High Stakes Gambling on Dischargeability

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May 1998

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With the increasing popularity of riverboats, state-sanctioned lotteries and
land-based casinos, the issue of the dischargeability of gambling
debt is gaining importance. One research group suggests that about 10
percent of bankruptcy filings are linked to gambling losses, 20
percent or more of compulsive gamblers are forced to file bankruptcy
because of their losses, and upwards of 90 percent of compulsive
gamblers use their credit cards to
gamble.<a name="note2"></a><a href="#foot2">2</a>
Harvard Medical School researchers estimate that about 1.3 percent of
American adults have a gambling
disorder.<a name="note3"></a><a href="#foot3">3</a>
These figures are significant, considering that in 1997 more than 1.3
million consumer bankruptcy cases were filed. Congress has even
created a commission to study the social and economic consequences of
legalized
gambling.<a name="note4"></a><a href="#foot4">4</a>

Not so long ago, bankruptcy courts regularly found gambling debt
non-dischargeable. More recently, however, and perhaps as a
repercussion of the upsurge in legalized gambling in many states, the
courts are allowing discharge of this debt. Nonetheless, the
nation’s current climate of bankruptcy reform, coupled with the
increased frequency of gambling debt, portends an uncertain future
for the dischargeability of such debt. Legislatures’ apparent
schizophrenia—legalizing more gambling, yet condemning the
ever-increasing amount of consumer debt and the "ease" of its
discharge—adds to the confusion. This article summarizes the
current state of the law and forewarns of some proposed changes to
the
law.<a name="note5"></a><a href="#foot5">5</a>

Legalized gambling debt may be incurred when credit is extended by
riverboats and casinos directly to patrons. More commonly, gambling
debt may manifest itself as cash advances from credit cards. Debtors
seek to discharge this gambling debt under 11 U.S.C. 727. Creditors,
in turn, seek a determination of its non-dischargeability, typically
under §523(a)(2)(A), which excepts from discharge a debt "for
money, property, services, or an extension, renewal, or refinancing
of credit, to the extent obtained by false pretenses, a false
representation or actual fraud, other than a statement respecting the
debtor’s or an insider’s financial condition..."

<center><big>Many recent courts reach this result [finding gambling
debt dischargeable] by measuring a debtor’s intent to repay
subjectively rather than objectively.</big></center>

Fraud in this context means common law fraud based on an intent
not to repay the debt. Creditors must prove their reliance, to their
detriment, on a material misrepresentation that was intentionally
made. SeeField v. Mans, 516 U.S. 59, 116 S.Ct. 437, 133
L.Ed.2d 351 (1995). Creditors must prove each element of the fraud by
a preponderance of the evidence. Grogan v. Garner, 498 U.S.
279, 286, 111 S.Ct. 654, 659, 112 L.Ed.2d 755 (1991).

With credit card debt, proving a debtor’s misrepresentation
and a creditor’s reliance thereon is difficult because of the
lack of personal contact between the parties. Courts have responded
to this problem in different ways. Some bankruptcy courts have
adopted an "implied representation" theory, under which the use of a
credit card is an implied representation to the issuer of the
holder’s intent and/or ability to pay. See GM Card v. Cox,
182 B.R. 626, 633 (Bankr. D. Mass. 1995) (collecting cases yet
rejecting theory). Other courts have adopted an "assumption of the
risk" theory, which provides for the discharge of credit card debt
incurred before the issuer com-municates to the holder that it is
revoking the card. First National Bank of Mobile v.
Roddenberry, 701 F.2d 927, 932 (11th Cir. 1983) (Bankruptcy Act
case). Still other courts have adopted a "totality of the
circumstances" test, sometimes in conjunction with an implied
representation theory. See Household Credit Services Inc. v.
Jacobs, 196 B.R. 429, 433 (Bankr. N.D. Ind. 1996).

Case Law

Despite the theory articulated, earlier cases often found gambling
to be debt non-dischargeable by appearing to objectively examine a
debtor’s intent to repay. This approach was no different than
that used in cases involving non-gambling credit card debt, despite
the unique factor that cash advances for gambling could produce
revenue, rather than just pay for goods and services. In Chemical
Bank v. Clagg, 150 B.R. 697 (Bankr. C.D. Ill. 1993), the debtor,
a long-time gambler, admitted that his only hope of repaying his debt
was winning the lottery. The court found that "[m]ere hope, or
unrealistic or speculative sources of income, are insufficient" to
show an intent to repay. Id. at 698. See, also, American
Express v. Nahas, 181 B.R. 930 (Bank. S.D. Ind. 1994)
(debtor’s hope to repay debts from gambling winnings did not
provide requisite reasonable expectation or intent to repay);
Citibank v. Hansbury, 128 B.R. 320 (Bankr. D. Mass. 1991)
(debtor’s hope of repaying debt by winning big at gambling
"unrealistic"); FCC National Bank v. Bartlett, 128 B.R. 775
(Bankr. W.D. Mo. 1991) (debtor’s belief that she could repay her
debt through gambling not "rea-sonable"). Cf. First Federal
of Jacksonville v. Landen, 95 B.R. 826, 829 (Bankr. M.D. Fla.
1989) (debtor’s "honest but somewhat questionable belief that he
would soon get lucky at gambling and pay off his debts" demonstrated
intent to repay).

