Chase Manhattan Bank USA, N.A. v. Smith

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Order Entered.

UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF WEST VIRGINIA

IN RE
WAYNE T. SMITH

and
BARBARA M. SMITH,

BK NO. 5:04-bk-04043

Debtor(s).
CHASE MANHATTAN BANK USA, NA.,

Plaintiffs),

V. AP NO. 5:05-ap-00037

WAY NET. SMITH,

MMMM M MMM MMMM MMMM

Defendant(s).

ORDER FINDING DEBI DISCHARGEABLE

Wayne T. and Barbara M. Smith (“Debtors”) filed their Chapter 7 petition on November 16,
2004, and listed “Chase” as the holder of an unsecured nor-prority claim against Mr. Smith for “credit
card jpurchases” on account number 6436 for $10,658.85. On March 9, 2005, Chase Manhattan
Bank, NA. (“Chase”) filed this adversary jproceeding against Mr. Smith alleging that $5,500 of his debt
wes incurred as the result of a cash advance within 60 days of Debtor's petition date and is, therefore,
presumed nondischargeahle under 11 U.S.C. § 523(a)(2)(C). The complaint went on to assert that,
based on Debtors’ income and entire debt load, they bormowed from Chase without the intent to repay.
Chase further alleges nondischaryeahility based on false joretenses, false representations, or actual

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fraud, under § 523(a)(2)(A). Debtors answered, a telephonic pre-trial hearing was conducted, and
discovery took place. On September 20, 2006, a trial took place in Wheeling. Both Debtors testified
and Plaintiff offered documentary evidence. At the conclusion of the trial, the Court directed both
parties to file their closing statements with the Court, at which time the matter would be taken under
advisement. The parties having done so, the Court enters this Order.
Debts incurred by false pretenses, a false representation, or actual fraud are nondischargeable.
§ 523(a)(2)(A). The general rule is that a plaintiff/creditor bears the burden of proving such bad acts
by a debtor. An exception to this general rule, however, is found in § 523(a)(2)(C), which shifts the
burden of proof to debtors for “consumer debts owed to a single creditor and aggregating more than
$1,000 for ‘luxury goods or services’ incurred by an individual debtor on or within 60 days before the
order for relief under this title, or cash advances aggregating more than $1,000 that are extensions of
consumer credit under an open end credit plan obtained by an individual debtor on or within 60 days
before the order for relief under this title.” The shift in burden is because such debts “are presumed to
be nondischargeable.” Id. For discharge, therefore, debtors must prove by a preponderance of the
evidence that they did not employ false pretenses, a false representation, or actual fraud to obtain the
debt in question.
Under a similar set of facts in First Card Services, Inc. v. Kitzmiller (In re Kitzmiller), 206 B.R.
424 (Bankr. N.D.W. Va. 1997), this Court acknowledged that there is general agreement as to the
elements of fraud. They are:
1. That the debtor made a representation;
2. That at the time the debtor made the representation, the debtor knew it was false;
3. That the debtor made the representation with the intention and purpose of deceiving the
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creditor;
4. That the creditor relied on such representation; and
5. That the creditor sustained the alleged losses as the proximate result of the representations.
With the § 523(a)(2)(C) presumption, the evidence that a debtor incurred such an obligation satisfies
these five elements. However, because the elements of fraud are conjunctive, the debtor need only
successfully rebut one element to prevail.
Here, the evidence shows that Debtor Wayne Smith accepted and cashed a convenience check
(the equivalent of a cash advance) for $5,500. The money was deposited into Debtors’ checking
account at Hancock County Savings Bank and used to pay off other credit cards held by Debtors.
Mrs. Smith, who admittedly ran the family finances, engaged in a pattern of transferring balances from
credit card account to account in order to take advantage of low payment minimums and low or no
interest offers from credit cards. The sole question here is whether the evidence related to this one
$5,500 convenience check charge/balance transfer rebuts any of the elements of fraud, above.
In the Court’s view, if the Debtors used the card in question as merely a final pre-bankruptcy
catch-can for their credit card debt, and if they had made nothing but minimum payments, the answer
would be simple. However, the detailed statements offered by Plaintiff show a course of dealing
between the parties that is quite different from that scenario.
In April 2003, Debtors transferred two card balances onto the Chase card. On June 7, 2003,
Debtors transferred a $360 balance which they then nearly paid off two weeks later. Similar patterns
continued until October 2003, when the card was first used for retail charges, and more balance
transfers. On October 17, 2003, Chase accepted a payment of $7,256, which was presumably a
balance transfer to another company’s account. In March 2004, Chase accepted a payment of
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1And in a manner in which they had no doubt been enticed. For instance, see Debtors’ April 2004 Chase statement.
With no less than eleven balance transfers onto the account and three payments made from transfers from other cards to date, the
Chase statement has this notice: “CONGRATULATIONS! AS A VALUED CARDMEMBER, YOUR CASH LINE HAS
BEEN INCREASED TO THE SAME AMOUNT AS YOU R CREDIT LINE AS OF MARCH 2004. PLEASE ENJOY YOUR
INCREASED CASH LINE FOR ALL YOUR CREDIT NEEDS.” (Emphasis in original.)
2 Payments of: $7,256 made to Chase on October 17, 2003; $4,898.70 made the Chase on November 25, 2004; $6,600
made to Chase on March 12, 2004; and $3,000 made to Chase on July 13, 2004.
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$6,600, again likely from another card. From April 2003 to November 2004, Debtors were never
delinquent on their Chase account, despite carrying a usual balance of roughly $4,000 to $7,000.
During that 20 month period, they paid more than the required minimum payment every month but five.
The Court finds that the $5,500 cash advance, used to pay off other debt, was nothing more
than another instance (albeit the final instance) of Debtors juggling their finances in a manner they had
been accustomed.1 If their use of Chase’s credit was in fact a representation that Chase would be
paid, and Chase extended credit in reliance, then the course of dealing between the parties indicates
that the representation was made in good faith, as the history between the parties indicates that Chase
would indeed be paid. It was no more fraudulent then Debtors’ previous balance transfers, which, as
indicated from the account statements, Plaintiff benefitted from four times.2 It was merely the last
instance. The Court concedes that Debtors mismanaged their finances. However the evidence rebuts
the Code’s presumption of fraud, as Mr. Smith had no intent or purpose to deceive Plaintiff when he
cashed the $5,500 convenience check Plaintiff provided him.
For these reasons, the Court finds the debt due and owing Chase Manhattan Bank USA, N.A.
by Wayne T. Smith to be DISCHARGEABLE and it is SO ORDERED.
The Clerk is directed to transmit copies of this Order to the parties in interest.
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