At&T Universal Card Services v. Mercer

UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
_____________________

No. 98-60693
_____________________

In The Matter Of: CONSTANCE P. MERCER,

Debtor,

AT&T UNIVERSAL CARD SERVICES,

Appellant,

versus

CONSTANCE P. MERCER,

Appellee.
_________________________________________________________________

Appeal from the United States District Court
for the Southern District of Mississippi

_________________________________________________________________

March 23, 2001

Before JOLLY, HIGGINBOTHAM, DAVIS, JONES, SMITH, DUHÉ, WIENER,
BARKSDALE, EMILIO M. GARZA, DeMOSS, BENAVIDES, STEWART, PARKER, and
DENNIS, Circuit Judges.1

RHESA HAWKINS BARKSDALE, Circuit Judge:

Rehearing en banc was granted to determine, for credit card

debt (card-debt), the standards for bankruptcy nondischargeability

under 11 U.S.C. § 523(a)(2)(A) (credit obtained by false

pretenses/representation or actual fraud). Primarily at issue are:

whether credit card use (card-use) constitutes a representation of

1
Chief Judge King is recused and did not participate in this
matter.
intent to pay the loan thereby obtained (intent to pay); and, if

so, whether the issuer may justifiably rely on it. AT&T Universal

Card Services (UCS) appeals the district court’s judgment affirming

the bankruptcy court’s decision that the debt from Constance P.

Mercer’s “pre-approved” UCS card is dischargeable. We REVERSE and

REMAND.

I.

In September 1995, when Mercer received UCS’ pre-approved

card-solicitation, she was employed as a paralegal, having worked

approximately 20 years; had a junior college degree and gross

annual income of approximately $25,000; and was familiar with card

accounts and how obligations arise with them. She had begun

gambling in casinos in 1993; as of UCS’ 1995 solicitation, she had

developed a “gambling obsession”, financed by winnings and cash

advances through card-use. That year, she began having problems

paying her bills and acquired at least six more cards (four before

UCS’ that November).

UCS’ solicitation followed a screening process begun months

earlier. The credit bureau listed prospects based on UCS criteria,

such as total revolving debt, bankruptcies, and existing credit

utilization; a risk score was established for each prospect. That

score predicted the probability of an account, within a one-year

period, being delinquent for 60-90 days or more. The maximum score

2
was 900; UCS required a minimum of 680. Mercer’s was 735,

evaluated at trial by UCS as “very good”.

From the resulting prospects, an outside vendor eliminated

duplicates and those who either had requested not to be solicited

or were located in high fraud areas. Those remaining were matched

against UCS’ internal risk and scoring models. For those still

remaining, the credit bureau screened again to ensure no change in

credit history or standing. As the Fair Credit Reporting Act

requires (according to UCS), UCS offered a pre-approved card to

each post-second-screening prospect (including Mercer).

In September 1995, Mercer completed, signed, and returned her

acceptance to UCS, providing, among other things, her income

($24,500) and identifying data, such as her social security number.

UCS checked this information against its database. A third credit

bureau screening determined Mercer’s ability to service a $3,000

credit line (limit). Had there been any deterioration in credit

history, UCS would have either withdrawn the offer or offered a

lower limit.

On 10 November 1995, UCS opened Mercer’s account, with a

$3,000 limit, and provided a card and cardmember agreement (card-

agreement). The agreement stated, inter alia: it was effective

upon card-use; Mercer was “responsible for all amounts owed”; and

she “agree[d] to pay such amounts according to the [card-

3
agreement’s] terms” (by making at least a minimum payment in each

billing cycle against the balance due).

Mercer reached her limit within a month of card-receipt,

obtaining 14 cash advances. Each was used for gambling. Four were

on or before 24 November, from an automatic teller machine (ATM) at

a casino; nine, between 28 November and 11 December, from an ATM at

a bank; and one, from another entity. On 29 November, 19 days

after card-issuance but before Mercer reached her limit, her

account was flagged by UCS for excessive transactions. UCS

determined they were not egregiously excessive and cleared the

account for further use.

Mercer’s last card-use was on 11 December, only a month after

card-issuance. Her first UCS monthly statement (through mid-

December), reflected a balance approximately $200 over-limit. The

minimum payment was not made.

The second statement requested the required payment and no

card-use. When contacted twice in February by UCS, Mercer stated:

she was trying to become current, and did not know when she could

make a payment; later (62 days post last card-use), that she had

consulted an attorney about bankruptcy. The final statement

(ending mid-March) advised the account had been closed. Quarterly,

UCS reviewed its customers’ creditworthiness. But, because

Mercer’s limit had been reached during the first billing cycle, her

review was irrelevant. Notwithstanding her claimed inability to

4
make the minimum payments, Mercer’s checking account statements for

that period reflect numerous ATM cash withdrawals, including in

casinos. For example, that for 17 January 1996 reflected 26,

totaling approximately $2,200.

On filing for Chapter 7 bankruptcy relief in April 1996,

Mercer was indebted to nine card-issuers for more than $31,000.

Most of those accounts (including with UCS) had been opened between

March and December 1995. She had lost approximately $36,000 in

gambling within two years prior to filing bankruptcy, including at

least $25,000 in 1995, when her income from two jobs was

approximately $24,000.

Following trial in 1997, Mercer’s UCS debt was held

dischargeable, the bankruptcy court ruling: for card-issuance, UCS

relied on its own investigation, rather than on any representation

by Mercer; therefore, UCS could not rely on her representation, “if

any”, at card-use; and, even assuming UCS actually relied on any

Mercer representation, it would not have been justifiable, because

UCS’ pre-issuance investigation was inadequate. AT&T Universal

Card Servs. v. Mercer (In re Mercer), 220 B.R. 315, 326-27 (Bankr.

S.D. Miss. 1998).

The district court affirmed, AT&T Universal Card Servs. v.

Mercer, No. 1:98cv290BrR (S.D. Miss. 30 Sept. 1998) (unpublished),

as did a divided panel on our court; but the majority could not

agree. AT&T Universal Card Servs. v. Mercer (Matter of Mercer),

5
211 F.3d 214, reh’g granted, 218 F.3d 770 (5th Cir. 2000). One

member concluded: UCS having provided a pre-approved card and

limit, “Mercer could not make any false representations” on which

UCS could rely; and it had assumed the risk of non-payment. 211

F.3d at 217 (Duhè, J.) (emphasis added). The other concluded:

card-use is an implied promise to pay; but, UCS could not

justifiably rely on it “without a reasonably adequate assessment of

[Mercer’s] credit history and present financial condition”. Id. at

218 (Dennis, J., specially concurring). The dissent concluded:

card-use is a representation of intent to pay; and the case should

be remanded for application of the correct justifiable reliance

standard. Id. at 231-32 (Barksdale, J., dissenting).

II.

Although the amount of the debt at stake in this

nondischargeability proceeding is relatively small, card-debt is

involved in many consumer bankruptcies. Accordingly, it is

imperative that we clarify the standards governing

nondischargeability of card-debt.

Cards play a major role in, and promote, modern commerce. A

few examples of their ever-increasing uses and importance follow.

Cards are a convenient — if not necessary — substitute for cash and

checks, especially where they are not a viable medium, such as in

telephone and Internet purchases. See Todd J. Zywicki, The

Economics of Credit Cards, 3 CHAP. L. REV. 79, 83, 91-92 (Spring

6
2000). They help small retailers compete with larger ones, many of

which have their own credit operations, by allowing the former to

shift the risk of non-payment to the issuer. Id. at 92-93.

Finally, cash advances, the focus of the case at hand, are a

prompt, simple, and extremely convenient alternative to bank loans.

The downside for increased consumer credit is bankruptcy. See

David F. Snow, The Dischargeability of Credit Card Debt: New

Developments and the Need for a New Direction, 72 AM. BANKR. L.J.

63, 94 (Winter 1998) (readily available cards “tempt consumers,

hard-pressed by loss of work, illness, or family difficulties, to

attempt to tide themselves over and to postpone financial collapse

or bankruptcy with little or no realistic prospect of success”).

Filings increased from approximately 800,000 in 1990 to 1.4 million

in 1998 (decreasing somewhat in 1999 and 2000). See AMERICAN BANKR.

INST., ANNUAL TOTAL BANKRUPTCY FILINGS FOR 1990-1999, available at

(last checked 15

Mar. 2001). “[B]ank, retail and credit-card industry advocates

estimate consumer bankruptcies cost their businesses about $40

billion a year”. Dawn Kopecki & Jeffrey Taylor, House, Senate

Diverge on Bills For Bankruptcy, WALL ST. J., 4 Feb. 2000, at A20.

As expected, that cost is passed along to customers. Bankruptcies

are said to cost each United States household $400 annually, in

part because, to recoup losses, issuers and other businesses

increase customers’ interest rates. Julie Hyman, Senate Set to

7
Pass Legislation to Curb Bankruptcy Abuse, WASH. TIMES, 2 Feb. 2000,

at B8.

Our court has not addressed the standards for card-debt §

523(a)(2)(A) nondischargeability (card-dischargeability). Numerous

others have, with conflicting theories emerging. Because of the

issue’s importance, the need for a uniform standard, and the many

subissues in this case, arising out of a pre-approved card being

used to obtain funds for gambling, we address each element in

detail.

In this regard, there is no statutory basis for distinguishing

between cards obtained at the debtor’s initiative and those

obtained in response to a solicitation (pre-approved).

Accordingly, although this case involves a pre-approved card, the

standard we adopt — common-law fraud — is not so confined.

Moreover, irrespective of how the debtor obtained the card, his

intent to pay representation, and the creditor’s (issuer’s) actual

reliance thereon, are the same. On the other hand, a card’s pre-

approval may be relevant as to whether that reliance was

justifiable.2

Section 523(a)(2)(A) excepts from discharge, inter alia, “any

debt ... for ... an extension ... of credit, to the extent obtained

2
In addition, if the debtor applied for a card, at issue may
be 11 U.S.C. § 523(a)(2)(B) (excepting debts for, inter alia,
credit extension obtained by materially false written statement
respecting debtor’s financial condition on which creditor
reasonably relied).

8
by ... false pretenses, a false representation, or actual fraud,

other than a statement respecting the debtor’s ... financial

condition”. 11 U.S.C. § 523(a)(2)(A) (emphasis added). UCS

contends that, with each card-use: Mercer knowingly falsely

represented her intent to pay; and the bankruptcy court applied an

incorrect standard in determining UCS failed to prove actual and

justifiable reliance.

We apply the same standard of review as did the district

court: the bankruptcy court’s factual findings are reviewed for

clear error; its legal conclusions and mixed questions of fact and

law, de novo. E.g., Randall & Blake, Inc. v. Evans (Matter of

Canion), 196 F.3d 579, 584 (5th Cir. 1999). But, of particular

importance to this case, the clear error standard does not apply to

findings of fact resulting from application of an incorrect legal

standard. See Fabricators, Inc. v. Technical Fabricators, Inc.

(Matter of Fabricators, Inc.), 926 F.2d 1458, 1464 (5th Cir. 1991).

A.

“The operative terms in § 523(a)(2)(A), ... ‘false pretenses,

a false representation, or actual fraud,’ carry the acquired

meaning of terms of art ... [and] are common-law terms”. Field v.

Mans, 516 U.S. 59, 69 (1995). “[W]here Congress uses terms that

have accumulated settled meaning under the common law, a court must

infer, unless the statute otherwise dictates, that Congress means

9
to incorporate the established meaning of these terms”. Id.

(internal quotation marks, ellipses, and citations omitted).

In Field, the debtor purchased real estate from the Fields;

they provided financing, requiring their consent to a subsequent

conveyance. Id. at 61-62. Failing consent, the balance was due.

Id. at 62. Without the Fields’ consent, the property was conveyed;

without disclosing that, the debtor asked them to waive the

balance-due provision. Id.

The sole issue before the Court was “the level of reliance

that § 523(a)(2)(A) requires a creditor to demonstrate”. Id. at

63. Field concerned “actual fraud”, one of § 523(a)(2)(A)’s three

nondischargeability bases. Id. at 69. Although “not mean[ing] to

suggest that the requisite level of reliance would differ if there

should be a case of false pretense or [false] representation but

not of fraud”, the Court did not settle the question. Id. at 70

n.8 (emphasis added).

For the common-law understanding of “actual fraud” in 1978

(when that term was added to § 523(a)(2)(A) by the Bankruptcy

Reform Act of 1978, Pub. L. 95-598, 92 Stat. 2590), the Court

looked to “the most widely accepted distillation of the common law

of torts” — the Restatement (Second) of Torts. Field, 516 U.S. at

70. The Restatement, however, does not define “fraud”, much less

“actual fraud”; instead, it discusses “fraudulent

misrepresentation”.

10
 Prior to Field, some courts defined differently §

523(a)(2)(A)’s three bases. See, e.g., Montgomery Ward & Co., Inc.

v. Blackburn (In re Blackburn), 68 B.R. 870, 876 (Bankr. N.D. Ind.

1987). Likewise, our court has applied different, but somewhat

overlapping, elements of proof for § 523(a)(2)(A) actual fraud, as

opposed to false pretenses/representation. See RecoverEdge L.P. v.

Pentecost, 44 F.3d 1284, 1292-93 (5th Cir. 1995) (for false

pretenses/representation, knowing and fraudulent falsehood

describing past or current facts that creditor relied upon; for

actual fraud, knowingly false representation with intent to deceive

creditor, who relied on it and therefore sustained loss). We are

not required to address whether such distinctions survived Field.3

UCS did not specify on which of the three bases it relied. It

has contended throughout, however, that, similar to the earlier

listed elements for “actual fraud” described in Pentecost, Mercer

made a knowingly false representation, with intent to deceive, upon

which it relied in extending her credit. Both parties have briefed

those elements. Likewise, most courts considering card-

3
Compare, e.g., F.C.C. Nat’l Bank v. Reid (In re Reid), 237
B.R. 577, 583 (Bankr. W.D.N.Y. 1999) (“actual fraud” not limited to
misrepresentation/reliance test; § 523(a)(2)(A)’s three bases are
separate categories) with LA Capitol Fed. Credit Union v. Melancon
(In re Melancon), 223 B.R. 300, 307 & n.4 (Bankr. M.D. La. 1998)
(same standard should apply).

