Chronic gambling destroys the life of gamblers and their families—wasting wages, squandering saving, and incurring devastating debt. Chronic gamblers who risk their family’s financial well being do so because of a bad habit, destructive addiction, or dangerous disease. Gamblers are now bombarded by a record number of legalized gambling alternatives: riverboats, lotteries, casinos, internet, horse racing, off-tract betting, etc.
Gamblers frequently generate gambling money by taking cash advances from credit card accounts. Unsuccessful gamblers lose the gambling money and are then burdened with burgeoning credit card debts. All too often, gamblers take additional cash advances from credit card accounts hoping to pay the mushrooming debt from future winnings. Instead, the destructive cycle continues and the debt deepens until the gambler and family are financially destroyed.
Luckily, a gambler’s luck changes upon filing Chapter 7 bankruptcy. Gamblers can discharge credit card debts and gain a "fresh start" in life by seeking Chapter 7 bankruptcy relief. With professional counseling and legal help, a gambler can then start a new life and focus on bettering the family and the family’s financial position. Most Chapter 7 cases result in gamblers retaining all their assets while their credit card debts are discharged — with no payments being made to creditors.
Chapter 7 of the US Bankruptcy Code (the "Code") provides the basic procedure designed to give gamblers or "debtors" a fresh start in life by jettisoning the accumulated burden of oppressive gambling-related credit card debts. See 11 USC Section 701 et seq. Debtors will be discharged from unpaid gambling-related credit card debts. Thereafter, debtors have no further obligation to pay credit card debts and credit card creditors are forever enjoined from enforcing claims.
Judge Ginsberg of the US Bankruptcy Court for the Northern District of Illinois stated in a scholarly treatise: "A discharge voids any judgment, whenever obtained, that determines the personal liability of the debtor on any discharged debt; enjoins any judicial or non-judicial action to collect, recover or offset any discharged debt as a personal liability of the debtor; and enjoins the collection of certain claims against the debtor’s community property". Ginsberg & Martin on Bankruptcy, Fourth Edition, Section 11.01(B).
It is important to note that gambling-related debts should not be treated any differently than other debts legally incurred by citizens who lack the ability to repay. Everyday millions of credit card users add to their already oppressive debt burden despite lacking the ability to repay. Nonetheless, credit card creditors are nearly silent when non-gamblers who are loaded with debt buy excessive clothing, take fancy vacations, or purchase expensive computers and big-screen televisions. In fact, non-gamblers who are grossly in debt often receive unsolicited credit card applications encouraging them to go deeper into debt.
Gamblers should be treated no differently than the debtors described above. Certain forms of gambling are legalized and are favored by public policy (a radical change from prior generations). Legalized gambling is hyped as a source of jobs (i.e. off-tract betting), as a source of revenue for government (i.e. Lotto proceeds used for education), and as a form of entertainment (i.e. riverboats). In the sense that gambling is a legitimate business, gambling losses should be looked upon as an excess similar to other excesses associated with living beyond one’s means. A gambler who finances excess gambling losses through the use of a credit card, is no different from a debtor who finances an excessive life-style through the use of a credit card — both incur debt they cannot afford.
FOCUSING ON GAMBLING
This article focuses on the "dischargeability" of an individual gambler’s credit card debts by analyzing attacks made by credit card issuers attempting to subvert the discharge provisions applicable to gambling debts. The beginning point is a simple declaration that all gambling debts are dischargeable unless challenged by adversary proceeding. Moreover, there is simply no statutory authority expressing stating that gambling debts are non-dischargeable. Consequently, gambling debt is not per se non-dischargeable.
The scope of a gambler’s discharge is not boundless however. The Code does provide statutory authority for denying the discharge of certain debts. For example, Code Section 523 identifies exceptions to the fresh-start, discharge rule and deems these exceptions "non-dischargeable" debt, which must be pay. See 11 USC Section 523.
Therefore, credit card creditors objecting to a gambler’s discharge typically utilize Section 523 as a sword attempting to render some or all gambling-related cash advances non-dischargeable. Section 523(a)(2)(A) is the sharpest sword because of its broad statutory language regarding "false pretenses, a false representation, or actual fraud". This Code subsection reads that an individual gambler is not discharged from any particular debt for money, property, services or an extension, renewal, or refinancing or credit, to the extent obtained by false pretenses, a false representation, or actual fraud.
Therefore, the central issue is whether a gambler’s use of credit card cash advances constitutes false pretenses, a false representation, or actual fraud. While the statutory language appears clear, the interpretation and application of the law has been cloudy. The judges in the Northern District of Illinois have addressed this issue on a case-by-case basis with rulings based on the facts and circumstances of each case.
