AT&T Universal Card v. Deison

IN THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT _______________

m 99-50704 Summary Calendar _______________

In the Matter of: MARSHA LYNN DEISON, Debtor. AT&T UNIVERSAL CARD SERVICES CORPORATION, Appellant, VERSUS

MARSHA LYNN DEISON, Appellee. _________________________

Appeal from the United States District Court for the Western District of Texas (A-99-CV-267) _________________________

January 18, 2000

Before SMITH, BARKSDALE, and Services Corporation (“Universal”) appealed PARKER, Circuit Judges. to the district court, which affirmed. We affirm the decision of the district court. JERRY E. SMITH, Circuit Judge:* I. Marsha Deison accumulated $3,971.05 in cash-advance credit-card debt only a few days before declaring bankruptcy.1 The bankruptcy court found that her testimony rebutted the statutory presumption that debt acquired in this manner was accumulated without the necessary intent to repay it, and it thus found the debt dischargeable. AT&T Universal Card

* Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not be published and is not precedent except under the limited circumstances set forth in 5TH CIR. R. 47.5.4. 1 We present disputed facts in the light most favorable to the verdict.

Deison held a credit card issued by If you look at this case on paper, it Universal, with a credit line of $4,500.00, from definitely strikes one, and I can July 26, 1994, until the beginning of 1998. understand why it would strike Ms. She made regular use of the card during most Metz [the witness called by Universal], of that period. In a four-day period from as being a case that should be December 30, 1997, through January 2, 1998, investigated and pursued, because within however, she made four cash-advance 30 days of bankruptcy you have $3900 withdrawals, totaling $3,903.50. On being taken in cash advances when that, December 30, 1997, she took $400.00 through one, never happened before and, two, it two cash-advance transactions of $200.00. was out of line with what one would The following day, she took $3,200.00 in cash expect in view of the debtor’s income. through an advance at a bank. On January 2, 1998, she took an additional $300.00 in cash. Nonetheless, the court entered judgment for Deison and dismissed the complaint, finding that she intended to pay off the cash-advance This spree represented a substantial withdrawals, thus rebutting the presumption increase in activity from previous months and that her withdrawals were fraudulent and a change in Deison’s buying and spending defeating Universal’s attempt to prove actual habits. Although her income had declined in fraud. 1996 by $7,000 from the prior year, it remained constant in 1996, 1997, and during III. the first month of 1998. As of the filing date, The bankruptcy court’s conclusions of law her net monthly income was $1,806.78. are reviewed de novo. Young v. National Union Fire Ins. Co., 995 F.2d 547 (5th Cir. From 1996 through January 1998, Deison 1993) (citing Allison v. Roberts, 960 F.2d 481 made $21,423.80 in merchandise purchases (5th Cir. 1992)). The bankruptcy court’s and cash advances on her various credit cards findings of fact are binding on the district court “to help make ends meet.” As of the filing and this court unless clearly erroneous. When date, her monthly expenses were $1,924.46 the bankruptcy court’s determination has been without regard to her credit card obligations, approved by the district court, we do not and her liabilities were $36,668.80. disturb it except for the most cogent reasons. See Boydston v. Sears, Roebuck & Co. (In re Deison testified that she used the cash- Boydston), 520 F.2d 1098, 1100 (5th Cir. advance funds primarily to pay off other bills, 1975). Harmless error does not constitute a bills that she had previously been servicing by valid basis for reversal. FED. R. CIV. P. 61. drawing down her savings and a small inheritance. She claimed never to have realized the extent of her financial problems and said she intended, at the time she took the $3,900 in cash advances, to repay it.

Deison met with a professional credit counselor on or about January 17 to discuss her financial situation, and, on January 19, she met with her bankruptcy attorney. On January 26, 1998, she filed a petition for relief under chapter 7.

