When an irate creditor comes to bankruptcy court in a chapter 7, 12 or 11 case in which an individual debtor is holding a check issued by the debtor that was dishonored by the debtor’s bank, she often expects a quick and easy finding that the debt is not dischargeable. Unfortunately, the debt based on a bad check is not automatically and not even usually held to be nondischargeable. To succeed, the creditor usually bears a heavy burden of proof of fraud.
Where the underlying debt for which the check was issued is based on fraud, the court may hold the debt to be nondischargeable based on the underlying fraud without reference to any fraud directly related to the issuance of the check. A claim of fraud in connection with a check intentionally written on a closed account is also an easier proposition to deal with. In this case the debtor can have little or no basis to assert that the dishonor of the check was inadvertent or beyond his/her control. In re Feldman, 111 B.R. 481 (Bankr. E.D. Pa. 1990).
Not every NSF (insufficient funds) check can result in a nondischargeable debt. A bad check will only be nondischargeable to the extent that it was “obtained by… false pretenses or representations or by means of actual fraud.” Printy v. Dean Witter Reynolds Inc., 110 F.3d 853, 857 (1st Cir. 1997). A check issued for a pre-existing debt does not result in any new loss, merely failure to pay an old debt. The only time the mere issuance of a check, without other accompanying fraud, can result in the denial of the dischargeability of the debt is when the check is tendered for the purchase of goods or services. Cowans, Daniel R., Bankruptcy Law and Practice, §6.21 at 2 (6th ed. 1994); Forbes v. Four Queen Enterprises, Inc., 210 B.R. 905, 912 (D. R.I. 1997)
The nondischargeability of a debt relating to a dishonored check must be determined under Bankruptcy Code §547, which provides that the discharge does not relieve “an individual debtor from any 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…” 11 U.S.C. §523(a)(2)(A).
The bankruptcy court cannot apply and will not be bound by local statutes that provide that the failure of the drawer of the check to pay the amount of a returned check constitutes “prima facie evidence of fraudulent intent,” such as the Code of Laws of South Carolina 1976, §34–11–70, or Indiana Criminal Code, §35–43–4–4(e), or that create other presumptions because this kind of imputed or implied fraud is insufficient for the purposes of denial of dischargeability of the debt in bankruptcy. Matter of Allison, Id. at 483; In re Fitzgerald, 109 B.R. 893 (Bankr. N.D. Ind. 1989).
The relevant question is whether the issuance of a check for goods or services, as a matter of law, constitutes a “representation” of a material fact or of an intent to pay the amount of the check.
There is a longstanding split of authority on whether delivery of a check constitutes a representation of intent to pay. Many courts hold that the mere issuance of a check that is ultimately dishonored, without more, does not constitute a “representation” that, if false, would constitute grounds to deny the dischargeability of the debt. In re Elibuyuk, 163 B.R. 75 (Bankr. E.D. Va. 1993). Goldberg Securities v. Scarlata, 979 F.2d 521 (7th Cir. 1992); In re Alvi, 191 B.R. 724 (Bankr. N.D. Ill. 1996); In re Anderson, 181 B.R. 943 (Bankr. D. Minn. 1995); In re Miller, 310 B.R. 185, (Bankr. C.D. Cal. 2004).
Another line of cases holds that tendering a check for goods or services constitutes an implied or actual representation that the maker’s account has or will have sufficient funds to cover the check. In re Kurdoghlian, 30 B.R. 500 (9th Cir. BAP 1983); In re Miller, 112 B.R. 937 (Bankr. N.D. Ind. 1989); In re Almarc Mfg., Inc., 62 B.R. 684, 689 (Bankr. N.D. Ill. 1986); Matter of Perkins, 52 B.R. 355 (Bankr. M.D. Fla. 1985); In re Mullin, 51 B.R. 377 (Bankr. S.D. Ind. 1985); In re Newell, 164 B.R. 992, 995 (Bankr. E.D. Mo. 1994); In re Anderson, 181 B.R. 943, 949 (Bankr. D. Minn. 1995).
An agreement between the parties to hold post-dated checks will likely contradict any assertion that the debtor represented that her account contained sufficient funds to cover the checks at the time she wrote them and defeat a claim of misrepresentation upon delivery of the check. Capital Chevrolet v. Bullock (In re Bullock), 2004 Bankr. LEXIS 1915 (Bankr. M.D. Ala. Dec. 7, 2004).
Some courts that have examined the presentment of a credit card in the context of proceedings seeking to deny the dischargeability of the debt have held that the use of a credit card constitutes an implied representation that the debtor in good faith intends to repay the credit card debt and that the debtor affirmatively believes in good faith that such credit card debt will be repaid. In re Mercer, 246 F.3d 391, 37 Bankr. Ct. Dec. 178, Bankr. L. Rep. P 78, 383 (5th Cir. (Miss.) 2001); Citibank (South Dakota) N.A. v. Parker, 2001 WL 1453933 (4th Cir. (Va.) 2001) (not selected for publication in the Federal Reporter); In re Widner, 285 B.R. 913 (Bankr. W.D. Va. 2002); In re Rembert, 141 F.3d 277, 281 (6th Cir. 1998), cert. denied, 525 U.S. 978, 119 S.Ct. 438, 142 L.Ed.2d 357 (1998).
