UNITED
STATES BANKRUPTCY COURT
EASTERN DISTRICT
OF KENTUCKY
LEXINGTON DIVISION
IN RE:
WALTER J. MILLER
DEBTOR
CASE
NO. 00-50064
BANK OF AMERICA
PLAINTIFF
VS.
ADV.
NO. 00-5014
WALTER J. MILLER
DEFENDANT
MEMORANDUM OPINION
This matter has come before the Court for a ruling on the
defendants Motion to Amend Judgment (Doc. #14).
The defendant seeks to have the Court amend the Order Sustaining Motion for Summary
Judgment of May 4, 2000 (Doc. #12) to grant him a reasonable attorney fee in the amount of
$1,000.00 pursuant to 11 U.S.C. §523(d). This
section allows attorney fees to a debtor who prevails in a nondischargeability action
initiated by a creditor, when the creditor was not substantially justified in
its position. This Court has jurisdiction of
this matter pursuant to 28 U.S.C. §1334(b); it is a core proceeding pursuant to 28 U.S.C.
§157(b)(2)(I).
The plaintiff filed a Complaint to Determine Dischargeability of
Debt (Doc. #1) on February 25, 2000, seeking to have the defendants debt to it
declared nondischargeable pursuant to 11 U.S.C. §§523(a)(2)(A) and 523(a)(2)(C),
alleging that the debt in the amount of $1,181.58 was incurred by false pretenses, false
representation and fraud. The defendant filed
a Motion for Summary Judgment (Doc. #5) on March 22, 2000 seeking dismissal of the
Complaint and discharge of the subject debt. The
plaintiff filed a Response (Doc. #9) on April 12, 2000.
A hearing on the Motion and Response was held on May 4, 2000, and the
defendants Motion was sustained. The
Order Sustaining Motion for Summary Judgment was entered that same day as set out above. The Order set out that the Court reserved for
future determination the allowance of costs and attorney fees.
The defendant now seeks attorney fees pursuant to 11 U.S.C.
§523(d) which provides:
If a creditor requests a determination of dischargeability of a
consumer debt under subsection (a)(2) of this section, and such debt is discharged, the
court shall grant judgment in favor of the debtor for the costs of, and a reasonable
attorneys 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.
The issue
before the Court is therefore whether the plaintiff was substantially
justified in its position. As the
plaintiff points out in its Response to Defendants Motion to Amend Judgment (Doc.
#15), the concept of substantial justification arose in the Equal Access to Justice Act,
28 U.S.C. §2412(d)(1)(A). The Supreme Court
(in a context other than bankruptcy) has interpreted the term to mean justified in
substance or in the mainthat is, justified to a degree that could satisfy a
reasonable person. Pierce v.
Underwood, 487 U.S. 552, 565-66, 108 S.Ct. 2541, 2550, 101 L.Ed.2d 490 (1988).
Some courts have articulated this standard as one of
reasonableness, i.e., to be substantially justified a creditors position must be
reasonable in both law and fact. This has
been expressed as a three-part test: (1) a reasonable basis in law for the theory
propounded; (2) a reasonable basis in truth for the facts alleged; and (3) a reasonable
connection between the facts alleged and the legal theory advanced. See In re Napier, 205 B.R. 900(Bkrtcy.N.D.
Ill. 1997), inter alia. Further, a
determination of substantial justification
should turn on a totality of the circumstances. This analysis permits a trial court to examine a
number of factors, including, but not limited to, whether the creditor attended the 341
meeting or conducted an examination under Rule 2004, as well as the extent of its
pre-trial investigation.
In re
Williams, 224 B.R. 523 (2nd Cir.BAP 1998), at 531.
The legal theory propounded by the plaintiff was that the
defendant obtained the sums represented by the subject debt by false pretenses, false
representation or actual fraud. As set out
in In re Rembert, 141 F.3d 277 (6th Cir. 1998), a creditor may, pursuant
to 11 U.S.C. §523(a)(2)(A), establish that the debtor did so by proving the following
elements:
(1) the debtor obtained money through a material
misrepresentation that, at the time, the debtor knew was false or made with gross
recklessness as to its truth; (2) the debtor intended to deceive the creditor; (3) the
creditor justifiably relied on the false misrepresentation; and (4) its reliance was the
proximate cause of loss. .... In order to except a debt from discharge, a creditor must
prove each of these elements by a preponderance of the evidence. .... Further, exceptions
to discharge are to be strictly construed against the creditor. .... (Cites omitted.)
