Presented
by
PETER B. STEIN
STEIN & MOORE
SAINT PAUL, MINNESOTA
| Eric
Sherburne Stein & Moore St. Paul, Minnesota |
Marie
Martin Hoglund Chwialkowski Greeman & Bergmanis Roseville, Minnesota |
| Christopher
Camardello Winthrop & Weinstine Minneapolis, Minnesota |
Stephen
J. Creasey U.S. Bankruptcy Court Minneapolis, Minnesota |
I. PRE-SUIT MATTERS
A. PLAINTIFF’S DUE DILIGENCE
1. Inquiry letter (See sample in Appendix)
2. Plaintiff’s decision-making regarding commencing the case
3. Background documents
B. WHAT HAS THE DEBTOR DONE?
1. Sources of information:
Schedules; Statement of Financial Affairs; Debtor’s card usage patterns
2. Admissions (e.g., at § 341)-
A creditor or a representative of a creditor may appear and examine the debtor
at the § 341 meeting without representation by an attorney. See
11
U.S.C. § 343. You should give the Trustee notice prior to appearing
if you believe your questions will be lengthy and/or you intend to have a court
recorder present.
II. COURT PROCEDURE – PRETRIAL
A. TRUNCATED TIMELINE
1. Approximately 6 months from date of filing to date of trial.
2. Some Dos and Don’ts
a. Do
i) READ THE LOCAL RULES
ii) Serve the Complaint - The failure to promptly serve a complaint could result
in dismissal of the case. See FED.
R. CIV. P. 4(m) made applicable to adversary proceedings by FED.
R. BANKR. P. 7004.
iii) File the Certificate of Service IMMEDIATELY after service
of the complaint - Failure to timely file a certificate of service may delay
your trial date.
iv) File your answer IMMEDIATELY AFTER SERVICE - 30 days after
service of the Summons and complaint the court will often scheduled a matter
for trial. Cases in which an answer is filed are usually scheduled separately.
If you serve an answer, but do not file it, the scheduling clerk treats it as
if no answer was served and you will be scheduled on the same date with several
other trials.
v) If no answer is served - FILE YOUR MOTION FOR DEFAULT JUDGMENT - Please do
not wait until the trial date to file for a default.
b. Don’t
i) File your certificate of service electronically before a summons is issued-its
embarrassing.
ii) When you electronically file your “certificate of service” please
file it as a “certificate of service” and not as an “affidavit.”
iii) Don’t file a notice of appearance-it is unnecessary in an adversary
proceeding.
B. SCHEDULING ORDER
1. Differences among Judges (See Appendix for Examples of Forms)
a. Chief Judge Gregory F. Kishel - St. Paul, Duluth
b. Judge Nancy C. Dreher - Minneapolis
c. Judge Robert J. Kressel - Minneapolis, Duluth
d. Judge Dennis D. O’Brien - St. Paul, Fergus Falls
2. Extensions - Discovery & motions deadlines- trial dates - Don’t
wait until the last minute to ask. Ask opposing counsel if they would agree
to an extension of time before you make the request to the court.
In your request for an extension please inform the court whether opposing counsel
consents or objects to the extension. If counsel objects, the court may request
that you file a motion for extension of deadlines.
III. SUBSTANTIVE LAW — 11 U.S.C. § 523(a)(2)(A)
A. BURDEN OF PROOF
Creditors seeking such relief bear the burden to affirmatively prove facts to
satisfy all of the recognized elements of their exceptions. In re Scarborough,
171 F.3d 638, 641 (8th Cir.1999); First Nat'l Bank v. Pontow, 111 F.3d
604, 608 (8th Cir.1997). Proof must be by a preponderance of the evidence. See
Grogan v. Garner, 498 U.S. 279 (1991).
B. LAW OF FRAUD
The creditor must make an affirmative showing, by direct or strong circumstantial
evidence, that the defendant intended to induce reliance on the part of the
plaintiff, knowing of the falsity of the representation or pretense. In
re Moen, 238 B.R. 785, 791 (B.A.P. 8th Cir. 1999). See also Star Bank,
N.A. v. Stearns (In re Stearns), 241 B.R. 611 (Bankr. D. Minn.
1999)(Copy in Appendix).
