At & T Universal Card Service v. Bermingham (In Re Bermingham)At & T Universal Card Service v. Bermingham (In Re Bermingham)
MEMORANDUM OPINION
I. FACTUAL BACKGROUNDS
Thеse four adversary proceedings all involve the dischargeability of credit card debt incurred by the four Chapter 7 debtors. They are further related by the fact that all four debtors and creditors negotiated a settlement prior to a trial on the merits and asked this Court to render a consent judgment in favor of the creditor. I take all four of the cases up in this consolidated opinion to demonstrate why I entered the consent judgment in two of the cases, refused to enter judgment in a third, and allowed the debtor to withdraw her Stipulation and Consent
A. MERCANTILE BANK OF ILLINOIS v. MONICA SHAW
Debtor/defendant Monica Shaw (“debtor” or “Ms. Shaw”) filed a Chapter 7 bankruptcy petition on March 8,1996. At the time of the filing debtor was indebted to creditor Mercantile Bank of Illinois, Southwestern Bell Visa (“Mercantile”) for the sum of $1,705.03. Mercantile claims in its Complaint that debt- or obtained a Southwestern Bell Visa in June of 1995, and incurred charges and cash advances which caused debtor to exceed her credit limit. Doe. # 1. The last charge debtor incurred on her credit card was July 26, 1995. Doc. # 8, Ex. B. Mercantile also states that debtor made two payments totaling $90.00 prior to filing her bankruptcy petition. Id. Prior to a trial on the merits in this proceeding, the parties еntered into a settlement agreement and asked this Court to sign and enter a document entitled Journal Entry of Judgment (the “Document”). Doc. #8, Ex. B. The Document stipulated in relevant part that:
3. At this [sic] time debtor used the subject credit card, the debtor represented to Plaintiff with each usage that she had the ability and intent to pay for the charges when they were incurred.
4. At the time debtor made these representations through her usage of the credit card, the debtor knew that these were false based upon the fact that the debtor knew she lacked the ability and intent to pay for the charges when they were incurred.
5. The debtor made these representations to the Plaintiff with the intentiоn and purpose of deceiving the Plaintiff and leading the Plaintiff to extend credit to the Defendant on the subject credit card account.
6. The Plaintiff relied on these representations and was justified in relying on
these representations of the debtor concerning her ability and intent to repay.
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8. The Defendant’s debt to Plaintiff herein in the amount of $1,700.00 is agreed to be nondischargeable.
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ORDERED, ADJUDGED AND DECREED that the indebtedness due to Mercantile Bank of Illinois, Inc. from the Defendant in the amount of $1,700.00 be and it is hereby determined to be nondis-chargeable; and it is
FURTHER ORDERED, ADJUDGED AND DECREED that Mercantile Bank of Illinois, Inc. is hereby granted a judgment in its favor against Defendant for the sum of $1,700.00, and it is
FURTHER ORDERED, ADJUDGED AND DECREED that the Defendant is hereby granted a stay of exеcution so long as she pays Plaintiff the sum of $50.00 per month, commencing on August 1,1996, and continuing on the 1st day of each month thereafter, and Plaintiff will accept the sum of $1,700.00 without'interest, if paid in a timely manner.
Id.
Pursuant to this Court’s policy, as articulated in
AT & T Universal Card Services Corp. v. Grayson (In re Grayson),
B. AT & T v. DEBRA BERMINGHAM
Debtor/defendant Debra Bermingham (“debtor” or “Ms. Bermingham”) filed a Chapter 7 bankruptcy petition on February 20, 1996. At the time of filing, debtor’s bankruptcy schedules indicate that she had $43,403.60 in nonpriority unsecured debt. Case No. 96-30079, Doc. #4. Debtor’s schedules also indicate that most of the unsecured debt was incurred in 1995. Debtor opened two credit card accounts in August of 1995, with creditor/plaintiff AT & T Universal Card Services, Corp. (“AT & T”).
The first account was for an AT & T Universal MasterCard (the “Classic Card”) with a credit limit of $3,000.00. The Classic Card, issued on August 21, 1996, was pursuant to a pre-approved application. Debtor incurred debt on the Classic Card, totaling $1,824.71, between October 23,1995, and November 14, 1995. Of those charges, one was a $1,300.00 cash advance. At the time of the bankruptcy petition the debt was $1,854.42 with interest and late payment penalties. No payments were ever made on the Classic Card account. Pl.Ex. A(l), (2), (3), and (4).