II. The bankruptcy court stated the following:

IV. his creditors].’” Rawoot, id. at *4 (brackets in Section 523 of the Bankruptcy Code details original). the circumstances in which certain debts will not be discharged in bankruptcy, among them A number of bankruptcy courts have dealt being debt accrued “for money, property, with this question. In Orecchio, the court services, or an extension, renewal or analyzed the legislative history of refinancing of credit, to the extent obtained by § 523(a)(2)(C) and concluded that it false pretenses, a false representation, or actual fraud, other than a statement respecting the seems to indicate that a debtor needs to debtor’s or an insider’s financial condition.” do much more than simply present 11 U.S.C. § 523 (a)(2)(A). With regard to evidence which could support a contrary certain types of credit card debt, the Code result. Rather, the debtor must makes a special provision: demonstrate non-fraudulent intent in connection with that obligation. Such [F]or purposes of [11 U.S.C. evidence need not be of the same clear § 523(a)(2)(A)], consumer debts owed and convincing nature as the creditor is to a single creditor and aggregating required to show to invoke the more than [$1,075] for “luxury goods or presumption, but the Debtor’s rebuttal services” incurred by an individual evidence must raise a substantial doubt debtor on or within 60 days before the in the mind of the trier of fact as to the order for relief under this title, or cash existence of the presumed intent. advances aggregating more than [$1,075] that are extensions of Orecchio, 109 B.R. at 289-90. Similarly, in consumer credit under an open end J.C. Penney Co. v. Leaird (In re Leaird), credit plan obtained by an individual 106 B.R. 177, 180 (Bankr. W.D. Wis. 1989), debtor on or within 60 days before the the court said, “To rebut a presumption of order for relief under this title, are fraudulent intent under 11 U.S.C. presumed to be nondischargeable. §523(a)(2)(C), the debtor must directly attack the presumed fact with sufficient evidence to 11 U.S.C. § 523(a)(2)(C). support a finding that the fraudulent intent did not exist.”2 It is undisputed that the debt Deison accrued through her cash-advance withdrawals qualified, under this section, as presumptively nondischargeable. The bankruptcy court, however, found that the evidence in the record overcame the presumption.

As Universal admits, no published circuit court opinion has discussed the presumption created by § 523(a)(2)(C) or the quantum of proof necessary to rebut it. In an unpublished opinion, however, in Signet Bank/Va. v. Rawoot, 1993 U.S. App. LEXIS 32091 (4th Cir. Dec. 10, 1993) (citing FCC Nat’l Bank Card v. Orecchio (In re Orecchio), 109 B.R. 285 (Bankr. S.D. Ohio 1989)), the court held 2 See also Chase Manhattan Bank v. Sparks (In that “[t]o rebut this presumption, Mr. Rawoot re Sparks), 154 B.R. 766 (N.D. Ala. 1993); was required to ‘raise [] a substantial doubt in Central Fidelity Nat’l Bank v. Powell, 213 B.R. the mind of the [bankruptcy judge] as to the 306 (Bankr. W.D. Va. 1997); Bank One Lafayette, existence of the presumed intent [to defraud N.A. v. Larisey (In re Larisey), 185 B.R. 877, 881 (Bankr. M.D. Fla. 1995).

In AT&T Universal Card Servs. v. particular case adheres to the rule Ellingsworth (In re Ellingsworth), 212 B.R. doesn’t establish the debtor’s intent . . . . 326 (Bankr. W.D. Mo. 1997), the court used It is insufficient for a debtor to simply language of particular relevance to this case: state that he always planned to pay the money back “somehow” (we have a The legislative history of section mental image of cash suddenly falling 523(a)(2)(C), however, indicates that from the skies, like manna from heaven). Congress intended for a debtor to do If the debtor has no idea how the money more than simply present evidence that will get paid back, or if it will get paid could support a contrary result. back, then he may hope to repaySShe Congress was concerned with what it may even want to repaySSbut he considered egregious conduct on the certainly does not intend to repay. part of debtors who incurred debt at a point when their insolvency should have Melançon, 223 B.R. at 318, 321. been obvious. In Orecchio the Court, therefore, held that a debtor must offer Taken together, these cases suggest that the substantial and believable evidence bankruptcy court should have looked for contrary to the presumed intent in order “substantial evidence” that the debtor did not to demonstrate non-fraudulent intent. intend to defraud by her cash-advance Otherwise, the usefullness [sic] of the withdrawals in the sixty days before filing presumption in section 523(a)(2)(C) is bankruptcy and that a completely unsupported destroyed. assertion of lack of intent will not suffice. We then review the bankruptcy court’s finding of Ellingsworth, 212 B.R. at 340-41 (footnotes substantial evidence for clear error. omitted). Courts have also recognized that in attempting to ascertain a debtor’s subjective Deison did aver that she did not intend to intent, the debtor’s testimony is of no fail to pay back the cash advances; the probative value. “[S]ince a debtor will rarely bankruptcy court believed her. Facts in the admit a lack of intention to repay, such intent record support that belief. must be inferred from the totality of the circumstances of the case at hand.” Chevy Chase Bank FSB v. Kukuk (In re Kukuk), 225 B.R. 778, 786 (B.A.P., 10th Cir. 1998). 3 As the court said in LA Capitol Fed. Credit Union v. Melançon (In re Melançon), 223 B.R. 300 (Bankr. M.D. La. 1998),