1. Representation - Past or present fact capable of being known
2. Materiality
3. Falsity
4. Intent to deceive
5. Actually relied on by Plaintiff
6. Justifiably relied on by Plaintiff - See Field v. Mans, 516 U.S
59 (1995)
7. Causing damages to Plaintiff
C. APPLICABILITY OF FRAUD LAW TO CREDIT CARD CASES
1. Multiple schools of thought
2. The “Dougherty factors” (non-exclusive). See In re Dougherty, 84 B.R. 653 (B.A.P. 9th Cir. 1988)(although Dougherty was critized on other grounds by the Supreme Court in Grogan v. Garner, 498 U.S. 279 (1991), the “Dougherty factors”are still used by courts in the Eight Circuit, including Judge Kishel in the Stearns case referenced above and by the Bankruptcy Appellate Panel in Universal Bank, N.A. v. Grause (In re Grause), 245 B.R. 95, 98 (B.A.P. 8th Cir. 2000))(copy in Appendix) .
a. The length of time between the charges made and the filing of bankruptcy;
b. Whether or not an attorney has been consulted concerning the filing of bankruptcy
before the charges were made;
c. The number of charges made;
d. The amount of the charges;
e. The financial condition of the debtor at the time the charges are made;
f. Whether the charges were above the credit limit of the account;
g. Whether the debtor made multiple charges on the same day;
h. Whether or not the debtor was employed;
i The debtor's prospects for employment;
j. The financial sophistication of the debtor;
k. Whether there was a sudden change in the debtor's buying habits; and
l. Whether the purchases were made for luxuries or necessities.
3. Areas of focus
a. Intent to deceive/debtor’s state of mind
i) Proven by circumstantial evidence, often financial in nature - "The
intent element of § 523(a)(2)(A) does not require a finding of malevolence
or personal ill-will; all it requires is a showing of an intent to induce the
creditor to rely and act on the misrepresentations in question." In
re Swan, 156 B.R. 618, 623 n. 6 (Bankr. D. Minn.1993) (citing In re
Hunter, 771 F.2d 1126, 1129 (8th Cir.1985))
ii) “Inability to repay” as indirect, circumstantial evidence of
absence of “intent to repay”-credit card use is coupled with something
more than debtor's subsequent inability to repay debt; evidence must be presented
from which court can draw inference of intent not to repay. See In re Sigrist,
163 B.R. 940 (Bankr. W.D.N.Y. 1994).
iii) Other evidence - i.e. consultation with a lawyer before their excessive
charges at Home Depot. Citibank v. Hale (In re Hale), 274
B.R. 220, 223-224 (Bankr. E.D. Va. 2001)
b. Reliance/Plaintiff’s “state of mind”
i) Did plaintiff rely?
“Actual reliance, the representation at issue is the intent to pay the
loan obtained through card-use. The fact that an issuer based its card-issuance
decision on its investigation of the debtor's creditworthiness does not preclude
the issuer from relying also on the debtor's subsequent card use.” AT
& T Universal Card Services v. Mercer (In re Mercer), 246
F.3d 391, 403, 414-15 (5th Cir. 2001); see also Manufacturer's Hanover Trust
Co. v. Ward (In re Ward), 857 F.2d 1082, 1088-89 (6th Cir.1988)
ii) Justifiably?
Universal Bank, N.A. v. Grause (In re Grause), 245 B.R. 95,
102 (B.A.P. 8th Cir. 2000)(“Universal not only should have been aware
of Ms. Grause's dire financial condition, the evidence shows that Universal
was in fact aware of her financial troubles, particularly the activity which
Universal asserts evidences Ms. Grause's intent to defraud it.”)
c. Damages - Causally linked to debtor’s representations?
Section 523(a)(2)(A) requires a "direct link" between the alleged
fraud and the creation of the debt to be excepted from discharge.. Gem Ravioli,
Inc. v. Creta (In re Creta), 271 B.R. 214, 218 (B.A.P. 1st Cir.
2002).