Even when the court sympathized with the debtor’s
circumstances as it did in Karelin v. Bank of America Nat’l
Trust & Sav. Assoc., 109 B.R. 943, 947-48 (9th Cir. BAP
1990), the debtor’s "hopeless financial condition" when she
obtained cash advances and the "consistently unsuccessful results of
her more than 15 years’ gambling experience" convinced the court
that she had no ability and no intent to repay her debts. The court
so ruled despite the debtor’s history of repaying some debt and
belief in her future ability to do so. Although the court noted that
the debtor was as much victim as culprit, in that her gambling
addiction was "in large part a function of the credit and facilities
made available to her by the casinos," it found that "[t]he bank was
not a gambling partner of the defendant but simply a lender."
Id. at 949.

In recent years, this country’s policies toward gambling have
shifted. As stated by one court:

<blockquote>At one point in time, not so far in the past, gambling
was against public policy and gambling debts were not enforceable in
a court of law. But public policy changed. Certain forms of gambling
are now legal...They are hyped as a source of jobs (i.e.,
riverboat gambling), as a source of revenue for government
(i.e., lotto proceeds used for education) and as a form of
entertainment (i.e., riverboat and off-track betting).

</blockquote>

Clagg, 150 B.R. at 698. Mirroring this public policy shift
are the bankruptcy courts’ apparent shift toward finding
gambling debt dischargeable. Many recent courts have reached this
result by measuring a debtor’s intent to repay subjectively
rather than objectively.

For example, in AT&T Universal Card Services v. Alvi,
191 B.R. 724, 734 (Bankr. N.D. Ill. 1996), the debtor, a regular
gambler who used his winnings to supplement his modest $12,000
income, incurred debt of approximately $54,202.19, mostly as cash
advances at casinos. Even though the amount of credit card debt
appeared excessive in relation to income, the court found that, based
on his history, the debtor genuinely believed he would be able to pay
his debts, and had the intent to pay his credit card debts at the
time he incurred them. See, also, Anastas v. American Savings
Bank, 94 F.3d 1280 (9th Cir. 1996) (debtor-gambler had intent to
repay his debt); Chase Manhattan Bank v. Murphy, 190 B.R. 327
(Bankr. N.D. Ill. 1995) (finding for the debtor, a gambler who had
successfully supplemented his regular income for years with his
gambling winnings, and who believed that he could continue to do so
in the future). But, see,In re Jacobs, 196 B.R. 429, 434
(Bankr. N.D. Ind. 1996), (even under subjective test, debtors "knew
or should have known that they could not possibly pay" credit card
debt).

In another recent case, AT&T Universal Card Services v.
Crutcher, 215 B.R. 696 (Bankr. W.D. Tenn. 1997), the debtor
suffered from a severe, diagnosed gambling addiction resulting in an
$11,885.75 cash advance balance on her credit card. Eleven months
after her latest gambling spree, the debtor filed bankruptcy. The
court, using a subjective approach, "including the reality of the
debtor’s addiction," focused on the intent of the debtor to
repay her debts, and found the credit card debt dischargeable. The
debtor’s good faith belief that she could repay her debts and
her history of doing so supported the discharge of the debt.

In addition to a debtor’s subjective intent to repay, some
recent decisions focus on whether a card issuer’s reliance on
the debtor’s representations were justifiable. See, e.g., In
re Alvi, 191 B.R. 724, 729 (Bankr. N.D. Ill. 1996). A
creditor’s reliance is justifiable if the falsity of the
representation is not obvious to someone having the creditor’s
knowledge and intelligence, even if an investigation would have
disclosed the falsehood. See Field,supra, 516 U.S. at 44.

In FCC National Bank v. Cacciatore, 209 B.R. 609 (Bankr.
E.D.N.Y. 1997), the card issuer performed a credit check on the
debtor before sending him an "invitation" for credit. The debtor
indicated on the invitation that he was a student and left blank the
space for a business phone number. The issuer then performed a second
credit check, but apparently did not determine whether the debtor was
employed or had financial resources. In less than a month, the debtor
received 12 cash advances for gambling. Finding for the debtor, the
court concluded that, even assuming that the debtor did not intend to
repay his gambling debt, the issuer did not justifiably rely on that
representation, based on the issuer’s failure to make relevant
inquiries about the debtor’s disclosures on the "invitation."
Id. at 617.