The second account was for an AT & T Universal Gold MasterCard (the “Gold Card”) with a credit limit of $5,000.00. The Gold Card was also issued pursuant to a pre-approved application on August 30, 1996. Debtor incurred charges on the Gold Card, totaling $1,684.82, between October 23, 1995, and November 4,1995. Many of the charges were for gasoline, however, debtor stated she made one purchase for sculpting supplies in the amount of $1,450.00. At the time of the bankruptcy petition the debt was $1,714.90 with interest and late payment penalties. No payments were ever made on the Gold Card account. Pl.Ex. # B(l)(2), (3), and (4).
AT & T filed a Complaint objecting to the discharge of its debt, in the combined sum of $3,636.14 pursuant, to 11 U.S.C. § 523(a)(2)(A). On April 3, 1996, prior to filing its Complaint, AT & T contacted debt- or’s attorney to discuss a settlement of the debt. Pl.Ex. D. The deadline, for filing a dischargeability complaint was June 3, 1996. AT & T filed a Complaint on that date as it had failed to reach an agreement with debt- or’s attorney. As negotiations were continuing, debtor did not file a response to the Complaint. On July 15, 1996, the parties filed a Stipulation and Consent Judgment with this Court. Doc. # 6. The Stipulation provides in relevant part:
6. That Defendant secured the aforesaid cash advances and made additional purchases on the account at a time when Defendant was unable to meet her existing financial obligations as they became due and when Defendant was already in default on debt payments to other creditors.
7. That at the time Defendant secured cash advanсes and made purchases referred to above, Defendant represented that she had the ability to repay the loan, when, in fact, Defendant did not have the ability nor the intent to repay the loan to Plaintiff.
8. That Plaintiff justifiably relied on the aforesaid representation in extending credit to Debtor/Defendant.
9. That the Court may enter an order finding the sum of $3,636.14 owed to the Plaintiff to be nondischargeable pursuant to 11 U.S.C. § 523.
10. That the court may enter a judgment in favor of the Plaintiff and against the defendant, Debra Bermingham for the sum of $3,636.14.
11. That Plaintiff will stay execution on said amount conditioned upon the payment to Plaintiff of the sum of $100.00 per month, beginning July 25, 1996 and due the 25st [sic] day of each month thereaftеr until the total sum of $1,800.00 is paid in full; at which time, said judgment shall be satisfied.
12. That in the event the defendant defaults in the payments as agreed, execution may issue for any unpaid portion of said judgment plus interest and costs including reasonable attorneys [sic] fees.
Id.
The Stipulation was signed by the debt- or. Pursuant to this Court’s policy, as articulated in
AT & T Universal Card Services Corp. v. Grayson (In re Grayson),
AT & T objected quite forcefully to debt- or’s request to withdraw the Stipulation and Consent Judgment. AT & T argues that debtor made the offer of settlement via a letter dated June 3,1996. Doc. # 11, Ex. A. Moreover, the Stipulation was signed by debtor without coercion. Doe. # 11. AT & T also claims that debtor was represented by counsel, and the Stipulation was an arm’s length transaction. Id. Lastly, AT & T points out that debtor never filed a responsive pleading to AT & T’s Complaint, therefore, if debtor does withdraw the Stipulation, AT & T is entitled to a default judgment.
Debtor then filed her Motion to File Answer to Complaint to Determine Dis-chargeability Out of Timе. Debtor claims that she had not previously filed an answer to AT & T’s Complaint because she had entered into a settlement agreement with AT & T. Since she now wished to withdraw the settlement agreement, it would be in her best interest to be allowed to file an answer out of time. The Court granted debtor’s Motion to File Answer Out of Tune on September 20, 1996, and a hearing was held on September 26,1996. 1
After finding that debtor no longer consented to the entry of a judgment in favor or AT & T, the Court granted debtor’s Application to Withdraw Stipulation and Consent Judgment, and the parties proceeded immediately to a trial on the merits of AT & T’s Complaint. As announced at the hearing, I find the debts to be dischargeable.
Debtor/dеfendant Lisa Fort (“debtor” or “Ms. Fort”) filed a Chapter 7 bankruptcy petition on March 8, 1996. Creditor/plaintiff Mercantile Bank of Illinois (“Mercantile”) filed its Complaint to Determine Discharge-ability of Debt (the “Complaint”) on June 17, 1996. Mercantile claims that debtor incurred charges of $976.41 during a six day shopping spree/vacation between August 15, 1995, and August 20,1995, which exhausted her credit limit. She subsequently made no payments to Mercantile prior to filing her bankruptcy petition. The parties submitted a Journal Entry of Judgment to this Court which provides in relevant part:
3. At this [sic] time debtor used the subject credit card, the debtor represented to Plaintiff with each usage that she had the ability and intent to pay for the charges when thеy were incurred.