11
dischargeability have applied elements similar to those described

in Pentecost for “actual fraud”.4

Those elements are appropriate for determining card-

dischargeability because, as discussed infra, card-use lends itself

to that analysis. Accordingly, for each card-use, and by a

preponderance of the evidence, Grogan v. Garner, 498 U.S. 279, 287

(1991), UCS was required to prove: (1) Mercer made a

representation; (2) it was knowingly false; (3) it was made with

the intent to deceive UCS; (4) UCS actually and justifiably relied

on it; and (5) UCS sustained a loss as a proximate result of its

reliance.

B.

Resolution of the issue at hand requires examining Davison-

Paxon Co. v. Caldwell, 115 F.2d 189 (5th Cir. 1940), cert. denied,

313 U.S. 564 (1941), which held: excepted from discharge were only

debts obtained by “actual overt false pretense or representation”,

not those “created by obtaining credit through concealment of

insolvency and present inability to pay”. Id. at 191 (emphasis

added). “The rationale underlying Davison-Paxon has been severely

eroded in the modern world of credit transactions and the decision

4
See, e.g., Household Credit Servs., Inc. v. Ettell (In re
Ettell), 188 F.3d 1141, 1144 (9th Cir. 1999); Rembert v. AT&T
Universal Card Servs., Inc. (In re Rembert), 141 F.3d 277, 280-81
(6th Cir.), cert. denied, 525 U.S. 978 (1998); Universal Bank, N.A.
v. Grause (In re Grause), 245 B.R. 95, 99 (8th Cir. B.A.P. 2000).

12
has been the subject of much criticism.” Sears, Roebuck & Co. v.

Boydston (Matter of Boydston), 520 F.2d 1098, 1101 (5th Cir. 1975).

Davison-Paxon was governed by § 523(a)(2)(A)’s predecessor, §

17(a)(2) of the Bankruptcy Act of 1898. It excepted, inter alia,

“liabilities for obtaining money or property by false pretenses or

false representations”. 11 U.S.C. § 35(a)(2) (repealed 1979); see

Field, 516 U.S. at 64-65 & n.5. “Actual fraud” was added as a

nondischargeability basis, some suggest, in order to eliminate

Davison-Paxon’s distinction between “overt” and “implied”

misrepresentation.5 Since the amendment, Davison-Paxon has caused

confusion among our circuit’s bankruptcy courts.6

When one has a duty to speak, both concealment and silence can

constitute fraudulent misrepresentation; an overt act is not

required. See RESTATEMENT (SECOND) OF TORTS, §§ 550, 551; Citibank

5
See, e.g., First Nat’l Bank of Mobile v. Roddenberry, 701
F.2d 927, 930 n.3 (11th Cir. 1983) (citing Zaretsky, The Fraud
Exception to Discharge Under the New Bankruptcy Code, 53 AM. BANKR.
L.J. 253, 257 (1979)); Reid, 237 B.R. at 586.
6
See, e.g., Melancon, 223 B.R. at 312-15 (Davison-Paxon
obsolete due to addition of actual fraud and Field’s adoption of
common-law interpretation); AT&T Universal Card Servs. v. Samani
(In re Samani), 192 B.R. 877, 879-80 (Bankr. S.D. Tex. 1996)
(allowing creditor to establish fraud based on card-use
representation of intent and ability to pay would directly
contravene Davison-Paxon); Louisiana Nat’l Bank of Baton Rouge v.
Talbot (In re Talbot), 16 B.R. 50, 54 (Bankr. M.D. La. 1981) (bound
by Davison-Paxon); Ranier Bank v. Poteet (In re Poteet), 12 B.R.
565, 568 (Bankr. N.D. Tex. 1981) (Davison-Paxon not relevant to
card-use).

13
(S.D.), N.A. v. Eashai (In re Eashai), 87 F.3d 1082, 1089 (9th Cir.

1996). Moreover, a misrepresentation need not be spoken; it can be

made through conduct. See id. § 525 cmt. b. Accordingly, Davison-

Paxon retains no validity; it is overruled.

C.

“The difficulty in credit card cases is for the creditor, who

does not deal face-to-face with the debtor, to prove the elements

of misrepresentation and reliance.” Eashai, 87 F.3d at 1087

(emphasis added); see also AT&T Universal Card Servs. Corp. v. Feld

(In re Feld), 203 B.R. 360, 365-66 (Bankr. E.D. Pa. 1996). The

bankruptcy court’s finding no actual and justifiable reliance on

any representations by Mercer was premised on an erroneous

interpretation of the law. It did not address the other elements

for card-dischargeability.

Based on our review, UCS has proved three of the five elements

and part of another; for the balance, we must remand for fact-

finding. Through each card-use, Mercer represented her intent to

pay. A question of fact for remand is whether the representation

was knowingly false. If so, intent to deceive is present. In

authorizing the loan, UCS actually relied on the representation;

whether that was justifiable is a question of fact for remand.

Finally, UCS’ loss (unpaid loan) was proximately caused by its

reliance.

14
 1.

A representation of intent to pay was made at card-use, not at

card-issuance. Mercer’s card being pre-approved did not preclude

the representation.

Many earlier cases held that, by card-use, the debtor

represented both intent and ability to pay.7 The “ability” factor

has been criticized for improperly shifting the burden of proof,

making the debtor a guarantor of her financial condition,8 and

because it gives preferential treatment to issuers, making card-

debt too easily nondischargeable.9 Moreover, even if card-use

could be understood as a representation not only of intent, but

also ability, to pay, the latter is not actionable under §

523(a)(2)(A); as noted, it excludes from its scope “a statement

respecting the debtor’s ... financial condition”. 11 U.S.C. §

523(a)(2)(A) (emphasis added).10

7
See, e.g., First Card Servs., Inc. v. Flynn (In re Flynn),
184 B.R. 8, 9 (Bankr. E.D.N.Y. 1995); Citibank (S.D.), N.A. v.
Rodriguez (In re Rodriguez), 138 B.R. 112, 114 (Bankr. S.D. Fla.
1992); Poteet, 12 B.R. at 567.
8
See, e.g., Sears, Roebuck & Co. v. Hernandez (In re
Hernandez), 208 B.R. 872, 880 (Bankr. W.D. Tex. 1997); Chase
Manhattan Bank, N.A. v. Ford (Matter of Ford), 186 B.R. 312, 317
(Bankr. N.D. Ga. 1995).
9
See, e.g., Chase Manhattan Bank (U.S.A.) N.A. v. Carpenter
(Matter of Carpenter), 53 B.R. 724, 728 (Bankr. N.D. Ga. 1985).
10
See, e.g., Rembert, 141 F.3d at 281; Anastas v. American Sav.
Bank (In re Anastas), 94 F.3d 1280, 1285 (9th Cir. 1996); Citibank
(S.D.), N.A. v. Senty (In re Senty), 42 B.R. 456, 459 (Bankr.

15
 Many, more recent, cases hold that card-use is a

representation of intent to pay (with payments pursuant to the

card-agreement schedule).11 When the representation is confined to

intent, not ability, to pay, there is no risk it will have the

undesirable consequence of making the debtor a guarantor of her

financial condition.12 Mercer apparently agrees. In her appellate

briefs, she implicitly concedes that, with each card-use, she

represented her intent to pay. On the other hand, several

bankruptcy courts have held card-use is not a representation. For

example, AT&T Universal Card Servs. v. Alvi (In re Alvi), 191 B.R.

724, 731 (Bankr. N.D. Ill. 1996) (emphasis added), held it

“involves no representation, express or implied”.13

Alvi, 191 B.R. at 731-32, relied on Williams v. United States,

458 U.S. 279 (1982). Williams had been charged with a crime under

18 U.S.C. § 1014 (knowingly false statement to influence action of

certain financial institutions). Id. at 282. Applying the rule of

S.D.N.Y. 1984).
11
See, e.g., Rembert, 141 F.3d at 281; Anastas, 94 F.3d at
1285.
12
See Chevy Chase Bank, FSB v. Briese (In re Briese), 196 B.R.
440, 450 & n.16 (Bankr. W.D. Wis. 1996).
13
See also, e.g., Universal Bank, N.A. v. Rich (In re Rich),
249 B.R. 709, 715-16 (Bankr. N.D. Tex. 2000) (citing Alvi); cf. FCC
Nat’l Bank v. Etto (In re Etto), 210 B.R. 734, 739-40 (Bankr. N.D.
Ohio 1997) (where card pre-approved and issued without credit
check, card-use not promise to pay).

16
lenity, the Court rejected the Government’s contention that “a

drawer [of a check] is generally understood to represent ... he

‘currently has funds on deposit sufficient to cover’” it, id. at

285, 290, holding: “a check is not a factual assertion at all, and

therefore cannot be characterized as ‘true’ or ‘false’”, and thus

“did not ... make any representation as to the state of [Williams’]

bank balance”. Id. at 284-85 (emphasis added). Alvi reasoned:

“[t]he similarities between the issuance of a check” and card-use

compel concluding that ordinary card-use is not a representation;

accordingly, card-use “in [and] of itself is not capable of being

true or false”. Alvi, 191 B.R. at 732 (emphasis added).

Williams does not compel that conclusion. Even assuming a

check is a representation of sufficient funds, this would be a

statement respecting financial condition, not actionable under §

523(a)(2)(A). In any event, the drawer does not request an

extension of credit from his bank; instead, he draws on his funds

on deposit. If they are not sufficient to cover the check, the

bank will not honor it. Because the drawer is not seeking an

extension of credit from his bank, he is not making a

representation, by check-use, of intent to pay a loan from his

bank. On the other hand, card-use is both a request to the issuer

for a loan against a line of credit and a promise to pay. Inherent

in the loan’s being made (and the consideration therefor) is that

promise; without it, there is no loan, merely a gift. See LA

17
Capitol Fed. Credit Union v. Melancon (In re Melancon), 223 B.R

300, 311 (Bankr. M.D. La. 1998). Moreover, Field, decided after,

and unlike, Williams, concerns a civil statute. Field directed

that § 523(a)(2)(A) be interpreted in accordance with the common

law.14

We agree with the Ninth Circuit that each card-use forms a

unilateral contract: the holder “promises to repay the debt ...

and the ... issuer performs by reimbursing the merchant who ...

accepted the ... card in payment”. Anastas v. American Sav. Bank

(In re Anastas), 94 F.3d 1280, 1285 (9th Cir. 1996) (emphasis

added); see RESTATEMENT (SECOND) OF CONTRACTS § 31 cmt. b (where each

loan is “the sole consideration for the corresponding part of the

[continuing] guaranty [for future loans], the guaranty is often

characterized as an offer for a series of separate contracts”),

cited in Anastas, 94 F.3d at 1285.15 Mercer understood that, on

14
Judge Duhé’s discussion of Williams overlooks the most
fundamental distinction between card-use and payment by check: as
discussed above, card-use is a loan-request against a line of
credit, an inherent part of which is a promise to repay; a check is
neither a loan-request nor a promise to repay.
15
See also, e.g., Manufacturer’s Hanover Trust Co. v. Ward (In
re Ward), 857 F.2d 1082, 1086-87 (6th Cir. 1988) (Merritt, J.,
dissenting) (card relationship is issuer’s offer for series of
unilateral contracts formed with each card-use (citing RESTATEMENT
(SECOND) OF CONTRACTS § 31)); AT&T Universal Card Servs. Corp. v.
Searle, 223 B.R. 384, 389 (D. Mass. 1998) (Anastas unilateral
contract approach consistent with words or conduct forming
representation, with it inherent in transaction); cf. Goldman v.
First Nat’l Bank of Chicago, 532 F.2d 10, 18 & n.13 (7th Cir.)
(under Consumer Credit Protection Act, no extension of credit until

18
card-issuance, UCS established a line of credit for her, providing

the opportunity to obtain goods, services, and cash from entities

with which UCS had contracted, with UCS reimbursing the merchants

and looking to her for payment. Her card-agreement provided, inter

alia: card-use signified acceptance of the agreement, including

the obligation to pay the charges by making at least the minimum

monthly payments.

Of course, by card-acceptance, Mercer was not obligated to use

that credit. But, by card-use, she requested a loan against that

line; and, by approving each card-use, and therefore reimbursing

the merchant, including an ATM owner, UCS made a loan to her. See

Melancon, 223 B.R. at 311. Her promise to pay occurred not when

the line was established, but at card-use, when the loan was made.

See id. With each card-use, Mercer did not say anything to UCS.

Again, her card-use (conduct) was a loan request and promise to

pay. See Feld, 203 B.R. at 367 (absence of express statement with

card-use “completely consistent with fraud doctrine”, which

recognizes representation can be made through conduct).

The common law of fraud supports a representation through

card-use. The Restatement does not define “representation”; it

card-use), cert. denied, 429 U.S. 870 (1976). But see Feld, 203
B.R. at 366-67 (card-use does not create separate contract;
instead, it is anticipated performance of contract created at card-
issuance, similar to draw on line of credit; instead of new
representation with each card-use, representation of intent to pay
continues while card used).

19
does define “misrepresentation”, which “denote[s] not only words

spoken or written but also any other conduct that amounts to an

assertion not in accordance with the truth”. RESTATEMENT (SECOND) OF

TORTS, § 525 cmt. b (emphasis added). A misrepresentation can be

one of “fact, opinion, intention or law”. Id. § 525 (emphasis

added).

If, as here, the misrepresentation concerns intention to

perform an agreement, that intention “may be expressed but it is

normally merely to be implied from the making of the agreement”.

Id. § 530 cmt. c (emphasis added). “[A] promise necessarily

carries with it the implied assertion of an intention to perform”.

Id. (emphasis added). Accordingly, Mercer’s card-use

representation included her “implied assertion of an intention to

perform”. Id. (emphasis added).

Likewise, it is of no moment that, with card-use, Mercer did

not deal directly with UCS, but instead with the merchant

(including through an ATM machine) which accepted her card. Based

on her testimony, Mercer “intend[ed], or ha[d] reason to expect

[her card-use representation would be] communicated to [UCS], and

that it [would] influence [UCS’] conduct”. Id. § 533 (emphasis

added).16

16
See also Feld, 203 B.R. at 367 (representation of intent to
pay transmitted to issuer even though not party to transaction;
because at some point issuer must be notified transaction occurred,

20
 Scienter distinguishes “actual” or “positive” fraud from

“constructive” fraud, or that “implied by law”; fraud actionable

under § 523(a)(2)(A) is the “positive” type. See, e.g., Ames v.

