Opinion
Case No. 03-12810-SSM, Adversary Proceeding No. 03-1271
April 13, 2004
MEMORANDUM OPINION
This matter is before the court on the defendant's motion for an award of attorney's fees from the plaintiff under § 523(d), Bankruptcy Code. A hearing was held on March 23, 2004, following which the court took the matter under advisement to review the record and the applicable law. For the reasons stated below, the motion will be denied.
Background
The defendant, Ana J. Vuong ("the debtor"), filed a voluntary petition under chapter 7 of the Bankruptcy Code in this court on June 13, 2003, and received a discharge of her dischargeable debts on September 29, 2003. The plaintiff, Bank One DE NA ("Bank One"), timely filed a complaint on September 4, 2003, to determine the dischargeability of $21,066.56 in credit card charges. Bank One alleged that the charges were nondischargeable under § 523(a)(2)(A) as having been incurred through fraud, false pretenses, or a false representation and that a portion of that debt was presumed nondischargeable under § 523(a)(2)(C).
The record reflects that Bank One issued the debtor and her spouse a joint First USA VISA credit card. In its complaint, Bank One alleged that the debtor charged a total of $21,066.56, and of that amount, $5,211.00 was charged between April 21, 2003 and April 25, 2003 ("the April charges"). Bank One alleged that $4,378.00 of the April charges were charged at casinos in Atlantic City, New Jersey. With these charges, the debtor exhausted the credit limit and made no further payments to Bank One. Although the complaint seeks the entire $21,066.56 declared nondischargeable, Bank One, in its response to the present motion, acknowledged that only the April charges should have been claimed nondischargeable.
Nothing in the record indicates when that credit card was issued.
Nothing in the record indicates whether the April charges constituted cash advances or regular charges.
Nothing in the record indicates whether Bank One attended the meeting of creditors. Additionally, Bank One did not file a motion to examine the debtor under Federal Rule of Bankruptcy Procedure 2004. However, in its response to the present motion and at the hearing, Bank One asserted that it did not seek to conduct a Rule 2004 examination because, during a telephone conversation on August 25, 2003, counsel for the debtor informed Bank One's counsel that the debtor was "missing" and that the debtor's husband had filed a missing person report. Thus, Bank One asserts that the filing of a motion for Rule 2004 examination would have been futile, and that the filing of the complaint was the only other avenue it could pursue to protect Bank One's interest.
In support of the present motion, the debtor submitted a letter dated October 2, 2003, from her counsel to counsel for Bank One, informing Bank One that the debtor's husband made the questionable charges, rather than the debtor. By letter, Bank One responded: "If that is the case, please send to me a signed notarized statement from Ms. Vuong's husband identifying each charge that he personally incurred on the credit card." Bank One never received a statement. The second and final argument of the debtor suggests that Bank One had an affirmative duty to inspect the charge slips prior to filing the complaint to verify the debtor's signature
A final pretrial conference was held on February 9, 2004, at which the debtor and Bank One were represented by counsel. Bank One moved to voluntarily dismiss its complaint and, on February 10, 2004, the court dismissed the complaint with prejudice and gave counsel for the debtor 10 days to file the present motion. Counsel for the debtor filed this motion seeking a total fee of $2,450.00 that was incurred in representing the debtor in this adversary proceeding.
The fees charged are broken down as follows:
DATE TASK TIME
09/15/03 Review Complaint .50
10/10/03 Drafting Answer .50
12/08/03 Drafting Discovery 4.00
01/08/04 Drafting letter to opposing counsel .25
02/08/04 Reviewing file;
Drafting Def.'s witness list .50
02/09/04 Pretrial conference 1.50
02/22/04 Research/Drafting motion for atty's fees 5.00
TOTAL HOURS: 12.25
HOURLY RATE: $200.00
TOTAL FEE: $2,450.00
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 Bank One 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 Bank One'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 the Government's position to be "substantially justified" if it is "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 must be applied in light of the special concerns that led 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] at 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). Thus, to determine whether the present complaint was "substantially justified," it is first necessary to review the law of dischargeability as it relates to the credit card debt and the facts known to Bank One at the time it filed this action.
