Star Bank, N.A. v. Stearns (In Re Stearns)
35 Bankr. Ct. Dec. (CRR) 69, 1999 Bankr. LEXIS 1675, 241 B.R. 611 (1999)
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Rule of Law:
The mere use of a credit card implies a representation of intent to repay, not ability to repay. For a credit card debt to be non-dischargeable due to fraud under 11 U.S.C. § 523(a)(2)(A), the creditor must prove the debtor had a contemporaneous, subjective intent not to repay the debt at the time the charges were incurred, and the creditor justifiably relied on this false representation.
Facts:
- In early 1996, Plaintiff Star Bank solicited Defendant Kathy Jo Rodman for a "Pre-Approved Star Bank VISA Gold card."
- Rodman completed the acceptance certificate, providing accurate information about her employment as a police dispatcher, gross annual income of $33,000, and $400 monthly housing payment. She also held "two or three" other credit cards with small balances and savings.
- Star Bank, relying on Rodman's "excellent" TRW credit score (339), issued her a VISA card with a $5,900 charge limit, foregoing standard income verification for that limit.
- Rodman began using the card in March 1996, primarily for small cash withdrawals at the Mystic Lake Casino to fund gambling, and established a pattern of making payments of $30-$50, meeting or exceeding minimum requirements.
- In March 1997, Rodman made a $1,483.84 payment on the account from a second mortgage loan, reducing the balance to approximately $414.00, after which Star Bank immediately raised her credit limit to $7,100.00.
- In June 1997, Rodman lost her full-time employment and subsequently took two part-time jobs, resulting in net monthly earnings of $1,382.00 against personal living expenses of $1,751.00.
- From August 25 to October 30, 1997, Rodman's gambling activity escalated, and she used her Star Bank VISA account to obtain $7,800.00 in cash advances at Mystic Lake and Treasure Island casinos to gamble, while also accumulating balances on other credit cards.
- During this period, Rodman believed a "big win" at the casino would enable her to pay off her accumulating debts, and she subjectively "never intended to not pay" Star Bank.
- By mid-November 1997, Rodman recognized her untenable financial situation, stopped using credit cards for gambling, and began seeking legal advice for bankruptcy.
Procedural Posture:
- Kathy Jo Rodman filed for Chapter 7 bankruptcy relief on December 7, 1997.
- Star Bank (Plaintiff) filed an adversary proceeding in the United States Bankruptcy Court for the District of Minnesota seeking to have Rodman's debt to it declared non-dischargeable under 11 U.S.C. § 523(a)(2)(A).
- The bankruptcy court conducted a trial on the adversary proceeding.
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Issue:
Does a debtor's use of a credit card constitute a false representation of intent and ability to repay the debt, sufficient to render the debt non-dischargeable under 11 U.S.C. § 523(a)(2)(A), when the debtor genuinely, though irresponsibly, intended to repay the debt at the time of the charges?
Opinions:
Majority - Gregory F. Kishel
No, the Defendant's debt to Star Bank is not excepted from discharge. The court adopted the Ninth Circuit's Anastas formulation, holding that the "representation made by the card holder in a credit card transaction is not that he has an ability to repay the debt; it is that he has an intention to repay." Fraud under 11 U.S.C. § 523(a)(2)(A) requires proving the debtor made a false representation of fact, knew it was false, intended to deceive, and the creditor justifiably relied. The critical inquiry is the debtor's subjective intent to repay. While Rodman's belief in a "big win" to cover her debts was "fatuous" and objectively unfounded, her testimony was credible, indicating a "subjective intent to pay back everything she was borrowing from the Plaintiff — an intent that was consistently heart-whole albeit increasingly unfounded in objective fact." Her self-deception regarding her ability to pay did not equate to a false representation of intent to defraud. Therefore, Star Bank failed to prove the first element: a false representation of a past or present fact. The court also noted that Star Bank failed to prove actual reliance on any implied representation from Rodman, as its credit decisions primarily relied on credit scoring and payment history, not continuous implied representations of intent or ability to pay from individual transactions.
Analysis:
This case reinforces the high bar for creditors seeking to declare credit card debt non-dischargeable under § 523(a)(2)(A). By adopting the Anastas "intent to repay" theory, the court prioritizes the debtor's subjective state of mind, emphasizing that mere financial irresponsibility or self-deception, without a conscious intent to defraud, is insufficient to deny a "fresh start" in bankruptcy. This approach recognizes the inherent risks assumed by credit card issuers who aggressively promote easy access to credit. It significantly increases the burden on credit card companies to prove an actual, knowing scheme to abuse credit rather than simply pointing to a debtor's deteriorating financial condition or problematic spending habits.
