except for the 2.75 hours associated with the motion to dismiss for failure to state a claim for relief. The complaint had alleged that with the use of his credit card the debtor had impliedly represented that he had both an intent to repay and the ability to repay. The motion to dismiss attacked the notion that use of the card carries with it an implied representation of ability to pay. Although the court agreed that a misrepresentation of ability to pay is not actionable as a basis for nondischargeability unless the misrepresentation is in writing, § 523(a)(2)(B), Bankruptcy Code, and that a misrepresentation of ability to pay that is merely implied will not suffice, Aguero, 1997 WL 633276 at *3 n. 2, the fact remained that the complaint (because it also alleged that the debtor lacked an intent to repay) otherwise stated a claim for relief. The allegations in the complaint that the debtor did not have the ability to repay the cash advances and charges, while not by themselves sufficient as a basis for excepting the debt from discharge, would nevertheless have been circumstantial evidence on the issue of intent. That is, the more hopeless a debtor's financial condition when charges are incurred, the less likely that the debtor honestly intended to repay them. Accordingly, the most the motion to dismiss could have accomplished was to strike a few possibly-superfluous allegations from an otherwise sufficient complaint. The point counsel for the debtor sought to make in filing the motion to dismiss could just as easily have been raised and preserved in the answer.
Multiplying the time reasonably expended by counsel and his paralegal by their respective reasonable hourly rates results in a lodestar amount of $2,629.35. None of the remaining Barber factors warrants an adjustment of the lodestar amount. Counsel additionally has claimed $372.44 in reimbursable costs. Of that amount, $220.00 was for the services of a translator and is compensable. However, the remaining $172.44 represents the value of the time taken off by the debtor from work for his meetings with counsel. Such time is not compensable as costs. Accordingly, only $220.00 in costs will be allowed.
A separate order will be entered granting judgment in favor of the debtor for $2,629.35 in attorneys fees and $220.00 in costs, for a total of $2,849.35.