Universal Bank, N.A. v. Howard (In re Howard)

Citations: 276 B.R. 113; 2002 Bankr. LEXIS 171Docket: Bankruptcy No. 00-21604; Adversary No. 00-214

Court: United States Bankruptcy Court, S.D. West Virginia; March 5, 2002; Us Bankruptcy; United States Bankruptcy Court

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On June 19, 2001, the court ruled in favor of defendants Sharon Lynn Howard and Ashley Lewis Howard regarding a complaint from Universal Bank, N.A. challenging the discharge of their debt under 11 U.S.C. § 523(a)(2)(A). Key facts include that Ashley Lewis Howard was laid off shortly before the couple purchased a second home intended for rental income. Following this, they received a pre-approved credit card from Universal with a limit of $5,000, which they used for various purchases, primarily necessities, totaling $1,804.76, along with a balance transfer of $3,060. Although Mr. Howard was unemployed when applying for the card, they claimed an annual income of approximately $30,000, anticipating quick re-employment due to his history of short-term contract work. They hoped to sell stock investments to cover expenses during this time, but the stock's value plummeted. Despite receiving unemployment benefits, the couple could not meet their debt obligations, leading them to file for Chapter 7 bankruptcy on September 1, 2000. Universal Bank's claim hinges on allegations of nondischargeable debt based on fraud, but the court found no sufficient evidence to support this claim.

To establish a claim under 11 U.S.C. § 523(a)(2)(A), a creditor must demonstrate five elements of fraud by a preponderance of the evidence: (1) the debtor made a false representation, (2) the debtor knew the representation was false when made, (3) the debtor intended to deceive the creditor, (4) the creditor justifiably relied on the representation, and (5) the creditor suffered a loss as a result. 

In applying this section to credit card transactions, courts typically follow three theories: 

1. **Implied Representation Theory**: This posits that by using a credit card, the cardholder implicitly represents an ability and intent to repay the debt. A breach of this duty can lead to the denial of the debtor's discharge, as the cardholder implicitly guarantees repayment with each transaction.

2. **Assumption of the Risk Theory**: Under this theory, the act of using a credit card does not constitute a representation to the issuer. Charges incurred prior to revocation of the card are generally dischargeable, placing the risk of non-repayment on the issuer, regardless of any fraudulent intent.

3. **Totality of the Circumstances Theory**: This approach requires proof of actual fraud through a pattern of deceptive conduct rather than simply the debtor’s ability to repay at the time of charging. Factors considered include the time between charges and bankruptcy filing, prior consultations with an attorney, the volume and amount of charges, the debtor’s employment status and financial sophistication, and changes in spending habits.

The court adopts the totality of the circumstances theory, recognizing it as a balanced approach that incorporates historical fraud principles with modern credit practices.

Debtors demonstrated a genuine intent to repay their debt to Universal and did not intend to deceive the creditor. Although charges on the Universal card occurred within three months of filing for bankruptcy, Debtors did not consult a lawyer until August 2000, after engaging a credit counseling service. Most of the 29 transactions were for small, necessary items, and despite being unemployed, Debtors believed Mr. Howard would quickly secure new employment, as he had consistently found jobs within two weeks after leaving previous positions. Throughout the years 1997 to 1999, Mr. Howard maintained full-time employment, reinforcing the Debtors' expectation of a quick return to work. Financial setbacks, including a significant drop in the value of their stock investment and the purchase of a second home shortly before Mr. Howard lost his job, contributed to their bankruptcy. The Court found that Debtors were utilizing credit responsibly to manage their financial difficulties. Universal failed to prove any intent to misrepresent repayment capability, leading to the discharge of the debt owed to them. The Court clarified that any claim of misrepresentation regarding financial condition must be in writing and cannot be based on oral statements, thus not supporting Universal's position. Finally, the Court noted that Debtors believed Mr. Howard would soon find employment following their credit card application submission.