Moir, 138 U.S. 306, 311 (1891) (“fraud in the act ... defining

[nondischargeability] ... means positive fraud, or fraud in fact,

involving moral turpitude or intentional wrong, ... and not implied

fraud, or fraud in law, which may exist without the imputation of

bad faith or immorality” (emphasis added; internal quotation marks

omitted)); Anastas, 94 F.3d at 1286 (same under § 523(a)(2)(A));

Pentecost, 44 F.3d at 1292 (same). Inferring, from card-use, a

representation of intent to pay does not violate this principle;

under § 523(a)(2)(A), the creditor still must prove all of the

other elements of fraud, including scienter (knowingly false

representation).17

it will receive any accompanying representation; therefore,
issuer’s failure to acquire contemporaneous knowledge of debtor’s
affirmation of intent to pay not fatal); Briese, 196 B.R. at 450
(although debtor, through card-use, may not speak directly to
issuer, “debtor makes a representation — namely, the promise to pay
for the credit advanced”).
17
Holding card-use is a representation of intent to pay is not
a “fiction”, as Judge Duhé asserts, but is, instead, consistent
with the Restatement’s above-discussed position that a
representation can be made through conduct. See RESTATEMENT (SECOND)
OF TORTS § 525 cmt. b. In so holding, we do not ignore the
principle that exceptions to discharge are narrowly construed.
That principle seeks to further the goal of providing the debtor a
“fresh start”. See Miller v. J.D. Abrams Inc. (Matter of Miller),
156 F.3d 598, 602 (5th Cir. 1998), cert. denied, 526 U.S. 1016
(1999). By enacting § 523(a)(2)(A), Congress made clear its intent
to limit the “fresh start” to honest, but unfortunate, debtors, not

21
 2.

The appropriate focus with respect to a debtor’s intent is

whether she acted in bad faith by knowingly making a false

representation. The bankruptcy court did not address whether

Mercer’s representations were knowingly false. “A

misrepresentation is fraudulent if the maker ... knows or believes

... the matter is not as” represented, or “does not have the

confidence in the accuracy of his representation” as stated or

implied, or “knows ... he does not have the basis for his

representation” as stated or implied. RESTATEMENT (SECOND) OF TORTS §

526 (emphasis added). “A representation of the maker’s own

intention to do ... a particular thing is fraudulent if he does not

have that intention.” Id. § 530(1) (emphasis added). “If he does

not have it, he must of course be taken to know that he does not

have it.” Id. § 530 cmt. b (emphasis added); see also Melancon,

223 B.R. at 319 (“one always knows his present intentions”).

a.

The card-use representation of intent to pay is false if there

is use without that intent. See, e.g., Anastas, 94 F.3d at 1285;

American Express Travel Related Servs. Co., Inc. v. Hashemi (In re

Hashemi), 104 F.3d 1122, 1126 (9th Cir.), cert. denied, 520 U.S.

perpetrators of fraud. See, e.g., Grogan, 498 U.S. at 286-87.
Accepting Judge Duhé’s view that card-use includes no
representation of intent to pay would undermine this equally
important principle of bankruptcy law.

22
1230 (1997). Many courts have listed various factors to consider

in determining whether the card-user’s representation was made with

the requisite scienter. In Eashai, 87 F.3d at 1090, the Ninth

Circuit referenced the 12 factors listed in Citibank S.D., N.A. v.

Dougherty (In re Dougherty), 84 B.R. 653, 657 (9th Cir. B.A.P.

1988): the time between card-use and the bankruptcy filing;

whether, prior to card-use, an attorney was consulted about

bankruptcy; the number of charges; their amount; the debtor’s

financial condition at card-use; whether the limit was exceeded;

whether multiple charges were made on the same day; whether the

debtor was employed; her employment prospects; her financial

sophistication; whether her buying habits changed suddenly; and

whether luxuries or necessities were purchased. See also, e.g.,

Rembert, 141 F.3d at 282; Feld, 203 B.R. at 367 & n.9. Others have

rejected their use.18

We agree with the Ninth Circuit that such “factors are

nonexclusive; none is dispositive, nor must a debtor’s conduct

satisfy a minimum number” to constitute fraudulent intent.

Hashemi, 104 F.3d at 1125. In most instances, a bankruptcy court’s

consideration of these factors will be helpful. It should consider

them, together with any other facts and circumstances it may find

18
See, e.g., American Express Travel Related Servs. Co., Inc.
v. Christensen (In re Christensen), 193 B.R. 863, 866 (N.D. Ill.
1996) (multi-factor “objective” test inconsistent with common-law
“subjective” standard); Alvi, 191 B.R. at 733 (factors do not
address critical subjective intent).

23
proper, in determining whether, at card-use, the debtor knew her

representation was false.

In this regard, and as the Ninth Circuit has stressed, the

debtor’s financial condition at card-use is only one of many

factors to consider, and should not be the sole basis for finding

fraudulent intent. Anastas, 94 F.3d at 1285-86.19 Our precedent

in Boydston, 520 F.2d 1098, is not at odds with this.

Boydston concerned credit purchases; the creditors claimed the

debts were nondischargeable under the predecessor to §

523(a)(2)(A), asserting acquisition with no intent to pay. Id. at

1099-1100. The bankruptcy court found they failed to establish

subjective intent not to pay; our court found no clear error. But,

it stated: “where hopeless insolvency at the time of the purchases

makes payment impossible, fraudulent intent may be inferred”. Id.

at 1101 (emphasis added). Although this appears to conflict with

the Ninth Circuit’s much later statement in Anastas, the point

being made in Boydston was that hopeless insolvency, when the

charges were made, was “merely one method of establishing” the

debtor’s “subjective intent not to pay”. Boydston, 520 F.2d at

1101 (emphasis added).

19
See also, e.g., Chase Manhattan Bank v. Murphy (In re
Murphy), 190 B.R. 327, 332 n.6 (Bankr. N.D. Ill. 1995) (intent to
pay not synonymous with ability to pay; “[a]lone, financial
inability to repay does not establish fraudulent intent”).

24
 To the extent Boydston could be interpreted as requiring a

bankruptcy court to infer fraudulent intent solely on the basis of

“hopeless insolvency” at card-use, it would be inconsistent with

the Restatement. It requires, instead, that the inquiry focus on

the debtor’s subjective intent, with such “hopeless insolvency”

simply being “evidence from which his lack of honest belief may be

inferred”. RESTATEMENT (SECOND) OF TORTS § 526 cmt. d (emphasis added);

see also Feld, 203 B.R. at 365 (Field and Restatement make clear

that, under common law, subjective standard must be applied in

determining fraudulent intent).

Accordingly, “hopeless insolvency”, or inability to pay, at

card-use may support finding the debtor did not intend to pay, but

only if she was aware of her financial condition and knew she could

not (and therefore did not intend to) make even the minimum monthly

payment to the issuer. See RESTATEMENT (SECOND) OF TORTS § 530 cmt. d

(intention not to perform “may be shown by any ... evidence that

sufficiently indicates its existence, as, for example, the

certainty that he would not be in funds to carry out his promise”

(emphasis added)); Melancon, 223 B.R. at 321 (“If the debtor has no

idea how the money will get paid back, or if it will get paid back,

then he may hope to repay — he may even want to repay — but he

certainly does not intend to repay.” (emphasis added)).

A debtor rarely will admit card-debt is incurred with the

intention of not paying it; therefore, the creditor may rely on

25
circumstantial evidence to prove the debtor’s state of mind at

card-use.20 In order to prove a debtor’s fraudulent intent under

§ 523(a)(2)(A), the creditor must present sufficient evidence to

convince the trier of fact that, as discussed, the debtor made the

statement of intent in bad faith — that is, knowing it was false.

Pentecost, 44 F.3d at 1292. In this regard, the aim of the

objective factors enumerated supra is to discern the debtor’s

subjective intent. Citibank (S.D.), N.A. v. Michel, 220 B.R. 603,

606 (N.D. Ill. 1998) (“[o]bviously the court must consider evidence

that is probative of the debtor’s intent to repay in addition to

considering the debtor’s demeanor, but the ultimate inquiry still

seeks to determine the debtor’s subjective intent”). Ultimately,

in cases such as this one, where a debtor testifies as to her

subjective intent, the bankruptcy court must make a credibility

determination, considering the debtor’s testimony, along with other

objective circumstantial evidence of the debtor’s subjective

intent. See Matter of Sheridan, 57 F.3d 627, 633-34 (7th Cir.

1995) (while certain objective circumstantial evidence may support

an inference of fraud, it does not compel such a conclusion when

the trial judge finds the debtor’s contrary testimony to be

credible). Accordingly, on remand, in addition to Mercer’s

20
See, e.g., Ettell, 188 F.3d at 1145; Rembert, 141 F.3d at
282; Hashemi, 104 F.3d at 1125; Eashai, 87 F.3d at 1090. Cf.
Harte-Hanks Communications, Inc. v. Connaughton, 491 U.S. 657, 668
(1989) (“a plaintiff is entitled to prove the defendant’s state of
mind through circumstantial evidence”).

26
testimony that she intended to pay, all of the facts and

circumstances surrounding her card-use may be considered in

determining Mercer’s subjective intent.

b.

Cases such as this one, involving card-use to finance

gambling, with the claim of intent to pay with gambling winnings,

present a particularly difficult challenge for determining whether

the debtor, at card-use, subjectively intended to pay.21 Obviously,

gamblers gamble with the hope of winning, not losing. Mercer so

testified. But, hoping to win is not synonymous with intending to

pay. “A statement of intent (I will repay) is distinguishable from

a hope or a desire to [do so. It] ... suggests a plan to repay [,

and] ... an anticipated source of funds from which [it] might be

21
See, e.g., Rembert, 141 F.3d at 279, 282 (debtor “believed”
and “thought” would win enough to pay card-debt; subjective intent
to pay present where debtor took second mortgage on home, used
proceeds to pay debt, and made substantial payments on it while
continuing to gamble and lose); Anastas, 94 F.3d at 1287 (although
unlikely debtor would win in order to pay cash advances that
financed gambling, record supported good faith intent, where debt
incurred over six-month period during which monthly payments made,
issuer contacted to try to make alternative payment arrangements,
and debtor testified always intended to pay, but gambling addiction
led to unexpected financial circumstances); Star Bank, N.A. v.
Stearns (In re Stearns), 241 B.R. 611, 624 (Bankr. D. Minn. 1999)
(debtor’s persistent belief in salvation of “big win” was fatuous,
but genuine); Universal Card Servs. v. Pickett (In re Pickett), 234
B.R. 748, 757 (Bankr. W.D. Mo. 1999) (intent to pay not credible
when debtor lost $100,000 in one year); Boyd Gaming Corp. v. Hall
(In re Hall), 228 B.R. 483, 490 (Bankr. M.D. Ga. 1998) (intent to
pay where debtor honestly, though unreasonably, believed would get
lucky and be able to pay debts, although had lost for over 15
years).

27
made.” Melancon, 223 B.R. at 336. Accordingly, if a debtor

presents evidence of alternative sources of expected-income

sufficient to make her minimum payment, her intent with regard to

her gambling winnings would be less relevant.

Therefore, in determining whether Mercer subjectively intended

to pay card-loans obtained to finance gambling, one relevant

inquiry is what Mercer intended to do with any winnings. Did she

intend to use them to pay her card-debt, or to finance more

gambling? See id. at 336-41 (suggesting court should inquire

whether debtor has ever gambled and won, and what she did with

winnings).

3.

The bankruptcy court did not consider intent to deceive. Of

course, if the debtor does not know the representation is false,

there is no misrepresentation; therefore, she does not intend to

deceive. See FCC Nat’l Bank/First Card v. Friend (In re Friend),

156 B.R. 257, 262 (Bankr. W.D. Mo. 1993). Nevertheless, the

Restatement treats the elements separately. See RESTATEMENT (SECOND)

OF TORTS § 526 cmt. b (§§ 526-530 state “rules that determine

whether a representation is fraudulently made”; §§ 531-36, rules

regarding “maker’s purpose to induce the recipient to act in

reliance upon the misrepresentation”); see also Chevy Chase Bank

FSB v. Kukuk (In re Kukuk), 225 B.R. 778, 784 (10th Cir. B.A.P.

28
1998) (fraudulent nature of representation separate from intent to

deceive to influence conduct).

Intent to deceive is present if the debtor “intends or has

reason to expect [the creditor] to act or to refrain from action in

reliance upon the misrepresentation”. RESTATEMENT (SECOND) OF TORTS §

531. “A result is intended if the actor either acts with the

desire to cause it or acts believing that there is a substantial

certainty that the result will follow from his conduct.” Id. § 531

cmt. c.

With card-use, and the concomitant representation of intent to

pay, the cardholder’s intent is for the creditor, in reliance on

that representation, to approve the requested loan. E.g.,

Melancon, 223 B.R. at 324-25.22 Accordingly, if the bankruptcy

court finds that, by card-use, Mercer made a knowingly false

representation of intent to pay, then the separate requisite intent

to deceive is also present.

4.

UCS had the burden of proving not only that it actually relied

on Mercer’s representation, but also that its reliance was

22
See also, e.g., Sears, Roebuck & Co. v. Homschek (In re
Homschek), 216 B.R. 748, 753 (Bankr. M.D. Pa. 1998) (card-use “for
the sole purpose of obtaining” loan); Feld, 203 B.R. at 372 (by
card-use, debtor intended to induce issuer to extend credit —
“requisite intent to induce action”).

29
justifiable. See RESTATEMENT (SECOND) OF TORTS § 537. The effect vel

non of the card’s being “pre-approved” comes into play here.

a.

In bankruptcy court, the parties did not devote much attention

to actual reliance. It is treated extensively here, for the most

part, in order to respond to Judge Dennis’ dissent. The parties

stipulated Mercer was familiar with card accounts and how

obligations arise in connection with them; and she admitted that,

through card-use, she incurred a debt to UCS. The trial’s focus

was primarily on the scienter element and on justifiable reliance.

Perhaps for that reason, most of the testimony of UCS’ bankruptcy

specialist (UCS’ witness) dealt with UCS’ pre-card-issuance

screening process and the information it had available to it before

offering Mercer a pre-approved card. Concerning actual reliance,

UCS’ witness testified as follows:

Q. Based on [UCS’] records with regard
to this information, would [UCS] have extended
credit to [Mercer] if it knew that she would
not pay or did not have ability to pay for
these charges on this account?