As with credit card cases, when these implied representations are acknowledged as a matter of law, there remain the highly fact-intensive questions of whether those representations were knowingly false. By parallel analysis to the credit card cases, at least one court has adopted these non-exclusive factors to be considered when examining the asserted falsity of the implied representation of the intent to pay a check:
- the time between delivery of the check and the bankruptcy filing;
- whether, prior to delivery of the check, an attorney was consulted about bankruptcy;
- the number of checks;
- their amount;
- the debtor’s financial condition at delivery of the check;
- whether multiple checks were delivered on the same day;
- whether the debtor was employed;
- the debtor’s employment prospects;
- the debtor’s financial sophistication;
- whether the debtor’s buying habits changed suddenly; and
- whether luxuries or necessities were purchased.
In re Paul, 266 B.R. 686 (Bankr. N.D. Ill 2001); Matter of Mercer (AT&T Universal Card Services v. Mercer), supra.
The courts in the bad-check cases should also hold that “hopeless insolvency” or inability to pay at the time the check was issued may support finding that the debtor did not intend to pay, but only if the debtor was aware of her financial condition and knew she could not (and therefore did not intend to) make the payment to the merchant or provider. Id.; In re Paul, 266 B.R. 686 (Bankr. N.D. Ill. 2001).
The Seventh Circuit, the Sixth Circuit BAP and other courts in those circuits have adopted an alternative approach to analysis of objections to dischargeability of credit card debt that may also be useful in the context of presentment of a check. McClellan v. Cantrell, 217 F.3d 890, 892-93 (7th Cir. 2000); In re Green, 296 B.R. 173, 179 (Bankr. C.D. Ill. 2003); In re Brobsten, 2001 WL 34076352, at *3–4 (Bankr. C.D. Ill. Nov. 20, 2001); In re Kendrick, 314 B.R. 468, 471–72 (Bankr. N.D. Ga. 2004); In re Bungert, 315 B.R. 735, 739 (Bankr. E.D. Wis. 2004). Instead of relying on “misrepresentation/reliance” and “implied representation,” these cases adopt an “actual fraud” analysis. The McClellan court defined “actual fraud” as “any deceit, artifice, trick or design involving direct and active operation of the mind, used to circumvent and cheat another.” Id. See, also, 4 Resnick, Alan N. and Sommer, Henry J., Collier on Bankruptcy 15th Rev. Ed. ¶523.08[1][e] (2004). The factors listed above are useful in determining whether such credit card use was made with intent to defraud, but creditors should be warned against relying too extensively on them. In re Green, 296 B.R. 173, 180 (Bankr. C.D. Ill. 2003); In re Alvi, 191 B.R. 724, 732–34 (Bankr. N.D. Ill. 1996). This “actual fraud” approach has been applied to hold that a check kiting scheme was nondischargeable. In re Vitanovich, 259 B.R. 873, 876–77 (6th Cir. BAP 2001).
Once a court finds that a debt based on presentment of a check is nondischargeable under any of the theories discussed above, the next question is the extent of the resulting nondischargeable debt. The few cases that have considered the nondischargeability of other amounts rated to the nondischargeable debt, such as penalties and attorneys’ fees have relied on U.S. Supreme Court authority and hold that the Bankruptcy Code “prevents the discharge of all liability arising from fraud” and “bars discharge of debts ‘resulting from’ or ‘traceable to’ fraud.” Cohen v. de la Cruz, 523 U.S. 213, 118 S.Ct. 1212, 140 L.Ed.2d 341 (1998) and Field v. Mans, 516 U.S. 59, 61, 116 S.Ct. 437, 133 L.Ed.2d 351 (1995). This includes “compensatory damages actually sustained by plaintiff as a consequence of defendants’ fraud.” In re Dobrayel, 287 B.R. 3, 12 (Bankr. S.D.N.Y. 2002) The court in a bad-check adversary proceeding should therefore hold that, in addition to the amount of the check interest, court costs, check service charges, bank charges, other actual damages, penalties where provided by statute and attorneys fees when allowable by law, are all also not dischargeable.
Debts arising from the presentment of certain checks payable to one creditor aggregating more than $1,150 within the 60 days prior to the filing of a bankruptcy case give rise to a rebuttable presumption that those debts are nondischargeable. 11 U.S.C. §523(a)(2)(C). This only applies when the check or checks were issued for “luxury goods or services” not including “goods or services reasonably acquired for the support or maintenance of the debtor or a dependent of the debtor.” Where the issue is carrying the burden of proof in a close case, the debtor’s failure to rebut this presumption may save the day for the objecting creditor.