D. APPLICATION OF THE LAW TO THE FACTS OF A CASE
1. Note this distinction: retail merchant cards (e.g., “Home Depot”)
vs. all- purpose card (e.g., “Visa”)
2. Broad range of fact patterns
a. Easiest pattern: debtor uses card to pay bankruptcy attorney, charges a
plasma TV, makes no payments, then files bankruptcy two weeks later
b. Multiple-card usage patterns
3. Usage patterns
a. This card
i) First payment default
ii) Prior usage, then rest, then use and payment default
b. Other cards
i) Minimal income but lots of card activity.
ii) Kiting. See In re Eashai, 87 F.3d 1082 (9th Cir. 1996)]
4. Other facts
a. Debtor’s income
i) Debtor’s expenses
ii) Other factors, including other cards
5. Gambling - See Star Bank, N.A. v. Stearns (In re Stearns), 241 B.R. 611, 624 (Bankr. D. Minn.1999) (debtor's persistent belief in salvation of "big win" was fatuous, but genuine);
6. Intervening events
IV. MANAGING THE CASE PRIOR TO TRIAL
A. RESPONDING TO THE COMPLAINT
1. Do nothing
2. File an answer
3. Explore additional bankruptcy options - e.g. Chapter 13
B. INFORMAL COMMUNICATIONS WITH OPPOSING COUNSEL
1. Explore settlement opportunities
2. Make a record for attorney fees.
Three elements must be present in order for an award of costs and attorney's
fees to be proper under 11 U.S.C. § 523(d):
(1) a request by a creditor for determination of dischargeability;
2) a consumer debt; and
3) the discharge of the consumer debt.
Once these three elements are present, it becomes the creditor's burden to show
that its case, or some part thereof, was substantially justified.
A creditor is not justified in continuing to pursue a case once it learns that
its position is not justified, even if the suit was originally filed in good
faith. Such a reading of the statute would all but emasculate the purpose of
section 523(d). Creditors could always contend they thought they had a good
case when they filed. Thus, the consumer debtor would be forced to settle rather
than fight it out. No, we think the better construction of 523(d) is that when
a creditor learns that it will not be able to prove its case, but continues
to pursue the case, it falls within the statute, and thus must pay the debtor's
attorneys' fees and costs.
Chevy Chase Fed. Sav. Bank v. Weinand (In re Weinand), 1991 WL 799, *1 (Bankr. D. Minn. 1990)(Dreher, J.)
C. MANAGING THE DEBTOR’S EXPECTATIONS
1. Procedure
2. Deposition
3. Outcome
D. DISCOVERY
1. Methods
a. Written
b. Oral
2. Objectives
a. Plaintiff to find out about debtor’s background, explanations, intervening
events, and credibility
b. If utilized at all, Debtor to find out about Plaintiff’s reliance,
including procedures regarding obtaining the card, using the card, and losing
charging privileges, and particular facts surrounding these particular transactions.
3. Discovery Disputes - See LOCAL RULE 7037-1
“No motion relating to contested discovery shall be heard unless it affirmatively
appears that the parties have conferred and attempted to resolve their differences.”
E. SETTLEMENT
1. Whether to settle: requires one to acknowledge a meaningful chance of an adverse outcome to the debtor
2. Options/terms
a. Ability to pay
b. Incentive to pay
c. Notice of default and opportunity to cure
3. Procedure
V. TRYING THE CASE
A. TRIAL PROCEDURE
1. Witnesses
2. Documents
Each of the four bankruptcy judges in Minnesota have slightly different practices
regarding exhibits. All require that exhibits be premarked in accordance with
the Trial order. You need to have an original set that will be available to
the witness that will become part of the record upon admission. You must have
copies for the opposing counsel, the presiding judge and the law clerk.
3. Burdens- In objections to dischargeability of a debt the burden on is on the creditor. See Waugh v. Eldridge (In re Waugh), 95 F.3d 706 (8th Cir. 1996).
B. ATTACKING THE PLAINTIFF — THE UNSYMPATHETIC PLAINTIFF
1. Challenge the probativity of plaintiff’s evidence
2. Attack the plaintiff itself
C. DEFENDING THE DEBTOR — THE SYMPATHETIC DEBTOR
1. Ennoble the debtor
a. Debtor as victim
b. Debtor as unsophisticated
c. Debtor as unknowing
2. The honest but unfortunate debtor
a. No evidence of intent to deceive
b. Evidence of honest intent
i) Absence of ill will toward plaintiff
ii) No benefit to debtor
D. TACTICAL DECISIONS - METHODS OF PERSUASION
1. Opening Statement
2. Closing Statement
3. Other choices