A. I would say no.

(Emphasis added.)23

23
Judge Dennis states that, when read in context, this quoted
testimony did not refer to reliance on Mercer’s card-use, but
instead concerned the quality of information available to UCS at
card-issuance. But, the specific question at issue specifically
refers to “extend[ing] credit” and to “for these charges” (emphasis
added), obviously referring to card-use, not card-issuance. The
fact that much of the testimony preceding and subsequent to the

30
 This lack of emphasis on actual reliance is shown by Mercer’s

closing argument instead being directed primarily at the

representation and scienter elements. Contrary to her later

appellate briefs’ position, she argued: card-use was not a

representation of intent to pay. As a result, she did not

expressly argue that UCS failed to prove actual reliance on card-

use representations. Instead, she argued that, at card-issuance,

UCS did not rely on any representations by her.

In its bankruptcy court brief, UCS contended actual reliance

was demonstrated by its extension of credit (loan) to Mercer at

each card-use. Mercer’s responsive brief took a different

approach: UCS could not show actual and justifiable reliance when,

quoted testimony dealt with card-issuance simply reflects the focus
of the parties — and the bankruptcy court — on justifiable, not
actual, reliance.

As Judge Dennis points out, prior to the quoted testimony,
UCS’ witness testified regarding Mercer’s other credit cards and
the credit bureau screening process. Immediately after the quoted
question and answer, counsel asked another question regarding UCS’
card-issuance decision. And, the very next question concerned
whether Mercer “had the intent and ability to repay these charges
when they were incurred”. (Emphasis added). Viewing UCS’ witness’
testimony as a whole, it seems clear that UCS’ counsel was trying
to present evidence to establish each of the elements of fraud, but
focused primarily on the most heavily-disputed elements of scienter
and justifiable reliance. The presentation of UCS’ witness’
testimony was somewhat disjointed, in part due to the bankruptcy
court’s intermittent questions regarding UCS’ pre-issuance
investigation.

In short, UCS’ witness testified that UCS would “no[t]” “have
extended credit” to Mercer “if it knew that she would not pay for
[the] charges on [her] account”. This is actual reliance.

31
at or before card-issuance, it had an opportunity to make an

adequate investigation; passively extending credit at card-issuance

did not constitute reliance on subsequent card-use.

Regarding actual reliance, the bankruptcy court held:

[UCS] solely relied on its own agents and
investigative processes to make its [card-
issuance] decision. The evidence reflects
nothing written, said or done by Mercer upon
which [UCS] relied at any time [at card-use].

The court concludes that without the
establishment of reliance on [Mercer’s]
representations at the time the card was
issued, reliance will not attach to the
representations, if any, made by [Mercer] with
the subsequent use of the card. Under the
circumstances of this case, where the credit
card was pre-approved, based solely on [UCS’]
screening process, performed through various
credit bureaus and the [risk] score, there was
no actual reliance by [UCS] on representations
made by [Mercer].

Mercer, 220 B.R. at 326-27 (emphasis added).

The finding of “nothing written, said or done by Mercer upon

which [UCS] relied at” card-use, id., was influenced by an

erroneous interpretation of the law as requiring reliance on

representations by the debtor, regarding her financial condition,

at card-issuance, in order for the issuer to rely on subsequent

representations at card-use. Prior to the above-quoted passage,

the bankruptcy court, 220 B.R. at 325-26, quoted at length from

AT&T Universal Card Services v. Ellingsworth (In re Ellingsworth),

212 B.R. 326 (Bankr. W.D. Mo. 1997), which held: “[A] creditor

32
cannot justifiably rely on any representation, or the absence

thereof, made by a card holder if the card was pre-approved, and no

direct financial information was obtained by the issuer”. Id. at

338 (emphasis added).

The actual reliance inquiry must focus on the representations,

through card-use, of intent to pay, even if, for card-issuance, the

issuer relied on its investigation of the debtor’s

creditworthiness, rather than on any representations by her.

Again, any such pre-issuance representations, regarding her

financial condition, are not actionable under § 523(a)(2)(A), and

cannot support actual reliance on subsequent card-use intent to pay

representations. Because the bankruptcy court’s factual finding of

no actual reliance on card-use representations is based on an

incorrect interpretation of the law, it is not insulated by the

clearly erroneous standard of review. See Fabricators, 926 F.2d at

1464.24

24
Judge Dennis focuses, as did the bankruptcy and district
courts, on UCS’ reliance on its own screening and investigation in
making the decision to issue the card to Mercer. Because the
representations at issue are those of intent to pay each loan
obtained through card-use, the fact that UCS did not rely on any
representation by Mercer at card-issuance does not preclude it, as
discussed infra, from relying on card-use representations. See
RESTATEMENT (SECOND) OF TORTS § 546 (representation need not be sole,
but only substantial, factor in influencing recipient’s action).
As discussed, because the bankruptcy and district courts applied an
incorrect legal standard in finding no actual reliance, focusing on
card-issuance rather than card-use, to find no actual reliance, the
clearly erroneous standard is not applicable. Judge Dennis’
suggestion that the error is harmless because UCS did not prove

33
 The record does not contain briefs filed in district court.

The district court held: the bankruptcy court correctly applied

the law in determining whether UCS actually and justifiably relied

on “Mercer’s representations, if any”; and the bankruptcy court did

not clearly err in finding “the evidence reflects nothing written,

said or done by Mercer upon which [UCS] relied at” card-use.

In its briefs before the panel, in addressing actual reliance,

UCS contended: the bankruptcy court applied the wrong standard and

“erroneously concluded that ... UCS did not actually rely on

Mercer’s representations despite the uncontested fact ... it

advanced the funds she requested [with] each” card-use; actual

reliance was demonstrated by this credit extension; and her

representation of intent to pay was a substantial factor in its

making the requested loans. (Emphasis added.) In its supplemental

(en banc) brief, UCS reiterated these contentions in support of its

credit extension proving actual reliance on Mercer’s

representations.

actual reliance on Mercer’s card-use representations is based on
his view of UCS’ witness’ testimony as relating to the information
UCS obtained through its pre-card-issuance investigation; as
discussed supra, the question asked of the witness referred to
“these charges”, not to card-issuance. Moreover, the error was not
harmless. By focusing solely on UCS’ card-issuance decision, and
what the bankruptcy court found to be an inadequate pre-issuance
investigation of Mercer’s creditworthiness under a standard even
more stringent than the now-rejected reasonable reliance standard,
the bankruptcy court did not consider: whether, with each card-
use, Mercer made a representation of intent to pay; or whether UCS
relied on that representation when approving charges or advancing
cash to Mercer.

34
 Mercer’s panel brief did not respond directly; it asserted,

conclusorily, that the no-actual-reliance finding should be

affirmed. In her supplemental brief, Mercer, for the first time,

attempted to respond, maintaining, consistent with the bankruptcy

court, that, because UCS did not actually rely on any

representations at card-issuance, it was precluded from relying on

any at subsequent card-use.

“The recipient of a fraudulent misrepresentation can recover

... only if he in fact relies upon the misrepresentation ... and

his reliance is a substantial factor in bringing about [his] loss.”

RESTATEMENT (SECOND) OF TORTS § 537 cmt. a (emphasis added). That

comment refers to the Restatement’s rule on causation in fact,

which provides, similarly, that the reliance must be “a substantial

factor in determining the course of conduct that results in his

loss”. Id. § 546 (emphasis added). Accordingly, actual reliance

is the equivalent of causation-in-fact.25

The “standard of actual reliance requires little of the

creditor”, City Bank & Trust Co. v. Vann (In re Vann), 67 F.3d 277,

284 (11th Cir. 1995) (emphasis added); it must prove it “in fact

relied upon the representations of the debtor”. Id. at 281.

Moreover, as mentioned, such reliance need not be the “but-for”

25
See, e.g., Mayer v. Spanel Int’l Ltd. (Matter of Mayer), 51
F.3d 670, 676 (7th Cir.), cert. denied, 516 U.S. 1008 (1995);
Novartis Corp. v. Luppino (In re Luppino), 221 B.R. 693, 701
(Bankr. S.D.N.Y. 1998); Hernandez, 208 B.R. at 876.

35
cause of the issuer’s actions: “It is enough that the

representation has played a substantial part, and so has been a

substantial factor, in influencing his decision.” RESTATEMENT

(SECOND) OF TORTS § 546 cmt. b (emphasis added; citation omitted).

Courts that recognize card-use as an intent to pay

representation generally have concluded that the issuer’s extension

of credit constitutes actual reliance on such representation.26

Obviously, the debtor’s promise to pay is an essential factor in

the issuer’s decision to make the requested loan; it would not do

so without it. Likewise, the debtor’s card-use (conduct) causes

the issuer’s loss when it reimburses the merchant and the debtor

does not pay.27

26
See, e.g., Melancon, 223 B.R. at 327; AT&T Universal Card
Servs. Corp. v. Pakdaman, 210 B.R. 886, 890 (D. Mass. 1997); see
also Ward, 857 F.2d at 1087 (Merritt, J., dissenting) (issuer
relied on good faith card-use because it paid debt created thereby
with expectation of reimbursement by cardholder); AT&T Universal
Card Servs. Corp. v. Dietzel (In re Dietzel), 245 B.R. 747, 755
(Bankr. D. Mass. 2000) (because card-use represents intent to pay,
cardholder induces action by issuer; thus, cardholder’s false
representation is substantial factor in issuer’s decision to make
loan); Citicorp Credit Servs., Inc. v. Hinman (In re Hinman), 120
B.R. 1018, 1022 (Bankr. D.N.D. 1990) (card industry functions upon
issuer’s guarantee of payment to merchant; reliance by issuer
inherent in system because card-use forces issuer to honor its
guarantee to merchant).
27
Judge Dennis’ quotation of testimony dealing with scienter
is not relevant to the analysis for actual reliance. Nevertheless,
Judge Dennis relies on that testimony to assert “[i]t is highly
improbable that [UCS] actually relied on these same card uses —
which its expert testified were indicative of a fraudulent intent
not to repay the charges incurred — in deciding to take the action
of extending credit to Mercer”. (Emphasis added.) Obviously, a
finding of no actual reliance cannot be based on evidence that the

36
 Some bankruptcy courts have held an issuer’s “passive”

extension of credit does not constitute reliance on card-use, that

it “cannot sit back and do nothing and still meet the standard for

actual and justifiable reliance when it had an opportunity to make

an adequate examination or investigation”. Alvi, 191 B.R. at 731

(emphasis added).28 Another line of cases holds that the issuer

relies only on the cardholder’s card-agreement promise to pay, and

not on any representations emanating from subsequent card-use. See

GM Card v. Cox (In re Cox), 182 B.R. 626, 636 (Bankr. D. Mass.

1995) (because card-agreement includes promise to pay, “it would be

irrational for a fact finder to conclude [the issuer] relied upon

a later [card-use] implied representation of intent to pay”).29 We

disagree with both lines of cases.

creditor, in hindsight, determines is indicative of the debtor’s
fraudulent intent.
28
See also Hernandez, 208 B.R. at 877; Bank One Columbus, N.A.
v. McDaniel (In re McDaniel), 202 B.R. 74, 78 (Bankr. N.D. Tex.
1996); Christensen, 193 B.R. at 867; cf. Bank of America v. Jarczyk
(In re Jarczyk), 253 B.R. 140, 149 (Bankr. W.D.N.Y. 2000) (if card
issued without relying on debtor’s representation of intent to pay,
may not claim reliance on card-use representations); Briese, 196
B.R. at 454 (issuer relied on own investigation; debtors’
representations largely irrelevant); Pan American Bank, N.A. v.
Lilienfeld (In re Lilienfeld), 36 B.R. 724, 726-27 (Bankr. S.D.
Fla. 1984) (issuer relies on debtor’s representations at card-
issuance and need not prove specific reliance at each card-use).
29
See also Rich, 249 B.R. at 719; Universal Bank, N.A. v. Kuntz
(In re Kuntz), 249 B.R. 699, 707 (Bankr. N.D. Tex. 2000);
Hernandez, 208 B.R. at 878.

37
 First, Alvi and its progeny also hold card-use is not a

representation. We have rejected that proposition.

Second, for actual reliance, the representation at issue is

the intent to pay the loan obtained through card-use. The fact

that an issuer based its card-issuance decision on its

investigation of the debtor’s creditworthiness does not preclude

the issuer from relying also on the debtor’s subsequent card-use

intent to pay representation. Similarly, consistent with the

earlier-quoted Restatement (Second) of Torts § 546 comment b,

reliance on the debtor’s card-agreement promise does not preclude

relying also on the card-use representation. Moreover, reliance on

the card-agreement alone would be insufficient; again, there is no

loan to pay until card-use.30 See Melancon, 223 B.R. at 327 n.37;

see also Manufacturer’s Hanover Trust Co. v. Ward (In re Ward), 857

F.2d 1082, 1088-89 (6th Cir. 1988) (Merritt, J., dissenting)

(without issuer’s reliance on promise to pay through card-use,

30
Judge Dennis states that, because each cash advance Mercer
obtained was made instantaneously from an ATM machine, no one at
UCS evaluated the transaction or relied on any representation
Mercer made through card-use. Relying on the evidence of the time
lag between transactions (when the loan/cash advance was
made/received) and posting the charges, Judge Dennis concludes
that, because UCS was not aware of the transactions until several
days after they occurred, UCS could not have relied
contemporaneously upon each individual draw on Mercer’s credit
line. As discussed, this analysis completely overlooks the
fundamental fact that a cash advance is a loan, not a gift.
Inherent in any loan is a promise to pay. See Melancon, 223 B.R.
at 326 (“promise to repay is not merely a substantial factor in
determining whether a loan will be made[;] [i]t is an essential
element of any loan”).

