Court Opinion

ID: 9478188
Source: CourtListenerOpinion
Date Created: 2023-08-05 06:42:32.226839+00
Date Added: 2024-06-11T17:46:17.387051
License: Public Domain

MERRITT, Circuit Judge,
dissenting.
The essence of the decision here, as well as the decision in First National Bank of Mobile v. Roddenberry, 701 F.2d 927 (11th Cir.1983), and other similar decisions cited by the Court, is found in the Court’s statement that the issuing bank’s “reliance” on the holder’s “misrepresentation [of his intent to pay the Master Card charges] was unreasonable as a matter of law.” (Op., p. 1084) “Reliance” is said to be “unreasonable” because the bank ran no credit check on its holders. Without a credit investigation, the bank was “unreasonable” to expect or assume that any particular cardholder’s promise to reimburse the bank was made honestly and in good faith. According to the Court, it is “negligent” to rely only on statistics that a high percentage of Master Card holders will act honestly to repay their debts and to cover losses from untruthful promises by dishonest debtors by charging all cardholders a higher rate of interest. There can be no reliance because the “risk is factored into the finance charges.” Opin. 1085. Without a credit check, the bank “assumes the risk” of dishonesty. Id. Thus, the Court holds that these “negligent” banks do not rely on the truthfulness or honesty of any particular debtor’s promises. The line of reasoning concludes that the element of “reliance” is absent and thus there can be no nondis-chargeable “fraud” under § 523(a)(2)(A) of the Bankruptcy Code.
The Court made its first mistake in its first paragraph by assuming that the cardholder, Ward, made representations or promises on which the bank relied when he applied for the card in the fall of 1984. It assumes incorrectly that a contract was formed based on these representations when the bank issued the card. The Court states — contrary to the facts of the case— that the card was “issued as a result of false representations made by Ward in his application for the credit cards” and that “it was undisputed that Ward ... misrepresented his financial capability upon the application ... intending to deceive.” Opin. 1083. The application contained only a few pieces of information, as follows:
Terry P. Ward
821 Exmoor Drive HANOVER TRUST MasterCard card
Cincinnati, OH 45240 immediately!
Approved
$2000.00 Credit Line
Offer Expires: November 2, 1984
App. 80. The credit cardholder misrepresented nothing at this point. The credit cardholder made no representations, and no contract was made when the bank “issued” the card later. When the card was issued, it was accompanied by a form containing stipulations concerning the use of the card, the calculation of finance charges and the fact that the bank may terminate the credit arrangement at will. App. 74-75.
The Court, like the Eleventh Circuit in Roddenberry, supra, reasons that the negligent bank’s “unreasonable reliance” on the holder’s conduct and intent takes place at the time it approves the application and issues the credit card, rather than at the time the credit card is used and the bank is required to pay the third party supplier. Since the bank assumed the risk of nonpayment by the holder, the bank’s payment of the holder’s purchases does not constitute reliance.
This characterization is based on an incorrect analysis of the contractual relationship. When an issuer of a credit card, like MasterCard, Visa or American Express, sends to the holder the card and the form describing the terms for its use, it makes “an offer [for] ... the formation of a number of contracts by successive acceptances from time to time,” as the card is used. Restatement (Second) of Contracts § 31 (1981). “A standard example of a divisible offer is the continuing guaranty, the promise to guarantee performance of obligations of a specified type as a third party may *1087incur to the offeree from time to time.” Id., Comment b. The credit card relationship, properly analyzed, should be viewed as an offer by the issuer to create the opportunity for a series of unilateral contracts which are actually formed when the holder uses the credit card to buy goods or services or to obtain cash.
