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
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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
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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