38
consideration is lacking, and contract is voidable; the opposite

“result would undermine credit cards as a medium of exchange”

(emphasis added)).31

In sum, an issuer usually will be able to establish actual

reliance by showing it would not have approved the loan in the

absence of debtor’s promise to pay (through card-use). It is

31
Along this line, in some circumstances the claimed reliance
on a representation of intent to pay may be so unreasonable that it
could support finding no actual reliance. “[T]he greater the
distance between the reliance claimed and the limits of the
reasonable, the greater the doubt about reliance in fact”. Field,
516 U.S. at 76; see also Vann, 67 F.3d at 281 (“Reasonableness of
the reliance may be used as proof that the creditor did rely.”);
cf. First Deposit Nat’l Bank v. Mack (In re Mack), 216 B.R. 981,
983, 985 (Bankr. N.D. Fla. 1997) (without conducting any credit
check, issuer sent debtor solicitation, requesting only her social
security number, home telephone number, and annual household
income; card provided debtor along with cash advance check for
$3,000); AT&T Universal Card Servs. v. Crutcher (In re Crutcher),
215 B.R. 696, 698 (Bankr. W.D. Tenn. 1997) (after debtor advised
issuer she was considering bankruptcy and was an addicted gambler,
and requested her account be closed and not reopened under any
circumstances, issuer approved emergency cash advance so debtor
could pay $2,500 casino debt and permitted cash advances,
increasing account balance to over $11,000 during 24-hour gambling
spree); First USA Bank v. Hunter (In re Hunter), 210 B.R. 212, 213-
14 (Bankr. M.D. Fla. 1997) (after debtor defaulted on card and
filed bankruptcy, same creditor offered debtor another pre-approved
card one week before trial on creditor’s nondischargeability
complaint); Feld, 203 B.R. at 370 (if issuer distributes cards
freely without conducting any credit analysis, appropriate to find
no reliance).

Concerning Field’s statement that “reasonableness goes to the
probability of actual reliance”, 516 U.S. at 76, it would seem that
any situation in which claimed actual reliance is so unreasonable
as to support finding no reliance-in-fact would also support
finding reliance was not justifiable, as discussed infra. We need
not reach that issue here.

39
undisputed that, for each Mercer card-use, UCS authorized the

requested loan. Obviously, her intent to pay representation,

through card-use, was a substantial factor in UCS’ decision to make

each loan. Equally obvious, if she had not used the card, UCS

would not have made a loan; nothing would have occurred.32 As a

32
Judge Dennis states: “After Mercer accepted the credit card
and began using it, [UCS] did not take any action to extend her
line of credit in contemporaneous reliance on each draw”. But,
obviously, by making the loan (cash advance) requested with each
card-use, UCS took action in reliance on Mercer’s promise to repay
that loan.

The transactions took place within the context of the
cardmember agreement and line of credit.

On a purely physical level, the course of
action that causes the issuer’s loss is the
pushing of buttons, combined with the internal
actions of the ATM. But these physical
actions must be understood within the context
of the contractual arrangement that makes them
meaningful. Pushing random buttons or putting
the wrong card in the machine won’t generate
any money. It is only through prior
arrangements (the assignment of a card to the
holder, the choice of a PIN, the operation of
the network, the provision of ATMs in
convenient locations) that the transaction
works at all, and part of this prior
arrangement is the understanding that the
physical act of pushing the buttons will carry
with it some unverbalized statements that have
legal significance.

Melancon, 223 B.R. at 326 (emphasis added).

When Mercer received the requested cash advances, she
immediately received cash in hand. The fact that the transactions
(cash advances) were not posted simultaneously does not change the
fact that they were loans which would not have been made in the
absence of a promise to repay them. Judge Dennis’ position would
require card issuers to monitor individual transactions as they

40
matter of law, UCS actually relied on Mercer’s card-use

representations.

b.

Concerning justifiable reliance, the Restatement has a special

rule for representations of intention, as at issue here. Reliance

is justifiable “if the existence of the intention is material and

the recipient has reason to believe that it will be carried out”.

Id. § 544 (emphasis added).

(1)

For the existence of the intention, the recipient is justified

in relying on a representation only if it gives him “reason to

believe that the intention is firmly entertained and, therefore, to

expect that it will be carried out. Whether the recipient has

reason for this belief depends upon the circumstances under which

the statement was made, including the fact that it was made for the

purpose of inducing the recipient to act in reliance upon it and

the form and manner in which it was expressed”. Id. § 544 cmt. a.

For the existence of the intention being material, id. § 544

cmt. b; see also id. § 538(1), § 544’s commentary contains a cross-

reference to § 538(2), which defines materiality. It is present

when, in deciding on a course of action, “a reasonable man would

occur, and would result in great delay in receiving credit
(especially troublesome for cash advances), increased credit costs
for non-bankrupt card users, and would, in short, greatly undermine
— if not destroy — the use of cards as a medium of exchange.

41
attach importance to its existence” or “the maker of the

representation knows or has reason to know ... its recipient

regards or is likely to regard the matter as important ...,

although a reasonable man would not so regard it”. Id. § 538(2)

(emphasis added).33

As a matter of law, the materiality element is present here:

in determining whether to approve the loan requested by card-use,

a reasonable issuer would attach importance to the existence of a

cardholder’s representation of intent (promise) to pay that loan.

See Melancon, 223 B.R. at 327 (“[i]f the representation is a

necessary part of the transaction, ... it is material”).

(2)

The second prong for justifiable reliance on a statement of

intention is reason to believe the intention will be carried out.

If the recipient “knows facts that will make it impossible for the

maker to [carry out his intention, the recipient] cannot be

justified in his reliance”. RESTATEMENT (SECOND) OF TORTS § 544 cmt.

c (emphasis added).

33
Cf. Mayer, 51 F.3d at 676 (“[A]n investor cannot close his
eyes to a known risk. If the investor possesses information
sufficient to call the representation into question, he cannot
claim later that he relied on or was deceived by the lie. This is
not because he has a duty to investigate lies or prevent
intentional torts, though; it is, rather, because the false
statement is not material under the circumstances.” (emphasis
added)).

42
 The comment’s use of “knows”, and its omission of “should have

known”, suggest strongly that, for justifiable reliance on a

representation of intention, the recipient is not required to

conduct an investigation. Section 540 confirms this: “The

recipient of a fraudulent misrepresentation of fact is justified in

relying upon its truth, although he might have ascertained [its]

falsity ... had he made an investigation.” Id. § 540 (emphasis

added).

This rule applies even when the investigation “could be made

without any considerable trouble or expense.... On the other hand,

if a mere cursory glance would have disclosed the

[representation’s] falsity ..., its falsity is regarded as obvious

....” Id. § 540 cmt. a (emphasis added). In this regard, “[t]he

recipient of a fraudulent misrepresentation is not justified in

relying upon its truth if he knows that it is false or its falsity

is obvious to him”. Id. § 541 (emphasis added).

Field, which involved a misrepresentation of fact, relied on

§ 540 (no duty to investigate) in concluding that, for §

523(a)(2)(A) “actual fraud”, the standard is justifiable, not

reasonable, reliance. Field, 516 U.S. at 70. But, § 540 speaks

only about fraudulent misrepresentations of fact. The case at hand

involves a representation of intention, prompting whether § 540

applies.

43
 The answer is found in the commentary to § 525. As mentioned,

§ 525 provides the general rule of liability for fraudulent

misrepresentations of fact, opinion, intention, or law.

Strictly speaking, “fact” includes not only
the existence of a tangible thing or the
happening of a particular event or the
relationship between particular persons or
things, but also the state of mind, such as
the entertaining of an intention or the
holding of an opinion.... There is sometimes,
however, a marked difference between what
constitutes justifiable reliance upon
statements of the maker’s opinion and what
constitutes justifiable reliance upon other
representations. Therefore, it is convenient
to distinguish between misrepresentations of
opinion and misrepresentations of all other
facts, including intention.

RESTATEMENT (SECOND) OF TORTS § 525 cmt. d (emphasis added); see also

Manufacturers Hanover Trust Co. v. Pannell (In re Pannell), 27 B.R.

298, 302 (Bankr. E.D.N.Y. 1983) (“A person’s intent, his state of

mind, ... is capable of ascertainment and a statement of present

intention is deemed a statement of a material existing fact,

sufficient to support a fraud action.” (emphasis added; internal

quotation marks and citation omitted)).

Therefore, for justifiable reliance, one form of a

representation of fact is one of intention. See Kukuk, 225 B.R. at

784 (comments to § 525 provide representations of fact include

those of intention). Accordingly, § 540’s no-duty-to-investigate

rule applies. Concomitantly, Field, even though it dealt with a

44
representation of fact rather than of intention, is controlling

with respect to whether an issuer has a duty to investigate.

In addition to its citing §§ 540 and 541, dealing with no duty

to investigate and obviousness of the representation’s falsity,

Field also cited the Restatement for “contributory negligence [not

being a] bar to recovery because fraudulent misrepresentation is an

intentional tort”. Field, 516 U.S. at 70 (emphasis added); see

also RESTATEMENT (SECOND) OF TORTS § 545A. Field contrasted justifiable

and reasonable reliance:

Although the plaintiff’s reliance on the
misrepresentation must be justifiable ... this
does not mean that his conduct must conform to
the standard of the reasonable man.
Justification is a matter of the qualities and
characteristics of the particular plaintiff,
and the circumstances of the particular case,
rather than of the application of a community
standard of conduct to all cases.

516 U.S. at 70-71 (quoting RESTATEMENT (SECOND) OF TORTS § 545A cmt. b

(emphasis added)).

In addition to the Restatement, Field cited other treatises to

support the applicable standard being justifiable, not reasonable,

reliance. Id. at 71-72. They state similarly that the recipient

of a fraudulent misrepresentation may justifiably rely on it unless

its falsity is obvious or there are “red flags” indicating such

reliance is unwarranted. See id. (“[i]t is only where, under the

circumstances, the facts should be apparent to one of his knowledge

and intelligence from a cursory glance, or he has discovered

45
something which should serve as a warning that he is being

deceived, that he is required to make an investigation of his own”

(quoting W. PROSSER, LAW OF TORTS § 108, p. 718 (4th ed. 1971))); id.

at 72 (recipient “is entitled to rely upon representations of fact

of such a character as to require some kind of investigation or

examination on his part to discover their falsity, and a defendant

who has been guilty of conscious misrepresentation can not offer as

a defense the plaintiff’s failure to make the investigation or

examination to verify the same” (quoting 1 F. HARPER & F. JAMES, LAW

OF TORTS § 7.12, pp. 581-83 (1956)) (emphasis added)); see also

Mayer v. Spanel Int’l Ltd. (Matter of Mayer), 51 F.3d 670, 675 (7th

Cir.) (“The common law of fraud ... does not have any reasonable-

investigation requirement.” (emphasis added)), cert. denied, 516

U.S. 1008 (1995).

(3)

Despite Field’s guidance, reliance has been found

unjustifiable by some courts if they conclude that, prior to card-

issuance, the issuer’s creditworthiness investigation was

inadequate.34 For example, the above-quoted holding in

34
See, e.g., Universal Card Servs. Corp. v. Akins (In re
Akins), 235 B.R. 866, 872-74 (Bankr. W.D. Tex. 1999) (applying
“commercial entrapment” theory, card-debt dischargeable because
credit extension was result of issuer’s negligent lending practices
and industry’s negligent use of faulty risk score system); Bank One
Columbus, N.A. v. Schad (In re Kountry Korner Store), 221 B.R. 265,
274 (Bankr. N.D. Okla. 1998) (“unlikely that ... issuer will be
able to prove justifiable reliance if it did nothing to protect
itself from irresponsible credit card use other than reviewing

46
Ellingsworth, relied on by the bankruptcy court in the case at

hand, was that the issuer cannot justifiably rely on a card-use

representation “if the card was pre-approved, and no direct

financial information was obtained by the issuer”. 212 B.R. at 338

(emphasis added). The court was critical of card-issuance based on

the debtor’s risk score, income, and employment, without the

issuer’s also considering her assets, secured debt, and other

living expenses. Id. at 339. Ellingsworth’s reasoning resembles

the “assumption of risk” doctrine applied in Ward, 857 F.2d at

1085, a pre-Field case, which held: unless the issuer conducts a

pre-issuance credit check, it assumes the risk that the debtor will

not pay card-use loans.35

A different kind of “assumption of risk” doctrine was adopted

by the Eleventh Circuit in First National Bank of Mobile v.

Roddenberry, 701 F.2d 927, 932-33 (11th Cir. 1983), decided under

§ 523(a)(2)(A)’s predecessor. A few years after applying for, and

receiving, cards from a bank, the cardholder engaged in “a credit

card spending spree”. Id. at 928. Although the bank advised

third-party credit reports which [are] ... so superficial in scope
as to make them unreliable predictors of solvency, income, budget,
work history, and other data relevant to the creditworthiness of a
customer”); McDaniel, 202 B.R. at 78 (“creditor cannot sit back and
do nothing and still meet the standard for actual and justifiable
reliance when it had an opportunity to make an adequate examination
or investigation” (emphasis added)).
35
See also Etto, 210 B.R. at 739; Carpenter, 53 B.R. at 728-29.

47
merchants calling for authorization of charges to retrieve the

card, she was able to use it without detection, by making small

purchases, and continued doing so, even after filing bankruptcy.

Id. at 928-29.

Roddenberry (pre-§ 523(a)(2)(A)) held: the issuer assumes the

risk of nonpayment until it unconditionally revokes the right to

card possession and use, and the cardholder is aware of the

revocation. Id. at 932.36 This theory has received considerable

criticism.37 Moreover, many bankruptcy courts in the very circuit

that rendered the opinion have interpreted it as not precluding

nondischargeability for “actual fraud” (added by the 1978

36
See also FCC Nat’l Bank v. Gilmore (In re Gilmore), 221 B.R.
864, 873 n.10 (Bankr. N.D. Ala. 1998) (suggesting Roddenberry
assumption of risk doctrine “simply a variation of the common law
principles of consent and estoppel, which may preclude a recovery
for fraud”, irrespective of justifiable reliance); Dominion
Bankshares Servs. v. Shrader (In re Shrader), 55 B.R. 608, 612
(Bankr. W.D. Va. 1985) (Roddenberry sound because burden properly
placed on issuer to effectively monitor accounts); cf. First Nat’l
Bank of Atlanta v. Robinson (Matter of Robinson), 55 B.R. 839, 847-
48 (Bankr. S.D. Ind. 1985) (issuer assumed risk of nonpayment to
extent of charges up to credit limit when mailed unsolicited, pre-
approved application without inquiring as to financial condition or
ability to pay).
37
See, e.g., Ford, 186 B.R. at 318 n.8 (“many courts have
criticized [Roddenberry’s] approach as going to an extreme, tipping
the scales so far in favor of debtors that very few credit card
debts will qualify as nondischargeable”); Cox, 182 B.R. at 634
(theory “too judgmental to support a court decision purporting to
apply a statute”); Sears Roebuck & Co. v. Faulk (In re Faulk), 69
B.R. 743, 755-56 (Bankr. N.D. Ind. 1986) (Roddenberry automatic
revocation rule rejected “as contrary to the clear language of §
523(a)(2)(A)”).