II. A.
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.
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 objecting party has the burden of proof, 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." ATT Universal Card Servs. 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 (quoting 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 Nat'l 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.
Finally, with respect to the element of reliance, the United States 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 an example 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." Am. Express Travel Related Servs. Co. 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).
B.
Additionally, § 523(a)(2)(C) provides that "for the purpose of § 523(a)(2),
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[.]
Although the Bankruptcy Code does not define "luxury goods or services," § 523(a)(2)(C) does provide guidance by stating that "`luxury goods or services' does not include goods or services reasonably acquired for the support or maintenance of the debtor or a dependent of the debtor[.]" Additionally, Webster's Dictionary defines "luxury" as, among other things, "something adding to pleasure or comfort but not absolutely necessary." MERRIAM WEBSTER'S COLLEGIATE DICTIONARY 695 (10th ed. 1993); see e.g., In re Williams, 106 B.R. 87 (Bankr. E.D.N.C. 1989) (holding that birthday and Christmas presents constitute luxury items).
No court within the Fourth Circuit has decreed gambling a luxury, and courts in other circuits have reached differing results. See Trump Castle Assocs. v. Poskanzer (In re Poskanzer), 143 B.R. 991, 1000 (Bankr. D. N.J. 1992) (finding gambling a luxury good or service); ATTv. Herrig (In re Herrig), 217 B.R. 891 (Bankr. N.D. Okla. 1998) (stating that gambling is a luxury). ButseeBoyd Gaming Corp. v. Hall (In re Hall), 228 B.R. 483, 481 (Bankr. M.D. Ga. 1998) (stating that the "[d]ebtor's recent gambling activities reflect a spirit of desperation, not pleasure" and is thus a necessity, not a luxury).
The reach of § 523(a)(2)(C), however, extends further than consumer debts owed for "luxury goods or services." The presumption of nondischargeability also arises if the debtor takes out cash advances aggregating more than $1,150 that are extensions of consumer credit on or within 60 days before the bankruptcy filing under an open end credit plan. For purposes of this presumption, "an extension of consumer credit under an open end credit plan is to be defined . . . as it is defined in the Consumer Credit Protection Act [("CCPA")]." The CCPA defines "open end credit plan" as
a plan under which the creditor reasonable contemplates repeated transactions, which prescribes the terms of such transactions, and which provides for a finance charge which may be computed from time to time on the outstanding unpaid balance.
15 U.S.C. § 1602(1). Thus, a consumer's cash advance on a credit card clearly qualifies as an extension of consumer credit under an open end credit plan.
Although the ultimate burden of proving dischargeability remains with the creditor, once the creditor proves that the § 523(a)(2)(C) presumption applies, the burden of going forward shifts to the debtor. MBNA Am. v. Simos (In re Simos), 209 B.R. 188, 195 (Bankr. M.D.N.C. 1997)("The presumption is rebuttable."). See also Citibank (South Dakota), Va. v. Parker, 23 Fed. Appx. 125, 126 (4th Cir. 2001) ("If the creditor proves that the debt is consumer debt for luxury goods and establishes the other elements of. . . § 523(a)(2)(C), the burden of proving dischargeability shifts to the debtor."). In other words, a presumption of nondischargeability satisfies the five elements of fraud. In re Kitzmiller, 206 B.R. 424, 428 (Bankr. N.D. W. Va. 1997). Suffice it to say that the court does not have to make a final determination that Bank One would have ultimately succeeded on its claim, but must only determine if Bank One's allegations were reasonably based in law and fact.
