Attorneys' fees for debtors who prevail in credit card adversaries.

• Author: LeVine, Dennis J.

Many courts are holding creditors accountable for sending unsolicited, preapproved credit cards to the general public without any proper investigation.

In recent litigation of dischargeability actions for "credit card fraud" under [sections] 523(a)(2)(A), courts have increasingly found in favor of debtors.(1) Many of these courts are holding creditors, especially credit card issuers, accountable for what the courts consider "casual and inadequate lending practices" and "irresponsible" actions in sending unsolicited, preapproved credit cards out to the general public without any proper investigation.(2) In two recent opinions by Judge Cristol of the Bankruptcy Court of the Southern District of Florida, the court severely criticized the credit card industry:

With little regard to levels of financial sophistication, the credit card industry has deluged virtually every adult American (and the unemployed minor children of many) with invitations to become a charge customer. Many of these solicitations offer "pre-approved" credit, whose extension requires nothing but a signature .... Lending practices almost encourage the misuse of credit, and affirmatively solicit use of the account to pay other existing credit card accounts .... Credit card issuers rarely investigate for changes in financial circumstances or to assess whether unsecured debt has grown to imprudent levels.(3)

What kind of underwriting procedures were used by First Card Services, Inc. in approving an $8,000 cash advance to a customer with over $40,000 in credit card debt and no income for over a year? Where did the Debtor, a 57-year-old Cuban refugee with a third grade education, get this magic card in the first place? He testified that he never applied for the card. "They sent it to him in the mail." Is this a great country or what?(4)

With more and more debtors prevailing in [sections] 523(a)(2)(A) nondischargeability actions, the bankruptcy courts have increasingly turned to [sections] 523(d) as a mechanism for punishing creditors. Section 523(d) authorizes an award of attorneys' fees and costs to a debtor who successfully defends against a [sections] 523(a)(2) dischargeability action. The statute is an exception to the "American Rule"normally applied in federal litigation.(5) Section 523(d) states:

If a creditor requests a determination of dischargeability of a consumer debt under (a)(2) of this section, and such debt is discharged, the court shall grant judgment in favor of the debtor for the costs of, and a reasonable attorney's fee for, the proceeding if the court finds that the position of the creditor was not substantially justified, except that the court shall not award such costs and fees if special circumstances would make the award unjust.

Congress enacted [sections] 523(d) with the Bankruptcy Code in 1978 to protect the honest consumer debtor who, afraid of incurring attorneys' fees, would quickly settle with an aggressive creditor who filed a nondischargeability action under [sections] 523(a)(2). According to the legislative history, the purpose of [sections] 523(d) is "to discourage creditors from initiating meritless actions based on [sections] 523(a)(2) in the hope of obtaining a settlement from an honest debtor anxious to save attorney's fees. Such practices impair the debtor's fresh start."(6) As one court succinctly stated:

Once such a [[sections] 523(a)(2) action) is filed, the ordinary rules of procedure are invoked, and the debtor must defend the charge if he or she wants to preserve the full value of the bankruptcy fresh start. Many consumer debtors are in such precarious financial condition when they file bankruptcy, however, that they can ill afford to pay additional fees to defend a lawsuit. These circumstances create a risk that the card issuer may coerce settlements from unrepresented consumers or obtain default judgments, regardless of the merits of the complaint. Congress enacted [sections] 523(d) to deal with this problem.(7)

To obtain an award of attorneys' fees under [sections] 523(d), the debtor must prove that:

(a) a creditor requested a determination of dischargeability of debt under [sections] 523(a)(2);

(b) the debt is a consumer debt; and

(c) the debt was discharged.(8)

When the debtor makes a prima facie showing by establishing these three elements, the creditor can avoid the imposition of attorneys' fees and costs only by proving:

(a) the creditor's actions were substantially justified; or

(b) special circumstances exist to make an award of fees unjust.(9)

To qualify for an award of attorneys' fees under [sections] 523(d), the litigation must involve a consumer debt. Section 101(8) of the Bankruptcy Code defines consumer debt as"debt incurred by an individual primarily for a personal, family, or household purpose." The legislative history indicates that the definition was adopted from language used in various consumer protection laws. Thus, the courts have turned to cases construed under these consumer...