The several state courts which have analyzed the contractual relationship with care have adopted this line of reasoning. They hold that a contract is not formed when a credit card is issued but rather unilateral contracts are formed each time the card is used. Garber v. Harris, 104 Ill.App.3d 675, 60 Ill.Dec. 410, 412-13, 432 N.E.2d 1309, 1311-12 (1982); Novack v. Cities Service Oil Co., 149 N.J.Super. 542, 374 A.2d 89 (1977); City Stores Co. v. Henderson, 116 Ga.App. 114, 156 S.E.2d 818, 823 (1967).
No bilateral contract is formed when the card is issued, as the Court appears to suggest. Thus the questions of fraud and reliance turn on the honesty of the cardholder’s intent and of the holder’s representations made at the time the card is used, not when it is issued. Most bankruptcy courts which have considered this issue have adopted this same reasoning and have held that the cardholder makes an implied representation at the time he uses the card that he has the ability and intent to pay the issuing bank for his purchases. See In re Dougherty, 84 B.R. 653, 17 B.C.D. 590, 592 (9th Cir. BAP 1988); In re Faulk, 69 B.R. 743, 752 (Bankr.N.D.Ind.1986); American Bank and Trust Co. v. Lipsey, 41 B.R. 255 (Bankr.E.D.Pa.1984). The Court does not allude to or attempt to answer this argument.
In the instant case, the Bankruptcy Court found that the cardholder had a dishonest intent not to pay and acted in bad faith when he used the card. App. 69. Obviously, the issuing bank “relied” on the holder’s good faith use of the card because it paid the debt created when the card was used. See In re Turner, 23 B.R. 681, 685 (Bankr.D.Mass.1982); Matter of Schnore, 13 B.R. 249, 257 (Bankr.W.D.Wis.1981). In traditional contract terms, the issuing bank changed its position by making payment in the expectation of reimbursement by the cardholder debtor who profited at the bank’s expense. Thus all three of the interests — change of position, expectation, and restitutionary unjust enrichment — that underlie the reliance concept are present. See Fuller and Perdue, The Reliance Interest in Contract Damages, 46 Yale L.J. 52, 54 (1936). Neither does the Court allude to or attempt to answer this argument concerning the fundamental elements of reliance.
The three party nature of the credit card arrangement may appear on the surface to affect the analysis of the issuing bank’s reliance. Three parties are involved in a credit card transaction — the issuer, holder and supplier — and each of them has separate obligations. See generally Maffly and McDonald, The Tripartite Credit Card Transaction: A Legal Infant, 48 Calif.L. Rev. 459 (1960); Wohl, Three Party Credit Card Transactions: Legal Rights and Duties, U.C. Davis L.Rev. 357 (1969). In a sense, the issuing bank may have a preexisting duty, via an agreement, to pay the supplier for the holder’s purchase regardless of the holder’s intent. But the fact that the issuing bank may have a preexisting duty does not alter the fact that the bank relied on the holder’s honesty in paying the third party. A preexisting duty to a third party creditor on a guaranty does not alter the reliance of a guarantor on the principal debtor’s promise to reimburse the guarantor. See Restatement (Second) of Contracts §§ 73, 88. There is no reason this principle of contract law respecting payments to a third party should be changed in the credit card context.
Thus the issuing bank relied on the holder’s dishonest representation of his intent to pay when the MasterCard was used. All the elements of dishonesty and fraud under this Circuit’s recent interpretation of § 523(a)(2)(A) of the Bankruptcy Code in In re Phillips, 804 F.2d 930, 933 (6th Cir.1986), are present, and the debt should not be discharged. To hold otherwise is to alter the fundamental principle of contract law that contracting parties are entitled to assume and rely on the good faith and honesty of those with whom they deal in the marketplace. “Every contract imposes *1088upon each party a duty of good faith and fair dealing in its enforcement." Restatement (Second) of Contracts § 205; see also Uniform Commercial Code § 1-203 (same). The effect of the Court’s decision, unfortunately, is to reward dishonesty and bad faith in the making of contracts.