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, it is appropriate to look to the information that was available to the creditor at the time it filed the nondischargeability complaint 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, Bank One appears to have performed no prefiling investigation except to examine the location of the charges and the pattern of charges and payments as reflected on its own accounting records. There is nothing in the record to suggest that Bank One attended the meeting of creditors under § 341, Bankruptcy Code or that Bank One formally sought to examine the debtor under Federal Rule of Bankruptcy Procedure 2004. These vehicles for examining the debtor can help the creditor avoid a finding that an unsuccessful nondischargeability complaint was not substantially justified.
In this case, however, Bank One was informed that the debtor was "missing" and that her husband filed a missing person report. The court agrees with Bank One that seeking a Rule 2004 examination would have been futile.
More importantly, Bank One had a good faith argument based in law and fact that the § 523(a)(2)(C) presumption would apply to the April charges regardless of whether they were for "luxury goods or services" or for cash advances on "an open end credit plan." Bank One knew that the $4,378.00 was charged at a casino in Atlantic City within 60 days of the order for relief. As stated, the debtor's only argument is that Bank One could have manually searched the charge slips to discover that the debtor did not sign them. However, the mere fact that the debtor's husband may have signed the slip would not necessarily preclude the debt from being nondischargeable. See 4, COLLIER ON BANKRUPTCY ¶ 523.08[3] AT 523-53 (noting that fraud of partners and agents may be imputed to the debtor for dischargeability purposes, and stating "[I]n cases involving spouses, the court must initially determine if the debtor-spouse was a partner of the spouse who committed the fraud or was otherwise in a principal-agent relationship. If so, the fraudulent intent may be imputed to the debtor spouse."). Given the law and the facts that Bank One knew at the time it filed the complaint, it was substantially justified in bringing this action under § 523(a)(2)(A) and in seeking to have the § 523(a)(2)(C) presumption apply.
B.
Courts have held that a creditor's justification must be assessed not only at the time the complaint is filed, but also throughout the litigation. See In re McCarthy, 243 B.R. 203, 210 (1st Cir. BAP 2000) ("A creditor must bring its claim against the debtor in good faith and, likewise, abandon its claim once it learns that the case is not substantially justified."); In re Williams, 224 B.R. 523, 530 (BAP 2nd Cir. 1998) (holding that a creditor must be substantially justified at all times through trial to be insulated from paying attorneys' fees under § 523(d)); 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."). Bank One, throughout this litigation, appears to have acted in good faith and was therefore substantially justified in prosecuting this adversary proceeding up to the point that it voluntarily requested dismissal of the complaint. After counsel for the debtor informed Bank One that the debtor's spouse, not the debtor, made the April charges, Bank One requested a signed affidavit by the spouse recounting that he was the one that made the charges. There is no dispute that the debtor did not provide such an affidavit. Counsel for Bank One asserts, and the court believes, that if Bank One had received the requested affidavit, it would have dismissed the complaint. At the time of the request on October 23, 2003, counsel for the debtor had only spent one hour in defending against the litigation (.50 hours in reviewing the complaint and .50 hours in drafting the answer). In addition, Bank One asserts, and the debtor does not deny, that on February 5, 2004, four days prior to the pre-trial conference, counsel for Bank One offered to prepare a joint motion to withdraw the complaint. At the pre-trial conference, counsel for the debtor admitted to his refusal to join in the motion because he wanted to request attorneys fees under § 523(d). Thus, most of the fees charged by counsel could have been avoided if the debtor had provided Bank One with a signed affidavit by her husband. Given that Bank One was armed with a viable § 523(a)(2)(C) argument, the court is unable to find that Bank One was not substantially justified in continuing to prosecute its complaint (based solely on an unsworn representation that the debtor's husband made the charges).
Conclusion
For the reasons stated above, the court concludes that Bank One was substantially justified in bringing the complaint and was substantially justified in prosecuting the complaint up to the point where it offered to dismiss the complaint. Accordingly, the defendant's motion for an award of attorney's fees and costs is denied.