IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
WALTER BRADLEY BARNES, JANET LEE BARNES,
SEARS, ROEBUCK AND CO.,
WALTER BRADLEY BARNES, and JANET LEE BARNES,
ADV. NO. 92-7105
MEMORANDUM OF DECISION
This case is before the Court for decision following a bench trial. Plaintiff-creditor Sears,
Roebuck and Company (Sears) seeks to have the debt owed to it declared nondischargeable
under 11 U.S.C.A. §523(a)(2)(A). Sears appears by counsel Thomas J. Wilder. The
debtors appear pro se. The Court is now ready to rule.
Sears alleges that within about 90 days of their bankruptcy filing, the debtors charged over $10,000 in merchandise on their account with Sears either with the intent not to pay or, as they knew or should have known, without the ability to pay, for the charges. Sears kept the account under Walter's name, and 69 separate charges to the account are at issue, 63 made by Walter and 6 by Janet. Janet did not appear at the trial, and no testimony was presented concerning her intent or knowledge about the debtors' ability to pay. A transcript of her testimony at a 2004 exam was introduced but only for a limited purpose not having to do with the Sears charges.
Up until about a year before the debtors filed for bankruptcy, Walter was the president of Barnes and Phillips Engineering (BPE). At its peak, BPE had 175 employees and offices in Tampa, Florida, Denver, Colorado, and Kansas City, Missouri, and provided Walter a substantial income. However, the business got into financial difficulty when it suffered a substantial loss through dealings with the Kroh brothers, whose extensive Kansas-City-based business empire wound up in bankruptcy, and a smaller loss through dealings with Executive Hills, a partnership that floundered when several partners were indicted for various alleged financial crimes. The secured creditors liquidated BPE, selling its assets to the Waldinger Corporation, another engineering firm, and leaving a large deficiency owing on debts which Walter had guaranteed. After the demise of his business, Walter worked as the Kansas City manager for Waldinger during the first part of 1991. This position ended in May or June of 1991, apparently because Waldinger closed its Kansas City operation. At all relevant times, Walter provided the primary income for the debtors.
During 1990 and into 1991, Walter attempted to negotiate with his primary creditors, particularly his primary business creditors, seeking a resolution to the financial troubles which befell him when BPE failed. All during this time, the debtors were insolvent. They did not have the present ability to pay their personal debts and Walter's BPE debts. Walter had been sued in small claims court by one creditor who garnished his wages while he was employed by Waldinger. Apparently, a large creditor with whom he had been negotiating, Home State Bank, terminated their discussions in September or October of 1991. Home State then garnished his checking accounts in December of 1991, and the debtors filed a chapter 7 bankruptcy in early January of 1992.
After Walter's job ended with Waldinger, he began to provide consulting and engineering services as a sole proprietor. He hoped to develop a business capable of supporting his family's living needs as well as enabling him to pay off the personal and business debts remaining after BPE's failure. When BPE was failing, he had discussed with his attorney the possibility of filing bankruptcy, but had decided instead to try to negotiate with his creditors and continue doing engineering work to generate funds with which they could be paid.
The debtors had had a charge account with Sears since 1964. It had a zero balance on the
April 1991 bill. Thereafter, the account balance grew to $728.01 on the June 9 bill,
$2,824.11 on the July 8 bill, $3,712.36 on the August 10 bill, and $4,156.50 on the
September 7 bill. For these months, the debtors paid the required monthly minimum
payment or more. By the October bill, the balance had increased to $4,667.20 and the
debtors did not pay the required minimum payment for that or any subsequent months.
They did pay $116 in October and $111 in November. The balance due ultimately grew to
$10,737.37 as of the date they filed for bankruptcy.