4. At the time debtor made these representations through her usage of the credit card, the debtor knew that these were false based upon the fact that the debtor knew she lacked the ability and intent to pay for the charges when they were incurred.
5. The debtor made these representations to the Plaintiff with the intention and purpose of deceiving the Plaintiff and leading the Plaintiff to extend credit to the Defendant on the subject credit card account.
6. The Plaintiff relied on these representations and was justified in relying on these representations of the debtor concerning her ability and intent to repay.
7. The Plaintiff sustained damages in the sum of $500.00 as a proximate result of the debtor’s representations.
8. The Defendant’s debt to Plaintiff herein in the amount of $620.00 should be found nondischargeable, under 11 U.S.C. § 523(a)(2)(A) of the Bankruptcy Code.
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ORDERED, ADJUDGED AND DECREED that the indebtedness due to Mercantile Bank of Illinois from the Defendant in the amount of $500.00 plus court
costs be and it is hereby determined to be nondischargeable; and it is
FURTHER ORDERED, ADJUDGED AND DECREED that Mercantile Bank of Illinois is hereby granted a judgment in its favor against Defendant for the sum of $500.00, plus court costs and it is
FURTHER ORDERED, ADJUDGED AND DECREED that the Defendant is hereby granted a stay of execution so long as she pays Plaintiff the sum of $25.00 per month, commencing on September 1, 1996, and continuing on the 1st day of each month thereafter, and Plaintiff will accept the sum of $500.00, plus costs оf $120.00 without interest, if paid in a timely manner.
Doc. #7, Ex. B. Pursuant to this Court’s policy, as articulated in
AT & T Universal Card Services Corp. v. Grayson (In re Grayson),
D. MERCANTILE BANK OF ILLINOIS v. RANA SIDDHARTH DHAR
Debtor/defendant Rana Siddharth Dhar (“debtor” or “Mr. Dhar”) filed a Chapter 7
The second account is a Visa account (the ‘Visa Card”) opened in October of 1993 with a credit limit of $2,300.00. Mercantile claims that debtor is obligated to it in the sum of $939.62 on the Visa account.
The parties submitted a Journal Entry of Judgment to this Court which provides in relevant part:
3. The Debtor/Defendant made written application to Plaintiff for the issuance of a credit card accounts [sic].
4. In the months immediatеly prior to the filing of the Petition in Bankruptcy, charges were incurred by the Debtor/Defendant and billed on the credit card accounts issued by Plaintiff.
5. At the time the charges were incurred, or cash advances taken, the Debt- or/Defendant did not have the ability to repay Plaintiff herein.
6. The Debtor/Defendant’s debt to the Plaintiff herein in the amount of $1,000.00, plus interest at the contract rate is determined to be nondischargeable.
7. Based upon the findings above, it is
ORDERED, ADJUDGED AND DECREED that the indebtedness due to Mercantile Bank of Illinois from Debt- or/Defendant, Rana Siddharth Dhar, in the amount of $1,000.00 be, and it is hereby determined to be nondischargeable; and it is
FURTHER ORDERED, ADJUDGED AND DECREED that Mercantile Bank of Illinois is hereby granted a judgment in its favor against Defendant for the sum of $1,000.00, and it is
FURTHER ORDERED, ADJUDGED AND DECREED that thе Defendant is hereby granted a stay of execution so long as he pays Plaintiff the sum of $35.00 per month, commencing October 5, 1996, and continuing on the 5th day of each month thereafter, and Plaintiff will accept the sum of $1,000.00, without interest, if paid in a timely manner.
Doc. # 7, Ex. # B. Pursuant to this Court’s policy, as articulated in
AT & T Universal Card Services Corp. v. Grayson (In re Grayson),
II. DISCUSSION
A CONSENT JUDGMENTS
All four оf these cases involve the issue of the Court’s responsibility in entering a consent judgment of non-dischargeability following a settlement by the parties. The rendition of a judgment is a judicial act of this Court.
Fleming v. Clark Township of Chariton County,
In Bermingham, the debtor simply wishes to withdraw her consent to judgment. This Court has no authority to impose a consent judgment upon a party who has withdrawn consent prior to entry of the judgment.
