In this case, the court found that Christmas gift charges on the debtor’s credit card would not be discharged by the bankruptcy court.

In this unique case, the court held that the creditor need not prove the debtor made a misrepresentation to the creditor in the use of the credit card.

In this case, debtor incurred approximately $1,400 of charges for gifts at Christmas. The court found that deciding whether credit card use was fraudulent does not require resorting to the so-called “traditional five elements of fraud”, for the term “fraud” has broader meaning.

“Abuse of credit cards or of lines of credit defies traditional analysis of “frauds.”

This is because two of the five elements that traditionally define a “fraud” are a false “representation” and “reliance” thereon: Although a credit card or line of credit frequently is initially issued on the basis of representations concerning assets, income and debts, the method of using such accounts after they are established is such as to leave one wondering where these two elements might be found in a given transaction at a later point in time when assets, income or debts might have changed.

Is there a new “representation” each time the account is used, and if bankruptcy ensues and the account is not paid can it be said that the representation was “false” and that the creditor relied thereupon?”

At least three schools of thought have emerged in the cases analyzing credit card or line-of-credit use as fraudulent under 11 U.S.C. 523(a)(2)(A).

This court cannot improve upon the examination of these schools of thought offered by other Courts. As explained therein, the three schools of thought are: (1) that each use of a charge account is an implied representation of ability and intent to repay; (2) that the card issuer assumes the risk of use or abuse, up to the credit limit or until the card is revoked; and (3) that there is an implied representation of intent to pay (but not of ability).

This court found that some fraudulent acts, tricks and deceptions do not involve “reliance” upon a “representation.” Some artifices or pretenses are frauds even if there is no real “representation” (but merely an action) and no real “reliance” (but merely an anticipated consequence).

Here, debtor had been unemployed for five months when she incurred these charges for Christmas gifts.

The court found that although the debtor may have been sincere and even intended to repay the charges, the court noted that the debtor was not unsophisticated and she should have known that she would not be able to repay the charges.

This court further held that the intent to trick or overreach may be fraud even if the debtor did not intend to cause a loss to the creditor.

The court found that the debtor’s intent to trick and overreach should be no different than debtor misrepresenting assets and/or liabilities on a loan application and the debt should be nondischargeable in bankruptcy.

This judge noted:

Few would disagree that if I were to knowingly and intentionally overstate my assets and understate my liabilities in order to obtain a loan, and if I were to obtain it on the basis of that deception, and if damage were to result, I would be defrauding the creditor even if all the while my honest intention had been to repay the loan if it were to be obtained . . . The result should be no different when the overreach is the act of invoking an account which I know I cannot repay.

J.C. Penney Company v. Mary Shanahan, 151 B.R. 44.

Author: Charles R. Harroun, Attorney at Law