FCC National Bank/First Card v. Friend (In Re Friend)
156 B.R. 257, 1993 WL 242700, 1993 Bankr. LEXIS 968 (1993)
Rule of Law:
To determine if credit card debt is nondischargeable due to fraud, courts must evaluate the debtor's subjective intent to repay using objective factors; furthermore, a creditor must pay the debtor's attorney's fees if the creditor proceeds with a dischargeability complaint without substantial justification based on law and fact.
Facts:
- Prior to July 1992, the Debtors (Mr. and Mrs. Friend) received an unsolicited pre-approved credit line and 'convenience checks' from FCC National Bank.
- In August 1992, Mr. Friend was laid off but started a new job on September 7, 1992, with an expectation of a raise within six weeks.
- On September 10, 1992, the Debtors used a convenience check to obtain a $3,000 cash advance.
- On September 22, 1992, the Debtors used these funds to pay off higher-interest loans and cover household expenses, believing this would lower their monthly payments.
- Mrs. Friend, who was on maternity leave, suffered a blackout on September 19 and was medically advised on September 22 not to return to work.
- Mr. Friend did not receive the raise he had been promised by his employer.
- Realizing on October 10 that they could no longer afford their living expenses due to these changed circumstances, the Debtors consulted an attorney on October 15.
- The Debtors stopped paying bills upon legal advice but had intended to repay the bank at the time they took the advance.
Procedural Posture:
- Debtors filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code.
- FCC National Bank (Plaintiff) filed an adversary proceeding complaint objecting to the dischargeability of the debt under 11 U.S.C. § 523(a)(2)(A).
- Debtors filed an answer denying fraud and counterclaiming for attorney's fees under § 523(d).
- The Bankruptcy Court held a trial on the merits.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Does a debtor commit actual fraud rendering a credit card debt nondischargeable when they use a cash advance to pay other debts while employed but subsequently suffer income loss, and is the creditor liable for attorney's fees for suing without a reasonable basis to prove such fraud?
Opinions:
Majority - Federman
No, the debt is not nondischargeable fraud, and Yes, the creditor must pay attorney's fees. The court held that to prove actual fraud under 11 U.S.C. § 523(a)(2)(A), a creditor must demonstrate that the debtor made representations knowing they were false with the intention of deceiving the creditor. Because direct proof of intent is difficult, the court applied a twelve-factor objective test to infer intent. The court found that the Debtors did not engage in fraud because they waited months between the charge and bankruptcy, did not consult an attorney until after the charge, stayed within their credit limit, and used the funds for necessities rather than luxuries. The sudden health issues and failure to receive a raise were unexpected intervening events that caused the default, not an initial intent to deceive. regarding fees, the court ruled that the creditor was not 'substantially justified' in filing the lawsuit under § 523(d). The creditor relied on its own internal four-point test rather than the established legal standard and possessed sufficient facts from the creditors' meeting to know it could not prove the Debtors intended to deceive. Therefore, the goal of preventing creditor intimidation warranted awarding fees to the Debtors.
Analysis:
This decision is significant because it establishes a strict boundary against creditors using 'cookie-cutter' lawsuits to challenge bankruptcy discharges. The court emphasized that credit card companies cannot rely on internal algorithms or strict liability standards to accuse debtors of fraud. By analyzing the 'totality of the circumstances' through the 12-factor test, the court protects debtors who honestly intend to repay but are struck by unforeseen financial calamities (like illness or job loss). Furthermore, the award of attorney's fees serves as a deterrent against creditors filing weak complaints in hopes that debtors will settle solely to avoid litigation costs.