Bankruptcy Courts may need to be especially vigilant as to continuing consent of the parties prior to rendering consent judgments which hold particular debts to be nondis-ehargeable. As this Court noted in its
Gray-son
opinion, debtors in bankruptcy are typically not able to settle nondischargeability cases by making lump sum cash payments. Instead, in order to settle an adversary proceeding, debtors will agree that the debt is nondischargeable in exchange for some time to pay an agreed upon amount, with or without interest. In the four cases above, only Lisa Fort understood that she was admitting to the commission of fraud in the settlement. Per the terms of the four settlements above, if any payment is not made, the creditor has the right to act to collect the entire amount of the nondischargeable debt immediately. Thus, in effect, the debtors waive the benefit of their discharges as to these debts. Addi
As a result of the bankruptcy discharge, creditors can only enforce these agreements pursuant to a Bankruptcy Court Judgment finding that the debt is nоndis-chargeable. The approval of the Court by way of the signature of the bankruptcy judge is required for entry of such judgment. Fed. R.Civ.P. 58; Fed.R.Bankr.P. 9021. As I held in
Grayson,
unless the entry of an Order approving a consent judgment is a meaningless, ministerial task, a Court is authorized to satisfy itself that debtor understands the terms of the agreement, that there is a reasonable basis for entry of the judgment on the terms agreed to by the parties, that debtor is aware of the right to a trial on the merits, and that debtor consents at the time judgment is rendered.
AT & T Universal Card Services v. Grayson (In re Grayson),
In the
Bermingham
case, AT & T argues that settlement agreements should be approved by the Court unless one party can prove it entered into the agreement because of fraud, duress or mutual mistake. AT & T offers authority for this premise.
See, e.g., Justine Realty v. American Nat’l Can Co.,
As these four cases also demonstrate, in dischargeability proceedings, there is yеt another reason to review consent judgments with some care. Debtors are often represented by counsel who take their case on a flat-fee basis, and, therefore, have no financial incentive to litigate dischargeability complaints. 2 Such counsel generally carry out their ethical responsibility to vigorously represent the interests of their clients. But, too often in cases where a creditor alleges fraudulent use of a credit card, debtors’ counsel advise them to agree to judgments which saddle them with obligations they are unable to pay. Further, creditors in these cases often bring adversary proceedings based solely on their records without an examination of the debtor or without attending the section 341 Meeting of Creditors. Moreover, in order to try these cases, the creditor is required to send a representative to testify, which increases the costs of the proceeding for the creditor as well. As a result, both the creditor and the debtor’s counsel have incentives to settle these cases, while the debtors forego protections provided them by the Bankruptcy Code (the “Code”). This type of injustice is prevented, however, by requiring the Court to render judgments based upon these settlements only after ascertaining that debtor’s consent is fully informed. Fed. R.Civ.P. 58(2).
For all of the reasons stated, this Court refuses to enter an Order approving a judgment of nondischargeability without some evidence that there is a reasonable basis for the entry of same, that the debtor both understands and agrees to the terms at the time of the judgment, and that the debtor
In Shaw the debtor did not understand the basis for the settlement. Moreover, she did not understand the meaning of fraud or that Mercantile must prove she did not intend to repay her obligation at the time she incurred the charges. I find that debtor cannot consent to an agreement she does not understand, therefore, I refuse to approve the settlement and enter judgment in favor of Mercantile. A trial on the merits will be scheduled and noticed to the parties.
By contrast, in Fort and Dhar it is clear to this Court that both debtors understand the terms of the agreement and that their consent is continuing. Having made that determination, this Court entered judgment in favor of Mercantile in both of these cases pursuant to the terms of the settlement. Both Ms. Fort and Mr. Dhar were well informed as to their rights. Ms. Fort understood that Mercantile could prove several badges of fraud as to her use of her credit card. Mr. Dhar believed that he could prevail at trial, but wished to avoid the risk of trial by settling for a minimal amount.
B. BERMINGHAM TRIAL ON THE MERITS
In Bermingham, I granted debtor’s motion to withdraw the Stipulation and Consent Judgment. The parties proceeded to trial. AT & T called Paul Patterson as a witness. Mr. Patterson testified that AT & T mailed debtor two pre-approved applications within a short period of time. One application was for the Gold Card, issued August 30, 1995, and one application was for the Classic Card, issued August 21, 1995. In determining whether to send pre-approved applications to prospective customers, Mr. Patterson stated that AT & T relies on certain analysis criteria. AT & T obtains a score from a credit bureau based upon a person’s payment history, income, and debts. AT & T then obtains a bankruptcy score that rates a person’s likelihood of filing bankruptcy. Mr. Patterson said that both scores indicated that Ms. Bermingham was a good credit risk, therefore, she was sent the pre-approved applications. Mr. Patterson admitted that AT & T was unaware that Ms. Bermingham obtained two different credit cards from it on two different accounts within ten days, extending her a line of credit totaling $8,000.00. He also stated that AT & T obtained only a score from the credit bureau, not a credit bureau report. He said the score received from the credit bureau does not specifically indicate debtor’s income or any other liabilities. The score indicates only debtor’s payment history, not the total line of credit available to debtor or her current obligations. He also said that AT & T does not obtain a standard credit bureau report unless there is a problem with the account, and, as a rule, AT & T does not obtain a credit burеau report prior to increasing a debtor’s line of credit or prior to issuing new cards. He stated that creditors cannot obtain a standard credit bureau report without a debtor’s consent. Since AT & T chooses to issue these cards on a pre-approved basis, it does not obtain such consent.