STANDARDS FOR ATTACKING DISCHARGEABILITY
The public policies underlying the Bankruptcy Code encourage a "fresh start" for gamblers and require that exceptions to discharge be strictly construed against creditors and in favor of a fresh start for gamblers. AT&T Universal Card Services v. Alvi, 191 B.R. 724, 728 (Bankr. N.D. IL 1996)(Ginsberg, J.). The party seeking to establish an exception to the discharge of debt bears the burden of proof—that burden is a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279 (1991); In re Robert Sheridan, 57 F.3d 627, 633 (7th Cir. 1995). The "discharge" feature is essential to the notion of a fresh start. AT&T Universal Card Services v. Alvi, 191 B.R. 724, 728 (Bankr. N.D. IL 1996)(Ginsberg, J.).
Section 523(a)(2)(A) provides that a Chapter 7 discharge will not discharge a gambler from any debt "for money, property, services, or any 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 [gambler’s] or an insider’s financial condition." 11 USC Section 523(a)(2)(A).
Courts have held that a single test for dischargeability must be applied even though Section 523(a)(2)(A) lists three separate grounds for dischargeability: actual fraud, false pretenses, and false representation—despite the elements of each being different under common law. First National Bank of Red Bud v. Kimzey, 761 F.2d 421, 423-24 (7th Cir. 1985); Citibank v. Michel, 220 B.R. 603, 604 (N.D.IL 1998)(Aspen, Chief J.); AT&T Universal Card Services v. Alvi, 191 B.R. 724, 728-729 (Bankr. N.D. IL 1996)(Ginsberg, J.). The Seventh Circuit readdressed the single-test issue in 1994, but declined to invalidate the test as a whole or to establish three separate tests for actions brought under one or more of the three types of fraudulent acts specified in Section 523(a)(2)(A). See Mayer v. Spanel International Ltd., 51 F.3d 670 (7th Cir. 1994).
The following test is applied to Chapter 7 gambling debt dischargeability cases:
1. False Representation: the credit card creditor must prove that the gambler made a false representation through which the gambler obtained money;
2. Knowledge: the credit card creditor must prove that the gambler either knew the representation was false or made with such reckless disregard for the truth as to constitute willful misrepresentations;
3. Scienter: the credit card creditor must prove that the gambler possessed scienter (i.e. intent to deceive); and
4. Justifiable Reliance: the credit card creditor must show that it actually relied on the gambler’s false representation and that creditor’s reliance was justifiable.
The remainder of this article analyzes separately the frequently disputed elements of the test. Cases from the Northern District of Illinois are presented only.
a. False Representation
Judge Ginsberg addressed the "representation" issue in the must read Alvi case. AT&T Universal Card Services v. Alvi, 191 B.R. 724, 731-732 (Bankr. N.D. IL 1996)(Ginsberg, J.). The Alvi Court addressed the issue of whether a gambler makes an actual "representation" by incurring a credit card charge. In Alvi, a credit card issuer brought an adversary proceeding to except from discharge the gambler’s obligation for cash advances obtained for gambling at a local casino. Judge Ginsberg declared that the use of a credit card to incur debt in a typical credit card transaction involves no representation at all, express or implied. The Alvi Court further stated that the use of a credit card to incur debt by itself is incapable of being true or false. Judge Ginsberg analyzed and rejected other courts’ holdings that the use of credit cards constitutes an "implied representation," noting that the majority of courts that accept the implied representation theory had failed to consider the NSF check cases and the US Supreme Court’s decision in Williams v. United States, 458 US 279 (1982).
However, other courts have ruled contrary to Judge Ginsberg. For example, Judge Squires held that the use of a credit card is an implied representation to the card issuer that the user has the means and the intent to repay the debt being incurred. FCC National Bank v. Phillips, 1994 WL 168279 (Bankr. N.D. IL 1994)(Squires, J.); See also FCC National Bank v. Berz, 173 B.R. 159, 162 (Bankr. N.D.IL 1994)(Schmetterer, J)(use of a credit card implies a representation of intent and ability to pay).
But Judge Barliant expressly disagreed with the implied representation cases that hold that the use of a credit card is also an implied representation of the means to pay. Chase Manhattan Bank v. Murphy, 190 B.R. 327, 332 (Bank. N.D.IL 1995)(Barliant, J.). Judge Barliant believed that one of the principal reasons people pay by credit card is a present lack of ability to pay. Consequently, Judge Barliant believed the credit card use represents debtor’s intent to pay only. Judge Conlon issued a consistent ruling in First National Bank of Lincolnshire v. Cloud, 107 B.R. 156, 159 (N.D.IL 1989)(Conlon, J.).
