Chemical Bank v. Jackson (In re Jackson)
7 Fla. L. Weekly Fed. B 171, 1993 Bankr. LEXIS 917, 156 B.R. 316 (1993)
Rule of Law:
A credit card debt is nondischargeable as actual fraud under 11 U.S.C. § 523(a)(2)(A) if the debtor incurs the debt knowing they have no ability to meet the obligation due to their financial condition.
Facts:
- Joseph Jackson was employed as a bus driver earning approximately $27,000 annually, while his wife contributed no financial income to the household.
- In August 1991, the balance on two Chemical Bank Visa credit cards issued to Jackson was zero.
- Between September and November 1991, Jackson obtained four cash advances totaling $6,525 using the Bank's credit cards.
- Jackson also purchased various goods totaling approximately $340 between September 1991 and March 1992.
- In early 1992, Jackson became disabled due to severe diabetes, reducing his income to disability compensation of approximately $250 per week.
- At the time the dispute arose, the Jacksons owned real property worth roughly $40,000 but had amassed unsecured debts totaling $98,065.77 across fifteen credit cards and three lines of credit.
- The Debtors' monthly living expenses exceeded their net disposable income by approximately $300, even before attempting to make any payments on their unsecured debt.
Procedural Posture:
- Joseph and Barbara Jackson filed a joint voluntary Petition for Relief under Chapter 7 of the Bankruptcy Code.
- Chemical Bank filed a two-count adversary complaint in the U.S. Bankruptcy Court objecting to the dischargeability of the debts owed to it.
- The parties entered a stipulation dismissing Mrs. Jackson from the adversary proceeding.
- The U.S. Bankruptcy Court for the Middle District of Florida held a final evidentiary hearing on the complaint.
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Issue:
Does a debtor commit actual fraud under § 523(a)(2)(A), thereby rendering a debt nondischargeable, when they incur credit card charges while possessing no realistic financial basis to repay the resulting obligations?
Opinions:
Majority - Judge Alexander L. Paskay
Yes, the court held that the debtor obtained money through fraudulent use of credit cards because the record demonstrated he knew or should have known he could not meet the obligations. The court reasoned that under 11 U.S.C. § 523(a)(2)(A), the creditor must prove by a preponderance of the evidence (citing Grogan v. Garner) that the debtor used the cards with no intent to repay or knowing they lacked the ability to repay (citing In re Stewart). The court analyzed the Debtors' financials, noting that interest payments alone on their $98,000 unsecured debt would require $1,000 monthly—an amount they plainly did not have. Given Mr. Jackson's disability and fixed income, there was no realistic expectation of future income sufficient to service the debt. Therefore, the incurrence of the debt constituted actual fraud.
Analysis:
This decision illustrates the 'implied representation' theory often applied in bankruptcy fraud cases regarding credit cards. The court determined that the act of using a credit card carries an implied representation of both the intent and the ability to repay. Significantly, the court did not require direct evidence of a subjective intent to deceive (like a confession); instead, it inferred fraudulent intent from the objective hopelessness of the Debtors' financial situation. Because the Debtors were mathematically incapable of servicing the debt they incurred, the court concluded they must have acted fraudulently. This case serves as a precedent that 'loading up' on credit card debt while insolvent can prevent those specific debts from being wiped out in bankruptcy.
