Case Name: In re Terry Patrick WARD, Debtor, MANUFACTURER'S HANOVER TRUST COMPANY, Plaintiff-Appellant, v. Terry Patrick WARD, Defendant-Appellee
Court: United States Court of Appeals for the Sixth Circuit
Jurisdiction: United States
Decision Date: 1988-09-16
Citations: 857 F.2d 1082
Docket Number: No. 87-3525
Parties: In re Terry Patrick WARD, Debtor, MANUFACTURER’S HANOVER TRUST COMPANY, Plaintiff-Appellant, v. Terry Patrick WARD, Defendant-Appellee.
Judges: Before ENGEL, Chief Judge , and MERRITT and KRUPANSKY, Circuit Judges.
Reporter: West's Bankruptcy Reporter
Volume: 91
Pages: 1082–1089

Head Matter:
In re Terry Patrick WARD, Debtor, MANUFACTURER’S HANOVER TRUST COMPANY, Plaintiff-Appellant, v. Terry Patrick WARD, Defendant-Appellee.
No. 87-3525.
United States Court of Appeals, Sixth Circuit.
Argued March 4, 1988.
Decided Sept. 16, 1988.
William R. Mapother (argued), James Adrian Earhart, Louisville, Ky., for plaintiff-appellant.
E. Hanlin Bavely (argued), Cincinnati, Ohio, for defendant-appellee.
Before ENGEL, Chief Judge , and MERRITT and KRUPANSKY, Circuit Judges.
The Honorable Albert J. Engel assumed the duties of Chief Judge effective April 1, 1988.

Opinion:
KRUPANSKY, Circuit Judge.
The claim at bar arises from the Chapter 7 bankruptcy proceeding of the defendant-appellee Terry Patrick Ward (Ward). Plaintiff-Appellant Manufacturers Hanover Trust Company (MHT) seeks to except from discharge indebtedness incurred by Ward as a result of his use of a Mastercard which it purportedly issued as a result of false representations made by Ward in his application for the credit card. The bankruptcy court concluded and the district court agreed that MHT's debt was dis-chargeable. MHT timely appealed.
Ward received the credit card in question upon completion of an application circulated by MHT as part of a nationwide direct mail solicitation sponsored by MHT to enroll new members in its retail consumer credit business. Ward received his credit card from MHT in May of 1985 with a preapproved credit limit of $2,000. During a 23-day period beginning on May 13,1985, and ending on June 5, 1985, he charged $2,200 to this account. The charges included two cash advances of $900 each. MHT admitted that it requested no financial statement from Ward, nor did it conduct a credit check of his financial responsibility, which would have disclosed indebtedness on at least twelve other credit accounts together with an embezzlement conviction ordering a restitution of $250,000. MHT's principal witness, Louise Cordeira, assistant manager in charge of retail credit cards, testified that MHT generally requested a credit bureau report which, if received, would have reflected many of Ward's other liabilities. However, MHT introduced no evidence to support a request for or the receipt of a report concerning Ward.
After Ward filed his Chapter 7 petition, MHT instituted this proceeding seeking to declare his indebtedness to it as non-dis-chargeable under Bankruptcy Code Section 523(a)(2)(A) because the money was obtained by "false representation or actual fraud". To support its position, MHT argued that Ward fraudulently misrepresented that he was financially responsible and would satisfy any and all charges that he incurred against MHT's extended credit. Appellee responded that the debt was dis-chargeable because MHT had assumed the risk of nonpayment of Ward's charges against its credit card since it had failed to minimally investigate Ward's financial responsibility.
To except a debt from discharge under § 523(a)(2)(A), a creditor must prove the following elements set forth in In re Phillips, 804 F.2d 930, 932 (6th Cir.1986):
[T]he creditor must prove that the debtor obtained money through a material misrepresentation that at the time the debt- or knew was false or made with gross recklessness as to its truth. The creditor must also prove the debtor's intent to deceive. Moreover, the creditor must prove that it reasonably relied on the false representation and that its reliance was the proximate cause of loss. In re Kimzey, 761 F.2d 421, 423 (7th Cir.1985); In re Hagedorn, 25 B.R. 666, 668 (Bankr.S.D.Ohio 1982); 3 Collier on Bankruptcy ¶ 523.08[4] (15th ed. 1985).
In the instant case, it was undisputed that Ward at least impliedly misrepresented his financial capability upon the application circulated by MHT and that he did so intending to deceive MHT. The lower court concluded, however, that the creditor did not "reasonably" rely on Ward's false representations because it failed to verify Ward's credit or to investigate the veracity of his representations. MHT, as the party seeking an exception from discharge in bankruptcy, had the burden to prove reliance by clear and convincing evidence. Phillips, 804 F.2d at 932; Parkey, 790 F.2d at 491. Exceptions to dischargeability are to be construed strictly. Gleason v. Thaw, 236 U.S. 558, 562, 35 S.Ct. 287, 289, 59 L.Ed. 717 (1915); In re Hunter, 780 F.2d 1577, 1579 (11th Cir.1986). In this context, the bankruptcy court's finding of fact is subject to a clearly erroneous standard of review by this court. Phillips, 804 F.2d at 932; Knoxville Teachers Credit Union v. Parkey, 790 F.2d 490 (6th Cir.1986); In re Martin, 761 F.2d 1163, 1165 (6th Cir.1985).