Depending on the facts of the case, gambling debt also may be
found non-dischargeable under other subsections of §523(a)(2).
At least one court has found gambling debt incurred on the eve of
bankruptcy non-dischargeable as "luxury goods or services" under
§523(a)(2)(C). Trump Plaza Assoc. v. Poskanzer, 143 B.R.
991 (Bankr. D.N.J. 1992). In addition, if there is a written
statement, such as credit markers signed by a patron of a casino, the
debt may be non-dischargeable under §523(a)(2)(B). Id. at
1000.

Proposed Legislation

As noted by one court, "[t]hat gambling debt should be
dischargeable in bankruptcy provokes strong reactions. However this
court may feel about the morality of the Bankruptcy Code permitting
discharge of such debt, there is no statutory rule that the use of
credit cards to incur gambling debts shows the requisite intent of a
debtor not to pay his debts... If Congress intended that credit card
advances for gambling losses be treated in any different fashion than
any other debts incurred by an honest—al

beit, misinformed, and always overly optimistic—debtor, it
can always amend the Bankruptcy Code." AT&T Universal Card
Services Corp. v. Totina, 198 B.R. 673, 681 (Bankr. E.D. La.
1996).

In fact, Congress has at least three major consumer bankruptcy
reform bills pending that would, if passed, undoubtedly have a direct
or indirect impact on the treatment of gambling debt. On February 3,
1998, Rep. George Gekas (R-PA) introduced the "Bankruptcy Reform Act
of 1998" (H.R. 3150), which provides, inter alia, for a
needs-based bankruptcy system and an amendment to §523(a)(2)(C)
to create a presumption that consumer debts incurred within 90 days
of bankruptcy are non-dischargeable. The bill also provides that debt
incurred when the debtor had no reasonable expectation or ability to
repay are non-dischargeable.6

Reps. Jerrold Nadler (D-NY) and John Conyers (D-MI) have
introduced the "Consumer Lenders and Borrowers Bankruptcy
Accountability Act of 1998" (H.R. 3146), which would, inter
alia, amend §502(b) to disallow claims that "arise
from a debt incurred in or adjacent to a gambling facility or a debt
that the creditor knew or should have known was intended to be used
for gambling."7 On the Senate side, Sens. Charles Grassley (R-IA) and
Richard Durbin (D-IL) have co-sponsored a bill (S. 1301) that allows
creditors to file §707(b) "substantial abuse" motions.

The National Bankruptcy Review Commission recommended that credit
card debts incurred less than 30 days before filing be
non-dischargeable. Debts incurred more than 30 days before filing
would be dischargeable unless the amount of the charge exceeded the
debtor’s credit limit.8

Conclusion

In light of the current climate of reform and the rise in both
consumer debt and legalized gambling, the future of the
dischargeability of gambling debt is unclear. Nonetheless, whatever
changes in the dischargeability of credit card and gambling
debtCongress ultimately adopts, the competing policies of preserving
a debtor’s "fresh start," while not providing the debtor a "head
start," must be carefully balanced.h

<hr>

<h3>Footnotes</h3>

1 All views expressed in this article are those of the
authors and do not necessarily represent the views of, and should not
be attributed to, the U.S. Department of Justice or the Office of the
United States Trustee. <a href="#note1">Return to
Text</a> <a name="foot2"></a>

2 SMR Research Corporation, The Personal Bankruptcy
Crisis, 1997, at 14, 18. <a href="#note2">Return to
Text</a> <a name="foot3"></a>

3 Harvard Medical School Researchers Map Prevalence
of Gambling Disorders in North America,
http://www.hms.harvard.edu/about/releases/1297gambling.html, (Dec. 4,
1997). <a href="#note3">Return to Text</a>
<a name="foot4"></a>

4 Gambling Impact Study Commission Act, Pub. L. No.
104-169, 110 Stat. 1482 (1996), as amended by Pub. L. No. 105-30, 111
Stat. 248 (1997). <a href="#note4">Return to Text</a>
<a name="foot5"></a>

5 See, also, James M. Cain, Proving Fraud in
Credit Card Dischargeability Actions: A Permanent State of Flux?
102 Com. L. J. 233 (1997); Reforming Consumer Bankruptcy Law: Four
Proposals, 71 Am. Bankr. L. J. (1997); Hon. David S. Kennedy
& James E. Bailey, Gambling and the Bankruptcy Discharge: An
Historical Exegesis and Case Survey, 11 Bankr. Dev. J. 49 (1995).
<a href="#note5">Return to Text</a>

Journal Authors

Alexander L. Edgar

Ellen L. Triebold

Journal Date

Friday, May 1, 1998 - 12:00