Saturday, May 29, 2010

Section 523(a)(2)(A) Claim Rejected for Credit Card Cash Advances

In re Schempp, 420 B.R. 637 (Bankr. W.D.Pa 2009). A credit card lender filed a Section 523(a)(2)(A) adversary complaint against a Debtor who took two cash advances on debtor's credit card 165 days before filing bankruptcy. The credit card provider alleged debtor made an implied misrepresentation by taking the cash advances without the intent to repay.


Creditor attempted to prove its claim by offering as evidence: (a) debtor made only one installment payment; (b) debtor filed bankruptcy within 165 days of taking the cash advance; (c) debtor had a negative net worth and was substantially insolvent when debtor filed bankruptcy; and (d) debtor earned substantially less than debtor spent on a monthly basis when debtor filed for bankruptcy.



Debtor admitted experiencing financial difficulty when and after debtor obtained the cash advances, but the court found that this fact by itself did not demonstrate that debtor never intented to repay the cash advances. Next, debtor admitted that debtor had financial difficulties at the time the bankruptcy case was filed, but the court found that this fact and the presumed insolvency some 165 days before the bankruptcy filing, did not constitute conclusive evidence that debtor lacked an intent to repay, and thus a misrepresentation to creditor regarding debtor's intent to repay the cash advances.



The court held that a "subjective standard" rather than an objective standard must be utilized to ascertain whether a debtor had an intent to deceive (i.e. whether a debtor's representation that debtor intended to repay was false) for purposes of Section 523(a)(2)(A). Therefore, the court focused its attention upon whether debtor subjectively intended to repay the cash advances, not upon whether an objective person would have thought that he or she could repay said debt. Consequently, the court gave great weight to debtor's testimony that (a) debtor's income had decreased dramatically in the roughly one-year period prior to filing bankruptcy because of the decline in the real estate market; and (b) debtor nevertheless thought that debtor's income would improve so as to allow debtor to make installment payments on the cash advances.



Therefore, the court rejected creditor's claim and concluded that the alleged facts did not preponderantly prove the falsity of, or any deceptive intent on debtor's part with respect to, debtor's representation that debtor intended to repay the cash advances. Instead, the court concluded that is was at least equally likely that debtor (a) did not obtain the cash advances as part of a scheme to deceive creditor by accumulating debt on the the eve of bankruptcy without any intent to repay, and (b) was thus truthful when debtor implicitly represented to creditor that debtor intended to repay the cash advances.
 
Warmest Regards,

Bob Schaller

Your Bankruptcy Advisor

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