There has been considerable attention, both in the media and among our various credit card clients, to the rise in popularity of gambling casinos as a revenue source for credit card issuers and users. This has created a very significant issue in the bankruptcy court in the context of objecting to a discharge where a debtor has withdrawn cash advances on their credit card within a short period of time prior to filing bankruptcy. There has been an attempt by creditors to show that this is a fraud upon the credit card grantor because the debtor did not have an intent to make payment, and therefore, the debt should be nondischargeable. There are several cases that have been adjudicated not only in our district, but in other districts throughout the federal system. Unfortunately, the courts have held that unless there is a definitive showing of intent not to pay back the funds, the debt is dischargeable. Let's review a few of the significant cases that have been decided in the various bankruptcy courts.
Bad Faith and Intent to Defraud
In the case of In Re Anastas the cardholder made charges of $40,000.00 over a six month period to finance his gambling habit and made very minimal payments on his balance. The court held that the debt was dischargeable despite the debtor 's purported insolvency and in spite of the fact that very minimal payments were made. The court stated that the helpless state of the debtor's financial condition should never become a substitute for an actual finding of bad faith and intent to defraud. In this particular case, the debtor used his credit card to receive cash advances in order to gamble at a casino. The issuer of the card in this case objected to dischargeability of the credit card debt pursuant to sec. 523 (a)(2)(A), which provides that any debt for money obtained by false pretenses, false representation or actual fraud is nondischargeable. It was undisputed at the initial trial that the debtor was insolvent and used the money for gambling and could not pay all of his credit card minimum payments when they became due. In addition, there was testimony that the debtor did make some minimum payments on his credit card. The debtor testified that he always intended to pay off his debt from his winnings. The court held that the debt was dischargeable.
The court in it's opinion stated that there must be a showing that the debtor lacked the intent to repay the debts on a timely basis. When a person gambles they always have an intention of paying back the debt because they intend to win. The court held that there was a lack of showing of actual intent to defraud. The court further held that the credit card debt was incurred over a six month period in which the debtor made some monthly payments; that there was no evidence of a check kiting scheme and that the debtor stated that he contacted the credit card grantor in an attempt to work out payments as an alternative to repaying the entire credit card debt at one time. The debtor testified that he always possessed the intent to repay his credit card debts with his winnings, but that he had a gambling addiction which lead him into an unexpected financial circumstance. Based on these factors, the 9th Circuit found that such behavior is inconsistent with the intent to incur a debt without repaying it and that the record of the hearing fully supports the debtor's good faith intention to do so.
The Importance of Intent
A Wisconsin case which discusses the above issue is In Re Briese 196 Bankruptcy Report 440 (Western District of Wisconsin 1996). The court held that the debtor did not act with intent to deceive the credit card grantor when she obtained cash advances to fuel her gambling fever and the creditor did not establish justifiable reliance on the debtor's alleged misrepresentations. The court rejected the use of a credit card as an implied representation that the holder has both the intent and the ability to pay. The court held that the debtor's representation by the implied use of the credit card is not actionable as fraud unless the creditor proves that the debtor acted with the intent to deceive when the charges were incurred and the representation made. There is an assumption that when one gambles, and uses money from credit card withdrawals to gamble, that they have an intention of winning. Therefore, there is not an intent to defraud or deceive anyone.
In another case in Illinois, In Re Christensen, 193 Bankruptcy Report 893 (Northern District of Illinois 1996), the debtor's use of a credit card is not an implied representation of an ability to pay debts in that consumers generally rely on credit cards because they lack a present ability to pay. Instead, the use of a credit card is more likely a representation that the debtor will pay off the debt at some point in the future. Although the debtor couldn't pay his credit card debts when they became due, he didn't possess a fraudulent intent when the charges were made. This theory is applied to a gambling debt as well.
All of these cases raise new questions including;
- does the credit card issuer have an affirmative duty to restructure its credit card debt if the debtor attempts to make withdrawals no matter how unreasonable;
- does the credit card issuer need to obtain expert testimony to discuss gambling as an addiction in order to rebut the unexpected financial circumstances;
- what is the ability of the credit card issuer to immediately terminate a charge incurred at a casino for fear that the debt will be discharged if it remains unpaid, and
- should the credit card grantors not allow casino cash withdrawals.
Based on the decisions referenced above, it may be important that some sort of reform is needed to address the gambling predicament.