no debtor is going to take the stand and testify against himself. Every debtor in a Section 523(a)(2)(A) action involving cash advances is going to say that he intended to repay the money. Given that this is an inflexible rule of nature, the fact that one particular debtor in one

3 See also Citibank (S.D), N.A. v. Eashai (In re Eashai), 87 F. 3d 1082, 1087 (9th Cir. 1996) (“Since a debtor will rarely admit to his fraudulent intentions . . . .”); AT&T Universal Card Servs. Corp. v. Rembert, 14 F. 3d 277, 282 (6th Cir. 1998).

Reading the record in the light most many of the ways in which others have favorable to the finding, we conclude that attempted to determine whether fraudulent Deison, a relatively unsophisticated consumer, intent exists suggest that Deison has shown had always paid at least the minimum balance none. Even with reference to these factors, we on her credit cards before her bankruptcy, might, de novo, have come to a different even as she accrued over $21,000 in debt in a decision than did the bankruptcy court about little more than a year. This evidences her whether Deison’s story created substantial intention to continue servicing her debt doubt of intent. That court, however, did not without fail and suggests that she might have clearly err. been totally unaware that she had “run out of rope.” Too, Deison was employed; she was V. not entirely bereft of income. Moreover, her Universal also argues that, even if Deison is uncontroverted testimony was that she used found to have rebutted the presumption that the funds withdrawn to satisfy other her cash-advances worked fraud, it made, as a liabilitiesSSnot to purchase luxury goods or matter of law, the case for fraud, which would make other frivolous uses of the funds. still render the debt undischarged under Finally, it appears that the transactions had § 523(a)(2)(A). A showing of fraud requires been completed for three weeks before Deison a showing of intentSSthe same intent that the consulted a consumer-credit specialist, who bankruptcy court found lacking when it found apparently alerted her to the precariousness of that Deison had rebutted the § 523(a)(2)(C) her position. presumption. For the same reasons, we conclude the bankruptcy court did not clearly In Anastas v. American Sav. Bank, 94 F.3d err in finding that Deison lacked the requisite 1280, 1284 n.1 (9th Cir. 1996), one of the intent necessary to have committed fraud cases to which Universal points in support of under § 523(a)(2)(A). its position, the court notes a list of non- exclusive factors that might be considered in VI. determining whether there is intent to repay: Universal contends that the bankruptcy court applied the wrong law in determining (1) the length of time between the whether Deison committed fraud against charges made and the filing of Universal, and the wrong finding of intent in bankruptcy; (2) whether or not an analyzing the fraud. To the extent that attorney has been consulted concerning Universal has demonstrated error, however, it the filing of bankruptcy before the has not established harm. charges were made; (3) the number of charges made; (4) the amount of the In the beginning of its review of applicable charges; (5) the financial condition of law, the bankruptcy court stated that "[t]he the debtor at the time the charges were state law definition of fraud generally is a made; (6) whether the charges were representation knowingly made, knowingly above the credit limit of the account; (7) false, with the intent that the other party rely whether the debtor made multiple upon it and that they are damaged as a result charges on the same day; (8) whether or of that reliance." In determining the not the debtor was employed; (9) the nondischargeability of a debt, federal common debtor’s prospects for employment; (10) law, not state law, controls. In Field, the the financial sophistication of the debtor; Court stated that “[w]e construe the terms in and (12) whether the purchases were § 523(a)(2)(A) to incorporate the general made for luxuries or necessities. common law of torts, the dominant consensus of common-law jurisdictions, rather than the Id. (citing Eashai, 87 F.3d at 1087-88). While law of any particular State.” Field, 516 U.S. we have no intention of adopting this twelve- at 70 n.9. The Court then explained that "the part test as determinative, we do note that most widely accepted distillation of the

common law of torts was the Restatement This is no legal fiction. (Second) of Torts (1976) . . . ." Id. at 70. Melançon, 223 B.R. at 307-08, 311, 316. Universal then points us to Melançon, in Thus, in conformity with the Restatement, the which the bankruptcy court reviewed the use of the credit card, be it for a cash advance application of the Restatement to or a purchase, is conduct that constitutes a § 523(a)(2)(A). representation that "I will repay the loan."