The bankruptcy court decided in pertinent part that:
The fact is that this company, Manufacturers Hanover, one of the largest banks in the United States, issued two thousand dollars in preapproved credit to a person who was not only hopelessly insolvent, but who had recently been convicted of an embezzlement offense.
While the testimony of the bank officer, the assistant manager in charge of retail credit cards indicated that a credit cheek must have been made, indeed, the contrary must be true. A credit check could never have been made, because if it had been made credit would not have been issued. If, in fact, the credit check was made, someone didn't heed it. . So as far as I'm concerned, there could not have been [a] credit check.
In disposing of the controversy before it, the court apparently assigned Cordeira's testimony little, if any, credibility in light of her vague and inconclusive recollections concerning MHT's efforts to obtain a credit bureau report or otherwise investigate Ward's financial responsibility. In short, MHT failed to meet its burden of introducing clear and convincing evidence that it conducted even the most superficial credit investigation. Accordingly, the trial court's factual determinations were not clearly erroneous.
Given the correctness of the district court's factual findings, MHT's reliance on Ward's misrepresentation was unreasonable as a matter of law. "Congress was [when passing § 523] . concerned that creditors use, when feasible, 'other sources of information, such as credit bureau reports, to verify the accuracy of the [debt- or's] list of debts.' " In re Martin, 761 F.2d at 1166. See also H.R.REP. No. 595, 95th Cong., 1st Sess. 130 (1977), reprinted in 1978 U.S.CODE CONG. & ADMIN. NEWS 5787, 5963, 6091. In cases where "minimal investigation and verification almost certainly would have uncovered the falsity of the representations," a bank's debt must be discharged if no such investigation had been performed. In re Mullet, 817 F.2d 677, 680 (10th Cir.1987). "Misplaced trust" is insufficient for nondis-chargeability. A lender must investigate creditworthiness and ferret out ordinary credit information. In re Hunter, 780 F.2d 1577, 1580 (11th Cir.1986). Cf. In re Lansford, 822 F.2d 902, 904 (9th Cir.1987) (assuming that a creditor bears a duty to investigate and verify a debtor's financial statement) (citing Kentile Floors, Inc. v. Winham, 440 F.2d 1128, 1131-32 (9th Cir.1971)). Since MHT made "no attempt to ascertain what [Ward's] ability to pay might have been before it issued the cards," the debt is dischargeable. In re Quick, 70 B.R. 562 (Bankr.S.D.Cal.1987).
This requirement that a credit check be performed best advances the policy of the Bankruptcy Act. As one commentator explained:
[F]rom the perspective of the bankruptcy proceeding, it is inequitable to reward a possibly imprudent creditor who failed to detect the debtor's misrepresentation by excepting her debt from discharge, while the debtor's other more prudent creditors have their claims evaluated collectively. As a matter of fairness among creditors, it is inappropriate to allow a creditor who is likely to have been imprudent to participate in the liquidation of the debtor's assets.
Zeigler, The Fraud Exception to Discharge in Bankruptcy: A Reappraisal, 38 Stan.L.Rev. 891, 907-08 (Feb.1986).
Far from generating additional credit card fraud, as the dissent has suggested, this court's decision will encourage banks to more prudently investigate the creditworthiness of high-risk borrowers and will deter potential debtors from engaging in credit card fraud. As one commentator correctly observed, disallowing a bank's non-dischargeability claim when the bank fails to investigate would best comport with the intent of Congress and would discourage fraudulent credit transactions. Filipow, Creditor Acquiescence as a Defense to an Exception to Discharge in Bankruptcy, 58 Ind. L.J. 319, 331-34 (1983).
MHT and the dissent have also charged that, assuming arguendo an unreasonable initial issuance of credit, such action was nevertheless irrelevant because the bank reasonably relied upon Ward's implied assurances that he would discharge each indebtedness incurred against MHT's line of credit which resulted from the use of the MHT Mastercard. Indeed, decisions such as In re Doggett, 75 B.R. 789, 791 (Bankr.S.D.Ohio 1987) and In re Pannell, 27 B.R. 298 (Bankr.E.D.N.Y.1983) support the proposition that a credit card holder impliedly represents to the bank that he is willing and able to pay the incurred indebtedness each time he uses the card.
However, even if each credit card charge constituted a "representation" of ability to pay, the case law and legislative history make it clear that a credit check must be conducted at some point; otherwise an exception to discharge is unavailable. A contrary rule would "place credit card companies in a special category of creditors and makes their [credit card] debts too easily nondischargeable." In re Carpenter, 53 B.R. 724, 728 (Bankr.N.D.Ga.1985). This court rejects extending preferential protection, at the expense of other unsecured creditors, to credit card companies which profit from extending consumer credit at the risk of non-payment, which risk is factored into finance charges which are higher than the rates charged by other lenders. "Banks are willing to risk nonpayment of [credit card] debts because that risk is factored into the finance charges. Because the risk is voluntary and calculated," Section 523 should not be construed to afford credit card issuers more protection than is given to all other creditors. See First National Bank of Mobile v. Roddenberry, 701 F.2d 927, 932 (11th Cir.1983).