48
amendment), which most of those courts define as occurring through

card-use without intent to pay.38

For several reasons, we reject both the Roddenberry and Ward

variations of “assumption of risk”. (Interestingly, Mercer did

not rely on it. In fact, at closing argument, her counsel stated

he was not urging its adoption: “in all fairness it goes a little

bit too far”.)

First, Roddenberry would make it virtually impossible for any

issuer to prevail under § 523(a)(2)(A). The Bankruptcy Code should

not be interpreted to require issuers to assume the risk that

cardholders will commit fraud.39 “Rather, the credit card

transaction (like any other lending relationship) is premised upon

the notion that both parties will act in good faith. Thus, the

debtor is expected to make ‘bona fide’ use of the card and not

38
See, e.g., AT&T Universal Card Servs. Corp. v. Reach (In re
Reach), 225 B.R. 236, 239 (Bankr. N.D. Ala. 1997); Hunter, 210 B.R.
at 215; American Express Travel Related Servs. Co., Inc. v. Johnson
(Matter of Johnson), 141 B.R. 473, 478 (Bankr. M.D. Ga. 1992).
39
See, e.g., Feld, 203 B.R. at 366 n.6 (fact that creditors
anticipate loss does not mean “they should be saddled with losses
resulting from fraud”); Briese, 196 B.R. at 449 (creditor does not
assume risk debtor is dishonest); J.C. Penney Co., Inc. v. Shanahan
(In re Shanahan), 151 B.R. 44, 47 (Bankr. W.D.N.Y 1993) (issuer
“perhaps assumes the risk of the user’s ignorance, mistake,
naivete, gullibility, misfortune, accident, or other innocent
failing or adversity, but [not of] user’s knowing and intentional
use of the card to obtain goods without any realistic prospect of
having the wherewithal to pay”).

49
engage in fraud.” Chevy Chase Bank, FSB v. Briese (In re Briese),

196 B.R. 440, 449 (Bankr. W.D. Wis. 1996) (emphasis added).40

Second, because the assumption of risk theory does not

consider the debtor’s intent in incurring card-debt, it is likely

to result in the discharge of debt fraudulently-incurred, contrary

to the language and purpose of § 523(a)(2)(A).41 See Grogan, 498

U.S. at 286-87 (Bankruptcy Code’s “fresh start” policy for benefit

of “honest but unfortunate” debtors, not perpetrators of fraud);

cf. Sovran Bank, N.A. v. Allen (In re Allen), 65 B.R. 752, 765 n.20

(E.D. Va. 1986) (“Judicial attempts to engraft a fresh start policy

onto [§ 523(a)(2)(B), regarding false financial statements] ... are

40
See also Sanford Inst. for Sav. v. Gallo, 156 F.3d 71, 75
(1st Cir. 1998) (rule that “party may justifiably rely on a
misrepresentation even when he could have ascertained its falsity
by conducting an investigation ... is at the heart of millions of
commercial transactions conducted daily in this nation which rely
on the honesty and truthfulness of representation made by the
parties” (citations omitted)).
41
See Searle, 223 B.R. at 389 (“‘assumption of risk’ theory
advantages the dishonest and deceptive debtor”); Briese, 196 B.R.
at 449 (“[w]hile the bankruptcy code is to be construed liberally
in favor of the debtor, it is also to be fair to creditors”;
assumption of risk theory is “unsatisfactory, primarily because
dishonest debtors may manipulate its mechanical distinction between
debts incurred before and after credit privileges are revoked”);
Hecht’s v. Valdes (In re Valdes), 188 B.R. 533, 536-37 (Bankr. D.
Md. 1995) (theory allows discharge regardless of debtor’s intent,
leaving issuer with little or no recourse even in most egregious
situations; focus should be not on issuer’s improvidence, but “on
a fundamental tenet of bankruptcy — the discharge and fresh start
are intended for the honest, but unfortunate debtor”); Dougherty,
84 B.R. at 657 (theory “improperly focuses on the conduct of the
‘improvident creditor’ rather than on the conduct of the deceitful
debtor who may be trying to misuse the Bankruptcy Code”).

50
properly viewed with skepticism. Because the policies underlying

questions of dischargeability are sharply conflicting, decisions

about the scope of the nondischargeability provisions are best left

to Congress where legislative techniques and the safeguard of

political accountability can ensure that the conflicting policies

are resolved in a legitimate manner.”).42

Moreover, such assumption of risk could have the unintended

consequence of encouraging dishonest debtors, especially those with

pre-approved cards, to undertake spending sprees, until they have

reached their credit limits, knowing their debts will be

discharged, as long as they wait at least 60 days before filing.

See 11 U.S.C. § 523(a)(2)(C) (Supp. 2000) (consumer debt for

luxury goods or services, or cash advances aggregating more than

$1,000, within 60 days before filing presumptively

nondischargeable).43 Obviously, a dishonest but patient debtor who

42
See also, e.g., Mayer, 51 F.3d at 674 (“Congress concluded
that preventing fraud is more important than letting defrauders
start over with a clean slate, and we must respect that
judgment.”); American Express Travel Related Servs. Co., Inc. v.
Diaz (In re Diaz), 185 B.R. 867, 870 (Bankr. M.D. Fla. 1994) (“By
creating the fraud exceptions to discharge, Congress sought to
discourage fraudulent conduct and ensure that relief intended for
honest debtors does not inure to the benefit of dishonest ones.”
(emphasis added)).
43
Accordingly, we disagree with the bankruptcy court’s holding
in Cox, 182 B.R. at 635-36, that § 523(a)(2)(C) is the “exclusive
remedy” against “loading up” (incurring card debt in contemplation
of bankruptcy); see also AT&T Universal Bank v. Hensley (In re
Hensley), 201 B.R. 494, 498 (Bankr. S.D. Ohio 1996). That portion
of Cox was disapproved by the district court in Pakdaman, 210 B.R.
at 889-90.

51
intends to incur card-debt in contemplation of discharge easily

could avoid this 60-day period. See AT&T Universal Card Servs.

Corp. v. Pakdaman, 210 B.R. 886, 889-90 (D. Mass. 1997). Likewise,

adoption of this theory undoubtedly would result in increased

credit costs for honest card-users. See Citibank (S.D.), N.A. v.

Senty (In re Senty), 42 B.R. 456, 461 (Bankr. S.D.N.Y. 1984).

Finally, this assumption of risk theory is inconsistent with

the common law, as expressed in the Restatement. Simply put, it

confuses “assumption of risk” with “contributory negligence”, as

those doctrines are commonly understood. Compare RESTATEMENT (SECOND)

OF TORTS § 463 (contributory negligence) with id. § 496A cmt. c

(assumption of risk). Fraud being an intentional tort, a victim’s

contributory negligence is not a defense.44 See RESTATEMENT (SECOND)

OF TORTS § 545A & cmt. a. On the other hand, as discussed, the

recipient of a fraudulent misrepresentation can be said, in a

sense, to have assumed the risk of relying on the representation

only when he knows it is false or it is obvious that reliance is

unjustified. Accordingly, if an issuer does not know the falsity

44
See also, e.g., Gallo, 156 F.3d at 74 (“equities weigh in
favor of giving the benefit of the doubt to the victim, careless as
it may have been, and even though it could have been more diligent
and conducted an investigation”); Mayer, 51 F.3d at 675 (“[I]t is
precisely because fraud has a mental-state requirement that it
lacks a reasonable-investigation requirement.... Tolerating fraud
by excusing deceit when the victim is too easily gulled increases
both the volume of fraud and expenditures on self-defense. Society
is better off with less fraud and fewer precautions against it, and
the common law has tailored the doctrine accordingly.”).

52
of the user’s representation of intent to pay, or if it is not

obvious that reliance on the representation is unjustified, the

issuer does not assume the risk the cardholder will commit fraud.

(4)

The Ninth Circuit’s justifiable reliance standard for card-

dischargeability is consistent with Field and the Restatement: the

“issuer justifiably relies on a representation of intent to pay 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”. Anastas, 94 F.3d at 1286

(emphasis added); see Eashai, 87 F.3d at 1090-91 (“although a

person ordinarily has no duty to investigate the truth of a

representation, a person cannot purport to rely on preposterous

representations or close his eyes to avoid discovery of the truth”

(emphasis added)); Hashemi, 104 F.3d at 1126.45 This standard

appropriately “recognizes the unique nature of credit card

45
See also, e.g., Dietzel, 245 B.R. at 754 (applying Anastas
standard); AT&T v. Herrig (In re Herrig), 217 B.R. 891, 899-900
(Bankr. N.D. Okla. 1998) (same); MBNA America v. Simos (In re
Simos), 209 B.R. 188, 193 (Bankr. M.D.N.C. 1997) (same); Feld, 203
B.R. at 370 (“In rejecting those cases that impose a duty to
investigate in the absence of anything that would arouse suspicion,
the Supreme Court implicitly accepts as justifiable the extension
of credit where the card use does not send up any red flags. Thus,
following an initial credit check that uncovers no problems, if a
cardholder’s use is consistent with past use, and the cardholder is
paying the minimum charge and staying within credit limits,
reliance on the cardholder’s implied representation of intent to
repay will generally be justifiable.” (emphasis added)).

53
transactions, the ability of a cardholder to mask an actual

financial condition by making minimum payments from whatever

sources, and the ... issuer’s lack of access to the cardholder’s

present financial condition” at each card-use. AT&T Universal Card

Servs. Corp. v. Searle, 223 B.R. 384, 391 (D. Mass. 1998) (for

card-debt, adopting Ninth Circuit’s justifiable reliance standard).

Of course, if the issuer discovers “red flags” during a pre-

issuance investigation or during the lending relationship, such as

unemployment or insufficient income to service existing debt, it

probably would not be justified in relying on a representation of

intent to pay. See Briese, 196 B.R. at 454 (reliance unjustified

where issuer’s investigation revealed “high debt load and an

inability to make more than minimum payments”; issuer thus “ignored

an obvious risk in extending credit”).46

Although the bankruptcy court cited Field and stated the

applicable justifiable reliance standard, Mercer, 220 B.R. at 323,

it did not apply it. Instead, it held: even assuming UCS actually

relied on any representations by Mercer, it was not justifiable “in

46
See also, e.g., Mercantile Bank v. Canovas, 237 B.R. 423,
429-30 (Bankr. N.D. Ill. 1998) (issuer did not justifiably rely on
representations of intent to pay made after it terminated debtor’s
charging privileges and then invited him to incur more charges;
falsity of misrepresentation was obvious upon cursory examination);
AT&T Universal Card Servs., Inc. v. Nguyen (In re Nguyen), 235 B.R.
76, 90-91 (Bankr. N.D. Cal. 1999) (reliance unjustifiable where
card issued with $8,000 limit, knowing debtor would have $32,400 in
available credit on his four cards, even though his monthly income
was only $640).

54
light of the incomplete nature of the credit information obtained

by [UCS]”. Id. at 327. It suggested: “If [UCS] does not want its

cardholders to use cash advances for gambling purposes and wants

such uses to be non-dischargeable, why not put a specific

restriction on this use in the cardholder agreement”. Id. at 328

(emphasis added).

At trial, the bankruptcy judge had suggested a number of

questions UCS should have asked Mercer before card-issuance, such

as whether she: was married; had other credit cards or loans; and

had a gambling addiction. It had also asked why UCS did not

prohibit card-use at ATM machines in casinos. At the trial’s

conclusion, the court had suggested that, in addition to relying on

credit bureau information and risk scores, issuers could ask, among

other things, whether the debtor: has any problem with gambling;

owes any gambling debts; and has had any gambling losses or

winnings over the past several years. It had also suggested

issuers should be required to exercise due diligence. Needless to

say, the applicable justifiable reliance standard does not require

such due diligence. In fact, the suggested standard was much more

stringent than the reasonable reliance standard applied in many

cases prior to being rejected by Field.47

47
See BancBoston Mortgage Corp. v. Ledford (In re Ledford), 127
B.R. 175, 178 (M.D. Tenn. 1991) (“critical issue is whether
reliance on the representations was reasonable, not whether the
decision to loan money was reasonable” (emphasis added)), aff’d,
970 F.2d 1556 (6th Cir. 1992), cert. denied, 507 U.S. 916 (1993);

55
 Even assuming UCS, a sophisticated lender with considerable

resources, could have conducted the type investigation envisioned

by the bankruptcy court, its failure to do so does not per se

preclude finding it was justified in relying on Mercer’s card-use

representations of intent to pay, because the information it

obtained prior to card-issuance appears, based on the earlier-

discussed evidence, not to have raised “red flags” requiring

further investigation. Of course, justifiable reliance is a

question of fact. See Coston v. Bank of Malvern (Matter of

Coston), 991 F.2d 257, 260 (5th Cir. 1993) (en banc) (pre-Field;

reasonable reliance question of fact). Because the bankruptcy

court applied an incorrect legal standard in finding no justifiable

reliance, on remand it must make that determination, under the

correct legal standard.

For justifiable reliance, the focus should be on whether UCS,

based on its credit screening and its relationship with Mercer

during her brief card-use, had reason to believe she would not

carry out her representation, through card-use, of intent to pay.

Relevant to that determination are the circumstances under which

the representation was made, including the fact that it was made

for the purpose of inducing UCS to act in reliance upon it, and the

Faulk, 69 B.R. at 749 (more stringent reasonable reliance standard
does not authorize court to “second guess a creditor’s decisions to
make a loan or set loan policy for a creditor” or “to undertake a
subjective evaluation and judgment of a creditor’s lending policies
and practices” (internal quotation marks and citations omitted)).

56
form and manner in which it was expressed. See RESTATEMENT (SECOND)

OF TORTS § 544 cmt. a. And, facts pertinent to that inquiry

include, but are not limited to: (1) UCS’ decision to offer the

pre-approved card, based on an examination of Mercer’s credit

history — twice before acceptance, and again between acceptance and

issuance; (2) the terms of the card-agreement, which provided that

Mercer’s card-use signified her acceptance of those terms,

including the requirement that she pay the loans incurred, by

making at least the minimum monthly payments; and (3) Mercer’s

reaching her limit within the first billing cycle, within the scope

of the card-agreement, and before UCS had any reason to suspect she

would not pay.