The "scienter" (or intent to deceive) element appears to be the most frequently litigated element. Chief Judge Aspen of the District Court addressed the "scienter" element issue asking "did the gambler intend to deceive" the credit card issuer when the gambler took cash advances in Citibank v. Michel, 220 B.R. 603, 604 (N.D.IL 1998)(Aspen, Chief J.). The Michel Court adopted a subjective test and stated that a bankruptcy judge must evaluate the subjective intent of a gambler when faced with a dischargeability issue. Judge Aspen believed that there is no fraud when a person makes a representation that the person sincerely believes is true. The Michel court expressly rejected the contrary position taken by some bankruptcy courts that have found debtors to have committed fraud merely because they lacked an objectively reasonable basis for believing that they could repay their debts. Such an approach, according to Judge Aspen, distorts the meaning of fraud. Id. At 606.
Judge Ginsberg of the Bankruptcy Court also addressed the "intent" issue in AT&T Universal Card Services v. Alvi, 191 B.R. 724, 732-733 (Bankr. N.D. IL 1996)(Ginsberg, J.). The Alvi Court noted that a gambler’s opportunity to obtain a fresh financial start would be negatively impacted if gamblers would be denied discharge because of unintentional or wholly immaterial misrepresentations having no effect on a creditor’s decision to extend credit. Congress clearly did not intend to have gamblers emerge from bankruptcy saddled with a mountain of nondischargeable credit card debt incurred by gamblers with absolutely no intent to defraud their respective credit card lender.
Judge Ginsberg therefore adopted a subjective test regarding a gambler’s intent to repay credit card debts. A subjective test requires an inquiry into the gambler’s state of mind at the time of the representation. The Court expressly rejected an objective test that equates (i) the inability of a gambler to repay the debt at the time of the transaction with (ii) the lack of intent to pay. Judge Ginsberg stated he would allow a discharge to gamblers who honestly, but mistakenly, believed that they would have the ability to repay their debts. The Court noted that care must be taken to stop short of a rule that would make every desperate, financially strapped gambler a guarantor of his ability to repay.
This "subjective" test has been also adopted by other bankruptcy courts in the Northern District of Illinois. See Chase Manhattan Bank v. Murphy, 190 B.R. 327, 332-333 (Bankr. N.D.IL 1995)(Barliant, J.) (inquired into the gambler’s state of mind at the time of the representation and determined that a chronic gambler and speculator had intended to repay debt and believed, however unreasonably, that gambler would have the means to do so from gambling winnings and other speculative investments).
c. Justifiable Reliance
Justifiable reliance is the last element that must be proved by a credit card issuer trying to attack a gambler’s discharge. The Supreme Court rejected the "reasonable" reliance standard in favor of a "justifiable" reliance standard. Field v. Mans, 116 S.Ct. 437, 439 (1995).
Judge Schmetterer has held that the use of a credit card implies a representation by debtor that debtor intends to pay, and the creditor relies on such implied representation. Chase Manhattan Bank v. Williams, 85 B.R. 494, 496 (Bankr. N.D.IL 1988)(Schmetterer, J.).
Judge Ginsberg on the other hand rejected the implied reliance theory in AT&T Universal Card Services v. Alvi, 191 B.R. 724, 731 (Bankr. N.D. IL 1996)(Ginsberg, J.). There, Judge Ginsberg held that credit card creditors must first prove that they actually relied on a gambler’s representations. Id. at 731. The Alvi Court further ruled that a credit card issuer’s act of passively extending credit does not constitute reliance on individual instances of card usage. Id. at 729-730. Judge Ginsberg stated that it could hardly conceive why such reliance, if it did exist, should always be justifiable. Therefore, the Alvi Court ruled that a credit card issuer cannot sit back and do nothing and still meet the standard for actual and justifiable reliance when the issuer had an opportunity to make an adequate examination or investigation. Judge Ginsberg granted the gambler’s motion for a judgment on partial findings because the credit card issuer failed to present any evidence indicating any reliance in fact on representations.
Judge Ginsberg also stated that a court cannot just assume the credit card issuer actually relied on any alleged representation (i.e. implied) by a gambler in doing business with the gambler. Id.at 731-732. In fact, the Alvi Court noted that case law indicates that some credit card issuers don’t rely on applicants’ "representations" at all, choosing not to prevent the use and abuse of their cards. Instead, these issuers calculate the attendant risks and allow consumers relatively free reign with their cards and credit limits. Quoting a 11th Circuit case, Judge Ginsberg stated "Banks are willing to risk nonpayment of debts because that risk is factored into finance charges." Citing First National Bank of Mobile v. Roddenberry, 701 F.2d 927, 932 (11th Cir. 1983).
Chronic gamblers should seek professional help. Risking family and financial ruin is a bet no gambler should take. Professional counseling can help gamblers cope with a bad habit, a destructive addiction, or a dangerous disease. Bankruptcy lawyers also can help chronic gamblers recover from financial ruin and regain a fresh start for gamblers and families by discharging gambling debts.
Robert Schaller is a bankruptcy attorney practicing in Oakbrook Terrace. He graduated from the University of Illinois and DePaul University. Bob also studied for an MBA at the University of Chicago. He is a CPA and a member of the Brief editorial board.