At 280-81. As the plaintiff correctly points out, Rembert
is the premier Sixth Circuit case addressing §523(a)(2)(A) claims and known to
every attorney practicing in the field of bankruptcy.
The Rembert court made it clear that the element of intent
can only be determined by an inquiry into whether the debtor subjectively intended
to repay the debt. Id., at 281. Based on the affidavit tendered by the defendant
in support of his Motion for Summary Judgment, and the failure of the plaintiff to provide
any facts which disproved those set out in the affidavit, this Court determined that the
defendant subjectively intended to pay the subject debt.
The companion legal theory propounded by the plaintiff was that
it could avail itself of the presumption of nondischargeability provided by 11 U.S.C.
§523(a)(2)(C). That section provides that if
a debtor has consumer debts owed to a single creditor and aggregating more than $1075 for
luxury goods and services or has taken cash advances aggregating more than
$1075 on an open-end account on or within 60 days of filing his bankruptcy petition, such
debts are presumed to be nondischargeable. The
facts alleged could not support this theory, either.
The plaintiffs own records showed that there was only one cash advance taken
in the amount of $1000 on November 12, 1999. The
$156.48 payment to U.K. Patient Accounts was made directly, and was not in the nature of a
cash advance as alleged by the plaintiff in ¶6 of its Complaint. Since the cash advance was less than the statutory
amount and outside the 60 day limit, the plaintiff could not, and did not, prevail on that
legal theory.
This leads to consideration of whether there was a
reasonable connection between the facts alleged and the legal theory advanced. Napier, supra. As set out above, at least certain alleged
facts were incorrect. Some facts alleged
which appear to speak to the element of intent could not establish intent under the
standards set out in Rembert. The
plaintiff alleged in ¶14 of its Complaint that the defendant knew when he incurred the
subject debt that he did not have the ability to repay it.
As stated by the Rembert court, quoting from the opinion in Anastas v.
American Savings Bank (In re Anastas), 94 F.3d 1280 (9th Cir. 1996),
We believe that the representation made by the cardholder 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. Anastas, 94
F.3d at 1287. Rembert, at 281. The defendant has already acknowledged familiarity
with the Rembert decision. It
therefore knew or should have known that ability to pay is not to be considered in the
determination of whether a debtor made a false representation.
In any event, all of the allegations of the Complaint were made
only on the basis of the schedules filed with the defendants bankruptcy petition and
the plaintiffs own records. The record
in this case reveals that the plaintiff did not attend the 341 meeting, nor did it attempt
to schedule a Rule 2004 examination (apparently plaintiff procrastinated in retaining
counsel to prosecute the matter). While the
failure to attend the 341 meeting or schedule a Rule 2004 examination is not
dispositive it is probative.
In re Williams, 224 B.R. at 532. Either
one of these actions would have provided information concerning material
facts. The plaintiff did not concern
itself with potential material facts until after it filed and pursued this adversary
proceeding. Considering this totality
of circumstances, at least by the time the defendant filed his Motion for Summary
Judgment and the plaintiff knew that it could not controvert the facts set out in his
supporting affidavit, it was not substantially justified in going on.
Creditors who challenge the dischargeability of debts based on
the fraud exception contained in 11 U.S.C. §523(a)(2)(A) are well advised to consider
whether they can offer facts which can support a finding of fraud pursuant to the
standards set out in In re Rembert, supra.
Allegations that focus on charges incurred or payments not made are not sufficient
in and of themselves. A minimal amount of
pre-filing investigation might have resulted in a better decision on the part of the
plaintiff concerning the filing and pursuit of this adversary proceeding.
Defendants counsel has filed an itemization of the time
expended on this case totaling 13.3 hours and has requested an allowance of fees in favor
of the defendant in the amount of $1,000.00. The
services rendered appear appropriate to the circumstances and the amount requested appears
to the court to be modest for the work performed and is clearly reasonable.
In consideration of all of the foregoing, it is therefore the
opinion of this Court that the defendants Motion to Amend Judgment should be
sustained and that he should be awarded an attorney fee in the amount of $1,000.00. A separate order amending the judgment as herein
held will be entered.
Dated:
By the Court
-
Judge
William S. Howard
Copies to:
Sidney N. White, Esq.
Linda J. West, Esq.