The Court’s additional point that the bank factors into its interest rate and finance charges the risk of loss from dishonesty and nonpayment does not alter the analysis. Lenders normally factor into their finance charges the risk of loss along with the nominal rate of interest applicable to the duration of the particular loan in question. This is true whether the loan is to the government, a blue-chip corporation or a consumer. The Court does not deal with this fact.
The Court’s observation that the bank “assumed the risk” of dishonesty and therefore could not rely on the cardholder’s implied promise of repayment (Opin. 1085) improperly imports a tort concept into contract theory. Contract theory puts the question in terms of “actual reliance” and “justifiable reliance.” Here there was actual reliance on the cardholder’s good faith just as in other contract arrangements. There is no evidence or information presented in the record that would lead to the view that issuers of credit cards may not rely on the good faith of the promisor in extending credit. The idea that lenders may not rely on a definite promise of repayment in the absence of particular credit information has no precedent in contract theory and should not be adopted. The Court’s interpretation of the Bankruptcy Code is completely contrary to the historical development of contract law.
The Court’s last point, that a contrary rule on discharge in bankruptcy prefers credit card issuers to other creditors (Opin. 1085), is also mistaken. Any other creditor whose extension of credit was induced by fraud will receive the same treatment accorded the credit card issuer. Section 523(a)(2)(A) on discharge distinguishes between transactions based on fraud and other transactions. All credit induced by fraud receives the same treatment. The Court does not try to deal with this obvious inconsistency in its argument.
Finally, it should be pointed out that the Court's analysis would lead logically to the unsound conclusion that there was no consideration “bargained for” between the issuing bank and a particular MasterCard holder, and therefore no obligation or contract was formed when the holder used the card to secure a benefit in a transaction with a third party supplier or in a transaction directly with the issuing bank. If the issuing bank may not rely on a particular holder’s implied promise to pay when the MasterCard is issued, there is no valid consideration for the contract and hence no enforceable obligation.
It is elementary that in order for there to be a contract there must be an “exchange of consideration”: “To constitute consideration, a performance or a return promise must be bargained for.” Restatement (Second) Contracts § 71. If there is no reliance or expectation that a particular promise or performance by a contracting party will take place, the consideration — in the language of the Restatement of Contracts — is not “bargained for” because
the consideration and the promise bear a reciprocal relation of motive or inducement: the consideration induces the making of the promise and the promise induces the furnishing of the consideration.... [A] mere pretense of bargain does not suffice, as where there is a false recital of consideration or where the purported consideration is merely nominal. In such cases there is no consideration and the promise is enforced, if at all, as a promise binding without consideration. ...
Id. at Comment b.
Unless there is some consideration other than the cardholder’s promised intent to pay when the card is used, consideration is missing, and the contract is voidable. Here there was no other consideration in the form of an application fee or other payment made when the card was issued. The only consideration was the consumer’s promise to pay which the Court holds may not be relied on as part of the bargained for exchange.
Thus the ingredient of “reliance” on a representation which supports one of the *1089elements of fraud is essentially the same ingredient that supports the “bargained for” element of consideration. If reliance is missing, consideration is missing. The reciprocal relationship necessary for a contract does not exist. There is no debt on a contract, and the credit cardholder has no contractual duty to pay, only perhaps a restitutionary or other noncontractual duty. Again the Court does not attempt to deal with the inconsistency of its argument in this respect.
Many holders of the 250,000,000 American Express, MasterCard and VISA cards in the United States, see New York Times, Sunday, June 26, 1988, p. 23F, will be happy to know that all they have to do to avoid paying their just credit card debts to the issuing bank in the future is to develop a present intent not to pay any of the debts incurred by using their cards. The logical result of the Court’s reasoning that issuing banks do not rely on the honesty of the debtor in the absence of a credit check is that consideration is missing; and the contract is, therefore, voidable. Such a result would undermine credit cards as a medium of exchange and call into serious question billions of dollars of consumer and other indebtedness.
For the reasons set out above, the Court’s reasoning and analysis should be rejected.