DISCUSSION AND CONCLUSIONS
Section 523(a)(2) of the Bankruptcy Code excepts from discharge any debt "for money, property, services, or an 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 debtor's or an insider's financial condition." The Court does not believe actual fraud or false pretenses have been shown here. However, a debtor's purchase on credit of goods for which he does not intend to pay constitutes a false representation. See 3 Collier on Bankruptcy, ¶523.08 at 523-55 (15th ed. 1993). Courts have disagreed whether mere proof of the debtor's insolvency or inability to pay is enough to make the credit-purchase debt nondischargeable or whether something beyond mere insolvency must be shown to support an inference of an intent not to pay. Compare Central Bank v. Kramer, 38 B.R. 80 (Bankr.W.D.La. 1984) (insolvency or inability to pay enough); Montgomery Ward v. Borah, 36 B.R. 535 (Bankr.M.D. Fla. 1983) (same); and First Tennessee Bank v. Wilson, 32 B.R. 772 (Bankr.E.D.Tenn. 1983) (same); with Montgomery Ward & Co., Inc., v. Blackburn, 68 B.R. 870 (Bankr.N.D.Ind. 1987) (insolvency alone not enough); and Chase Manhattan Bank v. Carpenter, 53 B.R. 724 (N.D.Ga. 1985) (same). This Court believes that insolvency alone will not necessarily make a credit-purchase debt nondischargeable, but that a debtor makes a false representation when he buys goods on credit at a time when he knew or should have known he had no realistic prospects of being able to pay for the charges when they came due.
The evidence presented to the Court shows that only Walter had control and knowledge of the debtors' prospects for making money and that he incurred nearly all of the charges on the Sears account. The Court concludes none of the evidence establishes that Janet made any false representation, so her obligation for the Sears charges is dischargeable.
Walter's situation is obviously very different. Although he had no intent to defraud Sears when he charged the purchases and had an intent to pay for them, unquestionably, he knew or should have known at some point that he no longer had any realistic ability to pay. In hindsight, it appears he probably made a mistake by not filing this chapter 7 case upon the termination of BPE's business in 1990. Instead, in a commendable effort to pay his debts, he negotiated with his primary secured creditors to try to work out some form of repayment schedule. He obtained a job in his field that might have enabled him to repay his creditors, only to lose it in May of 1991 through no apparent fault of his own. He then decided that in order to have a chance to pay his debts, he would need to develop his own business. Since his existing personal and business debts made normal sources of business financing unavailable to him, he used his still-available consumer credit to purchase items needed for his new business. He reasonably believed the use of this credit would help him develop his engineering consulting and service business and hopefully enable him to earn the money necessary to schedule some repayment of the debts he had incurred. Though his debt was overwhelming, he had some reasonable hope, at least for a time, that he could work out a payment arrangement with his creditors, particularly his BPE creditors. That hope ended, however, in September of 1991. After the negotiations with Home State Bank failed, it was unrealistic for him to believe that he would have the opportunity to repay his obligations.
Based upon the evidence presented, the court concludes that the charges Walter incurred
on the Sears account after the September 1991 bill are not dischargeable. The payments
the debtors made after September should be credited against the amount already owed
then. This leaves a balance due on the September bill of $3,929.50. Subtracting this
amount from the final balance due leaves a remainder of $6,807.87, which represents the
charges incurred after the September bill. Thus, Sears is entitled to a nondischargeable
judgment against Walter in the amount of $6,807.87.
The foregoing constitutes Findings of Fact and Conclusions of Law under Rule 7052 of the Federal Rules of Bankruptcy Procedure and Rule 52(a) of the Federal Rules of Civil Procedure. A judgment based on this ruling will be entered on a separate document as required by FRBP 9021 and FRCP 58.
Dated at Topeka, Kansas, this ____ day of August, 1993.
JAMES A. PUSATERI
CHIEF BANKRUPTCY JUDGE
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
In Re: )
WALTER BRADLEY BARNES, ) NO. 92-40016-7
JANET LEE BARNES, ) CHAPTER 7
SEARS, ROEBUCK AND CO., )
v. ) ADV. NO. 92-7105
WALTER BRADLEY BARNES, and )
JANET LEE BARNES, )
JUDGMENT ON DECISION
This case was before the Court for decision following a bench trial. Plaintiff-creditor Sears, Roebuck and Company (Sears) sought to have the debt owed to it declared nondischargeable under 11 U.S.C.A. §523(a)(2)(A). Sears appeared by counsel Thomas J. Wilder. The debtors appeared pro se.
The Court has rendered its Memorandum of Decision and prepared this judgment as required by Federal Rule of Bankruptcy Procedure 9021 and Federal Rule of Civil Procedure 58. Judgment is hereby entered declaring that Janet Lee Barnes' debt to Sears is dischargeable. Judgment is further entered granting Sears a nondischargeable judgment against Walter Bradley Barnes in the amount of $6,807.87.
IT IS SO ORDERED.
Dated at Topeka, Kansas, this _____ day of August, 1993.
JAMES A. PUSATERI