MHT's negligent reliance upon Ward's application for credit and on Ward's unsupported "implied representation" constituted an assumption of the risk that Ward would fail to pay his subsequent credit card bills. "[W]hen a credit card company issues a credit card with no credit check of the applicant it has made a calculated business decision to assume the risk of nonpayment. Such a company cannot now turn to this Court and ask for special consideration because the debt owed is being discharged in bankruptcy." Carpenter, 53 B.R. at 729. That assumption of risk "continues until it is clearly shown that the bank unequivocally and unconditionally revoked the right of the cardholder to further possession and use of the card." Roddenberry, 701 F.2d at 932; Carpenter, 53 B.R. at 729. Since MHT did not revoke Ward's card until after the charges in question had been incurred, MHT assumed the risk that Ward would default on such charges. See also In re Shrader, 55 B.R. 608, 612 (Bkrtcy W.D.Va.1985) (credit card issuers must effectively monitor their accounts; until bank decides to revoke credit card, voluntary assumption of risk of default continues).
It was unreasonable for MHT to rely upon Ward's mere signature, his supposed "good faith," and his "implied promise of repayment." As the court explained in Hunter, 780 F.2d at 1580, "misplaced trust" is insufficient for nondischargeabili ty. A lender must investigate creditworthiness and ferret out ordinary credit information. Id. Reliance on Ward's signature was unreasonable and the § 523 exception to discharge, which this court is constrained to construe narrowly, Gleason, 236 U.S. at 562, 35 S.Ct. at 289, is unavailable to MHT.
Accordingly, the judgment of the district court is AFFIRMED.
. 11 U.S.C. § 523(a)(2)(A) provides:
(a) A discharge under Section 727, 1141, or 1328(b) of this title does not discharge an individual debtor from any debt—
(2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by—
(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's or an insider's financial condition; [or]
(B) use of a statement in writing—
(i) that is materially false;
(ii) respecting the debtor's or an insider's financial condition,
(iii) or which the creditor to whom the debtor is liable for obtaining such money, property, services, or credit reasonably relied; and
(iv) that the debtor caused to be made or published with intent to deceive.
. Numerous bankruptcy court cases stand for the proposition that a bank must conduct a reasonable investigation as to the accuracy of the debtor's representations. See e.g. In re Mitchell, 70 B.R. 524, 528 (Bankr.N.D.Ill.1987) ("commercial lenders . are required to conduct a commercially reasonable investigation of the information that has been supplied by a debtor''); In re Iverson, 66 B.R. 219, 226 (Bankr. D.Utah 1986) ("it is well-settled that a creditor has a duty to check the credit rating of the debtor and not rely upon just the financial statement.''); In re Rosel, 63 B.R. 603, 606 (Bankr.W.D.Ky.1986) (where no effort was made by bank to verify accuracy or existence of listed debts or assets, creditor's reliance unreasonable); In re Reder, 60 B.R. 529, 538 (Bankr.D.Minn.1986) ("If a creditor fails to even minimally investigate the information contained in a debtor's financial statement, such a failure will be prima facie evidence that the creditor's reliance on that financial statement was unreasonable."); In re Bright, 57 B.R. 233, 235 (Bankr.N.D.Ohio 1986) (creditor bears duty to make reasonable inquiry as to information provided by financial statement); In re Kleinoeder, 56 B.R. 77, 78 (Bankr.N.D.Ohio 1985) (same); In re Aycott, 54 B.R. 578, 582 (Bankr.E.D.N.Y.1985) ("Reasonable reliance has not been found when a creditor failed to verify or investigate information given on a financial statement."); In re Bridges, 51 B.R. 85 (Bankr.W.D.Ky.1985) ("A creditor who ignores available information or who fails to seek information from sources that are commonly used should not be heard to complain about the debtor's fraud."); In re Hagedorn, 25 B.R. 666 (Bankr.S.D.Ohio 1982) ("plaintiff cannot conduct business without due care and then maintain that as a result of deception it extended credit"). See also Zaretsky, The Fraud Exception to Discharge Under the New Bankruptcy Code, 53 Am.Bankr.L.J. 253, 262 (1979) (if creditor fails to verify debtor's statements, "it is the creditor's failure to comport with normal business practices, not the debtor's fraud, that is the true cause of the loss.").
. At any rate, criminal law, rather than bankruptcy law, should be the primary deterrent to credit card fraud. The vast majority of consumer-debtors are unaware of the specific provisions of bankruptcy law and cannot be deterred by changes in dischargeability requirements. See 1 J. Fonseca & P. Teachout, Handling Consumer Credit Cases, 428 (2d ed. 1980); Ziegler, 38 Stan.LRev. at 902 n. 49-50.