According to Mr. Patterson, AT & T was not aware if Ms. Bermingham had any other debts when she was sent both pre-approved applications, nor was it aware that she was self-employed. He further stated that to activate the card, debtor did not have to disclose her assets, nor did the credit bureau score indicate any assets. Finally, Mr. Patterson testified that he was unaware of any actual misrepresentation or fraud committed by debtor. He did not know if she had the ability to repay any charges at the time of the application, as he relied solely on the score from the credit bureau, not any information contained in the application. 3
I announced at the hearing that I would enter an Order finding the obligations to AT & T to be dischargeable. I find that AT & T has failed to prove that debtor did not intend to repay the debts at the time she incurred them for the following reasons: (1) debtor did not use the cards for cash advances or luxury items within the presumption period pursuant to 11 U.S.C. § 528(a)(2)(C); (2) debtor never used the cards for the purchase of luxury goods; (3) there were no charges within the presumptive period as the last charge was made on November 17,1995; (4) debtor never exceeded her credit limit on either card; (5) debtor voluntarily returned a truck when she realized she could not pay her bills; (6) debtor ceased using her credit cards, even though she had credit remaining, when she rеalized she could not pay her bills; and (7) debtor sold her car to pay her bills. Debtor’s testimony indicates that she managed her business affairs poorly, but that is not fraud.
Debtor has made a motion for an award of attorney’s fees incurred in defending this action. The Code grants defendants in dischargeability actions special protection not afforded to other civil litigants. Section 528(d) of the Code provides:
(d) If a creditor requests a determination of dischargeability of a consumer debt under [11 U.S.C. § 523](a)(2) ... and such debt is discharged, the court shall grant judgment in favor of the debtor for the costs of, and a reasonable attorney’s fee for, the proceeding if the court finds that the position of the creditor was not substantially justified, except that the court shall not award such costs and fees if special circumstances would make the award unjust.
11 U.S.C. § 523(d). I find that the position of AT & T was not substantially justified, given its failure to examine the debtor, and discover facts relative to her intent, prior to filing its Complaint. However, I also find, given the failure of debtor’s counsel to file a timely Answer, or to fully advise his client regarding the proposed settlement, that special circumstances exist which would make an award of fees unjust.
In summary, the parties in
Fort
and
Dhar
demonstrated a basis for their settlement, and, in particular, that both debtors knowingly consent to the settlement terms. Therefore, those settlements are approved. In
Shaw,
the debtor’s consent to judgment was not fully informed, so the Court will set that matter for a trial on the merits. And, finally, in
Bermingham,
debtor was entitled to withdraw her consent to judgment prior to entry
Separate orders in accordance with this Memorandum Opinion will be entered this date.
Notes
. The Supreme Court holds that the Bankruptcy Court has the discretion to accept late filings where the failure to act is the result of "excusable neglect.”
Pioneer Investment Serv. Co. v. Brunswick Assoc. Ltd.,
. The Local Rules of Practice-United States Bankruptcy Court-Western District of Missouri (the "Local Rules”) generally prohibit counsel to Chapter 7 debtors from withdrawing unless new counsel has entered an appearance. Local Rule 9.009. Thus, once counsel takes a debtor’s case, such counsel is obligated to represent the debtor in any dischargeability actions which are filed.
. I note that AT & T relies on its alleged fact that debtor did not have the ability to repay the obligations at the time they were incurred as a basis for its objection to discharge of its debt. I would draw AT & T’s attention to a recent opinion from the Ninth Circuit which states "the representation made by the card holder in a credit card transaction is not that he has the ability to repay the debt; it is that he has an intention to repay. Indeed, section 523(a)(2) expressly prohibits using a non-written representation of a debtor's financial condition as a basis for fraud."
Anastas v. American Savings Bank,