(5)

Some courts have criticized issuers for allowing card-use at

casinos, and have held issuers cannot justifiably rely on

representations of intent to pay through card-use at a casino to

obtain cash advances.48 Along that line, Mercer contends that,

48
See, e.g., Melancon, 223 B.R. at 329 & nn. 42, 43 (noting
“obvious stupidity of ... decision to lend money in a casino to
borrowers who gamble”; “[i]f a lender allows a holder to borrow
money inside a casino, then the lender must be charged with two
bits of information: the money will be used for gambling, and
either the borrower has been losing or he has no money of his own
with which to gamble”; “[a] creditor that lends money inside a
casino is not justifiably relying on anything” (emphasis added));
AT&T Universal Card Servs. Corp. v. Reynolds (In re Reynolds), 221
B.R. 828, 840 (Bankr. N.D. Ala. 1998) (“issuers which allow cash
advances on ATMs in gambling casinos are on notice their customers
may use the money to gamble, and presumably that some gamblers may
be poor credit risks”).

57
because she so used her card, UCS failed to prove justifiable

reliance.

Although there may be circumstances in which a debtor’s

obtaining cash advances in a casino may have relevance in

determining justifiable reliance, see, e.g., AT&T Universal Card

Servs. v. Crutcher (In re Crutcher), 215 B.R. 696, 698 (Bankr. W.D.

Tenn. 1997), the record at hand does not contain evidence of such

circumstances. It does not support Mercer’s assertion UCS was

aware, when she inserted her card into the ATM, she was in a

casino. Instead, the billing statement reflects that, although

Mercer obtained four advances at a casino on 23 and 24 November,

they were not posted until 27 November. As UCS’ representative

testified, that posting-date is when UCS receives an electronic

transfer notification from the clearing bank, which may be several

days after the transaction.

Moreover, as a matter of law, there is no basis for treating

cash advances obtained at casinos differently from those obtained

elsewhere. Section 523(a)(2)(A) does not do so. In any event,

although Mercer testified she used her UCS cash advances for

gambling, she obtained more than twice as many of them at a bank as

in a casino. And, the evidence established UCS has no control over

ATM locations and is not affiliated with the entity which operated

the casino ATM from which Mercer obtained the advances.

58
 The record contains no evidence to support precluding issuers

from justifiably relying on a cardholder’s promise to pay a cash

advance merely because it was obtained at a casino. Common sense

suggests that not everyone does so to obtain gambling funds, much

less that she does so because she is losing and has no other source

for those funds. For example, if given a choice, some might

consider it safer, or more convenient, to enter a casino to obtain

cash, rather than do so at an ATM outside a bank, where there is no

security and far greater potential for being robbed. Or, some

might be in a casino hotel for a convention or musical

entertainment and obtain a cash advance at an ATM there for non-

gambling uses.

(6)

The fact that Mercer reached her limit within the first

billing cycle, before receiving her first statement, also does not

detract from finding justifiable reliance. Obviously, if a

cardholder has a history of payments with the issuer, justifiable

reliance will be easier to prove.49 But, the absence of that

49
See, e.g., Hashemi, 104 F.3d at 1126 (justifiable reliance
where account not in default and debtor had history of paying large
balances); AT&T Universal Card Servs. v. Fronning (Matter of
Fronning), 222 B.R. 614, 618 (Bankr. D. Neb. 1998) (justifiable
reliance where cards had been outstanding for over a year when
disputed charges made, charges were within limit, and no evidence
to suggest issuer on notice of debtor’s deteriorating financial
condition before charges made); Samani, 192 B.R. at 880
(justifiable reliance “based on debtors’ prior sporadic payment of
at least the minimum monthly amount due”); cf. AT&T Universal Card
Servs. v. Burdge (In re Burdge), 198 B.R. 773, 778 (9th Cir. B.A.P.

59
history does not preclude such reliance.50 Because Mercer reached

her limit so quickly, UCS had no opportunity to evaluate her

creditworthiness based on a history with it. Until 11 December

(only a month after issuance), the last day of card-use, when she

exceeded her $3,000 credit limit by approximately $186, Mercer’s

card-use was within the terms of the card-agreement.

Requiring that a cardholder have a history of timely payments

before the issuer can justifiably rely on the intent to pay

representation would result in the discharge of all card-debt

incurred within at least the first month of use. This would

encourage dishonest debtors to reach their limits within the first

billing cycle in order to preclude nondischargeability. It could

also have the unintended consequence of spurring issuers to

establish such low initial limits that cards would serve no useful

purpose to many cardholders.

(7)

Likewise, the fact that, 19 days after card-issuance, UCS

flagged Mercer’s account for excessive transactions does not

1996) (issuer’s failure to investigate prior to increasing limit
does not make reliance unjustifiable because debtor had history of
responsible card use and issuer not aware of any red flags).
50
See Pickett, 234 B.R. at 758-59 (justifiable reliance where
debtor immediately obtained cash advances and filed bankruptcy
before bi-monthly review could be made, issuer used appropriate
screening practices, and received no warning of fraud or other
irregularities in time to take action to prevent fraud; obtaining
cash advances within limit was not warning issuer being deceived
and should commence investigation).

60
preclude justifiable reliance. UCS’ representative testified: UCS

reviewed the account, decided the transactions were not egregiously

excessive, and cleared the account for further use; and, because

the charges were within the terms of the card-agreement, UCS was

obligated to honor it. Reliance on this factor could encourage

issuers to cancel cards if used frequently within the first billing

cycle, regardless of whether the limit had been exceeded.

5.

Finally, UCS was required to prove loss proximately caused by

reliance on Mercer’s representations. See RESTATEMENT (SECOND) OF TORTS

§ 548A (“fraudulent misrepresentation is a legal cause of a

pecuniary loss resulting from .... reliance upon it if ... the loss

might reasonably be expected to result from the reliance”). On

remand, if the bankruptcy court finds Mercer fraudulently

misrepresented her intent to pay and UCS justifiably relied on that

misrepresentation, then, as a matter of law, UCS’ loss (unpaid

loan) resulted from the reliance. Id.51

III.

For Mercer’s § 523(a)(2)(A) nondischargeability vel non, we

hold, as a matter of law, for each card-use: she represented her

51
See, e.g., Dietzel, 245 B.R. at 755 (proof of damage readily
established when debtor does not pay card-debt); Sears, Roebuck &
Co. v. McVicker,(In re McVicker), 234 B.R. 732, 740 (Bankr. E.D.
Ark. 1999) (issuer suffered loss equal to unpaid charges,
proximately caused by having justifiably relied on debtor’s
misrepresentation).

61
intent to pay the loan; if her representation was knowingly false,

she intended to deceive UCS; it actually relied on the

representation by authorizing the requested loan; and its loss was

proximately caused by such reliance. On remand, to be determined

for each representation is whether: it was knowingly false; and

UCS justifiably relied on it.

Accordingly, the judgment of the district court is REVERSED,

and the case is REMANDED to the district court, with instructions

to REMAND to the bankruptcy court for further proceedings

consistent with this opinion.

REVERSED and REMANDED

62
DUHÉ, Circuit Judge, joined by WIENER, DeMOSS, STEWART, and PARKER,

Circuit Judges, dissenting:

I am firmly convinced that the majority errs when it adopts

the fiction that, as a matter of law, each separate use of a pre-

approved credit card constitutes a representation by the user of an

intent to pay, and that, if it does, the credit card issuer may

rely on those representations. I, therefore, respectfully dissent

for the reasons set forth in the panel opinion, AT&T v. Mercer (In

re Mercer), 211 F.3d 214 (5th Cir. 2000), and the following reasons.

Mindful that dissents do little more than make the dissenter feel

better, I shall state my reasons briefly.

The majority admits that a creditor must prove every element

of its claim of nondischargeability by a preponderance of the

evidence. But the majority has completely ignored the universally

accepted and fundamental principle of bankruptcy law that

exceptions to discharge must be narrowly construed in favor of the

debtor. See, for example, Miller v. J.D. Abrams Inc. (In re

Miller), 156 F.3d 598, 602 (5th Cir. 1998). The majority’s omission

effectively shifts the burden of proof and alters “‘the balance of

bankruptcy policy struck by section 523'". Chevy Chase Bank, FSB

v. Briese (In re Briese), 196 B.R. 440, 448 (Bankr. W.D. Wis. 1996)

(quoting Chase Manhattan Bank, N.A. v. Ford (In re Ford), 186 B.R.

312, 317 (Bankr. N.D. Ga. 1995)) (“To permit credit card plaintiffs

to benefit from ‘implications’ is to engage in impermissible
burden-shifting.”) Briese, 196 B.R. at 449. If one can “infer” a

representation from use of the card, then the creditor is relieved

of the obligation of proving that a false representation was made.

The majority also ignores a second universally accepted canon

of construction: contracts should be construed so as to avoid

neutralizing or ignoring any provisions or treating provisions as

surplusage. See, for example, Texas E. Transmission Corp. v.

Amerada Hess Corp., 145 F.3d 737, 742 (5th Cir. 1998). The majority

construes Mercer’s credit agreement so as to neutralize completely

its provisions obligating Mercer to repay AT&T for debts

accumulated on the card.52 Mercer represented in writing in the

credit agreement, which she was required to accept before she used

the card, that she intended to repay AT&T for credit extended

through the card. The credit agreement embodied the entire

agreement between Mercer and AT&T. Why, then, would Mercer

undertake to represent each time she used her card that she

intended to repay AT&T for its use? Though otherwise impressively

thorough, the majority opinion does not answer this question.

Indeed, the question cannot be answered because Mercer made no such

representations. The majority’s less-than-benign fiction that she

did has an unfortunate consequence: it allows AT&T effectively to

52
In other words, to ignore the essence of the credit
agreement.

64
rewrite the credit agreement after the fact. This is hardly the

“narrow construction” the law requires. As rewritten through the

majority’s legerdemain, moreover, the agreement between Mercer and

AT&T clearly favors AT&T, since all agree that Mercer’s violation

of the credit agreement’s requirement that she repay AT&T does not

preclude discharge of her debt.

In my view, use of a credit card resembles the issuance of a

check. The Supreme Court has held, as the majority admits, that

issuing a check in payment of a debt knowing that the account on

which the check is drawn does not contain sufficient funds to cover

the check is not a representation that there are funds sufficient

to cover the check. It is in fact not a representation of anything.

Williams v. United States, 458 U.S. 279, 284, 102 S. Ct. 3088,

3091, 73 L.Ed. 2d 767 (1982) (“[T]echnically speaking, a check is

not a factual assertion at all, and therefore cannot be

characterized as ‘true’ or ‘false’”). In Williams, the defendant

engaged in a check kiting scheme during which he presented to

several federally insured banks checks on his accounts that greatly

exceeded the funds in those accounts. The Court held that by so

doing, the defendant did not “make a false statement” because

issuing the check was no statement at all. Id. The majority also

discounts this holding because Williams was a criminal case and

because a check simply orders funds to be transferred, but I fail

65
to see how these facts impact Williams’s holding that issuing the

check is not a representation. The majority also discounts

Williams on the basis that in it the Court was applying the rule of

lenity. A simple reading of the opinion shows, however, that the

rule of lenity did not affect the rationale for the holding, which

the Court announced early in the opinion after thorough analysis.

The Court in Williams only mentioned the rule of lenity in passing

at the very end of the opinion after fully establishing the

holding. If giving a check in payment of a debt is not a

representation, then there is no justification in my view for

holding, as the majority does, that using a credit card to obtain

cash or make purchases is. This is particularly true in this case,

where there was prior written representation of intent to repay.

When a check is presented in payment of goods or services, or in

exchange for cash, it simply authorizes the transfer of funds from

the drawer’s account to the merchant. Likewise, when a credit card

is presented for the same purposes, it simply authorizes a transfer

of funds from the card-holder’s approved line of credit to the

merchant, or to the card-holder in the case of the use of an ATM

machine. Williams, therefore, applies here.

Interestingly, most of the courts that have adopted the

implied representation theory have not considered Williams. AT&T

Universal Card Servs. v. Alvi (In re Alvi), 191 B.R. 724, 732

66
(Bankr. N.D. Ill. 1996). The similarities between the issuance of

a check and the use of a credit card make it illogical, I submit,

to conclude that the use of a credit card in an ordinary credit

transaction necessarily invokes a representation, when the issuance

of a check does not.

The majority incorrectly characterizes the relationship

between AT&T and Mercer as a series of loans–-i.e., a loan made

each time the card was used. The majority, accordingly, concludes

that “[h]er promise to pay occurred not when the line was

established, but at card-use, when the loan was made.” Opinion p.

19, lines 362-363. This conclusion is simply incorrect. Her

promise to pay occurred when Mercer accepted the written credit

agreement with AT&T, which states that the card holder is

“responsible for all amounts owed on [the card holder’s]

[a]ccount...and [the card holder] agree[s] to pay such amounts

according to the terms of the [a]greement.” AT&T conditioned its

offer of credit to Mercer on her promise to accept the credit

agreement and furnish certain information (annual income, social

security number, birth date, home and business telephone numbers

and her maiden name), which promise she kept. As I noted above,

AT&T agreed with Mercer at that time upon all terms and conditions

that would inform her use of the card. So what occurred when she

used the card, therefore, was simply the transfer of funds against

67
the credit line previously established and on the terms and

conditions previously established. No new loan agreement was made

and no new terms were agreed to. Hence, no new representations

were made.

Although the panel opinion noted as much, this case implicates

policy issues that, I think, merit another brief reference. AT&T

offered Mercer a credit card and a $3,000 credit limit after

conducting the cursory credit check described in the majority

opinion on the condition that she return certain information, which

she did, and that she accept the credit agreement, which she did.

She was then free to use the card, subject to the terms and

conditions of the agreement. Never did AT&T inquire about her

prior credit card use, or the amount of her debt. Had it done so,

Mercer’s lack of creditworthiness would have been obvious. Now

AT&T asks this Court to fashion a fiction to save it from the

consequences of its own inadequate credit check, and, to my

surprise, this Court has done so. This action, in my view,

subverts the requirement that the creditor prove each element of

the exception to discharge upon which it relies and the bedrock

principle that exceptions to discharge must be narrowly construed

in favor of the debtor.

68
 Since I would hold that no implied representation was made, I

would not reach the reliance issue.