Section 525 of the Restatement All of this is true, but all of it illustrates why provides: One who fraudulently makes the bankruptcy court’s application of the a misrepresentation of fact, opinion, wrong law of frauds worked no harm. intention, or law for the purpose of Universal points us to Melançon to inducing another to act or to refrain demonstrate that, had the bankruptcy court from action in reliance upon it, is subject employed the Restatement standard, it would to liability to the other in deceit for have realized that taking a cash advance pecuniary loss caused to him by his implicitly makes the “I will repay” justifiable reliance upon the representation. Of course, the bankruptcy misrepresentation . . . . [T]hat the use court noted that of a credit card to obtain a cash advance included with it a promise that the party I believe the credit card agreement obtaining the cash advance would pay makes it clear that the credit card holder the money back . . . . makes an express . . . statement they will in fact repay the debt, and that what According to the Restatement courts have said is that in order to curb (Second) of Contracts, a promise is a real abuses . . . there should be layered a manifestation of an intention to act or presumed intention that the party is refrain from acting. The Restatement of acting in good faith, that is, that not only Torts states that a promise automatically do you have an express statement that “I includes an assertion that the party intend to repay it,” but that on top of making the promise intends to fulfill it. that the facts and circumstances of that The credit card agreement, then, can be particular debtor are such at that time viewed as a contract that sets forth that that is a reasonable belief. I think certain agreed terms for future contracts that’s pretty much where the law sits. that are contemplated by the parties. If a credit card holder decides to exercise Thus, though the bankruptcy court applied the his rights under the agreement and wrong law of fraud, that error was harmless, borrow some money, he can do so because the court performed the same without waiting for bank approval, and functional analysis that Universal would have without paperwork. He simply goes to had it apply under the Restatement’s definition the nearest ATM, puts in this card, of fraud. pushes a few buttons, and takes his cash ..... Universal also argues that the bankruptcy court erred in that it mentioned that “I do But a loan is still a loan . . . . When think that . . . . Ms. Deison did not have any the card holder inserts the card into an contemplation of filing a bankruptcy petition ATM, he is, in one step, asking for a until after this transaction took place.” loan and promising to repay it if it is Universal points out that the intent analysis to obtained . . . . Inherent in any request be undertaken is whether the debtor intended for a loan, in any making of a loan by to repay the loan, not whether he intended to two parties, is a promise by the file bankruptcy. The cases cited above support borrower to repay the money borrowed. this position. The bankruptcy court’s error

was one of locution rather than analysisSSit simply misspoke.

This is shown by the court’s statement that “there should be layered a presumed intention that the party is acting in good faith, that is, that . . . you have an express statement that ‘I intend to repay it.’” This passage illustrates that the court was well aware of the proper standard when it explicated the relevant legal analysis.

Finally, Universal points to the Restatement, § 530, Comment d, and to Boydston, which acknowledge that, in the words of the Restatement, “[f]radulent intent may, however, be proved by circumstantial evidence. Thus, an intent not to pay for goods purchased may be shown by the promisor’s insolvency.” RESTATEMENT (SECOND) OF TORTS § 530, cmt. d. (1976); see Boydston, 520 F.2d at 1101. From this, Universal concludes that “as Ms. Deison could not afford to repay her debts the trial court should have, as a matter of law under the Restatement of Torts, inferred that she did not intend to repay the debt.”

We disagree with this logic; that insolvency may be used to demonstrate intent not to repay certainly does not require the conclusion, as a matter of law, that a consumer debtor who borrows when insolvent has committed fraud. Such a requirement would in fact render the § 523(a)(2)(C) presumption unrebuttable, because almost all consumer debtors are going to be technically insolvent in the days before their declaration of bankruptcy. This is not the law.

AFFIRMED.