69
DENNIS, Circuit Judge, dissenting.

Although I find Judge Duhé’s dissenting opinion quite

persuasive and am tempted to rest upon it, I dissent separately

because I believe that this court should affirm the bankruptcy and

district court judgments on the well-settled ground that there is

no evidence in the record that AT&T took action in actual reliance

upon each of Mercer’s individual credit or cash draws on her line

of credit. While I am uncertain about the analogy Judge Duhé draws

between bank checks and credit card transactions, I agree with the

reasoning of his dissent insofar as it demonstrates that there was

no evidence of actual reliance on individual card transactions as

representations in this case.

The Bankruptcy Code excepts from discharge certain debts

resulting from “false pretenses, a false representation, or actual

fraud.” 11 U.S.C. § 523(a)(2)(A). In interpreting this provision

the Supreme Court has looked to the concept of “actual fraud” as it

was understood in 1978 when that language was added to §

523(a)(2)(A). Field v. Mans, 516 U.S. 59, 70 (1995). For aid to

that understanding the Court has relied on the Restatement (Second)

of Torts (1976) published shortly before the Bankruptcy Reform Act

of 1978. Id. “The section on point dealing with fraudulent

misrepresentation states that both actual and justifiable reliance

are required.” Id. (internal quotation omitted) (citing RESTATEMENT

(SECOND) OF TORTS § 537).
 Section 537 of the Restatement (Second) of Torts provides:

“The recipient of a fraudulent misrepresentation can recover

against its maker for pecuniary loss resulting from it if, but only

if, (a) he relies on the misrepresentation in acting or refraining

from action, and (b) his reliance is justifiable.” See also id.

cmt. a (“If the recipient does not in fact rely on the

misrepresentation, the fact that he takes some action that would be

consistent with his reliance on it and as a result suffers

pecuniary loss, does not impose any liability upon the maker.”).

Consequently, to deny Mercer a discharge of her credit card debt,

AT&T was required to prove by a preponderance of the evidence that,

inter alia, AT&T sustained a pecuniary loss from fraudulent

misrepresentations by Mercer upon which AT&T in fact relied in

taking action or refraining from action. Proof by AT&T that it

took some action that would be consistent with its reliance on an

alleged misrepresentation, without proof of its actual reliance on

the alleged misrepresentation, is not sufficient.

Because AT&T did not introduce any evidence to show that it

actually relied on any of Mercer’s alleged misrepresentations in

taking or refraining from action, the bankruptcy court correctly

refused to deny Mercer’s discharge.53 The arguments by AT&T,

53
There is no evidence that AT&T relied on an alleged
misrepresentation in either “acting” or “refraining from action.”

71
adopted by the majority, that AT&T took action in actual reliance

on alleged misrepresentations implied by each of Mercer’s

individual draws on her line of credit are empty assertions. The

record simply does not support a factual finding of any such

reliance or action. The majority opinion wrongly reverses the

decision of the bankruptcy court, which held that AT&T failed to

prove that it actually relied on Ms. Mercer’s individual credit

purchases and ATM withdrawals in extending credit to her, because

there is absolutely no evidence in the record that AT&T

contemporaneously relied on the individual transactions in its

decision to extend or to continue a three-thousand-dollar line of

credit to her. The record evidence shows that AT&T relied solely

on its own screening process and automated system in allowing Ms.

Mercer to make cash and credit draws on her line of credit.

The majority opinion is badly mistaken in asserting that the

testimony of AT&T’s expert, Mr. Lewis, shows that AT&T relied on a

supposed representation made during each use of Mercer’s card in

authorizing her to draw on the credit line. Maj. Op. at 28. When

The majority’s theory is that AT&T “acted” by extending credit to
Mercer in actual reliance on each individual draw she made on her
credit line. The majority’s theory is not that AT&T “refrained
from action” in reliance upon misrepresentations. Therefore, for
purposes of this dissent, I do not repeat “or refraining from
action” at every point at which “act,” action” or “acting” is
mentioned.

72
read in context, his statement--to the effect that if AT&T had

known Mercer would not pay the credit card charges, it would not

have extended credit to her in the first place--was not made in

reference to reliance upon Mercer’s card use. It clearly concerned

the quality of the information AT&T had at the time it decided to

issue a pre-approved card and extend a line of credit to Mercer,

which of course occurred before she ever used her card. Mr. Lewis

made the statement after AT&T’s counsel reviewed with him the six

credit cards that Mercer obtained prior to receiving her AT&T card

and the fact that Mercer had been screened three times by a credit

bureau before her AT&T card was activated:

Q. Based on AT&T’s records with regard to this
information, would AT&T have extended credit to this
defendant if it knew that she would not pay or did not
have ability to pay for these charges on this account?
A. I would say no.
Q. Had any of those reports come back with negative
information concerning delinquent payments, over limits,
bankruptcy, that type of information, would she have been
sent a solicitation offer?
A. No.

ROA, Vol. 5, pp. 123-124 (emphasis added). The question put to Mr.

Lewis clearly refers to the point in time when AT&T determined the

credit limit it would offer to Ms. Mercer and accordingly “extended

credit” to her by issuing a credit card in her name with that

73
limit.54 This line of questioning--discussing the effort AT&T

expended by procuring credit reports before the credit card was

issued--was meant, in the words of AT&T’s counsel, “to dispel any

notion that may exist that credit card companies in general go

through the phone book and pull out a mailing list and send out

applications or offers to people without regard to their

creditworthiness.” Closing arguments of AT&T’s counsel, ROA, p.

105. In sum, Mr. Lewis never testified that AT&T relied in acting

or refraining from action on the individual credit purchases and

ATM withdrawals made by Ms. Mercer. AT&T’s decision and action

in extending a three-thousand-dollar line of credit to Mercer was

made in reliance upon AT&T’s own research before she accepted

AT&T’s offer of credit. AT&T v. Mercer, 220 B.R. 315, 326-327

(Bankr. S.D. Miss. 1998). As Mr. Lewis testified before the

bankruptcy judge:

[W]hen we issue a solicitation or subsequently issue a
card, it’s based on--and again, some people may agree
that it’s not long enough, but it’s based on at least a
six or seven month study of that person’s credit history
and their ability to maintain their accounts. . . .
[Pre-approved credit card holders] have been
eligible for a line [of credit] determined on their prior
usage and history as stated [by] the [credit] bureau.

54
The majority opinion misinterprets the words “extended
credit” in the question as referring to what happened when Ms.
Mercer made cash draws on her line of credit.

74
ROA, Vol. 5, p. 140-141. Later Mercer’s counsel again stressed and

Mr. Lewis agreed that the decision to act by extending a line of

credit to Mercer was made in reliance upon AT&T’s own research

before it activated her credit card:

Q. So based on all these different reviews, analyses
that’s done and everything else, y’all determined that
Ms. Mercer has the financial ability to handle a $3,000
unsecured credit line with your company, right?
A. Based on the information we had at the time, yes,
sir.

ROA, Vol. 5, p. 159.

After Mercer accepted the credit card and began using it, AT&T

did not take any action to extend her line of credit in

contemporaneous reliance on each draw. Instead of looking at each

transaction made by an individual like Mercer, AT&T set up its

automated system to make quarterly credit evaluations of its

customers, the results of which, along with information the company

maintained about the promptness of payments, whether each customer

stayed within his/her credit limit, and whether excessive use of a

particular card was made within a period of time, formed the basis

of AT&T’s decisions regarding whether to terminate or continue

cardholders’ credit lines.55 Each cash advance Mercer obtained was

55
See closing arguments of AT&T’s counsel before the bankruptcy
judge, ROA pp. 106-107. In Mercer’s case, AT&T had not yet
performed a quarterly review of Mercer’s credit when she exceeded
her credit limit and was advised to discontinue using her card. A
computerized program run for the purpose of monitoring excessive

75
made instantaneously from an ATM machine; no one at AT&T evaluated

the transaction or relied on any implicit representation made by

Mercer while using her card.

The testimony of AT&T’s expert, Mr. Lewis, explaining how

Mercer was allowed to make charges surpassing her credit limit

without being cut off first by AT&T, proves that AT&T does not

monitor each individual transaction while it is being made,

therefore negating a finding that AT&T actually relies on any

representation made during a specific transaction.

Q. Can you explain why [Mercer’s final account
balance] exceeds the [maximum] balance allowed on this
account of $3,000?
A. . . . The reason that there is an over limit
charge on the account is that if you’ll refer to page 1
and 2 of our statement you will see that the transaction
dates reflect the date that the charge was made. If you
will refer to the posting date when we receive the
charges from the merchants, in some cases there will be
delays of three days, five days, two days; so although
the charge has been made, if it is a floor limit charge
it does not have to be called in or authorized by us to
post to the account. There is going to be a gap where
all the charges[,] because we have not received them from
that merchant[,] are posted to the customer’s account,

usage of cards within a short period of time had, however, “red
flagged” Mercer’s account, and an AT&T associate evaluated her
account activity as a result. However, he “cleared” her account
for continued use because, in the words of Mr. Lewis, “[the
charges] were not overly excessive to thousands of dollars or
things of that nature.” ROA, Vol. 5, pp. 93-94. Again, however,
these facts constituted evidence of AT&T’s reliance on its own
methodology and systems, not evidence of any reliance upon the card
charges as implied representations.

76
 which would enable the account to have new charge
activity which could put it over the limit.

ROA Vol. 5, pp. 77-78. Mr. Lewis went on to explain that, even if

a merchant requires authorization for a charge, such authorization

does not involve reliance upon any representation that may be made

by the cardholder at the time the card is used; instead: “[A]n

authorization is basically an approval saying that at the time this

charge was made there is sufficient credit available on the

customer’s credit line to let the charge be made.” Id. at 78.

Furthermore, as the majority opinion points out, AT&T was not aware

that on several occasions

when [Mercer] inserted her card into the ATM, she was in
a casino. Instead, the billing statement reflects that,
although Mercer obtained four advances at a casino on 23
and 24 November, they were not posted until 27 November.
As [AT&T’s] representative testified, that posting-date
is when [AT&T] receives an electronic transfer
notification from the clearing bank, which may be several
days after the transaction.

Maj. Op. at 52-53 (emphasis omitted). Because AT&T was not aware

of each transaction until several days after it occurred, AT&T

could not have relied upon each individual draw on Mercer’s credit

line contemporaneously with its occurrence. Nor does the record

contain any evidence to support findings that AT&T in fact engaged

in action in reliance on each charge as it occurred.

Another telling line of questioning from AT&T’s own counsel in

the hearing before the bankruptcy court focuses on Mr. Lewis’s

77
assertions that Mercer’s uses of the card indicated her intent not

to repay the charges she was incurring:

Q. At the time that the debtor was using the card,
having reviewed her duplicate account statements, what
facts do you see in . . . her use of the card . . . that
would lead you to believe that she lacked the requisite
intent to repay this debt?
A. At the time of her usage of the card?
Q. Yes, sir.
A. [T]he fact of the location where the cash advances
were taken, namely casinos. . . .
Q. So to further elaborate on some other items that
might have been concerns to AT&T-–was the number of
charges made a concern?56
A. The number of charges in that one period of time,
yes.
Q. The amount of the charges?
A. The amount of the charges, particularly since it
took the account over the limit, yes.
Q. Would the fact that the debtor had made numerous
transactions on the same day become a concern?
A. That would have been addressed in . . . [AT&T’s
internal report], where that came in as a possible alert.

ROA, Vol. 5, pp. 127-131. It is highly improbable that AT&T

actually relied on these same card uses--which its expert testified

were indicative of a fraudulent intent not to repay the charges

incurred--in deciding to take the action of extending credit to

Mercer.

That AT&T utterly failed to prove actual reliance upon

anything while the charges were being made was unmistakably the

factual finding of the bankruptcy judge after hearing the evidence:

56
Lewis testified that Mercer used the card 32 or 36 times in
a 30-day period. ROA, Vol. 5, p. 130.

78
 The evidence showed that prior to and subsequent to
the issuance of the AT&T credit card to Mercer, several
investigations and evaluations of Mercer’s credit-
worthiness were conducted by AT&T. . . . AT&T solely
relied on its own agents and investigative processes to
make its decision. The evidence reflects nothing
written, said or done by Mercer upon which AT&T relied at
any time while the charges were being made. . . .

220 B.R. 315 at 326-327 (emphasis added). Because this finding of

fact was not clearly erroneous, the majority is manifestly wrong in

setting it aside. “Findings of fact, whether based on oral or

documentary evidence, shall not be set aside unless clearly

erroneous, and due regard shall be given to the opportunity of

the trial court to judge the credibility of the witnesses.”

Federal Rule of Civil Procedure 52(a). Because AT&T did not prove

that it actually relied on a misrepresentation by Mercer in acting

to extend or continue her line of credit, its suit to deny her

discharge was correctly rejected and dismissed by the bankruptcy

court. The fact that the bankruptcy court may have miss spoken or

incorrectly stated a rule of law that did not affect substantial

justice or the substantial rights of the parties must be

disregarded. “[N]o error or defect in any ruling by the court . .

. is ground for . . . disturbing a judgment . . . unless refusal to

take such action appears to the court inconsistent with substantial

justice. The court at every stage of the proceeding must disregard

any error or defect in the proceeding which does not affect the

79
substantial rights of the parties.” Federal Rule of Civil

Procedure 61.

The district court, therefore, was clearly correct in

affirming the bankruptcy court’s decision because there was no

clear error in the bankruptcy judge’s finding that AT&T failed to

prove that it actually relied on any representations made by

Mercer:

[T]his Court finds that the lower court did not commit
clear error in finding that “the evidence reflects
nothing written, said or done by Mercer upon which AT&T
relied at any time while the charges were being made” and
that AT&T “solely relied on its own agents and
investigative processes to make its decision” to issue
the credit card. Without the requisite proof showing
actual . . . reliance, the appellant’s claim for
nondischargeability does not meet the requirements for
the false pretense or actual fraud prongs of 11 U.S.C. §
523(a)(2)(A).

Mem. Op. p. 9.

Consequently, the majority is doubly wrong in reversing the

judgments of the bankruptcy and district courts. Furthermore, even

if we were not legally bound to uphold, in the absence of clear

error, the trial court’s crucial finding of fact that AT&T did not

actually rely on a misrepresentation by Mercer in taking action to

extend or continue her line of credit, a thorough, objective review

of the record shows that AT&T did not prove this element of its

case. Therefore, because AT&T failed to prove the essential

element of actual reliance this court should affirm the bankruptcy

80
and district courts without reaching the issues of representation

and justifiable reliance.

81